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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NO. 1-7436
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REPUBLIC NEW YORK CORPORATION
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
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MARYLAND 13-2764867
(I.R.S. EMPLOYER IDENTIFICATION NO.)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
452 FIFTH AVENUE, NEW YORK, NEW 10018
YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(212) 525-6100
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, Par Value
$5.00 Per Share New York Stock Exchange
The International Stock Exchange of the
United Kingdom & The Republic of Ireland Ltd.
Depositary Shares, each
representing a one-fourth
interest in a share of
Adjustable Rate Cumulative
Preferred Stock, Series D New York Stock Exchange
$1.8125 Cumulative Preferred
Stock New York Stock Exchange
8 3/8% Debentures Due 2007 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of Common Stock of the registrant held by non-
affiliates at January 31, 1997 was $3,451,290,850 based on the closing price
on the New York Stock Exchange Composite Tape on such date.
The number of shares outstanding of each of the registrant's classes of
common stock, as of January 31, 1997: 54,770,863.
Documents Incorporated by Reference:
DOCUMENT LOCATION IN FORM 10-K
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Proxy Statement for 1997 Annual Meeting, to the
extent indicated Part III
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CONTENTS
PART I
PAGE
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Item 1. Business......................................................... 1
Republic New York Corporation........................................ 1
Republic National Bank of New York................................... 1
Other Financial Services............................................. 2
Competition.......................................................... 3
Employees............................................................ 4
Customers............................................................ 4
Supervision and Regulation........................................... 4
Item 2. Properties....................................................... 6
Item 3. Legal Proceedings................................................ 6
Item 4. Submission of Matters to a Vote of Security Holders.............. 6
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters.................................................................. 7
Item 6. Selected Financial Data.......................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation..................................................... 7
Introduction......................................................... 7
Results of Operations................................................ 8
Liability and Asset Management....................................... 15
Risk Management and Control.......................................... 28
Capital Resources and Liquidity...................................... 29
Item 8. Financial Statements and Supplementary Data...................... 32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 89
PART III
Item 10. Directors and Executive Officers of the Registrant............... 89
Item 11. Executive Compensation........................................... 90
Item 12. Security Ownership of Certain Beneficial Owners and Management... 90
Item 13. Certain Relationships and Related Transactions................... 90
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K........................................................................ 91
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, 1996, the Corporation had consolidated total assets of $52.3
billion and stockholders' equity of $3.3 billion. Its principal asset is the
capital stock of Republic National Bank of New York (the "Bank"). The Bank
accounted for approximately 90% of the consolidated assets at December 31,
1996 and approximately 90% of consolidated revenues and 100% of consolidated
net income of the Corporation for the year ended December 31, 1996. The
Corporation's other subsidiaries include Republic Factors Corp. ("Factors"),
Republic New York Securities Corporation ("RNYSC"), a full service broker-
dealer, and Republic Bank California N.A. ("RBC"), a commercial bank operation
in southern California.
On February 29,1996, the Corporation completed the acquisition of Brooklyn
Bancorp, Inc. ("BBI"), parent of CrossLand Federal Savings Bank ("CrossLand"),
for approximately $530 million in an all cash transaction. At the date of
acquisition, BBI had total assets of $4.1 billion, total deposits of $3.6
billion and total stockholders' equity of $388 million. BBI had approximately
385,000 accounts in 30 branches in the New York metropolitan area. The
operations of CrossLand were merged into the Bank at the date of acquisition.
The executive offices of the Corporation are located at 452 Fifth Avenue,
New York, New York 10018 (telephone 212-525-6100).
As used herein, the term "Corporation" includes the subsidiaries of the
Corporation and the term "Bank" includes the subsidiaries of the Bank, unless
the context indicates otherwise.
REPUBLIC NATIONAL BANK OF NEW YORK
The Bank, a national banking association 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, 1996, the Bank had total assets of $47.0 billion, total
deposits of $32.0 billion and stockholder's equity of $3.2 billion.
On January 2, 1996, the operations of Republic Bank for Savings ("RBS"), a
wholly-owned subsidiary of the Corporation, were merged into the Bank. The
merger was accounted for similar to a pooling of interest and has been
reflected in the Bank's 1995 financial statements and in other information in
this Report that involves the Bank.
In addition to the CrossLand acquisition, during 1996 the Bank purchased
four retail branches from Bank Leumi Trust Company of New York with deposits
totaling approximately $255 million, three First Nationwide Bank FSB branches
with deposits of approximately $270 million and one branch from Independence
Saving Bank with deposits of approximately $51 million.
The Bank's headquarters and principal banking office is located at 452 Fifth
Avenue, New York, New York 10018. At December 31, 1996, the Bank had more than
ninety domestic branch banking offices in New York City and the suburban
counties of Westchester, Nassau and Suffolk, as well as nine branches in
southern Florida.
INTERNATIONAL BANKING
The Bank is active in international banking where it operates principally as
a wholesale bank. It has been its policy to deal primarily with foreign
governments, their agencies, foreign central banks and foreign commercial
banks as borrowers or guarantors. At December 31, 1996, approximately 75% of
the Bank's cross-border net outstandings were to or guaranteed by such
entities.
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, Moscow, Nassau, Sao Paulo,
Singapore, Mexico City, Montevideo, the Cayman Islands; and an Edge Act
subsidiary in Miami, which engages in off-shore banking activities with non-
resident customers and an Edge Act subsidiary in Wilmington, Delaware. The
Bank's recently opened commercial banking subsidiaries in Moscow and Sao Paulo
will focus on activities in the local capital markets and the Brazil operation
will also work to facilitate trade transactions for international
corporations. The Board of Governors of the Federal Reserve System (the "FRB")
approved the establishment of a Bank branch office in Taipei, that is expected
to begin operations during the first quarter of 1997, pending approval from
local authorities. The Bank also has foreign representative offices in
Beijing, Beirut, Buenos Aires, Copenhagen, Jakarta, Manila, Montevideo,
Moscow, Punta del Este and Rio de Janeiro. The Bank's facilities are
supplemented by a network of correspondent banks throughout the world.
The Bank's international banking services include accepting deposits,
extending credit, forfait financing, buying and selling foreign exchange,
buying and selling banknotes denominated in various currencies, issuing
letters of credit and bankers' acceptances
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and handling the collection and transfer of money. The Bank's Banknote
Services business ships U.S. dollars to and from financial institutions in
nearly 40 countries.
Through its International Private Banking Department, headquartered in New
York City, the Bank offers a full range of private banking services to
individuals who are not citizens or residents of the United States, including
deposit, lending and investment management products, custody services, buying
and selling foreign exchange, banknotes denominated in various currencies,
precious metals and financial instruments, issuing letters of credit and
handling the collection and transfer of money.
DOMESTIC BANKING
The Bank provides a full range of domestic banking services, including
commercial, consumer installment and mortgage loans to individuals and
businesses. Mortgage loans are originated by its subsidiary, Republic Consumer
Lending Group, Inc. The Bank also accepts deposits, including time and savings
deposits and regular and special checking accounts, and issues large
denomination negotiable certificates of deposit of $100,000 or more.
Through its Domestic Corporate Lending Department, the Bank services the
financing requirements of large national companies, middle-market companies
and other businesses in the New York metropolitan area and selected markets
outside of New York. Other banking facilities usually associated with a full-
service commercial bank are offered, among which are safe deposit boxes,
safekeeping and custodial services, collections and remittances, letters of
credit and foreign exchange. The Bank's Trust Department provides a broad
range of fiduciary services to both individual and corporate accounts.
Through its Domestic Private Banking operation, the Bank offers an array of
private banking services, including deposit, lending and investment management
products, custody services and trust and estate planning to high net worth
individuals. The Bank's domestic private banking clients are served from
locations in New York, Los Angeles and Miami.
Republic Financial Services Corporation ("RFSC"), a wholly-owned subsidiary
of the Bank, and a broker-dealer registered with the Securities and Exchange
Commission (the "SEC") and the National Association of Securities Dealers,
Inc. (the "NASD"), provides brokerage services, through which its customers
can invest in mutual funds, stocks and fixed income instruments.
TRADING
The Bank trades gold and silver bullion, both for immediate delivery and for
delivery in the future, buys and sells options on precious metals and engages
in various arbitrage activities in the precious metals markets. The Bank is a
dealer in gold and silver bullion and coins that are sold to commercial and
industrial users and investors. The Bank generally hedges its inventory
against price fluctuations. At December 31, 1996 and 1995, approximately $36.9
million and $22.4 million, respectively, of the Bank's inventory in precious
metals were unhedged.
The Bank's precious metals capabilities include global wholesale trading in
gold, silver, platinum and palladium, including spot, forward and options
dealing, as well as providing financial services in gold loans to central
banks, international financial institutions and institutional investors. The
Bank also offers production and inventory financing to mining companies,
industrial manufacturers and end-users.
The Bank's bullion banking operations in Sydney and Hong Kong also engage in
global wholesale trading in gold, silver, platinum and palladium, as well as
production and inventory financing. Precious metals operations are also
conducted in London by the Bank which is one of the five members of the London
Gold Fixing.
As an active participant in the foreign exchange markets, the Bank engages
in trading and market-making activities, as well as dealing in banknotes.
Republic Forex Options Corporation, an operating subsidiary of the Bank, is a
foreign currency options participant on the Philadelphia Stock Exchange, a
market-maker in foreign currency options and trades for its own account.
Trading account profits and commissions consist of income from trading
derivative products and dealing in international debt securities and
securities of the U.S. Government and its agencies. The Bank's derivative
products group acts as principal in trading interest rate and currency swaps
and options on these products as well as products related to the performance
of various indices.
The Bank expanded its emerging market trading activities in 1996 to include
acting as a dealer in certain financial instruments, such as certificates of
deposit issued by foreign banks, situated primarily in Mexico, Brazil and
Argentina, Brady Bonds, including forward sales and options on such bonds,
local currency instruments, eurobonds, syndicated bank loans and certain other
products. The Bank's customers for these products include financial
institutions, multinational corporations, other institutional investors and
high net worth individuals.
OTHER FINANCIAL SERVICES
REPUBLIC 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 more than 55,000 customers
primarily in the retail
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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, 1996, Factors factored approximately $5.5
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 10018. In addition, Factors has offices located in Los
Angeles, California and Charlotte, North Carolina.
REPUBLIC NEW YORK SECURITIES CORPORATION
RNYSC, a wholly-owned subsidiary of the Corporation, commenced operations in
1992 as a full-service securities broker primarily serving institutional
investors and high net worth individuals. On January 10, 1994, 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 SEC and is a member
of the NASD and the New York Stock Exchange, Inc. In addition, it is an
associate member of the American Stock Exchange. In 1995, RNYSC opened branch
offices in Chicago, Illinois and Philadelphia, Pennsylvania.
RNYSC is also registered with the Commodity Futures Trading Commission and
the National Futures Association as a futures commission merchant and a
commodity trading advisor. As such, RNYSC acts primarily as a commodities
broker to the Bank, executing futures contracts and options on futures
contracts for the Bank's account. RNYSC trades in futures and options on
futures in non-financial commodities, including contracts on energy products,
agricultural products and non-precious metals. RNYSC provides execution
services in connection with the Bank's activities as a dealer in precious
metals, financial instruments and foreign exchange. In addition, RNYSC acts as
a futures commission merchant and commodity trading advisor for the general
public. RNYSC is a clearing member of the Chicago Mercantile Exchange, Chicago
Board of Trade and New York Mercantile Exchange, including its Comex Division.
RNYSC is a non-clearing member of the New York Futures Exchange, the Coffee,
Sugar and Cocoa Exchange and the Philadelphia Board of Trade.
SAFRA REPUBLIC HOLDINGS S.A.
The Bank has a 49.1% investment in Safra Republic Holdings, S.A. ("Safra
Republic"), a Luxembourg holding company, principally engaged, through wholly-
owned banking subsidiaries in Switzerland, Luxembourg, France, Guernsey and
Gibraltar, in international private banking offering a range of private
banking services primarily to wealthy individuals, and commercial banking. At
December 31, 1996, Safra Republic had total assets of $17.2 billion, total
deposits of $13.3 billion and total shareholders' equity of $1.6 billion.
Total client portfolio accounts of Safra Republic at year end 1996, both on-
and off-balance-sheet amounted to $22.6 billion. In January 1997, Safra
Republic received a banking license from the banking authorities in Monaco.
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.
At December 31, 1996, Saban S.A., the Corporation's principal stockholder,
owned approximately 20.8%, and international investors owned approximately
30.1% of the outstanding shares of Safra Republic. The shares of Safra
Republic are listed on the Geneva, Zurich and Luxembourg Stock Exchanges, pre-
market traded on the Basle Stock Exchange and traded over-the-counter in
London on the SEAQ.
During 1996, Safra Republic acquired Banque Unigestion S.A., a Geneva based
private bank. In addition, Safra Republic has received regulatory permission
regarding its previously announced agreement to acquire Mercury Bank AG, a
Swiss private bank that specializes in investment management services. Upon
completion of this acquisition, Safra Republic will have total client
portfolio accounts of approximately $25 billion.
Safra Republic's headquarters and principal office is located at 32,
Boulevard Royal, 2449 Luxembourg. Safra Republic's subsidiary banks are
headquartered or have branches in Geneva, Lugano and Zurich, Switzerland;
Paris, France; and Monaco, Luxembourg, Gibraltar and Guernsey.
The financial statements of Safra Republic are included in "Affiliate
Financial Statements" in "Financial Statements and Supplementary Data"
elsewhere in this Report.
COMPETITION
All of the Corporation's financial activities are highly competitive. It
competes actively with other commercial banks, savings and loan associations,
financing companies, credit unions and other financial service providers
located throughout the United States and, in some of its activities, with
government agencies. The Interstate Banking and Branching Efficiency Act of
1994 ("IBEA"), which authorized interstate bank acquisitions beginning in 1995
and interstate branching beginning in 1997, was enacted in 1994. Although it
is too early to assess the impact of IBEA, the Corporation does not believe it
will have a material effect on its business. For international business, the
Corporation competes with other United States financial service providers
which have foreign installations and with other major foreign financial
service providers located throughout the world.
3
EMPLOYEES
As of December 31, 1996, the Corporation had approximately 5,700 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.
SUPERVISION AND REGULATION
As a bank holding company registered under the Bank Holding Company Act of
1956, as amended (the "BHCA"), the Corporation is subject to substantial
regulation and supervision by the FRB. The Corporation's subsidiary banks are
subject to regulation and supervision by federal bank regulatory agencies,
including the Office of the Comptroller of the Currency (the "OCC") and the
Federal Deposit Insurance Corporation (the "FDIC"). Federal banking and other
laws impose a number of requirements and restrictions on the operations of
depository institutions. In addition, the Corporation and certain of its
banking subsidiaries and branches located outside the United States are
subject to the requirements of and supervision by the regulatory authorities
in the countries in which they operate.
The FRB and the OCC exercise overall regulatory control over Safra Republic.
In addition, the Luxembourg Monetary Institute (the "IML"), by virtue of the
European Directive on consolidated supervision, exercises prudential
consolidated supervisory responsibilities and oversees the local subsidiaries'
compliance with local laws, regulations and banking practices.
RNYSC is subject to the supervision and regulation of the FRB, the SEC, the
New York Stock Exchange, the NASD, the National Futures Association, the
Commodity Futures Trading Commission, and other stock and commodity exchanges
and clearing houses of which it is a member. Both RNYSC and RFSC are subject
to the rules and regulations applicable to broker-dealers in each state in
which they operate. RFSC is also subject to the regulations of the SEC and the
NASD.
FIRREA
Pursuant to certain provisions of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), an insured depository
institution which is commonly controlled with another insured depository
institution is generally liable for any loss incurred, or reasonably
anticipated to be incurred, by the FDIC in connection with the default of such
commonly controlled institution, or any assistance provided by the FDIC to
such commonly controlled institution, which is in danger of default. The term
"default" is defined to mean the appointment of a conservator or receiver for
such institution, and "in danger of default" is defined generally as the
existence of certain conditions indicating that a default is likely to occur
in the absence of regulatory assistance. Thus, the Bank could incur liability
to the FDIC pursuant to this statutory provision in the event of the default
of any of the other insured depository institutions owned or controlled by the
Corporation. Such liability is subordinated in right of payment to deposit
liabilities, secured obligations, any other general or senior liability, and
any obligation subordinated to depositors or other general creditors, other
than obligations owed to any affiliate of the depository institution (with
certain exceptions) and any obligations to shareholders in such capacity.
In its resolution of the problems of an insured depository institution in
default or in danger of default, the FDIC is generally required to satisfy its
obligations to insured depositors at the least possible cost to the deposit
insurance fund. In addition, the FDIC may not take any action that would have
the effect of increasing the losses to the deposit insurance fund by
protecting depositors for more than the insured portion of deposits (generally
$100,000) or creditors other than depositors. The Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") authorized the FDIC to settle
all uninsured and unsecured claims in the insolvency of an insured bank by
making a final settlement payment after the declaration of insolvency. Such a
payment would constitute full payment and disposition of the FDIC's
obligations to claimants. The rate of such final settlement payment is to be a
percentage rate determined by the FDIC reflecting an average of the FDIC's
receivership recovery experience.
FDICIA
In general, FDICIA subjects banks to significantly increased regulation and
supervision. Among other things, FDICIA requires federal bank regulatory
authorities to take "prompt corrective action" in respect of banks that do not
meet minimum capital requirements. FDICIA establishes five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under the Comptroller's
regulations, a bank is defined to be well capitalized if it maintains a risk-
adjusted Tier 1 capital ratio of at least 6%, a risk-adjusted total capital
ratio of at least 10% and a Tier 1 leverage capital ratio of at least 5%, and
is not otherwise in a "troubled condition" as specified by its appropriate
federal regulatory agency. A bank is defined to be adequately capitalized if
it maintains a risk-adjusted Tier 1 ratio of at least 4%, a risk-adjusted
total capital ratio of at least 8%, and a Tier 1 leverage ratio of at least 4%
(3% for certain highly rated institutions), and does not otherwise meet the
well capitalized definition. The three undercapitalized categories are based
upon the amount by which the bank falls below the ratios applicable to
adequately capitalized institutions. A depository institution may be deemed to
be in a capitalization category that is lower than is indicated by its actual
capital position if it receives an unsatisfactory examination rating. The
capital categories are determined solely for the purposes of applying FDICIA's
prompt corrective action ("PCA") provisions, as discussed below, and such
capital categories may not constitute an accurate representation of the
overall financial condition or prospects of the Bank.
Under FDICIA's PCA system, a bank in the undercapitalized category must
submit a capital restoration plan guaranteed by its parent company. The
liability of the parent company under any such guarantee is limited to the
lesser of 5% of the bank's assets at
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the time it became undercapitalized or the amount needed to comply with the
plan. A bank in the undercapitalized category is also subject to limitations
in numerous areas including, but not limited to, asset growth, acquisitions,
branching, new business lines, acceptance of brokered deposits and borrowings
from the Federal Reserve System. Progressively more burdensome restrictions
are applied to banks in the undercapitalized category that fail to submit or
implement a capital plan and to banks that are in the significantly
undercapitalized or critically undercapitalized categories. In addition, a
bank's primary federal banking agency is authorized to downgrade the bank's
capital category to the next lower category upon a determination that the bank
is in an unsafe or unsound condition or is engaged in an unsafe or unsound
practice. An unsafe or unsound practice can include receipt by the institution
of a rating on its most recent examination of 3 or worse (on a scale from 1
(best) to 5 (worst)), with respect to its asset quality, management, earnings
or liquidity.
Undercapitalized banks are subject to limitations on the payment of
dividends and on offering interest rates on deposits higher than the
prevailing rate in its market; in addition, "pass through" deposit insurance
coverage may not be available for certain employee benefit accounts.
Significantly undercapitalized banks may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting
stock to become adequately capitalized, requirements to reduce total assets,
and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized institutions (which are defined to include institutions which
still have a positive net worth) are generally subject to the mandatory
appointment of a receiver or conservator.
FDICIA and the regulations issued thereunder also have (i) limited the use
of brokered deposits to well capitalized banks and adequately capitalized
banks that have received waivers from the FDIC, (ii) established restrictions
on the permissible investments and activities of FDIC insured state chartered
banks and their subsidiaries, (iii) implemented uniform real estate lending
rules, (iv) prescribed standards to limit the risks posed by credit exposure
between banks, (v) revised risk-based capital rules to include components for
measuring the risk posed by interest rate changes, (vi) amended various
consumer banking laws, (vii) increased restrictions on loans to a bank's
insiders, (viii) established standards in a number of areas to assure bank
safety and soundness, and (ix) implemented additional requirements for
institutions that have $500 million or more in total assets with respect to
annual independent audits, audit committees, and management reports related to
financial statements, internal controls and compliance with designated laws
and regulations.
FDICIA also directs that each federal banking agency prescribe new safety
and soundness standards for depository institutions and depository institution
holding companies relating to internal controls, information systems, internal
audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, a maximum rate of classified assets to
capital, minimum earnings sufficient to absorb losses, a minimum ratio of
market value to book value for publicly traded shares and other standards
which the agencies deem appropriate. In general, the standards are expected to
increase the regulatory burden and expense of conducting the banking business.
DEPOSIT INSURANCE
The Bank's deposits are insured by and are subject to FDIC insurance
assessments. The FDIC's deposit insurance assessments have moved under FDICIA
from a flat-rate system to a risk-based system. The risk-based system places a
bank in one of nine risk categories, principally on the basis of its capital
level and an evaluation of the bank's risk to the insurance fund, and bases
premiums on the probability of loss to the FDIC with respect to each
individual bank. On November 26, 1996, the FDIC Board of Directors voted to
retain the existing Bank Insurance Fund ("BIF") premium schedule for the first
semiannual period of 1997. The annual premium schedule ranges from 0 basis
points to 27 basis points. The imposition of the BIF premium schedule will not
have a material effect on the Bank's earnings. It is, however, possible that
the BIF deposit insurance premiums will be revised by the FDIC in the future.
In October 1996 the Deposit Insurance Funds Act of 1996 (the "Funds Act")
was enacted. The Funds Act authorizes the Financing Corporation ("FICO") to
levy assessments on BIF-assessable deposits and deposits assessable by the
Savings Association Insurance Fund ("SAIF") commencing January 1, 1997. The
FICO assessment rate for the first semiannual period of 1997 is 1.30 basis
points annually for BIF-assessable deposits and 6.48 basis points annually for
SAIF-assessable deposits. These rates may be adjusted quarterly. By law, the
FICO rate on BIF-assessable deposits must be one-fifth the rate on SAIF-
assessable deposits until the earlier of the merger of the insurance funds or
January 1, 2000. The Bank's deposits include both BIF-assessable deposits and
SAIF-assessable deposits. The SAIF-assessable deposits are a result of the
Corporation's recent acquisitions of the deposits of savings associations.
Because the Corporation has both BIF-assessable and SAIF-assessable deposits,
it is subject to both assessment rates. The amounts payable to FICO by the
Corporation are in addition to other FDIC deposit insurance premiums and thus
represent an increased cost to the Corporation.
OTHER DEVELOPMENTS
FDICIA requires that each federal banking agency revise its risk-based
capital rules to ensure that those rules take account of interest rate risk,
concentration of credit risk and the risk of non-traditional activities. In
August 1995, the Comptroller approved a final rule amending its risk-based
capital rules to take account of interest rate risk. In addition, in December
1994, the Comptroller amended its risk-based capital rules explicitly to
identify concentrations of credit risk and certain risks arising from non-
traditional activities, as well as a bank's ability to manage those risks, as
important factors in assessing a banking institution's overall capital
adequacy. The Bank does not believe that the consideration of interest rate
risk, concentrations of credit risk and the risks of non-traditional
activities will have a material effect on its minimum risk-based capital
requirements.
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Effective October 1, 1995, the Comptroller amended its risk-based capital
rules to refine, for capital consumption purposes, the treatment of derivative
financial instruments on which a bank has credit exposure. The Corporation
does not believe that the amendment will have a material effect on the Bank's
minimum risk-based capital requirements.
In September 1994, Congress enacted IBEA, which permits nationwide
interstate bank acquisitions beginning in 1995, and interstate bank branching
in 1997 (or earlier at a state's option). While it is too early to assess the
impact of IBEA, the Corporation does not currently believe that the changes to
the country's banking system brought about by this statute will have a
material effect on its business.
Various legislative proposals have been introduced in Congress in recent
years, including, among others, proposals regulating the derivatives
activities of banks and permitting affiliations between banks and commercial
or securities firms. It is impossible to predict whether or in what form these
proposals may be adopted in the future and, if adopted, what their effect will
be on the Corporation.
DIVIDENDS
The Corporation's ability to pay dividends is dependent upon its receipt of
dividends from its subsidiaries and on its earnings from investments. National
banks may use only capital surplus that represents earnings, not paid-in
capital, when calculating permissible dividends. The approval of the OCC is
required if the total of all dividends declared or proposed to be declared by
the Bank in any calendar year exceeds the Bank's net profits, as defined, for
that year, combined with its retained net profits for the preceding two
calendar years. The OCC also has authority to prohibit a national bank from
engaging in what, in its opinion, constitutes an unsafe or unsound practice in
conducting its business. The payment of dividends could, depending upon the
financial condition of the Bank, be deemed to constitute such an unsafe or
unsound practice. Based on the Bank's financial position at December 31, 1996,
the Bank may declare dividends in 1997, without regulatory approval, of
approximately $281 million plus an additional amount equal to its net profits
for 1997 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, neither RNYSC nor RFSC may
pay cash dividends if doing so would reduce the company's net capital ratio to
less than 5 percent.
ITEM 2. PROPERTIES
The Corporation has its principal offices in its world headquarters building
at 452 Fifth Avenue, New York, New York 10018, which is owned and occupied
principally by the Bank. The Bank owns properties in Miami, Florida; Buenos
Aires, Argentina; Santiago, Chile; Montevideo, Uruguay; Mexico City, Mexico;
Milan, Italy, and London, England, which house the Bank's or its subsidiaries'
offices in those locations. The Bank also owns other properties in New York
City, which are principally occupied by branches. All of the remainder of the
Corporation's offices and other facilities throughout the world are leased.
ITEM 3. LEGAL PROCEEDINGS
The nature of its business generates a certain amount of litigation against
the Corporation involving matters arising in the ordinary course of the
Corporation's business. None of the legal proceedings currently pending or
threatened to which the Corporation or its subsidiaries is a party or to which
any of their properties are subject will have, in the opinion of management of
the Corporation, a material effect on the business or financial condition of
the Corporation or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No meetings of security holders were held during the fourth quarter of 1996.
6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Corporation is listed on the New York Stock Exchange
(ticker symbol RNB) and the London Stock Exchange. At December 31, 1996, there
were 2,868 stockholders of record of outstanding Common Stock of the
Corporation.
The following table presents the range of high, low and closing sale prices
reported on the New York Stock Exchange Composite Tape and cash dividends
declared for each quarter during the past two years.
1996 1995
------------------------------- --------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.
------ ----- ------ ----- ------ ----- ------ -----
Common stock sale price:
High................... $88 5/8 $71 $65 3/8 $63 1/2 $65 $60 1/2 $56 $49 7/8
Low.................... 68 7/8 58 1/2 56 56 57 7/8 53 7/8 46 7/8 44 3/4
Close.................. 81 5/8 69 1/8 62 1/4 59 1/2 62 1/8 58 1/2 56 49 1/8
Cash dividends
declared............... .38 .38 .38 .38 .36 .36 .36 .36
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.
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
Dividends declared per common share.......... $1.52 $1.44 $1.32 $1.08 $1.00
Dividend payout ratio........................ 21.81% 31.37% 23.53% 21.39% 23.15%
The quarterly dividend rate on Common Stock has been increased to $.46 per
share commencing with the dividend payable April 1, 1997.
ITEM 6. SELECTED FINANCIAL DATA
For information regarding selected financial highlights, see "Supplementary
Data" in "Financial Statements and Supplementary Data" elsewhere in this
Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Net income was a record $418.8 million in 1996, compared to $288.6 million
in 1995 and $340.0 million in 1994. The results for 1995 included a pre-tax
provision for restructuring and related charges of $120.0 million. Fully
diluted earnings per share were $6.97 in 1996, $4.59 in 1995 after $1.44 per
share related to the restructuring charge, and $5.61 in 1994.
The Corporation's risk-based capital ratios, which include the risk-weighted
assets and capital of Safra Republic, were 13.80% for Tier 1 capital and
23.28% for total capital at December 31, 1996. These ratios substantially
exceeded the regulatory minimums for bank holding companies of 4% for Tier 1
capital and 8% for total capital.
Total average interest-earning assets were $40.0 billion in 1996, with
approximately 43% invested in securities of the U.S. Government and its
agencies, and interest-bearing deposits with banks. Average loans in domestic
offices of $8.3 billion represented approximately 21% of average interest-
earning assets in 1996. Average loans in foreign offices of $3.7 billion
represented less than 10% of total average interest-earning assets in 1996.
Non-accrual loans were $105.1 million at year end 1996, of which $49.6
million are covered by a loss sharing agreement with the FDIC related to the
CrossLand acquisition. Non-accrual loans were 0.90% of total loans
outstanding, at year end 1996, compared to 0.69% at year end 1995. At December
31, 1996, the allowance for possible credit losses was $350.4 million, or
2.99% of loans outstanding and 333% of non-performing loans.
Income from trading activities was $175.8 million in 1996, unchanged from
1995. Increased income from the emerging markets trading unit and derivative
products offset lower levels of income from foreign exchange trading and
precious metals activities.
Earnings from Safra Republic rose to $93.4 million in 1996 from $79.5
million in 1995.
The Corporation's returns on average total assets and average common
stockholders' equity, based on net income applicable to common stock, were
0.80% and 15.24%, respectively in 1996. The book value per common share rose
to $50.01 at year end 1996 from $43.24 at year end 1995.
7
RESULTS OF OPERATIONS
The following table presents condensed consolidated statements of income for
the Corporation for each of the years in the three-year period ended December
31, 1996. The results of BBI and its wholly-owned subsidiary CrossLand, which
was acquired on February 29, 1996 and accounted for as a purchase, are
included from the date of acquisition. These statements differ from the
Corporation's consolidated financial statements presented elsewhere in this
Report in that net interest income is presented on a fully-taxable equivalent
basis. The tax equivalent adjustment, related to certain tax exempt
instruments, permits all interest income and net interest income to be
analyzed on a comparable basis. The rate used for this adjustment, which is
reflected throughout this section, is 44%.
INCREASE INCREASE
(DECREASE) (DECREASE)
--------------- ---------------
1996 AMOUNT % 1995 AMOUNT % 1994
---------- -------- ----- ---------- -------- ----- ----------
(DOLLARS IN THOUSANDS)
Interest income......... $2,865,032 $383,073 15.4 $2,481,959 $273,138 12.4 $2,208,821
Interest expense........ 1,870,898 243,126 14.9 1,627,772 300,917 22.7 1,326,855
---------- -------- ---------- -------- ----------
Net interest income..... 994,134 139,947 16.4 854,187 (27,779) (3.1) 881,966
Provision for credit
losses................. 32,000 20,000 166.7 12,000 (7,000) (36.8) 19,000
---------- -------- ---------- -------- ----------
Net interest income
after provision for
credit losses.......... 962,134 119,947 14.2 842,187 (20,779) (2.4) 862,966
Other operating income.. 446,115 33,234 8.0 412,881 26,513 6.9 386,368
Other operating
expenses............... 785,754 (35,911) (4.4) 821,665 100,189 13.9 721,476
---------- -------- ---------- -------- ----------
Income before income
taxes.................. 622,495 189,092 43.6 433,403 (94,455) (17.9) 527,858
---------- -------- ---------- -------- ----------
Income taxes............ 171,706 62,240 56.9 109,466 (42,892) (28.2) 152,358
Tax equivalent
adjustment............. 31,949 (3,339) (9.5) 35,288 (204) (0.6) 35,492
---------- -------- ---------- -------- ----------
Total applicable income
taxes.................. 203,655 58,901 40.7 144,754 (43,096) (22.9) 187,850
---------- -------- ---------- -------- ----------
Net income.............. $ 418,840 $130,191 45.1 $ 288,649 $(51,359) (15.1) $ 340,008
========== ======== ===== ========== ======== ===== ==========
Net income applicable to
common stock........... $ 387,322 $135,140 53.6 $ 252,182 $(53,416) (17.5) $ 305,598
========== ======== ===== ========== ======== ===== ==========
NET INTEREST INCOME
The following table contains information on the Corporation's average asset
and liability structure and rates earned and paid for each of the years in the
three-year period ended December 31, 1996, which are discussed throughout this
section.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE
INTEREST RATES INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID BALANCE EXPENSE PAID BALANCE EXPENSE PAID
----------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
Interest-earning
assets:
Interest-bearing
deposits with banks.. $ 5,697,285 $ 376,030 6.60% $ 7,627,905 $ 526,185 6.90% $ 7,878,149 $ 414,294 5.26%
Investment
securities(1):
Taxable............... 17,899,644 1,279,226 7.15 11,687,830 927,740 7.94 11,965,375 871,785 7.29
Exempt from federal
income taxes(2)...... 1,511,573 125,206 8.28 1,320,208 125,032 9.47 1,191,303 112,275 9.42
----------- ---------- ----------- ---------- ----------- ----------
Total investment
securities.......... 19,411,217 1,404,432 7.24 13,008,038 1,052,772 8.09 13,156,678 984,060 7.48
Trading account
assets(3)............ 1,156,531 67,279 5.82 966,483 55,736 5.77 1,014,942 55,736 5.49
Federal funds sold and
securities purchased
under resale
agreements........... 1,773,945 98,061 5.53 1,567,809 97,547 6.22 1,418,607 57,915 4.08
Loans, net of unearned
income(4):
Domestic offices...... 8,329,626 673,446 8.08 6,637,384 551,579 8.31 6,606,904 499,985 7.57
Foreign offices....... 3,650,052 245,784 6.73 2,890,341 198,140 6.86 3,287,291 196,831 5.99
----------- ---------- ----------- ---------- ----------- ----------
Total loans, net of
unearned income..... 11,979,678 919,230 7.67 9,527,725 749,719 7.87 9,894,195 696,816 7.04
----------- ---------- ----------- ---------- ----------- ----------
Total interest-
earning assets...... 40,018,656 $2,865,032 7.16% 32,697,960 $2,481,959 7.59% 33,362,571 $2,208,821 6.62%
========== ==== ========== ==== ========== ====
Cash and due from
banks................. 728,185 607,169 664,665
Other assets(5)........ 7,887,199 8,209,707 7,394,711
----------- ----------- -----------
Total assets......... $48,634,040 $41,514,836 $41,421,947
=========== =========== ===========
8
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE
INTEREST RATES INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID BALANCE EXPENSE PAID BALANCE EXPENSE PAID
----------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
Interest-bearing funds:
Consumer and other
time deposits........ $10,797,056 $ 430,416 3.99% $ 7,650,443 $ 318,874 4.17% $ 7,933,799 $ 246,133 3.10%
Certificates of
deposit.............. 1,031,044 51,618 5.01 871,289 48,573 5.57 619,916 26,325 4.25
Deposits in foreign
offices.............. 14,644,586 800,171 5.46 12,769,411 770,628 6.03 12,064,790 555,332 4.60
----------- ---------- ----------- ---------- ----------- ----------
Total interest-
bearing deposits.... 26,472,686 1,282,205 4.84 21,291,143 1,138,075 5.35 20,618,505 827,790 4.01
Trading account
liabilities(3)....... 170,393 11,841 6.95 37,117 2,561 6.90 145,993 8,736 5.98
Short-term
borrowings........... 6,563,751 321,234 4.89 4,609,403 216,243 4.69 5,574,157 209,793 3.76
Total long-term debt.. 4,019,216 255,618 6.36 4,120,206 270,893 6.57 4,924,002 280,536 5.70
----------- ---------- ----------- ---------- ----------- ----------
Total interest-
bearing funds....... 37,226,046 $1,870,898 5.03% 30,057,869 $1,627,772 5.42% 31,262,657 $1,326,855 4.24%
========== ==== ========== ==== ========== ====
Noninterest-bearing
deposits:
In domestic offices... 2,020,937 1,514,908 1,368,838
In foreign offices.... 138,352 116,881 109,490
Other liabilities...... 6,132,333 7,039,751 6,039,394
Stockholders' equity:
Preferred stock....... 574,685 635,457 630,592
Common stockholders'
equity............... 2,541,687 2,149,970 2,010,976
----------- ----------- -----------
Total stockholders'
equity.............. 3,116,372 2,785,427 2,641,568
----------- ----------- -----------
Total liabilities and
stockholders'
equity.............. $48,634,040 $41,514,836 $41,421,947
=========== =========== ===========
Interest income/earning
assets................ $2,865,032 7.16% $2,481,959 7.59% $2,208,821 6.62%
Interest
expense/earning
assets................ 1,870,898 4.68 1,627,772 4.98 1,326,855 3.98
---------- ---- ---------- ---- ---------- ----
Net interest
differential.......... $ 994,134 2.48% $ 854,187 2.61% $ 881,966 2.64%
========== ==== ========== ==== ========== ====
- -------
(1) Based on amortized or historic cost with the mark-to-market adjustment on
securities available for sale included in other assets.
(2) Income has been fully adjusted to a fully-taxable equivalent basis. The
rate used for this adjustment was approximately 44%.
(3) Excludes noninterest-bearing balances which are included in other assets
or other liabilities, respectively.
(4) Including non-accrual loans.
(5) Including allowance for possible credit losses.
Net interest income increased $139.9 million, or 16.4%, to $994.1 million in
1996, compared to $854.2 million in 1995. While spreads narrowed in 1996 when
compared to the prior year, average interest-earning assets rose $7.3 billion
in 1996, to $40.0 billion, or 22.4% over 1995. This increase was primarily due
to the additional interest-earning assets acquired from BBI, and the
investment of proceeds from deposit liabilities acquired from First Nationwide
Savings Bank, Bank Leumi Trust Company and Independence Savings Bank. Higher
levels of investment securities were funded by deposits in foreign offices and
short-term borrowings. The net interest rate differential declined to 2.48% in
1996, from 2.61% in 1995, as the rate on interest-earning assets declined more
than the rate on interest-bearing funds.
Net interest income declined $27.8 million, or 3.1%, to $854.2 million in
1995, compared to $882.0 in 1994. This decline was due to narrower spreads, as
the cost of interest-bearing funds rose more than the yields on interest-
earning assets. Average interest-earning assets declined 2.0% to $32.7 billion
in 1995 from $33.4 billion in 1994. The net interest rate differential
declined to 2.61% in 1995, compared to 2.64% in 1994. Net interest income in
1995 included a one-time increase of $5.9 million attributable to converting
financial reporting of Factors and the Corporation's operations in Chile and
Uruguay to a current basis in the fourth quarter. In the fourth quarter of
1994, net interest income included a similar addition amounting to $6.3
million attributable to the Corporation's operations in Hong Kong and
Singapore.
At year ends 1996 and 1995, the gross notional amount of off-balance-sheet
contracts used in asset and liability management was approximately $13.6
billion and $9.8 billion, respectively. At year ends 1996 and 1995, the market
value of these off-balance-sheet contracts reflected unrealized losses of
approximately $50 million and $121 million, respectively. At December 31, 1996
and 1995 the net effect of these hedging transactions decreased the net
interest rate differential by 3 basis points.
9
The following table presents changes in the levels of interest income and
interest expense attributable to changes in volume or rate. Changes not solely
due to volume or rate are allocated to volume.
INCREASE (DECREASE)
-------------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
------------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- --------- --------- -------- -------- --------
(IN THOUSANDS)
Interest income from:
Interest-bearing
deposits with banks.. $(127,271) $ (22,884) $(150,155) $(17,311) $129,202 $111,891
Taxable securities.... 443,820 (92,334) 351,486 (21,820) 77,775 55,955
Securities exempt from
federal income
taxes................ 15,884 (15,710) 174 12,161 596 12,757
Trading account
assets............... 11,060 483 11,543 (2,842) 2,842 --
Federal funds sold and
securities purchased
under resale
agreements........... 11,332 (10,818) 514 9,274 30,358 39,632
Loans, net of unearned
income:
Domestic offices.... 137,133 (15,266) 121,867 2,703 48,891 51,594
Foreign offices..... 51,401 (3,757) 47,644 (27,290) 28,599 1,309
--------- --------- --------- -------- -------- --------
Total interest on
loans............ 188,534 (19,023) 169,511 (24,587) 77,490 52,903
--------- --------- --------- -------- -------- --------
Total interest
income........... 543,359 (160,286) 383,073 (45,125) 318,263 273,138
--------- --------- --------- -------- -------- --------
Interest expense on:
Consumer and other
time deposits........ 125,313 (13,771) 111,542 (12,151) 84,892 72,741
Certificates of
deposit.............. 7,924 (4,879) 3,045 14,065 8,183 22,248
Deposits in foreign
offices.............. 102,329 (72,786) 29,543 42,770 172,526 215,296
Trading account
liabilities.......... 9,261 19 9,280 (7,518) 1,343 (6,175)
Short-term
borrrowings.......... 95,772 9,219 104,991 (45,390) 51,840 6,450
Total long-term debt.. (6,623) (8,652) (15,275) (52,482) 42,839 (9,643)
--------- --------- --------- -------- -------- --------
Total interest
expense.......... 333,976 (90,850) 243,126 (60,706) 361,623 300,917
--------- --------- --------- -------- -------- --------
Change in net interest
income................. $ 209,383 $ (69,436) $ 139,947 $ 15,581 $(43,360) $(27,779)
========= ========= ========= ======== ======== ========
PROVISION FOR CREDIT LOSSES
The Corporation determines its provision for credit losses based on factors
such as past credit loss experience, the composition of the loan portfolio and
other potential credit exposures and prevailing worldwide economic conditions.
The provision for credit losses rose to $32 million in 1996, compared to $12
million in 1995 and $19 million in 1994. While no specific credit concerns
exist, the increase in the provision for credit losses in 1996 over the prior
year was considered prudent by management in consideration of increased
domestic and foreign exposures. In 1995, a weakening in the domestic chain
store sector contributed to higher levels of domestic charge-offs that were
partially offset by recoveries from foreign debtors in foreign restructuring
countries. The decline in the provision in 1995 from the prior year reflected
management's view that the level of the allowance for credit losses was
adequate to provide for potential credit losses. In 1994, 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, net charge-offs and the provision for credit losses. For
additional information on loan charge-offs and recoveries and the provision
for credit losses, see "Asset Management--Allowance for Possible Credit
Losses" in this section of this Report.
Net charge-offs were $25.0 million in 1996, compared to $31.3 million in
1995. The allowance for possible credit losses was $350.4 million at year end
1996, or 2.99% of loans outstanding, net of unearned income, an increase of
$49.8 million from the $300.6 million at year end 1995. This increase was
primarily due to the $42.6 million allowance acquired in the BBI transaction.
The allowance for possible credit losses was $319.2 million at year end 1994.
10
OTHER OPERATING INCOME
The following table presents the principal categories of other operating
income for each of the years in the three-year period ended December 31, 1996.
INCREASE INCREASE
(DECREASE) (DECREASE)
--------------- ---------------
1996 AMOUNT % 1995 AMOUNT % 1994
-------- -------- ----- -------- -------- ----- --------
(DOLLARS IN THOUSANDS)
Trading income:
Income from precious
metals................. $ 24,700 $(13,349) (35.1) $ 38,049 $(12,881) (25.3) $ 50,930
Foreign exchange trading
income................. 98,165 (14,886) (13.2) 113,051 22,023 24.2 91,028
Trading account profits
and commissions........ 52,941 28,195 113.9 24,746 (2,611) (9.5) 27,357
-------- -------- -------- -------- --------
Total trading income.. 175,806 (40) -- 175,846 6,531 3.9 169,315
Investment securities
gains, net............. 23,247 (2,416) (9.4) 25,663 10,692 71.4 14,971
Net gain on loans sold
or held for sale....... 974 (5,791) (85.6) 6,765 5,002 * 1,763
Commission income....... 71,393 14,458 25.4 56,935 (362) (0.6) 57,297
Equity in earnings of
affiliate.............. 93,418 13,937 17.5 79,481 2,105 2.7 77,376
Other income............ 81,277 13,086 19.2 68,191 2,545 3.9 65,646
-------- -------- -------- -------- --------
$446,115 $ 33,234 8.0 $412,881 $ 26,513 6.9 $386,368
======== ======== ===== ======== ======== ===== ========
- -------
* Exceeds 200%
Total Trading Income
The following table presents the components of total trading related income
for each of the years in the three year period ended December 31, 1996. Net
interest income/(expense) included below represents the net interest
earned/paid on instruments held for trading, as well as a management
allocation reflecting the funding cost or benefit associated with the trading
positions.
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Income from precious metals:
Trading revenue................................. $ 24,700 $ 38,049 $ 50,930
Net interest income/(expense)................... (3,075) (15,587) (31,812)
-------- -------- --------
Combined total................................ 21,625 22,462 19,118
-------- -------- --------
Foreign exchange trading income:
Trading revenue................................. 98,165 113,051 91,028
Net interest income/(expense)................... (7,417) (11,685) (6,468)
-------- -------- --------
Combined total................................ 90,748 101,366 84,560
-------- -------- --------
Trading account profits and commissions:
Trading revenue................................. 52,941 24,746 27,357
Net interest income/(expense)................... 25,987 24,737 32,842
-------- -------- --------
Combined total................................ 78,928 49,483 60,199
-------- -------- --------
Total:
Trading revenue................................. 175,806 175,846 169,315
Net interest income/(expense)................... 15,495 (2,535) (5,438)
-------- -------- --------
Combined total................................ $191,301 $173,311 $163,877
======== ======== ========
Total trading income including interest rose to $191.3 million in 1996 from
$173.3 million in 1995. Total trading income including interest rose slightly
to $173.3 million in 1995 from $163.9 million in 1994. During 1996, total
trading activities generated net interest income of $15.5 million compared to
net interest expense of $2.5 million in 1995 and $5.4 million in 1994. The
year-to-year increase in total trading income in 1996 reflected, in part, the
addition of the emerging markets trading unit and other revenue increases
generated from trading securities and derivative related products.
Precious Metals
Income from precious metals is derived from the Corporation's activities as
a dealer in gold and silver bullion and coins sold to commercial and
industrial users and investors, as well as its trading and arbitrage
activities in the precious metals markets. Income from precious metals was
$21.6 million in 1996, as compared to $22.5 million in 1995 and $19.1 million
in 1994. The change in 1996 from the prior year reflected lower trading
revenue that was offset by lower interest costs to fund trading activities.
During 1995, certain arbitrage and straddle opportunities normally available
in the precious metals markets were significantly reduced and were offset by
lower interest costs to fund precious metals activities which contributed to
the increase in income from 1994. The fluctuations in this income in each of
the last three years reflects volatility in price and volume in the precious
metals markets and the level of funds invested in precious metals activities.
11
Foreign Exchange
Foreign exchange trading income is derived from trading and market-making
activities in foreign currencies, transactions that service the needs of the
Corporation's customers, including other banks and corporations, and dealings
in banknotes, principally in New York, London and locations in the Far East.
Foreign exchange trading income was $90.7 million in 1996 compared to $101.4
million in 1995, which increased $16.8 million over the $84.6 million earned
in 1994. The decline in foreign exchange trading income in 1996 from 1995
reflected lower levels of volatility in the foreign exchange markets in 1996.
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 1995
and 1994. In addition, 1995 also benefited from higher levels of income from
market-making activities.
Trading Account Profits and Commissions
Total trading account profits and commissions were $78.9 million in 1996,
compared to $49.5 million in 1995 and $60.2 million in 1994. A significant
portion of this line of income is derived from dealings in fixed and variable
rate debt securities denominated in all major currencies with large financial
institutions, including investment banks, commercial banks and multinational
organizations, as well as high net worth individuals. More specifically,
trading account profits and commissions consist of income from trading
derivative products, emerging market fixed income securities, the securities
of the U.S. Government and its agencies, and to a lesser extent, the
government securities of countries where the Corporation has an active local
presence, such as Argentina, Brazil, Italy, Uruguay and Russia.
During the first quarter of 1996, the Corporation expanded its Emerging
Markets Trading Department to include activities as a dealer in certain
financial instruments of issuers located primarily in Latin America and other
developing countries. These instruments include Brady and other sovereign
eurobonds, forward sales and options on Brady Bonds, bank certificates of
deposit, sovereign local currency obligations and certain other products.
Customers for these products include financial institutions, multinational
corporations, other institutional investors and high net worth individuals.
Total income generated by this group's activities rose to $20.1 million in
1996 from $2.5 million in 1995 and $1.1 million in 1994.
The Corporation's derivative products group acts as a principal in providing
interest rate and currency swaps and options on these products, as well as
products related to the performance of various indices. This group operates in
New York and London. The Corporation's strategy includes providing financial
services to meet the changing needs of its customers and stresses product
innovation, both within existing product areas and between different product
areas. The level of activity and revenues related to off-balance-sheet
transactions increased in 1996 from the lower levels in 1995 and 1994. The
increase in total revenues in 1996 reflected improved levels of activity in
these markets, compared to generally reduced activity in the markets during
1995. For additional information related to derivative instruments, see Notes
4, 18 and 19 of "Notes to Consolidated Financial Statements" in "Financial
Statements and Supplementary Data" elsewhere in this Report.
Investment Securities Gains
The Corporation realized net investment securities gains of $23.2 million in
1996, $25.7 million in 1995 and $15.0 million in 1994. In 1996, 1995 and 1994,
the net gains were from sales of securities available for sale. Sales of
emerging market securities and securities which were redeemed by the issuer
prior to their scheduled maturity, resulted in gains of $9.8 million and $7.2
million, in 1996 and 1995, respectively. In 1994, gains of $52.0 million were
realized on the sale of Argentine equities acquired in a 1990 debt-for-equity
swap, and gains of $26.9 million were realized on the sale of all of the
securities received in connection with Brazil's debt restructuring. Also, in
1994, net losses of $63.9 million were incurred primarily as a result of the
disposition of securities sold as part of the Corporation's asset-liability
management program. The proceeds from securities sold were reinvested in other
high-quality, interest-earning assets.
Loans Sold or Held for Sale
Net gains on loans sold or held for sale were $1.0 million in 1996, $6.8
million in 1995 and $1.8 million in 1994. The net gains in both 1996 and 1995
resulted from the sale of originated mortgage loans. The Corporation has
retained the servicing rights on the loans sold. The net gains in 1994
resulted from the sale of loans of domestic, foreign and restructuring country
obligors.
Commission Income
Commission income included fees for the collection and transfer of funds and
asset management activities and the shipment of U.S. dollar denominated
banknotes. Total commission income amounted to $71.4 million in 1996, compared
to $56.9 million in 1995 and $57.3 million in 1994. Commission income included
fees for the issuance of letters of credit and the creation of acceptances of
$21.7 million in 1996 and $18.9 million in both 1995 and 1994. In 1996,
commissions attributable to securities clearance, funds transfer and money
management activities were $24.8 million compared to $20.1 million in 1995.
Commission income from the broker dealer business in the securities subsidiary
amounted to $5.2 million in 1996, compared to $4.4 million in 1995 and $6.2
million in 1994. Commission income from the shipment of U.S. dollar
denominated banknotes was $8.5 million in 1996, $2.6 million in 1995 and $2.3
million in 1994.
12
Affiliate Earnings
Equity in earnings of affiliate, representing the Corporation's share of the
earnings of Safra Republic, was $93.4 million in 1996, compared to $79.5
million in 1995 and $77.4 million in 1994.
The following table presents summary information for Safra Republic for each
of the last three years.
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
At December 31:
Total assets............................... $17,223,409 $15,660,544 $12,487,010
Interest-bearing deposits with banks....... 6,041,717 6,058,483 5,232,408
Loans, net of unearned income.............. 1,687,050 1,443,803 1,306,545
Allowance for possible credit losses....... 131,071 130,300 124,774
Non-performing loans....................... 10,777 19,697 13,454
Total deposits............................. 13,337,947 11,347,601 9,363,840
Total shareholders' equity................. $ 1,643,110 $ 1,467,807 $ 1,246,353
For the year:
Net interest income........................ $ 266,180 $ 235,402 $ 224,478
Provision for credit losses................ 12,000 1,000 12,000
Other operating income..................... 119,113 95,508 91,376
Other operating expenses................... 167,521 157,635 136,044
Net income................................. 189,830 162,104 158,575
Earnings per common share.................. $ 10.78 $ 9.16 $ 8.94
Average common shares outstanding.......... 17,609 17,692 17,738
For additional information on Safra Republic and its relationship with the
Corporation, see Note 7 of "Notes to Consolidated Financial Statements" and
"Affiliate Financial Statements" in "Financial Statements and Supplementary
Data" elsewhere in this Report.
Other Income
Other income consists of service charges on deposit accounts, trust income,
other income from factoring activities, fees for precious metals storage, and
correspondent securities clearing fees. Other income was $81.3 million in 1996
and included gains of $2.7 million on the sale of a New York retail branch,
$1.1 million from the repurchase and early extinguishment of an issue of $100
million principal amount of floating-rate subordinated long-term debt and $4.7
million of net gains on the sale of other real estate owned. In 1995 other
income was $68.2 million and included gains of $1.3 million on the sale of a
New York retail branch, $2.4 million from the sale of an equipment lease and
$1.9 million of net gains from other real estate owned. Other income was $65.6
million in 1994, including a $2.4 million gain on the early extinguishment of
$79.9 million principal amount of long-term debt.
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,
1996.
INCREASE
(DECREASE) INCREASE (DECREASE)
--------------- --------------------
1996 AMOUNT % 1995 AMOUNT % 1994
-------- --------- ---- -------- ------------ ------- --------
(DOLLARS IN THOUSANDS)
Salaries and employee
benefits............... $420,101 $ 38,485 10.1 $381,616 $ 433 0.1 $381,183
Occupancy, net.......... 72,692 14,717 25.4 57,975 2,550 4.6 55,425
Other expenses.......... 292,961 30,887 11.8 262,074 (5,794) (2.2) 267,868
-------- --------- -------- ----------- --------
785,754 84,089 12.0 701,665 (2,811) (0.4) 704,476
Restructuring and
related charges........ -- (120,000) * 120,000 103,000 * 17,000
-------- --------- -------- ----------- --------
Total other operating
expenses............. $785,754 $ (35,911) (4.4) $821,665 $ 100,189 13.9 $721,476
======== ========= ==== ======== =========== ======= ========
- -------
* Exceeds 200%
Total operating expenses before restructuring and related charges were
$785.8 million in 1996, $701.7 million in 1995 and $704.5 million in 1994. The
increase in total other operating expenses before restructuring and related
charges in 1996 reflected approximately $73.3 million of expenses attributable
to the acquisition of BBI and other branches purchased from Bank Leumi, First
Nationwide Bank FSB and Independence Savings Bank during the year.
During 1996, the Corporation invested in initiatives designed to increase
revenues in future periods and in infrastructure to support and control those
operations. Retail banking expenses increased as a result of the branch
expansion mentioned above. Growth in the volumes of mortgage and home equity
loans, as well as, increased sales of investment products resulted in the
payment of additional fees for related services.
13
The Corporation continued to invest in broadening the array of its
investment product offerings, including the recent introduction of an asset
allocation product which is targeted at retail clients. Republic Financial
Services saw significant expansion during the year to include offering full-
service and discount securities brokerage services to corporate and retail
clients. The Corporation also invested in trading market services and in
advanced risk management systems to support its expanding trading operations.
The development of a new profitability measuring system which will enable the
Corporation to efficiently measure and present line of business results also
contributed to the higher expense level.
In the second quarter of 1995, the Corporation recorded a $120.0 million
pre-tax provision for restructuring and related charges as a result of the
implementation of Project Excellence Plus. For additional information on this
charge see Note 14 of "Notes to Consolidated Financial Statements" in
"Financial Statements and Supplementary Data" elsewhere in this Report. In
addition, in 1995, the Corporation converted the financial reporting of
Factors and its operations in Chile and Uruguay to a current basis in the
fourth quarter of the year. The conversion resulted in a one-time increase to
expense of $3.4 million for the year. The restructuring and related charges in
1994 resulted from a management decision to de-emphasize certain business
activities, including those of RNYSC. In 1994, a similar conversion of
financial reporting of the Corporation's Hong Kong and Singapore operations
resulted in a one-time increase to expenses of $3.0 million.
Salaries and Employee Benefits
Salaries and employee benefits were $420.1 million in 1996, $381.6 million
in 1995 and $381.2 million in 1994. The increase in salaries and benefits in
1996 over the prior year reflects staff additions attributable to the
acquisitions mentioned above, recently established operations and to the
achievement of higher revenue thresholds that required higher provisions for
incentive compensation reflecting more competitive market conditions. The
level of salaries and benefits was virtually unchanged between 1995 and 1994,
due to the implementation of Project Excellence Plus, with resultant staff
reductions throughout the Corporation and lower provisions for employee
benefits.
Occupancy
Occupancy costs were $72.7 million in 1996, $58.0 million in 1995 and $55.4
million in 1994. The increase in 1996 is primarily due to the acquisition of
38 branches during the year that included a one-time charge of $2.0 million
related to branch consolidations. The increase in 1995 is primarily
attributable to increased rent expense.
Other Expenses
All other expenses were $293.0 million in 1996, $262.1 million in 1995 and
$267.9 million in 1994. Communication and equipment expenses represent a
substantial portion of other expenses which amounted to $75.8 million, $73.0
million and $76.1 million in 1996, 1995 and 1994, respectively. Amortization
of goodwill and other intangible assets rose to $28.7 million in 1996 from
$9.9 million in 1995 and $11.0 million in 1994. The 1996 increase is primarily
due to the acquisition of BBI and other branches that occurred during the
year. Also, professional fees, consisting of consulting, external legal and
audit fees, amounted to $29.2 million in 1996 compared to $30.7 million in
1995 and $35.7 million in 1994. All other expenses include premiums for
deposit insurance paid to the FDIC, which declined to $0.5 million in 1996,
compared to $11.7 million in 1995 and $22.6 million in 1994. The decline in
this expense in 1996 and 1995, when compared to the respective prior year, was
the result of a reduction of the premium rate paid for FDIC insurance. Other
expenses in 1995 also included the effect of adopting a change in the method
of accounting for charitable contributions that resulted in a $7.5 million,
one-time charge. Expenses applicable to net losses on other real estate owned
were $2.7 million in 1994.
TOTAL APPLICABLE INCOME TAXES
Total applicable income taxes, which includes the effect of a taxable
equivalent adjustment, increased $58.9 million in 1996 to $203.7 million,
following a decline of $43.1 million in 1995 from 1994. The ratio of total
applicable income taxes to income before taxes was 33% in 1996 and 1995 and
36% in 1994. The increase in total applicable income taxes in 1996 reflected
the higher level of taxable income for the year which was reduced by a one-
time $12.0 million tax benefit recognized as a result of a tax law change
enacted in August 1996. This one-time income tax benefit was recognized by the
Corporation because it was no longer liable for deferred taxes which had been
provided in prior years for credit provisions of Republic Bank for Savings.
The decline in total applicable income taxes and the lower effective income
tax rate in 1995 when compared to 1994, was attributable to lower earnings
caused by the provision for restructuring charges and fluctuations in the
level of income subject to federal, state and local income taxes.
NET INCOME APPLICABLE TO COMMON STOCK
Net income applicable to common stock was a record $387.3 million in 1996,
compared to $252.2 million in 1995 and $305.6 million in 1994. On a fully
diluted basis, earnings per common share were $6.97 in 1996, $4.59 in 1995 and
$5.61 in 1994. Dividends declared and the average annual rates paid on the
Corporation's issues of preferred stock were as follows: $31.5 million in 1996
at 5.48%, $36.5 million in 1995 at 5.74% and $34.4 million in 1994 at 5.46%.
14
LIABILITY AND ASSET MANAGEMENT
Changes in the level of interest rates and the relationship between rates
can affect 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 assets and liabilities
have approximately the same interest rate sensitivity.
Diversification is another principle employed in the management of
liabilities and assets. The Corporation is active in international banking
and, in managing this activity, diversifies risks among many countries and
counterparties throughout the world. Liabilities, which are mostly interest-
bearing deposits and other purchased funds, are obtained from both domestic
and international sources. These sources of funds represent a wide range of
depositors, mostly individuals, and various types of deposits. The Corporation
also raises funds from institutional and individual investors with a variety
of marketable instruments. The diversification of the Corporation's funding
sources provides stability of 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 interest
rate swaps, caps, options and forwards in managing its exposure to interest
rate sensitivity resulting from 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 simulated
changes in interest rates. A net interest income simulation model measures
this sensitivity. This model utilizes Monte Carlo simulation, a statistical
technique that allows the Corporation to build variability around current
market conditions. Inputs include the maturity and repricing characteristics
of the Corporation's on- and off-balance-sheet liability and asset positions
as well as assumptions on interest rates, asset prepayments, inter-bank
spreads and deposit growth. Given the assumptions used, the model's output
projects the variance in net interest income over the next year. The Board of
Directors adopted a limit of 5% of annual net interest income at risk, based
on this measured interest rate sensitivity. Results are periodically presented
to the Asset and Liability Management Committee and to the Board of Directors.
Simulation modeling gives a broader view of net interest income variability
than does traditional gap analysis, allowing the Corporation to capture more
variables that are interest rate sensitive and to explore interrelationships
between variables. To complement the simulation model, the Corporation employs
traditional gap analysis to provide information on longer term interest rate
sensitivity.
The table below illustrates the Corporation's interest rate sensitivity gap
position at December 31, 1996 and 1995. 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, 1996
--------------------------------------------------------------------
WITHIN AFTER ONE AFTER THREE AFTER SEVEN
ONE YEAR BUT WITHIN YEARS BUT WITHIN YEARS BUT WITHIN AFTER
YEAR THREE YEARS SEVEN YEARS TEN YEARS TEN YEARS
------- --------------- ---------------- ---------------- ---------
(IN MILLIONS)
ASSET/(LIABILITY)
Interest rate
sensitivity gap........ $(1,925) $ 261 $ 712 $2,020 $(1,068)
------- ------- ----- ------ -------
ASSET/(LIABILITY)
Cumulative interest rate
sensitivity gap........ $(1,925) $(1,664) $(952) $1,068 $ --
======= ======= ===== ====== =======
REPRICING PERIOD AT DECEMBER 31, 1995
--------------------------------------------------------------------
WITHIN AFTER ONE AFTER THREE AFTER SEVEN
ONE YEAR BUT WITHIN YEARS BUT WITHIN YEARS BUT WITHIN AFTER
YEAR THREE YEARS SEVEN YEARS TEN YEARS TEN YEARS
------- --------------- ---------------- ---------------- ---------
(IN MILLIONS)
ASSET/(LIABILITY)
Interest rate
sensitivity gap........ $ (611) $ (567) $ 243 $1,721 $ (786)
------- ------- ----- ------ -------
ASSET/(LIABILITY)
Cumulative interest rate
sensitivity gap........ $ (611) $(1,178) $(935) $ 786 $ --
======= ======= ===== ====== =======
15
In 1996, the Corporation made additional long-term investments, primarily
mortgage backed securities, which were funded with short-term liabilities in
order to take advantage of an anticipated stable interest rate environment. As
a result, more of the Corporation's liabilities will reprice within one year
than the assets which they fund. This resulted in an increase in the interest
rate sensitivity gap in the 1-3 and 4-7 year repricing periods.
The following table presents information related to the expected maturities
and weighted average interest rates to be received or paid on the interest
rate swap portfolio and other instruments used in asset-liability management.
Asset-liability management swaps are designated as hedges of an underlying
asset or liability at the inception of the contract.
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------------------------- -----------------------------------------------
DUE IN LESS DUE IN ONE DUE AFTER DUE IN LESS DUE IN ONE DUE AFTER
THAN ONE YEAR THRU FIVE YEARS FIVE YEARS TOTAL THAN ONE YEAR THRU FIVE YEARS FIVE YEARS TOTAL
------------- --------------- ---------- ------ ------------- --------------- ---------- ------
(DOLLARS IN MILLIONS)
Receive fixed swaps:
Notional amount....... $ -- $ 640 $ 950 $1,590 $ 195 $ 797 $ 675 $1,667
Weighted average
receive rate......... -- 8.43% 6.99% 7.57% 8.43% 7.67% 7.49% 7.69%
Weighted average pay
rate................. -- 5.83% 5.56% 5.67% 7.56% 6.23% 5.86% 6.24%
Pay fixed swaps:
Notional amount....... $ 30 $3,200 $ 220 $3,450 $ 216 $3,131 $ 259 $3,606
Weighted average
receive rate......... 5.84% 5.64% 7.60% 5.76% 8.07% 6.15% 9.94% 6.54%
Weighted average pay
rate................. 9.22% 7.01% 9.39% 7.18% 8.13% 7.48% 9.87% 7.69%
Forward contracts:
Notional amount....... $ -- $ 450 $ -- $ 450 $ -- $ 300 $ 150 $ 450
Interest rate caps
purchased:
Notional amount....... $1,687 $2,698 $ 150 $4,535 $ 30 $2,312 $ 250 $2,592
Other interest rate
swaps:
Notional amount....... $ 223 $ 882 $1,879 $2,984 $ 70 $ 368 $1,011 $1,449
Cross-currency swaps:
Notional amount....... $ 461 $ 109 $ -- $ 570 $ 77 $ 7 $ -- $ 84
In June 1996, Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" was issued. The SFAS as written, establishes
the criteria for determining whether a transfer of financial assets should be
accounted for as a sale or as a pledge of collateral in a secured borrowing.
This SFAS was adopted by the Corporation on January 1, 1997, except those
provisions relating to repurchase agreements, securities lending, and other
similar transactions and pledged collateral, which have been delayed until
after December 31, 1997 by SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125, an amendment of FASB Statement
No. 125." The adoption of this SFAS is not expected to have a material effect
on the Corporation's results of operations.
LIABILITY MANAGEMENT
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's customers
are from the New York City metropolitan area and Florida branch systems of the
Bank and the California branches of RBC. This customer base increased
significantly during 1996 with the addition of $3.6 billion of deposits from
approximately 385,000 accounts in the thirty branches acquired in the BBI
acquisition. In addition, eight branches with deposits aggregating
approximately $576 million were purchased from Bank Leumi Trust Company, First
Nationwide Bank FSB and the Independence Savings Bank. The Bank also has a
retail operation in southern Florida with eight branches. RBC is an
independent banking subsidiary servicing the California market with two
banking offices in Los Angeles County, that focuses on domestic private
banking and mortgage banking. Its customers invest in a diverse mix of retail
time and savings deposits of both short-term and long-term maturities. The
Bank's institutional customers are pension funds, money market funds and
corporate cash accounts. The Corporation has been successful in selling long-
term deposits to institutional and corporate investors, thereby generating a
source of long-term funds. The Corporation's Domestic Private Banking group
provides a fourth area with a focus on general banking and lending, trusts and
estates, custody and investment management relationships for high net worth
individuals.
16
The following table sets forth the Corporation's deposit structure at
December 31, in each of the last three years.
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
DOMESTIC OFFICES:
Noninterest-bearing deposits:
Individuals, partnerships and
corporations............................ $ 2,005,782 $ 1,494,015 $ 1,445,545
Foreign governments and official
institutions............................ 1,756 3,196 1,085
U.S. Government and states and political
subdivisions............................ 42,912 16,629 18,602
Banks.................................... 117,857 123,133 115,542
Certified and official checks............ 127,960 103,062 120,893
----------- ----------- -----------
Total noninterest-bearing deposits..... 2,296,267 1,740,035 1,701,667
----------- ----------- -----------
Interest-bearing deposits:
Individuals, partnerships and
corporations............................ 6,093,852 3,989,593 3,857,533
Savings and NOW accounts................. 3,277,077 2,428,295 2,684,499
Money market accounts.................... 2,812,222 2,001,830 1,940,605
Banks and other.......................... 376,403 1,734 1,925
Deposit notes............................ -- 50,000 50,000
----------- ----------- -----------
Total interest-bearing deposits........ 12,559,554 8,471,452 8,534,562
----------- ----------- -----------
Total deposits in domestic offices..... 14,855,821 10,211,487 10,236,229
----------- ----------- -----------
FOREIGN OFFICES:
Noninterest-bearing deposits............... 177,675 160,133 114,503
----------- ----------- -----------
Interest-bearing deposits:
Individuals, partnerships and
corporations............................ 8,010,355 7,404,510 7,179,880
Banks located in foreign countries....... 7,784,154 5,947,085 4,702,972
Foreign governments and official
institutions............................ 897,574 1,196,418 492,418
----------- ----------- -----------
Total interest-bearing deposits........ 16,692,083 14,548,013 12,375,270
----------- ----------- -----------
Total deposits in foreign offices...... 16,869,758 14,708,146 12,489,773
----------- ----------- -----------
Total deposits....................... $31,725,579 $24,919,633 $22,726,002
=========== =========== ===========
The following table presents the maturity distribution at December 31, 1996
of certificates of deposit and other time deposits of $100,000 or more
included in interest-bearing deposits in domestic offices in the previous
table.
CERTIFICATES OTHER TIME
OF DEPOSITS DEPOSITS TOTAL
-------------- -------------- ------------------
AMOUNT % AMOUNT % AMOUNT %
---------- --- ---------- --- ---------- ---
(DOLLARS IN THOUSANDS)
Due in 90 days and less....... $ 524,241 34 $1,229,341 80 $1,753,582 57
Due in 91-180 days............ 43,993 3 115,917 8 159,910 5
Due in 181-360 days........... 30,198 2 87,137 6 117,335 4
Due in over 360 days.......... 965,739 61 94,603 6 1,060,342 34
---------- --- ---------- --- ---------- ---
Total......................... $1,564,171 100 $1,526,998 100 $3,091,169 100
========== === ========== === ========== ===
FOREIGN DEPOSITS
The Corporation's International Private Banking Group, headquartered in New
York City, generates a substantial portion of foreign deposits by establishing
relationships with clients throughout the world.
Deposits from foreign sources are placed by over 25,000 individuals and
foreign banks from over 80 different countries in both domestic and foreign
branch offices and in foreign banking subsidiaries. This customer base is a
stable source of funding for the Corporation. Total average deposits in
foreign offices rose to $14.8 billion in 1996, after increasing to $12.9
billion in 1995 from $12.2 billion in 1994.
The following table presents information on the distribution, by type, of
the Corporation's foreign deposits at December 31 in each of the last three
years. The majority of the deposits in each category at the indicated dates
were in amounts in excess of $100,000.
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
Foreign deposits:
Time deposits of individuals,
partnerships and corporations........... $ 8,534,615 $ 7,979,187 $ 7,725,714
Banks and other financial institutions... 7,940,121 6,075,247 4,824,135
Foreign governments and official
institutions............................ 899,742 1,197,995 493,860
Other deposits........................... 174,800 111,132 84,584
----------- ----------- -----------
Total foreign deposits................. $17,549,278 $15,363,561 $13,128,293
=========== =========== ===========
17
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 payables for precious metals
and unrealized losses related to interest rate swaps, options and other
derivative financial instruments, and related premiums received, which are
utilized in trading activities.
Trading account liabilities were $4.4 billion at year end 1996, $3.7 billion
at year end 1995 and $2.1 billion in 1994. In each of the last three years,
unrealized losses represent a substantial portion of these liabilities while
the unrealized gains are recorded in trading account assets. Unrealized gains
and losses on forward, swap, option and other financial instruments, resulting
primarily from the marking to estimated market value of trading instruments,
are reported on a gross basis, except when right of set-off criteria are met
or a legally enforceable netting agreement with a counterparty exists.
SHORT-TERM BORROWINGS
The Corporation's short-term funding sources include federal funds purchased
and securities sold under repurchase agreements, commercial paper issuances,
local borrowings in overseas operations and interest-bearing precious metals
balances. From time to time, the Bank also issues short-term securities in
public offerings. Average short-term borrowings rose to $6.6 billion in 1996
from $4.6 billion in 1995, which had declined from $5.6 billion in 1994,
primarily from the maturity, in March 1995, of $1.0 billion principal amount
of 4.30% Notes that were not replaced. The increase in 1996 over the prior
year was primarily due to increased levels of securities sold under repurchase
agreements. Short-term borrowings as a percentage of total interest bearing
funds were 18% in 1996, 15% in 1995 and 18% in 1994.
The Corporation's commercial paper is rated A-1+, F-1+, P-1 and D-1+ by
Standard & Poor's Corporation, Fitch Investors Service, Moody's Investors
Service and Duff & Phelps, respectively. Commercial paper proceeds are used
principally to finance the current operations of Factors and RNYSC. The
Corporation has $160 million of lines of credit outstanding to provide
liquidity for its commercial paper program under which it is authorized to
issue up to $2.5 billion.
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.
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Federal funds purchased and securities
sold under repurchase agreements:
Average interest rate:
At year end........................... 5.19% 5.47% 4.92%
For the year.......................... 5.31% 5.75% 3.97%
Average amount outstanding during the
year................................... $2,517,980 $1,474,225 $1,442,585
Maximum amount outstanding at any month
end.................................... 4,263,640 2,951,484 2,404,354
Amount outstanding at year end.......... 1,090,300 1,231,744 987,110
Commercial paper:
Average interest rate:
At year end........................... 5.40% 5.58% 5.71%
For the year.......................... 5.41% 5.91% 4.24%
Average amount outstanding during the
year................................... $ 887,055 $ 640,368 $ 876,677
Maximum amount outstanding at any month
end.................................... 1,091,613 820,258 1,047,678
Amount outstanding at year end.......... 862,347 667,563 979,390
Other borrowings:
Average interest rate:
At year end........................... 4.68% 4.34% 4.07%
For the year.......................... 4.41% 3.75% 3.55%
Average amount outstanding during the
year................................... $3,158,716 $2,494,810 $3,254,895
Maximum amount outstanding at any month
end.................................... 3,494,194 3,164,334 3,884,558
Amount outstanding at year end.......... 3,494,194 1,991,461 3,002,894
ASSET MANAGEMENT
The management of the Corporation's assets is based on three principal
criteria: creditworthiness, diversification and structural characteristics,
including maturity and interest rate sensitivity. A significant portion of the
Corporation's interest-earning assets are invested in U.S. Government agency
securities, including mortgage-backed and other asset-backed securities.
International banking activities also comprise a substantial portion of the
Corporation's business and involve factors other than the normal credit risk
associated with domestic lending. In determining the creditworthiness of
international borrowers, the economic, political and social conditions that
affect the borrower's ability to repay obligations must be taken into account.
Through country and political analysis and diversification of activities
across a wide geographic distribution and within exposure limits set on a
country-by-country basis, the Corporation reduces the unique risks of
extending international credit. The Corporation endeavors to reflect risk in
its pricing policy.
18
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
-------- ------------- -------- -------------
1996............ 71.9% 28.1% 60.8% 39.2%
1995............ 69.6% 30.4% 61.1% 38.9%
1994............ 61.1% 38.9% 64.4% 35.6%
The following table sets forth the Corporation's principal assets, which are
primarily interest-earning, by category, at year end for each of the last
three years. Additional details related to maturity distribution, interest
rate sensitivity and creditworthiness are provided elsewhere in this section.
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
Interest-bearing deposits with banks... $ 5,909,195 $ 6,094,495 $10,242,061
Total investment securities............ 21,175,513 16,238,545 11,439,728
Trading account assets................. 4,807,788 4,035,606 2,543,637
Federal funds sold and securities
purchased under resale agreements..... 2,109,109 1,749,268 1,123,925
Loans:
Real estate.......................... 4,106,231 3,148,147 3,220,981
Government and official
institutions........................ 57,136 80,038 89,625
Broker loans......................... 1,091,567 1,114,466 582,781
Banks and other financial
institutions........................ 864,717 419,444 380,811
Commercial and other................. 5,627,591 5,116,853 4,686,401
----------- ----------- -----------
Total loans.......................... 11,747,242 9,878,948 8,960,599
Less unearned income............... (25,306) (34,988) (47,109)
----------- ----------- -----------
Loans, net of unearned income........ 11,721,936 9,843,960 8,913,490
----------- ----------- -----------
$45,723,541 $37,961,874 $34,262,841
=========== =========== ===========
INTEREST-BEARING DEPOSITS WITH BANKS
Interest-bearing deposits with banks are placed with major international and
domestic banking organizations on a short-term basis, thereby insuring
liquidity while reducing credit risk. Investments in interest-bearing deposits
with banks declined to approximately 14% of average interest-earning assets in
1996 from approximately 23% in 1995 and 1994, as the Corporation's funds were
invested in assets yielding more favorable returns.
The following table provides information on the maturity distribution of the
Corporation's interest-bearing deposits with banks at December 31, 1996.
MATURITY
DISTRIBUTION %
------------ ---
(DOLLARS IN
MILLIONS)
Due within one month................... $3,096.1 52
Due after one but within six months.... 2,529.8 43
Due after six but within twelve
months................................ 75.2 1
Due after one year..................... 208.1 4
-------- ---
$5,909.2 100
======== ===
INVESTMENT PORTFOLIO
The Corporation's total investment securities portfolio increased $4.9
billion, or 30%, during 1996 to $21.2 billion at year end from $16.2 billion
at year end 1995. This increase was primarily in U.S. Government agency
securities and other asset-backed investment securities.
In December 1995, the Corporation reassessed the appropriateness of its
investment securities portfolio classifications under a one-time provision
granted in a Special Report issued by the Financial Accounting Standards Board
("FASB"). As a result of this portfolio reassessment, the Corporation
transferred certain securities with a book value of approximately $1.4 billion
from held to maturity to available for sale. The securities and hedges
transferred had a carrying value in excess of market value of approximately
$11.2 million.
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 1994
19
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. Government agency securities, that
were sold as part of the Corporation's asset-liability management program.
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.
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
U.S. Government obligations............... $ 179,533 $ 85,345 $ 100,592
Obligations of U.S. Government agencies... 12,201,021 9,410,057 7,417,287
Obligations of U.S. states and political
subdivisions............................. 702,200 703,449 624,033
Other investment securities............... 8,092,759 6,039,694 3,297,816
----------- ----------- -----------
$21,175,513 $16,238,545 $11,439,728
=========== =========== ===========
Except for investment securities of the Brazilian government and its
agencies, with book and market values amounting to $801 million, the
Corporation has no investments in any single issuer other than the U.S.
Government and its agencies that represented more than 10% of total
stockholder's equity at year end 1996.
The following tables present, by maturity distribution, the book
value/amortized cost and the book value/estimated market value of the
Corporation's portfolio of securities held to maturity and available for sale,
respectively at December 31, 1996. The Corporation has designated certain
derivative instruments, primarily in the form of interest rate swaps, as
hedges against the interest rate risks of the available for sale and held to
maturity portfolios. Such derivatives are shown separately in the following
tables. The swaps used to hedge the available for sale portfolio are carried
on the statement of condition at their estimated market values. The weighted
average yields on these instruments are presented based on their scheduled
maturities. Based on year end market conditions, mortgage-backed securities
included in U.S. Government agencies held to maturity and available for sale
had estimated average lives of approximately 8.6 years and 6.8 years,
respectively. Such securities are subject to the risk that average lives will
extend as interest rates rise. It is not anticipated that such shifts would
have a significant impact upon the Corporation's gap and net interest income.
Yields on obligations of states and political subdivisions and investments in
certain preferred stock issues are adjusted to a fully-taxable equivalent
basis using a tax rate of 44%.
SECURITIES HELD TO MATURITY
DECEMBER 31, 1996
-------------------------------
ESTIMATED WEIGHTED
BOOK MARKET AVERAGE
VALUE VALUE YIELD
---------- ---------- --------
(DOLLARS IN THOUSANDS)
Obligations of U.S. Government agencies:
Due after 10 years.......................... $ 8,965 $ 9,322 8.04%
Mortgage-backed securities.................. 7,432,536 7,451,244 7.48
Interest rate swaps......................... -- (48,971)
---------- ----------
7,441,501 7,411,595
---------- ----------
Obligations of U.S. states and political
subdivisions:
Due after 1 year but within 5 years......... 39,324 42,457 10.14%
Due after 5 years but within 10 years....... 63,459 71,172 10.56
Due after 10 years.......................... 590,784 619,294 7.45
---------- ----------
693,567 732,923
---------- ----------
Total held to maturity........................ $8,135,068 $8,144,518
========== ==========
20
SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1996
-----------------------------------
WEIGHTED
AMORTIZED BOOK/ESTIMATED AVERAGE
COST MARKET VALUE YIELD
----------- -------------- --------
(DOLLARS IN THOUSANDS)
U.S. Government obligations:
Due within 1 year....................... $ 74,073 $ 74,212 5.83%
Due after 1 year but within 5 years..... 104,763 105,321 6.31
----------- -----------
178,836 179,533
----------- -----------
Obligations of U.S. Government agencies:
Due within 1 year....................... 52,342 52,480 6.11%
Due after 1 year but within 5 years..... 174,030 174,963 6.05
Due after 5 years but within 10 years... 152,057 153,290 5.82
Due after 10 years...................... 1,075,238 1,083,310 5.97
Mortgage-backed securities.............. 3,330,266 3,338,449 7.00
Interest rate swaps..................... -- (42,972)
----------- -----------
4,783,933 4,759,520
----------- -----------
Obligations of U.S. states and political
subdivisions:
Due after 10 years...................... 8,635 8,633 7.43%
----------- -----------
8,635 8,633
----------- -----------
Other investment securities:
Due within 1 year....................... 1,106,784 1,108,624 11.96%
Due after 1 year but within 5 years..... 1,887,393 1,911,971 6.51
Due after 5 years but within 10 years... 1,588,525 1,657,410 8.19
Due after 10 years...................... 3,396,692 3,455,614 7.36
Interest rate swaps..................... -- (40,860)
----------- -----------
7,979,394 8,092,759
----------- -----------
Total available for sale.................. $12,950,798 $13,040,445
=========== ===========
The following table presents, by type, the amortized cost and the
book/estimated market value of the Corporation's other investment securities,
all of which are classified as available for sale.
SECURITIES AVAILABLE FOR
SALE DECEMBER 31, 1996
-------------------------
AMORTIZED BOOK/ESTIMATED
COST MARKET VALUE
---------- --------------
(IN THOUSANDS)
Bonds, debentures and other securities of:
Foreign banks....................................... $ 982,383 $1,009,554
Foreign governments and government agencies......... 2,344,264 2,458,356
Foreign companies................................... 410,855 416,193
Domestic companies.................................. 352,171 358,238
U.S. financial organizations........................ 1,096,264 1,094,458
Federal Reserve Bank stock.......................... 62,588 62,588
Other, asset-backed securities...................... 2,730,869 2,734,232
Interest rate swaps................................. -- (40,860)
---------- ----------
Total other investment securities..................... $7,979,394 $8,092,759
========== ==========
TRADING ACCOUNT ASSETS
Trading account assets consist of securities of the U.S. Government, foreign
governments, restructuring countries and corporations. Such securities are
carried at their estimated market value with the resultant gains and losses
recorded as trading account profits and commissions. Trading account assets
also include unrealized gains related to interest rate swaps, options and
other derivative financial instruments, and related premiums paid, that are
utilized in trading activities. 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. For additional information
related to the potential risks associated with trading activities, and the
Corporations management of those risks, See "Risk Management and Control--
Credit Risk" below in this section of this Report.
21
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.
1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Domestic:
Real estate--
residential
mortgage............. $ 1,832,850 $1,171,158 $1,245,500 $1,310,718 $1,454,416
Real estate--
commercial........... 2,116,627 1,791,693 1,813,878 1,854,377 2,107,112
Banks and other
financial
institutions......... 45,112 28,291 83,010 7,384 14,841
Broker loans.......... 1,051,472 1,086,530 559,019 678,490 307,018
Commercial and
industrial........... 1,855,251 2,004,783 2,242,124 2,152,691 1,859,595
Individuals........... 200,607 389,520 106,195 90,218 51,305
All other............. 400,705 187,360 11,810 16,915 59,852
----------- ---------- ---------- ---------- ----------
7,502,624 6,659,335 6,061,536 6,110,793 5,854,139
----------- ---------- ---------- ---------- ----------
Foreign:
Broker loans.......... 40,095 27,936 23,762 732,812 --
Government and
government agencies.. 57,136 80,038 89,625 429,232 341,320
Banks and other
financial
institutions......... 819,605 391,153 297,801 68,416 288,682
Commercial and all
other................ 3,327,782 2,720,486 2,487,875 2,262,130 1,672,038
----------- ---------- ---------- ---------- ----------
4,244,618 3,219,613 2,899,063 3,492,590 2,302,040
----------- ---------- ---------- ---------- ----------
Total loans............. 11,747,242 9,878,948 8,960,599 9,603,383 8,156,179
Less unearned income.. (25,306) (34,988) (47,109) (94,825) (148,722)
----------- ---------- ---------- ---------- ----------
Loans, net of unearned
income................. $11,721,936 $9,843,960 $8,913,490 $9,508,558 $8,007,457
=========== ========== ========== ========== ==========
Average loans in domestic offices increased to $8.3 billion in 1996 from
$6.6 billion in 1995, primarily due to the loan portfolio acquired in the BBI
transaction, while continuing to represent approximately 20% of interest-
earning assets as in 1995 and 1994. At year end 1996, the domestic loan
portfolio consisted of $1.8 billion of one-four family residential mortgages
and $2.1 billion of commercial real estate loans. Average loans in foreign
offices rose to $3.7 billion in 1996 after a decline to $2.9 billion in 1995
from $3.3 billion in 1994. See "Risk Management and Control--Credit Risk"
below in this section of this Report.
The following tables present loan portfolio information, excluding consumer
loans and residential mortgage loans totaling $2.0 billion, related to
maturity distribution and interest rate sensitivity, based on scheduled
repayments at December 31, 1996.
DUE IN ONE DUE AFTER ONE
YEAR OR YEAR THROUGH DUE AFTER
LESS FIVE YEARS FIVE YEARS TOTAL
---------- ------------- ---------- ----------
(IN THOUSANDS)
Domestic:
Commercial and other...... $1,928,898 $ 371,454 $ 41,012 $2,341,364
Real estate--commercial... 198,982 371,774 1,545,871 2,116,627
Banks and other financial
institutions............. 35,843 9,269 -- 45,112
Broker loans.............. 1,051,472 -- -- 1,051,472
---------- ---------- ---------- ----------
Total domestic loans.... 3,215,195 752,497 1,586,883 5,554,575
---------- ---------- ---------- ----------
Foreign:
Commercial and other...... 2,884,640 264,191 20,971 3,169,802
Real estate--commercial... 51,956 41,344 6,531 99,831
Banks and other financial
institutions............. 702,347 96,593 20,665 819,605
Governments and government
agencies................. 8,896 32,288 15,952 57,136
Broker loans.............. 40,095 -- -- 40,095
---------- ---------- ---------- ----------
Total foreign loans..... 3,687,934 434,416 64,119 4,186,469
---------- ---------- ---------- ----------
Total loans............. $6,903,129 $1,186,913 $1,651,002 $9,741,044
========== ========== ========== ==========
At December 31, 1996, 71% of the loan portfolio presented above was due in
one year or less, compared to 74% in 1995. Of the total loan portfolio due in
one year or less, 47% were domestic loans and 53% were foreign loans.
22
The following table is an analysis, at December 31, 1996, of loans due after
one year which have fixed interest rates and those with interest rates that
vary directly in relation to the Corporation's reference rate, an
international money market rate or some other similar variable base rate.
Loans with variable rates amounting to approximately $1.0 billion are due
after one year.
FIXED RATE VARIABLE RATE TOTAL
---------- ------------- ----------
(IN THOUSANDS)
Loans due after one year:
Domestic loans............................ $1,715,856 $623,524 $2,339,380
Foreign loans............................. 162,288 336,247 498,535
---------- -------- ----------
$1,878,144 $959,771 $2,837,915
========== ======== ==========
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The Corporation's policy is to maintain an allowance for credit losses that
is adequate to absorb any inherent credit losses. Inherent losses are
unconfirmed losses that probably exist, based upon known information regarding
the credit quality and portfolio characteristics prevailing as of the date of
the evaluation. If future events confirm these losses, these amounts will be
charged off against the allowance for credit losses.
In accordance with regulatory guidance, the Corporation performs a
comprehensive and consistently applied analysis of the various factors that
affect collectibility. The process is complex and includes several different
analyses of credit exposures. Management analyzes its loan portfolio by three
main components: individually significant loans, homogeneous groups or pools
of loans and other segmentations of the portfolio into pools of loans with
similar characteristics, such as risk classification, type of loan, industry
group, collateral, size and maturity and country risk characteristics.
Management periodically reviews the loan portfolio, particularly non-accrual
and restructured loans. The review may result in a determination that a loan
should be placed on a non-accrual status for income recognition. In addition,
to the extent that management identifies potential losses in the loan
portfolio, it reduces the book value of such loans, through charge-offs, to
their estimated collectible value. The Corporation's policy is to classify as
non-accrual any loan (other than factored trade accounts receivable, consumer
installment and residential mortgage loans) on which payment of principal or
interest is 90 days past due. In addition, a loan will be classified as non-
accrual if, in the opinion of management, based upon a review of the
borrower's or guarantor's financial condition, collateral value and other
factors, payment is questionable, even though payments are not 90 days past
due.
When a loan, other than a well secured residential mortgage loan, is
classified as non-accrual, any unpaid interest is reversed against current
income except where the loan is well collateralized and it is anticipated that
all unpaid interest will be collected. The loan remains in a non-accrual
classification until such time as the loan is brought current, when it may be
returned to accrual classification. When principal and interest on a non-
accrual loan are brought current, if in management's opinion future payments
are questionable, the loan would remain classified as non-accrual. Subsequent
payments of either interest or principal received on a partially charged-off
non-accrual or restructured loan are first applied to any remaining balance
outstanding, until the loan is reduced to its net realizable value, then to
recoveries and finally to income. Interest is included in income thereafter
only to the extent received in cash.
Factored trade accounts receivable that are past due 90 days remain on an
accrual basis because the past due interest usually will be charged to and
collected from the factoring client.
The large number of consumer installment loans and the relatively small
dollar amount of each makes an individual review impracticable. The
Corporation charges off any consumer installment loan which is past due 90
days.
Residential mortgage loans are placed on non-accrual status when the
mortgagor is in bankruptcy or foreclosure proceedings are instituted, at which
time the loan ceases to accrue interest. Any accrued interest receivable
remains in interest income as an obligation of the borrower.
The individually significant loans represent larger, more problematic loans
which are individually assessed as to collectibility. For homogeneous
portfolios, principally the consumer retail portfolio, the Corporation
utilizes the prior year's loss experience to estimate an amount necessary to
provide for the upcoming twelve months of expected losses. For the other
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 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 credit losses. The actual
rate selected for the analysis may differ from the calculated loss rate as the
historical rate may be adjusted upward or downward to reflect current and
anticipated business and economic conditions and other factors which are
likely to cause the current portfolio to differ from historical experience.
The Corporation's allowance also reflects a margin for the imprecision in the
estimates of expected credit losses. The resultant allowance for credit losses
is viewed by management as a single, unallocated allowance available for all
credit losses and any segmentation thereof is done only for compliance with
reporting requirements.
23
The following table presents data related to the allowance for possible
credit losses and net charge-offs for each of the years in the five-year
period ended December 31, 1996.
1996 1995 1994 1993 1992
-------- -------- -------- -------- ---------
(IN THOUSANDS)
Balance at beginning of
year....................... $300,593 $319,220 $311,855 $241,020 $ 227,454
Charge-offs:
Domestic:
Commercial and
industrial............. 26,911 35,315 14,287 11,947 51,956
Installment loans to
individuals............ 3,894 2,825 1,730 1,757 2,396
Secured by real estate.. 8,068 9,995 11,183 32,466 36,022
Foreign................... 4,165 3,356 17,355 12,731 20,257
Losses on sale, swap and
charge-off of
restructuring countries'
debt..................... -- -- -- 9,729 18,477
-------- -------- -------- -------- ---------
Total charge-offs....... 43,038 51,491 44,555 68,630 129,108
-------- -------- -------- -------- ---------
Recoveries:
Domestic:
Commercial and
industrial............. 6,445 5,165 6,201 15,281 9,498
Installment loans to
individuals............ 1,311 599 724 661 680
Secured by real estate.. 2,401 5,217 6,663 2,731 289
Foreign*.................. 7,886 9,234 19,538 36,693 12,849
-------- -------- -------- -------- ---------
Total recoveries........ 18,043 20,215 33,126 55,366 23,316
-------- -------- -------- -------- ---------
Net charge-offs........... (24,995) (31,276) (11,429) (13,264) (105,792)
Provision charged to
operating expense........ 32,000 12,000 19,000 85,000 120,000
Allowance of acquired
companies................ 42,579 -- -- 297 764
Translation adjustment.... 181 649 (206) (1,198) (1,406)
-------- -------- -------- -------- ---------
Balance at end of year...... $350,358 $300,593 $319,220 $311,855 $ 241,020
======== ======== ======== ======== =========
- -------
* Primarily restructuring countries' debt in 1992-1993.
The provision for credit losses increased to $32 million in 1996, from $12
million in 1995. The increase in the provision in 1996 resulted from
management's decision to increase the provision for credit losses in the third
quarter of 1996 by $20.0 million to be prudent in the context of increased
domestic and international exposures.
The provision for credit losses declined slightly to $12 million in 1995
from $19 million in 1994. The economic improvement in domestic and foreign
markets, which was noted in 1994, continued into 1995. However, in 1995, a
weakening in the domestic chain store sector contributed to higher levels of
domestic charge-offs that were partially offset by recoveries from foreign
debtors in foreign restructuring countries.
The provision for credit losses declined to $19 million in 1994, compared to
$85 million in 1993 as economic improvement in domestic and foreign markets
contributed to an enhancement in the credit quality of the loan portfolio and
a declining level of non-performing loans and net charge-offs.
The lower levels of the provision for credit losses and net charge-offs in
1993 compared to 1992, reflected the gradual economic improvement in domestic
markets during the years. The provision high of $120 million was recorded in
1992 when the Corporation experienced increased charge-offs because of
economic difficulties by a limited number of domestic and commercial
businesses and a limited number of international obligors.
The following table presents loan data and ratios related to net charge-offs
for each of the years in the five-year period ended December 31, 1996.
1996 1995 1994 1993 1992
------- ------ ------ ------ ------
(DOLLARS IN MILLIONS)
Loans:
Loans outstanding, net of unearned
income, at end of year............. $11,722 $9,844 $8,913 $9,509 $8,007
Average loans outstanding, net of
unearned income, during the year... $11,980 $9,528 $9,894 $8,891 $8,732
Ratios:
Allowance for possible credit losses
to loans outstanding, net of
unearned income, at end of year.... 2.99% 3.05% 3.58% 3.28% 3.01%
Net charge-offs to average loans
outstanding, net of unearned income
during the year.................... 0.21% 0.33% 0.12% 0.15% 1.21%
Net charge-off coverage(1).......... 24.91x 13.11x 44.74x 40.44x 4.42x
- -------
(1) Calculated by dividing net charge-offs into income before income taxes
plus the provision for credit losses.
24
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.
1996 1995 1994 1993 1992
-------- ------- ------- -------- --------
(IN THOUSANDS)
Non-accrual loans:
Domestic......................... $ 94,137 $49,311 $43,392 $ 48,084 $ 49,929
Foreign--other................... 10,956 18,561 14,734 12,956 38,276
Foreign--restructuring
countries....................... -- -- -- 33,853 42,123
-------- ------- ------- -------- --------
Total non-accrual loans........ 105,093 67,872 58,126 94,893 130,328
-------- ------- ------- -------- --------
Other non-performing assets:
Other real estate owned.......... 36,278 31,329 23,479 23,338 55,551
Other non-accrual assets......... -- -- -- -- 4,572
-------- ------- ------- -------- --------
Total other non-performing
assets........................ 36,278 31,329 23,479 23,338 60,123
-------- ------- ------- -------- --------
Total non-accrual loans and
other non-performing assets... 141,371 $99,201 $81,605 $118,231 $190,451
======= ======= ======== ========
Less: FDIC loss-sharing(1)....... (52,359)
--------
Total.......................... $ 89,012
========
- -------
(1) Represents the carrying value of non-performing assets acquired in the
CrossLand transaction that are covered by a loss sharing agreement with
the FDIC which expires on June 30, 1998. The covered amount of non-
performing assets at December 31, 1996 was $55.6 million.
The above table excludes restructured performing loans which amounted to
$35.0 million, $14.4 million, $28.3 million, $63.0 million and $58.5 million
in 1996, 1995, 1994, 1993 and 1992, respectively. Also excluded from the above
table are loans past due 90 days and still on accrual status, primarily
residential mortgage loans, which amounted to $20.1 million, $6.3 million,
$9.6 million, $5.6 million and $8.8 million at year ends 1996, 1995, 1994,
1993 and 1992, respectively. The increase in past due and accruing residential
mortgage loans are those acquired from BBI.
At December 31, in each of the years 1996 through 1992, the Corporation's
allowance for possible credit losses represented approximately 250%, 365%,
369%, 198% and 128%, respectively, of total non-accrual and restructured
loans. The decline in the coverage from 1995 to 1996 is primarily associated
with non-performing loans acquired from BBI in 1996. Substantially all of the
increase in non-performing loans acquired from BBI is covered by an FDIC loss
sharing agreement. The Corporation's allowance for possible credit losses,
after taking into consideration the FDIC loss sharing agreement, would be 374%
of total non-accrual and restructured loans. The coverage of the allowance for
credit losses to non-accrual and restructured loans is only one subjective
measure of the adequacy of the allowance for credit losses that management
utilizes.
Non-accrual domestic loans increased to $94.1 million in 1996 from $49.3
million in 1995 and $43.4 million in 1994. The 1996 increase was primarily
attributable to the non-accrual loans acquired in the BBI acquisition
substantially all of which are covered by an FDIC loss sharing agreement. The
change in non-accrual loans between 1995 and the prior year was primarily the
result of increases of non-accrual loans in the chain store sector and
reductions in the commercial real estate portfolio that were charged off or
transferred to the other real estate owned classification.
25
In order to comply with certain regulatory reporting requirements,
management has prepared the following allocation of the Corporation's
allowance for possible credit losses among various categories of the loan
portfolio for each of the years in the five-year period ended December 31,
1996. 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.
DECEMBER 31, 1996
-----------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR
POSSIBLE CREDIT LOSSES BY CATEGORY
-----------------------------------------------------------------
DOMESTIC FOREIGN TOTAL
--------------------- --------------------- ---------------------
% OF LOANS ALLOCATED % OF LOANS ALLOCATED % OF LOANS ALLOCATED
OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Real estate loans....... 34 $ 80,000 1 $ 15,000 35 $ 95,000
Commercial and
industrial loans....... 16 95,000 21 15,000 37 110,000
Other loans............. 14 10,000 14 75,000 28 85,000
Unallocated............. -- 27,594 -- 32,764 -- 60,358
--- -------- --- -------- --- --------
Total................. 64 $212,594 36 $137,764 100 $350,358
=== ======== === ======== === ========
DECEMBER 31, 1995
-----------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR
POSSIBLE CREDIT LOSSES BY CATEGORY
-----------------------------------------------------------------
DOMESTIC FOREIGN TOTAL
--------------------- --------------------- ---------------------
% OF LOANS ALLOCATED % OF LOANS ALLOCATED % OF LOANS ALLOCATED
OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Real estate loans....... 30 $ 70,000 2 $ 10,000 32 $ 80,000
Commercial and
industrial loans....... 20 70,000 22 30,000 42 100,000
Other loans............. 17 5,000 9 50,000 26 55,000
Unallocated............. -- 21,733 -- 43,860 -- 65,593
--- -------- --- -------- --- --------
Total................. 67 $166,733 33 $133,860 100 $300,593
=== ======== === ======== === ========
DECEMBER 31, 1994
-----------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR
POSSIBLE CREDIT LOSSES BY CATEGORY
-----------------------------------------------------------------
DOMESTIC FOREIGN TOTAL
--------------------- --------------------- ---------------------
% OF LOANS ALLOCATED % OF LOANS ALLOCATED % OF LOANS ALLOCATED
OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Real estate loans....... 34 $ 80,000 2 $ 10,000 36 $ 90,000
Commercial and
industrial loans....... 25 75,000 20 30,000 45 105,000
Other loans............. 8 5,000 11 60,000 19 65,000
Unallocated............. -- 31,887 -- 27,333 -- 59,220
--- -------- --- -------- --- --------
Total................. 67 $191,887 33 $127,333 100 $319,220
=== ======== === ======== === ========
DECEMBER 31, 1993
-----------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR
POSSIBLE CREDIT LOSSES BY CATEGORY
-----------------------------------------------------------------
DOMESTIC FOREIGN TOTAL
--------------------- --------------------- ---------------------
% OF LOANS ALLOCATED % OF LOANS ALLOCATED % OF LOANS ALLOCATED
OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Real estate loans....... 33 $ 80,000 2 $ 10,000 35 $ 90,000
Commercial and
industrial loans....... 22 75,000 18 30,000 40 105,000
Other loans............. 8 5,000 17 50,000 25 55,000
Unallocated............. -- 29,499 -- 32,356 -- 61,855
--- -------- --- -------- --- --------
Total................. 63 $189,499 37 $122,356 100 $311,855
=== ======== === ======== === ========
26
DECEMBER 31, 1992
-----------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR
POSSIBLE CREDIT LOSSES BY CATEGORY
-----------------------------------------------------------------
DOMESTIC FOREIGN TOTAL
--------------------- --------------------- ---------------------
% OF LOANS ALLOCATED % OF LOANS ALLOCATED % OF LOANS ALLOCATED
OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Real estate loans....... 44 $ 60,000 2 $10,000 46 $ 70,000
Commercial and
industrial loans....... 23 55,000 15 20,000 38 75,000
Other loans............. 5 1,000 11 40,000 16 41,000
Unallocated............. -- 45,699 -- 9,321 -- 55,020
--- -------- --- ------- --- --------
Total................. 72 $161,699 28 $79,321 100 $241,020
=== ======== === ======= === ========
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 $52.3 billion, $43.9 billion and $41.1
billion at December 31, 1996, 1995 and 1994, respectively, were as follows:
BANKS AND OTHER GOVERNMENT COMMERCIAL
FINANCIAL AND OFFICIAL AND
INSTITUTIONS INSTITUTIONS INDUSTRIAL(1) 1996 1995 1994
--------------- ------------ ------------- ------ ------ -------
(IN MILLIONS)
Japan................... $1,946 $ -- $ 70 $2,016 $1,421 $ 2,129
Belgium/Luxembourg...... 411 -- 808 1,219 1,168 1,131
United Kingdom.......... 560 -- 520 1,080 1,044 1,492
France.................. 642 378 40 1,060 1,192 2,589
Canada.................. 548 28 394 970 1,181 1,766
Germany................. 794 -- 37 831 809 1,249
Brazil.................. 10 734 55 799 681 569
Netherlands............. 666 -- 23 689 -- 800
Australia............... 151 -- 414 565 589 --
------ ------ ------ ------ ------ -------
$5,728 $1,140 $2,361 $9,229 $8,085 $11,725
====== ====== ====== ====== ====== =======
- -------
(1) Includes excess of local currency outstandings over local currency
liabilities.
No other countries cross-border net outstandings exceeded 1.0% of
consolidated total assets in each of the last three years.
At December 31, in each of the last three years, countries with cross-border
net outstandings representing between 0.75% and 1.0% of consolidated total
assets were: Singapore with $465 million in 1996; the Netherlands with $426
million, Switzerland with $417 million and Singapore with $415 million,
respectively, in 1995; Spain with $349 million and Taiwan with $331 million,
respectively, in 1994.
BRAZIL
During 1996, 1995 and 1994, the Corporation invested in the local Brazilian
financial markets, principally short-term floating rate Brazilian Central Bank
and Treasury debt issuances as well as short-term certificates of deposits
issued by prime Brazilian banks. When necessary, the Corporation utilized
interest rate and foreign currency futures to hedge its local currency
position against short-term changes. At December 31, 1996, total cross-border
net outstandings in Brazil consisted primarily of Brady bonds and short-term
investments amounting to approximately $799 million, or 1.53% of total assets,
all of which were on a performing basis. Cross-border net outstandings in
Brazil at December 31, 1996 consisted of approximately $734 million of the
public sector, $10 million of the private bank sector and $55 million of the
private non-bank sector, respectively. At December 31, 1995, total cross-
border net outstandings in Brazilian investments amounted to approximately
$681 million, or 1.55% of total assets, all of which are on a performing
basis. Cross-border net outstandings in Brazil at December 31, 1995 consisted
of approximately $603 million of the public sector, $45 million of the private
bank sector and $33 million of the private non-bank sector. At December 31,
1994, total cross-border net outstandings in Brazilian investments amounted 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 of the public sector, $188 million of
the private bank sector and $26 million of the private non-bank sector.
27
The following table presents an analysis of the changes in aggregate cross-
border net outstandings discussed above.
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(IN MILLIONS)
Aggregate outstandings at beginning of year........ $ 681 $ 569 $ 226
Purchases of Brazilian Government securities and
bank placements................................... 679 367 516
Sales of Brazilian Government securities and
repayments at maturity............................ (543) (252) (215)
Other changes:
Interest income accrued.......................... 81 45 77
Collections of accrued interest.................. (99) (48) (35)
------- ------- -------
Aggregate outstandings at end of year.............. $ 799 $ 681 $ 569
======= ======= =======
RISK MANAGEMENT AND CONTROL
In order to reduce uncertainty as to the level of future earnings and its
book value, the Corporation manages several types of risks, principally credit
and market risks. The Corporation seeks to control these risks by diversifying
its exposures and activities among many instruments, markets, clients and
geographic regions and by limiting its positions in various instruments and
investments.
The processes and procedures by which the Corporation manages its risk
profile continually evolve as the Corporation's business activities change in
response to market and product developments. The Corporation routinely reviews
its procedures in order to ensure that they are comprehensive with respect to
all major risks and that a consistent approach is followed throughout the
organization.
To enhance the environment for the Corporation's risk management activities
and assist in decision making, significant investments have been made in the
training of personnel and in the development of information technology.
Proprietary and analytical trading systems have been developed for the
Corporation's existing and future business. This control environment is
subject to periodic review by management, internal auditors and regulators.
The Risk Assessment Committee of the Corporation's Board of Directors
oversees the identification, measurement and limitation of the risks relating
to all activities of, and products offered by, the Corporation. Such
committee's activities include review of risk management methodologies
employed by management. The committee is supported by the Risk Assessment and
Control Department, whose task is to develop and implement risk quantification
and reporting mechanisms. This Department also monitors market-related risk
exposure on a daily basis, reporting to management.
CREDIT RISK
Credit risk for lending, trading and investment activities and products
represents the possibility of loss to the Corporation if a borrower or
counterparty fails to honor their commitment to repay contractual obligations.
Credit risk and exposure to loss are inherent parts of the banking business.
Management seeks to manage and control or limit these risks through its loan
and investment policies, including obtaining collateral, and credit review
procedures. Senior management establishes and continually reviews lending and
investment criteria and approval procedures that it believes reflect the risk
averse nature of the Corporation.
The Credit Review Committee of the Board of Directors periodically reviews
and approves the Corporation's policies and procedures to define, measure and
monitor the credit and settlement risks arising from the Corporation's diverse
activities. Global limits are established to control these risks, and it is
the responsibility of each operating unit to conduct its business activity
within these prescribed limits. Any customer credit, currency or transaction
exposure that exceeds established limits must be approved by senior
management.
Management's objective in establishing lending and investment standards is
to minimize the risk of loss. In the case of foreign investments and loans,
management emphasizes investments and loans to, or with guarantees of,
governments, government agencies or banks. In addition, the Corporation places
particular emphasis on the matching of the maturity and interest rate
sensitivity of assets and liabilities. By this policy, the Corporation seeks
to minimize the effect of rate changes, largely externally influenced and
difficult to control, on the portfolio and to limit its exposure primarily to
credit risks over which it has more direct control. One technique which the
Corporation utilizes to achieve these goals is to enter into interest rate
contracts, including swaps, caps and collars, and currency swaps, each of
which is designed to protect against interest rate or currency fluctuations.
See "Liability and Asset Management", for additional information on interest
rate management.
The Credit Review Department provides an independent evaluation of the
Corporation's credit exposures and assures ongoing credit quality by reviewing
individual credits and concentrations, with a focus on operating units where
risk is at a higher level, and monitoring of corrective action where
necessary. Additionally, the Credit Review Department evaluates adherence to
laws and regulations and to policies and established criteria as stated in the
Corporation's Credit Policy Manual to assure compliance with such standards.
The Credit Review Department also periodically prepares portfolio summaries
for review by executive management and the Board of Directors. These reports
are then submitted for consideration to certain members of executive
management who determine the amount of loans to be charged off. The Executive
Credit Committee subsequently reviews the loans to be charged off and ratifies
executive management's decision. Rules and formulae relative to the adequacy
of the allowance, although useful as
28
guidelines to management, are not final determinants. In addition, any loan or
portion thereof which is classified as a "loss" by regulatory examiners is
charged off. Consistent with its policy of maintaining an adequate allowance
for possible credit losses, management generally charges off a loan, or a
portion thereof, when a loss is probable.
MARKET RISK
Market risk is the possibility of a decline in value of the Corporation's
assets (net of hedges) acquired in the course of its trading activities and
asset-liability management. To manage market risk, the Corporation establishes
limits for interest rate, foreign currency and other market exposures. An
important tool in monitoring exposures and establishing limits for
substantially all products offered is the estimation, under a range of
assumptions, of the potential loss of current and future earnings on existing
positions within the markets being measured.
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. See Note 19 of Notes to Consolidated Financial Statements below in this
section of this Report.
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL FINANCING POLICY
The Corporation's policy is to obtain capital externally, when opportunities
arise, if the cost of such capital is reasonable and the form is appropriate
for the Corporation's needs and overall capital structure. In keeping with
this policy, capital has been obtained externally on several occasions,
although, at such times, the Corporation, relative to other major bank holding
companies, was considered to be well capitalized.
The Corporation conducts its business through its bank and non-bank
subsidiaries. Thus, the Corporation frequently provides capital and financing
to these subsidiaries to support their operations and to permit expansion.
In formulating its dividend policy, the Corporation's Board of Directors
considers historical financial results, future prospects and anticipated needs
for capital. The current policy, which is reviewed annually, is to pay out
approximately 25% to 30% of the prior year's earnings on a normalized basis.
This policy is intended to provide stockholders with increasing dividend
income while allowing the Corporation to maintain its desired internal capital
generation rate. Future dividends are dependent upon the Corporation's
financial results, capital requirements and economic conditions in general.
CAPITAL TRANSACTIONS
During 1996, the Corporation repurchased an aggregate of 2,062,586 shares of
its Common Stock, of which 1,898,425 shares were repurchased pursuant to
programs authorizing the purchase of up to 2,500,000 shares in the open market
or in privately negotiated transactions and 164,161 shares were repurchased
from employees pursuant to a one-time authorization to purchase up to 170,000
shares upon the vesting of their rights under the Corporation's restricted
stock plans.
In the fourth quarter of 1996, the Corporation issued an aggregate of $350
million principal amount of preferred securities through two wholly-owned
subsidiary trusts formed by the Corporation. An issue of $150 million 7 3/4%
preferred securities was sold by Republic New York Capital I and an issue of
$200 million 7.53% preferred securities was sold by Republic New York Capital
II. Each issue of preferred securities qualifies as Tier I capital under risk-
based capital guidelines and were sold to qualified institutional investors
with the proceeds being used to purchase junior subordinated debt securities
of the Corporation. A portion of the proceeds from these issues were used to
redeem outstanding Remarketed Preferred stock with a liquidation value of
$19.2 million during 1996 and $55.8 million in the first quarter of 1997. Also
in the first quarter of 1997, the Corporation redeemed all 4 million
outstanding shares of $1.9375 cumulative preferred stock with an aggregate
stated value of $100 million.
On June 26, 1995, the Corporation sold, in a public offering, 3 million
shares of $1.8125 Cumulative Preferred Stock ($25 Stated Value) (the
"Preferred Stock") with an aggregate stated value of $75 million. The
Preferred Stock may be redeemed, at the option of the Corporation, in whole or
in part, at any time or from time to time, on or after July 1, 2000 at $25 per
share, plus, in each case, dividends accrued and unpaid to the redemption
date. The net proceeds received were used for general corporate purposes,
including payment to holders of the $3.375 Cumulative Convertible Preferred
Stock who, in connection with the Corporation's call for redemption described
below, elected to redeem.
On July 24, 1995, the Corporation redeemed all of the outstanding shares of
its $3.375 Cumulative Convertible Preferred Stock. Holders of such preferred
stock tendered an aggregate of 42,596 shares at the redemption price of
$52.025 plus accrued and unpaid dividends of $0.21563 per share. Holders of
3,406,093 shares of such preferred stock elected to convert, at the conversion
ratio of 1.03448, into an aggregate of 3,523,369 shares of common stock.
29
The Bank has a $5.0 billion Global Note Program (the "Program") authorizing
the periodic sale of notes, including through its overseas branches, or a
certain wholly-owned subsidiary of the Bank. A group of major international
securities dealers is participating in the Program. Notes may be issued for
any maturity of 7 days or more, subject to regulatory compliance. Notes can be
denominated in various currencies. Any notes issued will be direct,
unconditional and unsecured general obligations of the Bank, or guaranteed by
it and are not deposits insured by the FDIC. Any notes to be issued as part of
the Program have been accepted for listing on the Luxembourg Stock Exchange.
The Program has been rated F1+ and AA+ by Fitch Investors Service, Inc., A1+
and AA+ by I.B.C.A., Prime-1 and Aa1 by Moody's Investors Service, Inc., A1+
and AA by Standard & Poor's Ratings Group and D-1+ and AA+ by Duff & Phelps.
FINANCIAL RATIOS
The following table presents financial ratios for each of the years in the
five years ended December 31, 1996.
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
Average stockholders' equity as a
percentage of average assets.............. 6.41% 6.71% 6.38% 6.33% 6.43%
Returns based on net income:
Average total stockholders' equity....... 13.44 10.36 12.87 12.73 11.95
Average total assets..................... 0.86 0.70 0.82 0.81 0.77
Returns based on net income applicable to
common stock:
Average total common stockholders'
equity.................................. 15.24 11.73 15.20 15.08 14.18
Average total assets..................... 0.80 0.61 0.74 0.73 0.68
The return on average stockholders' equity, based on net income, rose to
13.44% in 1996 from 10.36% in the prior year, and the return on average common
stockholders' equity, based on net income applicable to common stock, rose to
15.24% in 1996 from 11.73% in the prior year, as net income and net income
applicable to common stock rose 45.1% and 53.6%, respectively, in 1996 from
1995.
RISK-BASED CAPITAL AND LEVERAGE GUIDELINES
The FRB has established guidelines that mandate risk-based capital
requirements for bank holding companies. The guidelines require a minimum
ratio of capital to risk-weighted assets (including certain off-balance-sheet
activities, such as standby letters of credit and derivative instruments) of
8.0%. At least half of the total capital ratio is to be composed of common
equity, noncumulative perpetual preferred stock and a limited amount of
cumulative perpetual preferred stock, preferred securities less goodwill and
intangible assets subject to certain minimums ("Tier 1" or "core capital").
The remainder may consist of limited amounts of subordinated debt, the balance
of cumulative preferred stock and the allowance for credit losses ("Tier 2
capital").
As a supplement to its risk-based capital ratios, the FRB established
leverage capital standards based upon the definition of Tier 1 capital. These
standards require the most highly-rated banks to maintain a minimum leverage
capital ratio of at least 3.0% if they are not anticipating or experiencing
any significant growth and meet certain other conditions. Each of the
Corporation's banking subsidiaries complies with all applicable regulatory
capital requirements.
The Corporation's leverage ratio and its risk-based capital ratios include
the assets and capital of Safra Republic on a consolidated basis in accordance
with the requirements of the FRB specifically applied to the Corporation.
These ratios do not include the effect on stockholders' equity related to the
Corporation's portfolio of securities available for sale. In accordance with
regulatory guidelines, the Corporation excludes RNYSC's assets and off-
balance-sheet contracts from the Corporation's capital calculations. The
guidelines also require the Corporation to deduct one-half of its investment
in this subsidiary from each of Tier 1 and Tier 2 capital.
30
The following table presents the components of the Corporation's risk-based
capital and related ratios at December 31, in each of the last three years.
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
Tier 1:
Common stockholders' equity.............. $2,696,353 $2,507,570 $2,129,166
Preferred stock.......................... 325,000 325,000 422,500
Equity of Safra Republic................. 784,691 738,643 688,018
Mandatorily redeemable preferred
securities of subsidiary trusts......... 350,000 -- --
Other net--goodwill, minority interest
and intangible assets................... (359,472) (87,328) (88,792)
Less:
50% of investment in securities
affiliate............................. (39,953) (41,774) (44,586)
50% of investment in unconsolidated
subsidiaries.......................... -- (2,411) (3,274)
---------- ---------- ----------
Total tier 1......................... 3,756,619 3,439,700 3,103,032
---------- ---------- ----------
Tier 2:
Qualifying preferred stock and perpetual
capital notes........................... 380,800 400,000 400,000
Qualifying long-term debt................ 1,898,286 1,741,943 1,575,446
Allowance for possible credit losses..... 343,049 294,879 243,433
Less:
50% of investment in securities
affiliate............................. (39,952) (41,773) (44,586)
50% of investment in unconsolidated
subsidiaries.......................... -- (2,411) (3,273)
---------- ---------- ----------
Total tier 2......................... 2,582,183 2,392,638 2,171,020
---------- ---------- ----------
Total risk-based capital........... $6,338,802 $5,832,338 $5,274,052
========== ========== ==========
Risk-based Capital Ratios:
Tier 1 risk-based capital ratio.......... 13.80% 14.72% 16.17%
Total risk-based capital ratio........... 23.28% 24.96% 27.49%
Leverage ratio........................... 5.87% 6.24% 5.87%
All of the above ratios exceed the minimum requirements of the FRB. It is
expected that these ratios will decline slightly in the first quarter of 1997
as the Corporation has agreed to redeem $155.8 million of permanent preferred
stock.
LIQUIDITY
Of primary importance to depositors, creditors and regulators is the ability
of the Corporation to have sufficient funds readily available to repay
liabilities as they mature. In order to insure that funds are available at all
times, the Corporation devotes substantial resources to projecting the amount
of funds which will be required on a daily basis and maintains relationships
with a diversity of sources so that funds are available on a global basis.
Through its worldwide network, the Corporation obtains funds from a large and
varied customer base that provides a stable source of "core" domestic demand
and consumer deposits, and foreign office deposits. Other sources provide
short-term borrowings, including the sale of commercial paper and long-term
liabilities in the form of notes and debentures and common and preferred
stock. Liquidity requirements also can be met through the disposition of
short-term assets that are generally matched to the maturity of liabilities.
Liquid assets include cash and due from banks, interest-bearing deposits with
banks, federal funds sold and securities purchased under resale agreements,
trading account assets and precious metals. Average total liquid assets were
approximately 22% of average total assets in 1996, compared to 29% and 27% in
1995 and 1994, respectively. In 1996, the Corporation invested in assets with
longer term maturities. The Corporation's portfolio of securities available
for sale of $13.0 billion at December 31, 1996, can be readily sold to meet
any immediate cash flow obligations. In each of the last three years the
Corporation used net cash flows from investing activities to increase asset
growth. During 1996 and 1994 financing activities provided net cash flows of
approximately $4.8 billion and $0.9 billion compared to net uses of
approximately $100 million in 1995.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The following audited consolidated financial statements and related
documents are set forth in this Report on the following pages:
PAGE
----
Consolidated Statements of Condition, December 31, 1996 and 1995......... 33
Consolidated Statements of Income, Years ended December 31, 1996, 1995
and 1994................................................................ 34
Consolidated Statements of Changes in Stockholders' Equity, Years ended
December 31, 1996, 1995 and 1994........................................ 35
Consolidated Statements of Cash Flows, Years ended December 31, 1996,
1995 and 1994........................................................... 36
Bank Consolidated Statements of Condition, Years ended December 31, 1996
and 1995................................................................ 37
Notes to Consolidated Financial Statements............................... 38
Independent Auditors' Report on Financial Statements..................... 63
Report of Management..................................................... 64
Independent Accountants' Report on Management's Assertions
Related to Internal Controls Over Financial Reporting.................. 65
SUPPLEMENTARY DATA
The following supplementary data are set forth in this Report on the
following pages:
Five Year Consolidated Statements of Condition........................... 66
Five Year Consolidated Statements of Income.............................. 67
Summary of Unaudited Quarterly Financial Information..................... 68
AFFILIATE FINANCIAL STATEMENTS
The following audited financial statements of Safra Republic are set forth
in this Report on the following pages:
Consolidated Statements of Condition, December 31, 1996 and 1995......... 69
Consolidated Statements of Income, Years ended December 31, 1996, 1995
and 1994................................................................ 70
Consolidated Statements of Changes in Shareholders' Equity, Years ended
1996, 1995 and 1994..................................................... 71
Consolidated Statements of Cash Flows, Years ended December 31, 1996,
1995 and 1994........................................................... 72
Notes to Consolidated Financial Statements............................... 73
Independent Auditors' Report............................................. 88
32
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks.............................. $ 710,183 $ 675,683
Interest-bearing deposits with banks (note 20)....... 5,909,195 6,094,495
Precious metals (note 4)............................. 1,231,319 1,250,038
Securities held to maturity (approximate market value
of $8,144,518 in 1996 and
$4,595,454 in 1995)................................. 8,135,068 4,487,022
Securities available for sale (at approximate market
value) (note 20).................................... 13,040,445 11,751,523
----------- -----------
Total investment securities (note 3)............. 21,175,513 16,238,545
Trading account assets (note 4)...................... 4,807,788 4,035,606
Federal funds sold and securities purchased under
resale agreements................................... 2,109,109 1,749,268
Loans (net of unearned income of $25,306 in 1996 and
$34,988 in 1995) (notes 5, 6 and 20)................ 11,721,936 9,843,960
Allowance for possible credit losses (note 6)........ (350,358) (300,593)
Customers' liability on acceptances.................. 938,615 818,007
Accounts receivable and accrued interest............. 2,108,318 1,946,077
Investment in affiliate (note 7)..................... 806,274 722,466
Premises and equipment (note 8)...................... 469,231 436,771
Other assets (note 13)............................... 661,728 371,231
----------- -----------
Total assets..................................... $52,298,851 $43,881,554
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits:
In domestic offices................................ $ 2,296,267 $ 1,740,035
In foreign offices................................. 177,675 160,133
Interest-bearing deposits:
In domestic offices................................ 12,559,554 8,471,452
In foreign offices................................. 16,692,083 14,548,013
----------- -----------
Total deposits (note 20)......................... 31,725,579 24,919,633
Trading account liabilities (notes 4 and 20)......... 4,402,085 3,719,651
Short-term borrowings (notes 9 and 20)............... 5,446,841 3,890,768
Acceptances outstanding.............................. 939,598 819,766
Accounts payable and accrued expenses................ 1,405,822 2,840,048
Due to factored clients.............................. 604,686 528,684
Other liabilities.................................... 218,910 193,645
Long-term debt (notes 10 and 20)..................... 1,498,710 1,555,111
Subordinated long-term debt and perpetual capital
notes (note 10)..................................... 2,400,000 2,406,440
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts
holding solely junior subordinated debt securities
(note 11)........................................... 350,000 --
Commitments and contingent liabilities (note 17)
Stockholders' equity (notes 12 and 15):
Cumulative preferred stock, no par value 8,502,308
shares outstanding in 1996 and
8,502,500 in 1995................................. 555,800 575,000
Common stock, $5 par value 150,000,000 shares
authorized; 55,009,549 shares
outstanding in 1996 and 56,259,563 in 1995........ 275,048 281,298
Surplus............................................ 502,425 590,008
Retained earnings.................................. 1,918,880 1,636,264
Net unrealized appreciation (depreciation) on
securities available for sale, net of taxes....... 54,467 (74,762)
----------- -----------
Total stockholders' equity....................... 3,306,620 3,007,808
----------- -----------
Total liabilities and stockholders' equity....... $52,298,851 $43,881,554
=========== ===========
See accompanying notes to consolidated financial statements.
33
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fees on loans............. $ 919,230 $ 749,719 $ 696,816
Interest on deposits with banks........ 376,030 526,185 414,294
Interest and dividends on investment
securities:
Taxable.............................. 1,279,226 927,740 871,785
Exempt from federal income taxes..... 93,257 89,744 76,783
Interest on trading account assets..... 67,279 55,736 55,736
Interest on federal funds sold and
securities purchased under resale
agreements............................ 98,061 97,547 57,915
------------ ------------ ------------
Total interest income.............. 2,833,083 2,446,671 2,173,329
------------ ------------ ------------
INTEREST EXPENSE:
Interest on deposits................... 1,282,205 1,138,075 827,790
Interest on short-term borrowings...... 333,075 218,804 218,529
Interest on long-term debt............. 255,618 270,893 280,536
------------ ------------ ------------
Total interest expense............. 1,870,898 1,627,772 1,326,855
------------ ------------ ------------
NET INTEREST INCOME.................... 962,185 818,899 846,474
Provision for credit losses (note 6)... 32,000 12,000 19,000
------------ ------------ ------------
Net interest income after provision for
credit losses......................... 930,185 806,899 827,474
------------ ------------ ------------
OTHER OPERATING INCOME:
Income from precious metals (note 4)... 24,700 38,049 50,930
Foreign exchange trading income (note
4).................................... 98,165 113,051 91,028
Trading account profits and commissions
(note 4).............................. 52,941 24,746 27,357
Investment securities gains, net (note
3).................................... 23,247 25,663 14,971
Net gain on loans sold or held for
sale.................................. 974 6,765 1,763
Commission income...................... 71,393 56,935 57,297
Equity in earnings of affiliate (note
7).................................... 93,418 79,481 77,376
Other income........................... 81,277 68,191 65,646
------------ ------------ ------------
Total other operating income....... 446,115 412,881 386,368
------------ ------------ ------------
OTHER OPERATING EXPENSES:
Salaries............................... 256,002 237,414 238,825
Employee benefits (note 15)............ 164,099 144,202 142,358
Occupancy, net (notes 8 and 17)........ 72,692 57,975 55,425
Restructuring and related charges (note
14)................................... -- 120,000 17,000
Other expenses......................... 292,961 262,074 267,868
------------ ------------ ------------
Total other operating expenses..... 785,754 821,665 721,476
------------ ------------ ------------
INCOME BEFORE INCOME TAXES............. 590,546 398,115 492,366
Income taxes (note 13)................. 171,706 109,466 152,358
------------ ------------ ------------
NET INCOME............................. $ 418,840 $ 288,649 $ 340,008
============ ============ ============
NET INCOME APPLICABLE TO COMMON STOCK.. $ 387,322 $ 252,182 $ 305,598
============ ============ ============
Net income per common share:
Primary.............................. $ 6.97 $ 4.66 $ 5.79
Fully diluted........................ 6.97 4.59 5.61
Average common shares outstanding:
Primary.............................. 55,595 54,060 52,736
Fully diluted........................ 55,595 56,199 56,534
See accompanying notes to consolidated financial statements.
34
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
CUMULATIVE PREFERRED STOCK:
Balance at beginning of year.............. $ 575,000 $ 672,500 $ 556,425
Redemption of 192 shares of remarketed
preferred stock.......................... (19,200) -- --
Issuance of 3,000,000 shares of $1.8125
cumulative preferred stock in 1995 and
1,500,000 shares of adjustable rate
cumulative preferred stock, series D in
1994..................................... -- 75,000 150,000
Redemption of 3,450,000 shares of $3.375
cumulative convertible preferred stock in
1995 and 678,500 shares of floating rate
series B preferred stock in 1994......... -- (172,500) (33,925)
---------- ---------- ----------
Balance at end of year.................... $ 555,800 $ 575,000 $ 672,500
========== ========== ==========
COMMON STOCK:
Balance at beginning of year.............. $ 281,298 $ 263,106 $ 263,516
Net issuance under stock option,
restricted stock and restricted stock
election plans of 812,572 shares in 1996,
497,975 shares in 1995 and 775,825 shares
in 1994.................................. 4,063 2,490 3,879
Retirement of 2,062,586 shares in 1996,
382,936 shares in 1995 and
857,941 shares in 1994................... (10,313) (1,915) (4,289)
Issuance of 3,523,369 shares upon
conversion of $3.375 cumulative
convertible preferred stock.............. -- 17,617 --
---------- ---------- ----------
Balance at end of year.................... $ 275,048 $ 281,298 $ 263,106
========== ========== ==========
SURPLUS:
Balance at beginning of year.............. $ 590,008 $ 437,653 $ 459,713
Net issuance of common stock under stock
option, restricted stock and restricted
stock election plans of 812,572 shares in
1996, 497,975 shares in 1995 and
775,825 shares in 1994................... 36,719 20,276 17,700
Treasury stock transactions of affiliate.. (891) (1,568) (326)
Retirement of 2,062,586 common shares in
1996, 382,936 shares in 1995 and 857,941
shares in 1994........................... (123,411) (16,506) (35,451)
Cost of issuing preferred stock........... -- (2,437) (3,983)
Issuance of 3,523,369 common shares upon
conversion of $3.375 cumulative
convertible preferred stock.............. -- 152,590 --
---------- ---------- ----------
Balance at end of year.................... $ 502,425 $ 590,008 $ 437,653
========== ========== ==========
RETAINED EARNINGS:
Balance at beginning of year.............. $1,636,264 $1,457,609 $1,204,818
Net income................................ 418,840 288,649 340,008
Foreign currency translation, net of
taxes.................................... (20,399) 4,578 16,812
Dividends declared on common stock........ (84,307) (78,193) (69,619)
Dividends declared on issues of preferred
stock.................................... (31,518) (36,379) (34,410)
---------- ---------- ----------
Balance at end of year.................... $1,918,880 $1,636,264 $1,457,609
========== ========== ==========
NET UNREALIZED APPRECIATION (DEPRECIATION)
ON SECURITIES
AVAILABLE FOR SALE, NET OF TAXES:
Balance at beginning of year.............. $ (74,762) $ (191,480) $ 262,750
Unrealized appreciation (depreciation).... 209,133 172,093 (735,276)
Income tax (expense) benefit.............. (79,904) (55,375) 281,046
---------- ---------- ----------
Balance at end of year.................... $ 54,467 $ (74,762) $ (191,480)
========== ========== ==========
TOTAL STOCKHOLDERS' EQUITY:
Balance at beginning of year.............. $3,007,808 $2,639,388 $2,747,222
Net changes during the year............... 298,812 368,420 (107,834)
---------- ---------- ----------
Balance at end of year.................... $3,306,620 $3,007,808 $2,639,388
========== ========== ==========
See accompanying notes to consolidated financial statements.
35
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $ 418,840 $ 288,649 $ 340,008
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization, net... 88,478 73,428 58,120
Provision for credit losses.......... 32,000 12,000 19,000
Investment securities gains, net..... (23,247) (25,663) (14,971)
Net gain on loans sold or held for
sale................................ (974) (6,765) (1,763)
Restructuring and related charges.... -- 73,821 16,395
Equity in earnings of affiliate...... (93,418) (79,481) (77,376)
Net change in precious metals........ 18,719 206,231 (338,659)
Net change in trading accounts....... (89,748) 140,088 561,111
Net change in accounts receivable and
accrued interest.................... (519,493) 180,605 329,716
Net change in accounts payable and
accrued expenses.................... (367,486) 276,760 (1,102,251)
Other, net........................... (162,574) (85,115) (31,061)
----------- ----------- -----------
Net cash provided by (used in)
operating activities.................. (698,903) 1,054,558 (241,731)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Interest-bearing deposits with banks... 363,800 4,147,566 (4,895,414)
Federal funds sold and securities
purchased under resale agreements..... 290,159 (625,343) 1,198,540
Short-term investments................. (46,049) (111,925) (157,230)
Purchases of securities held to
maturity.............................. (3,167,356) (236,646) (130,840)
Proceeds from maturities of securities
held to maturity...................... 686,471 406,711 261,107
Purchases of securities available for
sale.................................. (6,481,359) (6,752,227) (3,803,755)
Proceeds from sales of securities
available for sale.................... 2,002,799 1,461,195 3,883,180
Proceeds from maturities of securities
available for sale.................... 3,523,480 1,664,475 3,058,742
Loans.................................. (811,415) (1,125,115) 119,360
Payment for purchase of Brooklyn
Bancorp, Inc., net of cash received... (486,002) -- --
Investment in affiliate................ 30,296 28,133 23,805
----------- ----------- -----------
Net cash used in investing activities.. (4,095,176) (1,143,176) (442,505)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits............................... 3,188,607 2,193,950 (74,821)
Short-term borrowings.................. 1,533,114 (1,078,626) 804,975
Due to factored clients................ 76,002 (151,326) 65,461
Proceeds from issuance of long-term
debt.................................. 427,136 270,970 490,933
Repayment of long-term debt............ (489,159) (1,295,600) (492,003)
Proceeds from issuance of subordinated
long-term debt........................ 100,000 -- 200,000
Repayment of subordinated long-term
debt.................................. (100,000) -- (66,000)
Company-obligated mandatorily
redeemable preferred securities of
subsidiary
trusts holding solely junior
subordinated debt securities.......... 350,000 -- --
Net proceeds from issuance of
cumulative preferred stock............ -- 72,563 146,017
Repurchase of cumulative preferred
stock................................. (19,200) -- (33,925)
Repurchase of common stock............. (133,724) (18,421) (39,740)
Cash dividends paid.................... (115,136) (113,431) (98,856)
Other, net............................. 18,803 22,342 32,892
----------- ----------- -----------
Net cash provided by (used in)
financing activities.................. 4,836,443 (97,579) 934,933
Effect of exchange rate changes on cash
and due from banks.................... (7,864) (5,362) (20,088)
----------- ----------- -----------
Net (decrease) increase in cash and due
from banks............................ 34,500 (191,559) 230,609
Cash and due from banks at beginning of
year.................................. 675,683 867,242 636,633
----------- ----------- -----------
Cash and due from banks at end of
year.................................. $ 710,183 $ 675,683 $ 867,242
=========== =========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest........................... $ 1,910,818 $ 1,632,989 $ 1,268,041
Income taxes....................... 115,981 88,347 105,364
Transfers from securities available
for sale to securities held to
maturity............................ 1,009,550 -- 3,862,350
Transfers from securities held to
maturity to securities available for
sale................................ -- 1,391,750 --
See accompanying notes to consolidated financial statements.
36
REPUBLIC NATIONAL BANK OF NEW YORK
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks.............................. $ 668,596 $ 633,621
Interest-bearing deposits with banks................. 5,811,949 5,962,065
Precious metals...................................... 1,231,319 1,250,038
Securities held to maturity (approximate market value
of $7,893,991 in 1996 and
$4,395,472 in 1995)................................. 7,839,329 4,292,649
Securities available for sale (at approximate market
value).............................................. 10,894,777 10,036,416
----------- -----------
Total investment securities...................... 18,734,106 14,329,065
Trading account assets............................... 4,620,335 3,947,294
Federal funds sold and securities purchased under
resale agreements................................... 2,039,987 1,679,268
Loans (net of unearned income of $24,944 in 1996 and
$34,988 in 1995).................................... 10,722,022 8,999,601
Allowance for possible credit losses................. (326,105) (274,109)
Customers' liability on acceptances.................. 937,114 816,683
Accounts receivable and accrued interest............. 707,585 1,051,723
Investment in affiliate (note 7)..................... 806,274 722,466
Premises and equipment............................... 405,926 387,589
Other assets......................................... 593,792 319,425
----------- -----------
Total assets..................................... $46,952,900 $39,824,729
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Noninterest-bearing deposits:
In domestic offices................................ $ 2,182,618 $ 1,662,722
In foreign offices................................. 179,250 162,085
Interest-bearing deposits:
In domestic offices................................ 12,354,338 8,287,291
In foreign offices................................. 17,325,808 15,213,910
----------- -----------
Total deposits................................... 32,042,014 25,326,008
Trading account liabilities.......................... 4,314,640 3,719,639
Short-term borrowings................................ 3,579,807 2,873,499
Acceptances outstanding.............................. 938,097 818,441
Accounts payable and accrued expenses................ 795,743 2,161,828
Other liabilities.................................... 142,869 127,340
Long-term debt....................................... 1,390,226 1,355,111
Subordinated long-term debt, primarily with parent... 575,000 681,440
Stockholder's equity (note 21):
Common stock, $100 par value 4,800,000 shares
authorized; 4,000,000 shares outstanding in 1996
and 3,550,000 in 1995............................. 400,000 355,000
Surplus............................................ 1,631,834 1,492,278
Retained earnings.................................. 1,109,513 990,194
Net unrealized appreciation (depreciation) on
securities available for sale, net of taxes....... 33,157 (76,049)
----------- -----------
Total stockholder's equity......................... 3,174,504 2,761,423
----------- -----------
Total liabilities and stockholder's equity......... $46,952,900 $39,824,729
=========== ===========
See accompanying notes to consolidated financial statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Republic New York Corporation (the "Corporation") is a United States based
bank holding company that provides a variety of banking and financial services
worldwide to corporations, financial institutions, governmental units and
individuals. In addition to its domestic business, the Corporation is active
in international banking where it operates principally as a wholesale bank.
The Corporation conducts its business activities in many countries and regions
throughout the world and is not dependent on any one market, geographic area,
customer or industry segment. However, the negative effects of economic and
political events both within and outside the United States cannot be
predicted.
The accounting and reporting policies of the Corporation reflect banking
industry practices and conform to generally accepted accounting principles.
The preparation of financial statements requires that management make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts
of income and expenses for the reporting period. Such estimates are subject to
change in the future as additional information becomes available or previously
existing circumstances are modified. A summary of the significant accounting
policies followed by the Corporation in the preparation of the accompanying
consolidated financial statements is set forth below.
A. Basis of Consolidation. The consolidated financial statements include the
accounts of the Corporation and its subsidiaries, principally Republic
National Bank of New York (the "Bank"), Republic New York Securities
Corporation ("RNYSC") and Republic Factors Corp. ("Factors"). Investments in
affiliates which are less than majority-owned but more than 20% owned are
accounted for by the equity method. On January 2, 1996, the operations of
Republic Bank for Savings ("RBS"), a wholly-owned subsidiary of the
Corporation, was merged into the Bank and accounted for similar to a pooling
of interests, effective for financial reporting as of December 31, 1995.
Previously reported financial statements of the Bank have been restated to
reflect this transaction. 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, on an after tax basis.
Foreign currency amounts of foreign currency denominated assets and
liabilities are generally sold or purchased under fixed forward contracts at
prices which differ from cost. Such differences, which are considered part of
the interest yields, are reflected in net interest income ratably over the
life of the contracts.
C. Statement of Cash Flows. For purposes of the Statement of Cash Flows, the
Corporation defines cash and cash equivalents as the Statement of Condition
caption cash and due from banks.
D. Investment Securities. The Corporation designates an investment security
and any related hedge as held to maturity or available for sale at the time of
acquisition. The held to maturity classification includes debt securities,
which are carried at amortized cost, that the Corporation has the positive
intent and ability to hold to maturity. The available for sale classification
includes debt and equity securities which are carried at estimated fair value.
Unrealized gains or losses on securities available for sale and derivative
instruments used to hedge these securities are included as a separate
component of stockholders' equity, net of tax effect. Gains or losses on sales
of securities are recognized by the specific identification method and are
recorded in investment securities gains, net.
The Corporation periodically reviews its intent with respect to securities
available for sale and may redesignate these securities and related derivative
instruments used as hedges as held to maturity. At the time of redesignation,
such securities are recorded at market value, and any unrealized appreciation
or depreciation existing with respect to such securities and related hedges
continues to be reported as a separate component of stockholders' equity and
amortized to interest income over the life of the security.
E. Trading Account Assets and Liabilities. Securities included as trading
account assets are held to benefit from short-term changes in market prices.
Trading account securities and liabilities incurred in short-sale transactions
are carried at market value. Such liabilities are included in trading account
liabilities. Premiums paid or received related to contracts that are marked to
market are included in trading account assets or trading account liabilities,
respectively. Gains and losses on trading account activities, including market
value adjustments, are reported as trading account profits and commissions.
Trading account loans are marked to market with the resultant gains or losses
included in 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.
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 factored trade accounts
receivable, consumer installment and residential mortgage loans) on which the
accrual of interest ceases when principal or interest payments are past due 90
days. A loan may be placed on a non-accrual status prior to the 90-day period
if, in management's opinion, conditions warrant. When a loan is placed on a
non-accrual
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
basis, all accrued interest receivable is reversed and charged against current
interest income except in instances where it is expected to be paid in full.
Thereafter, interest income on non-accrual loans is recorded only when
received in cash.
Residential mortgage loans are placed on non-accrual status when the
mortgagor is in bankruptcy or foreclosure proceedings are instituted. Any
accrued interest receivable remains in interest income as an obligation of the
borrower. The Corporation charges off any consumer installment loan which is
past due 90 days.
On January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan" as amended by SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan--Income Recognition and Disclosures." SFAS No. 114 applies to all
loans except large groups of small-balance homogeneous loans that are
collectively evaluated for impairment and certain other loans. The
Corporation's impaired loans under SFAS No. 114 include loans with principal
balances of $500,000 or more and is generally applied to nonaccrual commercial
loans and renegotiated loans. A loan is considered impaired if it is probable
that the creditor will be unable to collect all contractual amounts due
(principal and interest) as scheduled in the loan agreement. Such loans have
been placed on non-accrual status either because interest or principal are
past due or, based on management's judgment, the Corporation does not expect
to receive all principal and interest in accordance with the terms of the loan
agreements. Impaired loans are measured based on either an estimate of the
present value of expected future cash flows at a loan's effective interest
rate, the loan's market value or the fair value of collateral if the loan is
collateral dependent. Interest income on an impaired loan is recorded on a
cash basis when the outstanding principal is brought current.
G. Derivative Products. Derivatives used by the Corporation include futures,
forwards, swaps, caps, floors and options in the interest rate, foreign
exchange, equity and precious metals commodity markets. The Corporation uses
these instruments for trading and to assist in its asset and liability
management activities which include hedging.
The Corporation records unrealized gains and losses on forward, swap, option
and other conditional or exchange contracts on a gross basis except when a
legally enforceable netting agreement with a counterparty exists.
Derivatives that are used for trading or to hedge other trading instruments
are carried on a mark-to-market basis with resultant gains and losses included
in trading account profits and commissions, foreign exchange trading income
and income from precious metals. Unrealized gains and option premiums paid are
included in trading account assets. Unrealized losses and option premiums
received are included in trading account liabilities. In valuing such
contracts, the Corporation considers potential credit costs, tenor, future
servicing costs, future capital costs and transaction hedging costs which are
recognized over the life of the contracts.
Foreign exchange trading positions are revalued monthly by pricing spot
foreign exchange and forward contracts for foreign exchange at prevailing
market rates.
Precious metals activities include arbitrage, purchases and sales of
precious metals for forward delivery, options on precious metals and precious
metals lending and borrowing. Precious metals, outstanding open positions in
contracts for forward delivery, option contracts and precious metals loans and
borrowings are revalued monthly at prevailing market rates. Precious metals
interest arbitrage balances are recorded at cost, with the difference between
the fixed forward contract price and cost is accreted into income from
precious metals ratably over the life of the contracts.
The Corporation enters into interest rate and foreign currency swap and
option transactions as part of its asset and liability management activities,
including hedging activities. 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 related agreements. Gains or losses on terminated derivative
contracts used as hedges of non-trading assets or liabilities, where the
underlying asset or liability has not been settled, are deferred and amortized
into interest income or interest expense over the life of the original hedge.
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 Credit Losses. The allowance for possible credit
losses is increased by provisions charged to operating expense and decreased
by charge-offs, net of recoveries. The provision for credit losses is based on
the Corporation's past credit loss experience and other factors which, in
management's judgment, deserve current recognition in estimating possible
credit losses. Such other factors considered by management include the
composition of the Corporation's credit exposure and worldwide economic
conditions.
I. Mortgage Servicing Rights. On July 1, 1995, the Corporation adopted SFAS
No. 122, "Accounting for Mortgage Servicing Rights an amendment of FASB
Statement No. 65." SFAS No. 122 eliminates the distinction made in SFAS No. 65
in accounting for mortgage servicing rights which depended on whether the
loans were originated by the servicer or purchased. Under SFAS No. 122,
mortgage servicers are required to recognize, as separate assets, rights to
service loans regardless of how the rights were acquired. The statement also
requires, among other things, mortgage servicers who sell or securitize loans
on which the servicing rights are retained to allocate the total cost of the
loans to the servicing rights and loans if it is practicable to estimate those
fair values. Mortgage
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
servicing rights must be assessed periodically for impairment and written down
to fair value through a valuation allowance. The effects of initially adopting
this SFAS were not material to the Corporation's results of operations.
J. Other Assets. On January 1, 1996, the Corporation adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." This SFAS establishes the recognition and measurement
criteria for impairment losses on long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of. This
SFAS requires that an impairment loss be recognized when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The effects of initially adopting this SFAS were not material to
the Corporation's results of operations.
K. Income Taxes. The Corporation files a consolidated federal income tax
return. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of changes in tax rates is recognized in
income in the period the change occurs. The earnings of the Corporation's
foreign subsidiaries were not subject to U.S. income taxes for taxable years
beginning prior to 1987, except to the extent that they were remitted as
dividends. The undistributed earnings prior to 1987 of the Corporation's
foreign subsidiaries are expected to be reinvested indefinitely in the
subsidiaries' operations; accordingly, no provision has been made for such
undistributed earnings.
L. Earnings Per Common Share. Primary earnings per common share are computed
by dividing net income, less preferred stock dividend requirements ("net
income applicable to common stock"), by the average number of common shares
outstanding during each of the years.
Fully diluted earnings per common share are computed by dividing net income
applicable to common stock, after adding back the dividends on the convertible
preferred stock, by adjusted average common shares outstanding. The average
number of common shares outstanding is adjusted for the assumed conversion of
the outstanding convertible preferred stock from the date of issuance to the
actual date of conversion and the additional shares assumed to be issued under
stock option plans, if dilutive.
M. Reclassification. Certain amounts from prior years have been reclassified
to conform with 1996 classifications.
2. ACQUISITION OF BROOKLYN BANCORP, INC.
On February 29, 1996, the Corporation completed the acquisition of Brooklyn
Bancorp, Inc. ("BBI") and its wholly-owned subsidiary, CrossLand Federal
Savings Bank ("CrossLand"), which was merged into the Bank. The Corporation
purchased all of the common stock and common stock equivalents of BBI at
$41.50 for a total consideration of approximately $530 million. The
acquisition was accounted for as a purchase and BBI's results are included
from the date of acquisition. The excess of cost over the market value of net
assets acquired, goodwill, amounted to $172.4 million at December 31, 1996 and
is being amortized to expense on a straight-line basis over a life of fifteen
years. Approximately $452 million of assets acquired from BBI are currently
subject to a loss-sharing agreement with the Federal Deposit Insurance
Corporation (FDIC). Under this agreement, the Corporation will be reimbursed
by the FDIC for 80 percent of any losses it incurs through the expiration of
the agreement on June 30, 1998. On the date of acquisition, BBI had total
assets of approximately $4.1 billion, including investment securities of $2.0
billion and loans of $1.3 billion, total deposits of approximately $3.6
billion and 30 branches in the New York metropolitan area.
The following unaudited pro forma condensed results of operations for the
year ended December 31, 1995 have been prepared after giving effect to the
purchase of BBI as if it had been consummated on January 1, 1995. Pro forma
information for 1996 is not presented, since the results are substantially the
same as the actual amounts reported by the Corporation. The pro forma
information may not be indicative of the results that actually would have
occurred if the purchase had been consummated on that date.
YEAR ENDED DECEMBER 31, 1995
-------------------------------------
REPORTED PRO FORMA
------------------ ------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Total operating revenue.................. $ 2,859,552 $ 3,141,473
Net income............................... $ 288,649 $ 299,178
Net income per common share:
Primary................................ $ 4.66 $ 4.86
Fully diluted.......................... $ 4.59 $ 4.78
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENT SECURITIES
The following table presents information related to the Corporation's
portfolio of securities held to maturity and available for sale at respective
year ends.
SECURITIES HELD TO MATURITY
-----------------------------------------
1996
-----------------------------------------
GROSS UNREALIZED ESTIMATED
BOOK ------------------ MARKET
VALUE GAINS (LOSSES) VALUE
---------- -------- --------- ----------
(IN THOUSANDS)
U.S. Government and federal agency
obligations....................... $7,441,501 $ 90,673 $ (71,608) $7,460,566
Obligations of U.S. states and
political subdivisions............ 693,567 40,995 (1,639) 732,923
Interest rate swaps................ -- -- (48,971) (48,971)
---------- -------- --------- ----------
$8,135,068 $131,668 $(122,218) $8,144,518
========== ======== ========= ==========
SECURITIES AVAILABLE FOR SALE
-------------------------------------------
1996
-------------------------------------------
GROSS UNREALIZED BOOK/
AMORTIZED ------------------ MARKET
COST GAINS (LOSSES) VALUE
----------- -------- --------- -----------
(IN THOUSANDS)
U.S. Government and federal
agency obligations.............. $ 4,962,769 $ 31,380 $ (12,124) $ 4,982,025
Obligations of U.S. states and
political subdivisions.......... 8,635 -- (2) 8,633
Domestic debt securities......... 3,686,608 10,500 (5,203) 3,691,905
Foreign debt securities.......... 3,523,598 146,362 (6,773) 3,663,187
Equity securities................ 769,188 22,452 (13,113) 778,527
Interest rate swaps.............. -- -- (83,832) (83,832)
----------- -------- --------- -----------
$12,950,798 $210,694 $(121,047) $13,040,445
=========== ======== ========= ===========
During 1996, the Corporation transferred securities with a book value and
approximate market value of $1.0 billion from available for sale to held to
maturity.
Investment securities having a carrying value of approximately $2.8 billion
at December 31, 1996, were pledged to secure public deposits, short-term
borrowings and for other purposes required or permitted by law.
SECURITIES HELD TO MATURITY
----------------------------------------
1995
----------------------------------------
GROSS UNREALIZED ESTIMATED
BOOK ----------------- MARKET
VALUE GAINS (LOSSES) VALUE
---------- -------- -------- ----------
(IN THOUSANDS)
U.S. Government and federal agency
obligations........................ $3,783,573 $150,879 $ (8,133) $3,926,319
Obligations of U.S. states and
political subdivisions............. 703,449 52,169 (1,020) 754,598
Interest rate swaps................. -- -- (85,463) (85,463)
---------- -------- -------- ----------
$4,487,022 $203,048 $(94,616) $4,595,454
========== ======== ======== ==========
SECURITIES AVAILABLE FOR SALE
-------------------------------------------
1995
-------------------------------------------
GROSS UNREALIZED BOOK/
AMORTIZED ------------------ MARKET
COST GAINS (LOSSES) VALUE
----------- -------- --------- -----------
(IN THOUSANDS)
U.S. Government and federal
agency obligations.............. $ 5,768,745 $ 56,788 $ (14,567) $ 5,810,966
Domestic debt securities......... 2,483,246 11,595 (3,846) 2,490,995
Foreign debt securities.......... 2,930,613 80,108 (58,322) 2,952,399
Equity securities................ 635,819 21,851 (23,636) 634,034
Interest rate swaps.............. -- -- (136,871) (136,871)
----------- -------- --------- -----------
$11,818,423 $170,342 $(237,242) $11,751,523
=========== ======== ========= ===========
In December 1995, the Corporation reassessed the appropriateness of its
investment securities portfolio classifications under a one-time provision
granted in a Special Report issued by the Financial Accounting Standards
Board. As a result of this portfolio reassessment, the Corporation transferred
certain securities with a book value of approximately $1.4 billion from held
to maturity to available for sale. The securities transferred had a net
unrealized depreciation, including associated hedges, of $11.2 million before
tax effect.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents information for investments in securities held
to maturity and securities available for sale at December 31, 1996, based on
scheduled maturities. Actual maturities can be expected to differ from
scheduled maturities due to prepayment or early call privileges of the issuer.
SECURITIES HELD TO MATURITY SECURITIES AVAILABLE FOR SALE
------------------------------------------------------------
BOOK ESTIMATED AMORTIZED BOOK/MARKET
VALUE MARKET VALUE COST VALUE
------------- ------------------------------ ---------------
(IN THOUSANDS)
Due in one year or
less................... $ -- $ -- $ 1,233,199 $ 1,235,316
Due after one year
through five years..... 39,324 42,457 2,166,186 2,192,255
Due after five years
through ten years...... 63,459 71,172 1,740,582 1,810,700
Due after ten years..... 599,749 628,616 4,480,565 4,547,557
Mortgage-backed
securities............. 7,432,536 7,451,244 3,330,266 3,338,449
Interest rate swaps..... -- (48,971) -- (83,832)
------------- ------------- -------------- --------------
$ 8,135,068 $ 8,144,518 $ 12,950,798 $ 13,040,445
============= ============= ============== ==============
Mortgage-backed securities included in the tables above in held to maturity
and available for sale have estimated average lives, based on year end market
conditions, of approximately 8.6 years and 6.8 years, respectively. Mortgage-
backed securities held to maturity include a mark-to-market writedown of $65.8
million that is reported in the separate component of stockholders' equity
related to securities that were transferred from available for sale in 1994.
The following table presents the components of net investment securities
gains and losses attributable to securities held to maturity and securities
available for sale for each of the years in the three-year period ended
December 31, 1996.
1996 1995 1994
------------------------- ------------------------- ---------------------------
GROSS GROSS GROSS
---------------- NET ---------------- NET ------------------ NET
GAINS (LOSSES) GAINS GAINS (LOSSES) GAINS GAINS (LOSSES) GAINS
------- -------- ------- ------- -------- ------- -------- --------- -------
(IN THOUSANDS)
Securities held to
maturity:
Maturities, calls and
mandatory
redemptions.......... $ 1,986 $ (89) $ 1,897 $ 3,912 $ (747) $ 3,165 $ 3,294 $ (222) $ 3,072
Securities available for
sale:
Sales of securities... 56,098 (36,072) 20,026 31,445 (12,131) 19,314 129,074 (117,846) 11,228
Maturities, calls and
mandatory
redemptions.......... 2,573 (1,249) 1,324 3,722 (538) 3,184 716 (45) 671
------- -------- ------- ------- -------- ------- -------- --------- -------
$60,657 $(37,410) $23,247 $39,079 $(13,416) $25,663 $133,084 $(118,113) $14,971
======= ======== ======= ======= ======== ======= ======== ========= =======
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.
1996 1995
---------- ----------
(IN THOUSANDS)
Precious metals (including derivatives related balances
of $255,017 in 1996 and $152,932 in 1995).............. $1,231,319 $1,250,038
========== ==========
Trading account assets:
U.S. Government obligations........................... $ 365,534 $ 534,258
U.S. Government agency obligations.................... 115,661 68,218
Other, primarily foreign bonds........................ 997,054 301,255
Unrealized gains on derivative financial instruments.. 3,329,539 3,131,875
---------- ----------
$4,807,788 $4,035,606
========== ==========
Trading account liabilities:
Securities sold, not yet purchased.................... $ 327,827 $ 12,243
Payables for precious metals.......................... 510,299 500,889
Unrealized losses on derivative financial
instruments.......................................... 3,563,959 3,206,519
---------- ----------
$4,402,085 $3,719,651
========== ==========
Trading income is generated by the Corporation's participation in the
foreign exchange and precious metals markets and by its activities as an
international dealer in other derivative contracts, including interest rate
swaps, and from trading securities. The Corporation reports the net trading
income from each of these activities, which includes mark-to-market
adjustments and any related direct trading expenses, on the statement of
income as foreign exchange trading income, income from precious metals and
trading account profits and commissions, respectively.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents net trading income related to the Corporation's
trading activities for each of the last three years.
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Income from precious metals.................... $ 24,700 $ 38,049 $ 50,930
Foreign exchange trading income................ 98,165 113,051 91,028
Trading account profits and commissions:
Debt securities and loans.................... 15,802 25,546 (10,276)
Interest rate futures, forwards and swaps,
and commodity, equity and
other derivative contracts.................. 37,139 (800) 37,633
-------- -------- --------
Total trading account profits and
commissions............................... 52,941 24,746 27,357
-------- -------- --------
Total trading income........................... $175,806 $175,846 $169,315
======== ======== ========
The following tables present information related to the fair value, after
the effect of netting agreements, which is also the carrying value, of
derivative instruments held for trading purposes.
AVERAGE FAIR
VALUE DURING FAIR VALUE AT
1996 DECEMBER 31, 1996
------------- ----------------------
ASSETS
(LIABILITIES) ASSETS LIABILITIES
------------- ---------- -----------
(IN THOUSANDS)
Interest rate:
Futures and forwards..................... $ 3,738 $ 18,695 $ 21,460
Swaps.................................... 49,536 797,330 796,696
Options written.......................... (148,871) -- 117,787
Options purchased........................ 179,502 150,440 --
--------- ---------- ----------
$ 83,905 $ 966,465 $ 935,943
========= ========== ==========
Foreign exchange:
Spot, swaps, futures and forwards........ $ 16,125 $1,681,277 $1,514,712
Options written.......................... (385,368) -- 706,555
Options purchased........................ 368,845 657,054 --
--------- ---------- ----------
$ (398) $2,338,331 $2,221,267
========= ========== ==========
Other-principally precious metals:
Swaps, futures and forwards.............. $ (3,931) $ 201,472 $ 301,810
Options written.......................... (45,318) -- 104,939
Options purchased........................ 33,237 78,288 --
--------- ---------- ----------
$ (16,012) $ 279,760 $ 406,749
========= ========== ==========
AVERAGE FAIR
VALUE DURING FAIR VALUE AT
1995 DECEMBER 31, 1995
------------- ----------------------
ASSETS
(LIABILITIES) ASSETS LIABILITIES
------------- ---------- -----------
(IN THOUSANDS)
Interest rate:
Futures and forwards..................... $ 24,768 $ 7,078 $ 36,719
Swaps.................................... 104,339 742,583 784,671
Options written.......................... (275,127) -- 200,397
Options purchased........................ 329,858 302,035 --
--------- ---------- ----------
$ 183,838 $1,051,696 $1,021,787
========= ========== ==========
Foreign exchange:
Spot, swaps, futures and forwards........ $ 27,506 $1,405,691 $1,332,608
Options written.......................... (476,767) -- 638,400
Options purchased........................ 479,881 658,307 --
--------- ---------- ----------
$ 30,620 $2,063,998 $1,971,008
========= ========== ==========
Other-principally precious metals:
Swaps, futures and forwards.............. $ 4,674 $ 97,548 $ 142,051
Options written.......................... (50,147) -- 71,673
Options purchased........................ 46,550 71,565 --
--------- ---------- ----------
$ 1,077 $ 169,113 $ 213,724
========= ========== ==========
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LOANS
The following table sets forth the composition of the Corporation's loan
portfolio at respective year ends.
1996 1995
----------- ----------
(IN THOUSANDS)
Domestic:
Real estate--residential mortgage.................... $ 1,832,850 $1,171,158
Real estate--commercial.............................. 2,116,627 1,791,693
Banks and other financial institutions............... 45,112 28,291
Broker loans......................................... 1,051,472 1,086,530
Commercial and industrial............................ 1,855,251 2,004,783
Individuals.......................................... 200,607 389,520
All other............................................ 400,705 187,360
Foreign................................................ 4,244,618 3,219,613
----------- ----------
11,747,242 9,878,948
Less unearned income................................. (25,306) (34,988)
----------- ----------
Loans, net of unearned income.......................... $11,721,936 $9,843,960
=========== ==========
6. ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The Corporation's allowance for possible credit losses is determined by
management, based on previous credit loss experience, prevailing and
anticipated economic conditions and the composition of the loan portfolio, all
of which are continuously reviewed. The allowance is viewed by management to
be an adequate, single, unallocated reserve, available for potential credit
losses. To comply with regulatory reporting requirements, management has
allocated the allowance for possible credit losses between domestic and
foreign components. By such allocation, management does not intend to imply
that future charge-offs will necessarily follow the same pattern or that any
portion of such allowance is restricted in any way.
Changes in the Corporation's allowance for possible credit losses applicable
to domestic and foreign operations for each of the years in the three-year
period ended December 31, 1996 were as follows:
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
DOMESTIC FOREIGN TOTAL DOMESTIC FOREIGN TOTAL DOMESTIC FOREIGN TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Balance, January 1...... $166,733 $133,860 $300,593 $191,887 $127,333 $319,220 $189,499 $122,356 $311,855
Provision............... 32,000 -- 32,000 12,000 -- 12,000 16,000 3,000 19,000
-------- -------- -------- -------- -------- -------- -------- -------- --------
198,733 133,860 332,593 203,887 127,333 331,220 205,499 125,356 330,855
-------- -------- -------- -------- -------- -------- -------- -------- --------
Charge-offs............. (38,874) (4,164) (43,038) (48,135) (3,356) (51,491) (27,200) (17,355) (44,555)
Recoveries.............. 10,156 3,452 13,608 10,981 5,007 15,988 13,588 12,639 26,227
Net recoveries of
restructuring countries
debt................... -- 4,435 4,435 -- 4,227 4,227 -- 6,899 6,899
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net (charge-offs)
recoveries........... (28,718) 3,723 (24,995) (37,154) 5,878 (31,276) (13,612) 2,183 (11,429)
Allowance of acquired
company................ 42,579 -- 42,579 -- -- -- -- -- --
Translation adjustment.. -- 181 181 -- 649 649 -- (206) (206)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance, December 31.... $212,594 $137,764 $350,358 $166,733 $133,860 $300,593 $191,887 $127,333 $319,220
======== ======== ======== ======== ======== ======== ======== ======== ========
The following table presents the book balances of the Corporation's non-
accrual and restructured loans (excluding consumer installment loans) at
respective year ends.
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
Domestic............................................. $ 94,137 $49,311 $43,392
Foreign.............................................. 10,956 18,561 14,734
-------- ------- -------
Non-accrual loans.................................... 105,093 67,872 58,126
Less: FDIC loss-sharing (1).......................... (46,306) -- --
-------- ------- -------
58,787 67,872 58,126
Restructured loans................................... 34,993 14,383 28,330
-------- ------- -------
$ 93,780 $82,255 $86,456
======== ======= =======
(1) Represents the carrying value of non-performing loans acquired in the
CrossLand transaction that are covered by a loss-sharing agreement with
the FDIC which expires on June 30, 1998. The covered amount of non-accrual
loans at December 31, 1996 was $49.6 million.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Included in the above table at December 31, 1996 and 1995, are impaired
loans with a book value of $70.2 million and $46.0 million, respectively. At
December 31, 1996 and 1995, impaired loans amounting to $62.0 million and
$16.7 million were evaluated based on underlying collateral value and $8.2
million and $29.3 million were evaluated based on future cash flow
projections. At December 31, 1996 and 1995, the Corporation's recorded
investment in impaired loans included $6.5 million and $35.6 million with a
related allowance for credit losses of $0.8 million and $9.7 million. The
balance of impaired loans at December 31, 1996 and 1995, amounting to $63.7
million and $10.4 million had no related allowance for credit losses. The
average recorded investment in impaired loans, net of charge-offs, was $74.4
million in 1996 and $39.6 million in 1995.
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, 1996.
1996 1995 1994
------- ------ -------
(IN THOUSANDS)
Gross amount of interest that would have been earned at
original contract rates:
Domestic............................................. $15,831 $4,349 $ 7,430
Foreign.............................................. 1,065 2,478 2,713
------- ------ -------
$16,896 $6,827 $10,143
======= ====== =======
Actual amount recorded as interest income:
Domestic............................................. $10,537 $2,319 $ 3,318
Foreign.............................................. 11 449 318
------- ------ -------
$10,548 $2,768 $ 3,636
======= ====== =======
Foregone interest income:
Domestic............................................. $ 5,294 $2,030 $ 4,112
Foreign.............................................. 1,054 2,029 2,395
------- ------ -------
$ 6,348 $4,059 $ 6,507
======= ====== =======
Included in the above table in 1996 and 1995 were $5,072,000 and $151,000,
respectively of interest income recorded on impaired loans.
7. INVESTMENT IN AFFILIATE
At December 31, 1996, the Corporation, Saban S.A. (see Note 20), a
Panamanian holding company wholly-owned by Mr. Edmond J. Safra, and
international investors owned approximately 49.1%, 20.8% and 30.1%,
respectively, of the outstanding common shares of Safra Republic Holdings S.A.
("Safra Republic"), a Luxembourg holding company, to which the Bank
contributed its European banking subsidiaries in Switzerland, Luxembourg,
France, Guernsey and Gibraltar in 1988.
Summary financial information for Safra Republic for the last two years is
as follows:
1996 1995
----------- -----------
(IN THOUSANDS)
Total assets........................................... $17,223,409 $15,660,544
Total deposits......................................... 13,337,947 11,347,601
Total shareholders' equity............................. 1,643,110 1,467,807
Operating revenue...................................... 1,102,145 999,623
Net income............................................. 189,830 162,104
8. PREMISES AND EQUIPMENT
A summary of the Corporation's premises and equipment at respective year
ends follows.
1996 1995
-------- --------
(IN THOUSANDS)
Premises.................................................... $513,100 $475,428
Equipment................................................... 199,913 170,808
-------- --------
713,013 646,236
Less accumulated depreciation and amortization.............. (243,782) (209,465)
-------- --------
$469,231 $436,771
======== ========
Other operating expenses included depreciation and amortization of $48.4
million in 1996, $44.1 million in 1995 and $37.2 million in 1994. The
estimated useful lives are 10 to 50 years for premises and 3 to 10 years for
equipment.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SHORT-TERM BORROWINGS
The following table presents the Corporation's short-term borrowings at
respective year ends.
1996 1995
---------- ----------
(IN THOUSANDS)
Federal funds purchased and securities sold under
repurchase agreements.................................. $1,090,300 $1,231,744
Commercial paper........................................ 862,347 667,563
Other borrowings........................................ 3,494,194 1,991,461
---------- ----------
$5,446,841 $3,890,768
========== ==========
Federal funds purchased generally mature one business day following the sale
date. Securities sold under repurchase agreements and commercial paper
generally mature within 30 days and 90 days, respectively, from the related
dates of sale. Other borrowings generally mature within twelve months and
include local borrowings in overseas locations. Included in other borrowings
at December 31, 1996 was $100 million of notes sold under the Bank's program
to issue notes globally, see Note 10.
The Corporation has $160 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:
1996 1995
---------- ----------
(IN THOUSANDS)
Republic New York Corporation:
8 3/8% Debentures due February 15, 2007................ $ 100,000 $ 100,000
7% Capitalized lease obligations due December 31,
2000.................................................. 8,484 --
8 3/8% Notes due May 1, 1996........................... -- 100,000
---------- ----------
108,484 200,000
========== ==========
Republic National Bank of New York:
S&P 500 Index Notes due August 4, 2000*................ 20,000 20,000
Other long-term debt (various)......................... 36,312 16,821
Collateralized repurchase agreements, rates from 3.25%-
7.55% in 1996 and 3.25%-8.07% in 1995................. 1,333,914 1,298,190
LIBOR Accrual Notes due February 2, 1996............... -- 20,100
---------- ----------
1,390,226 1,355,111
---------- ----------
$1,498,710 $1,555,111
========== ==========
* The S&P 500 Index was 615.93 and 740.74 at December 31, 1995 and 1996,
respectively.
The Bank has a Program (the "Program") authorizing the periodic sale,
globally, of notes (the "Notes") by the Bank, including through its overseas
branches, or through a certain overseas subsidiary. A group of major
international securities dealers are eligible to participate in the offerings
pursuant to the Program. Notes may be issued for any maturity of 7 days or
more, subject to regulatory compliance. Notes may be denominated in various
currencies, may pay a fixed or floating rate based on one or more indices and,
unless otherwise specified, will be issued only in minimum denominations of
$250,000 and integral multiples of $1,000 in excess thereof. The Notes are
direct, unconditional and unsecured general obligations of the Bank, do not
evidence deposits and are not insured by the FDIC. Notes to be issued as part
of the program have been accepted for listing on the Luxembourg Stock
Exchange. At December 31, 1996, $120 million of Notes were outstanding
pursuant to this Program.
All other outstanding notes of the Bank were issued under an authorization
by its Board of Directors which allows for an aggregate of up to $7 billion of
such obligations to be outstanding at any time. All such outstanding notes of
the Bank are unsecured debt obligations and are not subject to redemption
prior to maturity. The Notes are direct, unconditional and unsecured general
obligations of the Bank, do not evidence deposits and are not insured by the
FDIC.
Collateralized repurchase agreements consist of securities repurchase
agreements with initial maturities exceeding one year.
All of the outstanding long-term notes and debentures of the Corporation are
direct unsecured obligations and are not subordinated in right of payment to
any other unsecured indebtedness of the Corporation.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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: $201 million in 1997, $226 million in 1998, $13 million in 1999,
$180 million in 2000 and $76 million in 2001.
Subordinated Long-Term Debt and Perpetual Capital Notes:
1996 1995
---------- ----------
(IN THOUSANDS)
Republic New York Corporation:
9 1/2% Subordinated Notes due July 1, 2000............. $ 100,000 $ 100,000
9 3/4% Subordinated Notes due December 1, 2000......... 100,000 100,000
7 7/8% Subordinated Notes due 2001..................... 100,000 100,000
8.25% Subordinated Notes due 2001...................... 150,000 150,000
8 7/8% Subordinated Notes due 2001..................... 100,000 100,000
7 3/4% Subordinated Notes due May 15, 2002............. 150,000 150,000
7 1/4% Subordinated Notes due July 15, 2002............ 250,000 250,000
Floating Rate Subordinated Notes due August 2002
(5.4556% in 1996 and 5.8931% in 1995)................. 100,000 100,000
Floating Rate Subordinated Notes due October 2002
(5.4868% in 1996 and 5.9713% in 1995)................. 150,000 150,000
Subordinated Floating Rate Yield Curve Notes due 2002
(5.4625% in 1995)*.................................... -- 100,000
5 7/8% Subordinated Notes due 2008..................... 250,000 250,000
7 3/4% Subordinated Notes due 2009..................... 200,000 200,000
9.70% Subordinated Notes due February 1, 2009.......... 150,000 150,000
7% Subordinated Notes due March 22, 2011............... 100,000 --
9 1/2% Subordinated Debentures due April 15, 2014...... 150,000 150,000
9 1/8% Subordinated Notes due 2021..................... 100,000 100,000
9.30% Subordinated Notes due 2021...................... 100,000 100,000
Perpetual Capital Notes (6.0625% in 1996 and 6.1875% in
1995)**............................................... 150,000 150,000
---------- ----------
2,400,000 2,400,000
Republic National Bank of New York:
Other subordinated long-term debt...................... -- 6,440
---------- ----------
$2,400,000 $2,406,440
========== ==========
* These notes were repurchased prior to their scheduled maturity.
** These notes are redeemable prior to maturity.
The rates in effect at December 31, 1996 and 1995 for floating rate issues
are shown in parentheses.
The Corporation's outstanding issues of subordinated notes and debentures
are all direct unsecured obligations of the Corporation. Interest rates on
subordinated floating rate note issues are determined quarterly or semi-
annually by formulas based on certain money market rates and, in the case of
the issue of the Floating Rate Subordinated Notes due 2002, is subject to a
minimum rate of 5% per annum.
The Corporation has an outstanding shelf registration statement pursuant to
which it 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, 1996, an
aggregate of $775 million principal amount of outstanding debt securities and
preferred stock had been issued pursuant to such registration statement.
On March 22, 1996, the Corporation sold, in a public offering, $100 million
principal amount of 7% Subordinated Notes due 2011. The Notes are direct
unsecured general obligations of the Corporation and are subordinated to all
present and future senior indebtedness of the Corporation. The Notes are not
redeemable prior to maturity. The net proceeds received by the Corporation
from the sale of the Notes were used for general corporate purposes, which
included the repurchase of $100 million principal amount outstanding of the
Corporation's issue of Subordinated Floating Rate Yield Curve Notes due 2002.
In connection with the repurchase and early extinguishment of such issue, the
Corporation recorded a gain of $1.1 million in other income.
The Corporation's $150 million principal amount of Putable (or Perpetual)
Capital Notes (the "PCNs") are a component of total qualifying capital under
applicable risk-based capital rules. The principal amount of each PCN will be
payable as follows: (1) at the option of the holder on the put date in each
year commencing in 2012, PCNs may be exchanged for securities that constitute
permanent primary capital securities (the "capital securities") for regulatory
purposes, (2) at the option of the Corporation on 90 days prior notice, the
PCNs may be either (i) redeemed on the specified redemption date, in whole,
for cash and at par, but only with the proceeds of a substantially concurrent
sale of capital securities issued for the purpose of such redemption or (ii)
exchanged, in whole, for capital securities having a market value equal to the
principal amount of the PCNs, and, in each case, the payment of accrued
interest in cash or (3) in the event that the sum of the Corporation's
consolidated retained earnings and surplus accounts becomes less than zero,
the PCNs will automatically be exchanged, in whole, for capital securities
having a market value equal to the principal amount of the PCNs and the
payment of accrued interest in cash.
The PCNs are unsecured and subordinated in right of payment to all senior
indebtedness of the Corporation. The interest rate for each six-month interest
period is determined by a formula based on certain money market rates.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1996, the Bank redeemed $6.440 million of other subordinated long-term
debt for 283,379 shares of the Corporation's common stock.
The Corporation and the Bank are obligated with respect to the above
subordinated long-term debt to make principal payments within the next five
years as follows: $200 million in 2000 and $350 million in 2001.
11. COMPANY-OBLIGATED MANDITORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBT SECURITIES
The following table presents information related to the issues of company-
obligated manditorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debt securities issued by the Corporation
at December 31, 1996
1996
--------------
(IN THOUSANDS)
7 3/4% Capital Trust Pass-through Securities SM (TruPS)
(Issued by Republic New York Capital I)........................ $150,000
7.53% Capital Securities
(Issued by Republic New York Capital II)....................... 200,000
--------
$350,000
========
The Preferred Securities (the "Trust Securities"), were issued by two trusts
that are wholly-owned subsidiaries of the Corporation and were sold to
qualified institutional buyers under Rule 144A of the Securities Act of 1933.
Each trust exists for the exclusive purpose of issuing Trust Securities and
investing the proceeds in junior subordinated debt securities of the
Corporation with similar interest rates and maturities. The Trust Securities
are guaranteed by the Corporation as to the payment of distributions and the
payment on liquidation of the Trust Securities within certain limits. The
Trust Securities are a component of Tier 1 capital under applicable risk-based
capital rules.
The Trust Securities are subject to mandatory redemption (i) in whole, but
not in part upon repayment in full, at the stated maturity of the junior
subordinated debt securities at a redemption price equal to the principal
amount of, plus accrued interest on, the junior subordinated debt securities
and (ii) in whole or in part on or after November 15, 2006 in respect of
Republic New York Capital I and December 4, 2006 in respect of Republic New
York Capital II, contemporaneously with any optional redemption by the
Corporation of junior subordinated debt securities at a redemption price equal
to the optional prepayment price. Subject to prior approval to do so by the
Federal Reserve, the respective issues of the junior subordinated debt
securities are redeemable during the 12-month periods beginning with the dates
above at 103.66% and 103.765% of the principal amounts outstanding, declining
ratably each year thereafter to 100%, plus accrued but unpaid interest thereon
to the date of redemption.
12.PREFERRED STOCK
The Corporation'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
OUTSTANDING DECEMBER 31, AMOUNT OUTSTANDING
----------- ------------ -----------------------
1996 1996 1996 1995
----------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS)
$1.9375 Cumulative Preferred
Stock ($25 stated value).... 4,000,000 7.75% $ 100,000 $ 100,000
$1.8125 Cumulative Preferred
Stock ($25 stated value).... 3,000,000 7.25% 75,000 75,000
6,000,000 Depositary shares
each representing a one-
fourth interest in a share
of adjustable rate
Cumulative Preferred Stock,
Series D ($100 stated
value)...................... 1,500,000 5.74% 150,000 150,000
Dutch Auction Rate
Transferable Securities
Preferred Stock ("DARTS")
Series A ($100,000 stated
value).................... 625 3.92% 62,500 62,500
Series B ($100,000 stated
value).................... 625 4.00% 62,500 62,500
Remarketed Preferred ("RP")
($100,000 per share
liquidation preference)..... 558 3.90-4.10% 55,800 75,000
Money Market Cumulative
Preferred ("MMP")
($100,000 per share
liquidation preference)..... 500 4.10% 50,000 50,000
--------- ----------- -----------
8,502,308 $ 555,800 $ 575,000
========= =========== ===========
The 4 million shares of $1.9375 Cumulative Preferred Stock with a stated
value of $25 per share will be redeemed on February 27, 1997, at $25 per
share, plus, accrued and unpaid dividends to the redemption date. Such shares
are being redeemed with the proceeds of an issue of 7 3/4% Trust Securities
sold by a special purpose trust which is a wholly-owned subsidiary of the
Corporation.
On June 26, 1995, the Corporation sold, in a public offering, 3 million
shares of $1.8125 Cumulative Preferred Stock ($25 Stated Value) (the
"Preferred Stock") with an aggregate stated value of $75 million. The
Preferred Stock may be redeemed, at the option of the Corporation, in whole or
in part, at any time or from time to time, on or after July 1, 2000 at $25 per
share, plus, in each case, dividends accrued and unpaid to the redemption
date.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The 6 million depositary shares outstanding each represent a one-fourth
interest in a share of Adjustable Rate Cumulative Preferred Stock, Series D
($100 Stated Value) (the "Series D Stock"). The dividend rate on the Series D
Stock is determined quarterly, by reference to a formula based on certain
benchmark market rates, but will not be less than 4 1/2% or more than 10 1/2%
per annum for any applicable dividend period. The dividend rate in effect for
the period ended December 31, 1996, was 5.7429%. 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.
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. In December
1996, the Corporation announced its intention to redeem all the outstanding
shares of remarketed preferred stock. The Corporation redeemed 192 shares of
this issue with a liquidation value of $19.2 million in the fourth quarter of
1996 and will redeem the remaining 558 shares of this issue with an aggregate
liquidation value of $55.8 million, during the first quarter of 1997.
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 preceding such dividend payment date equals
or exceeds the 60-day "AA" composite commercial paper rate on the date of
determination of such applicable rate.
13.INCOME TAXES
Total income tax expense (benefit) for each of the years in the three-year
period ended December 31, 1996 was allocated as follows:
1996 1995 1994
-------- -------- ---------
(IN THOUSANDS)
Income from operations........................... $171,706 $109,466 $ 152,358
Stockholders' equity:
Net unrealized appreciation (depreciation) on
securities available for sale, net of taxes... 79,904 55,375 (281,046)
Foreign currency translation, net.............. (12,041) 2,389 9,719
-------- -------- ---------
$239,569 $167,230 $(118,969)
======== ======== =========
The components of the Corporation's consolidated income tax expense from
operations were as follows:
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Current Tax Expense:
Federal............................................ $100,606 $ 59,312 $ 53,093
Foreign............................................ 23,565 19,150 21,138
State and other.................................... 8,300 6,700 8,837
-------- -------- --------
132,471 85,162 83,068
-------- -------- --------
Deferred Tax Expense
Federal............................................ 39,235 24,304 62,194
State and other.................................... -- -- 7,096
-------- -------- --------
39,235 24,304 69,290
-------- -------- --------
$171,706 $109,466 $152,358
======== ======== ========
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense on operations amounted to $171.7 million for 1996, $109.5
million for 1995 and $152.4 million for 1994, representing effective tax rates
of 29.1%, 27.5% and 30.9%, 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
----------------
1996 1995 1994
---- ---- ----
Federal tax expense at statutory rates........................ 35.0 35.0 35.0
State and local income tax, net of federal tax benefit........ 0.9 1.1 2.1
Interest and dividend income exempt from federal tax.......... (4.5) (6.4) (4.6)
Other, net.................................................... (2.3) (2.2) (1.6)
---- ---- ----
Income tax expense as reported................................ 29.1 27.5 30.9
==== ==== ====
The tax effects of temporary differences that gave rise to the deferred tax
assets and deferred tax liabilities at December 31, 1996 and 1995 are
presented below.
1996 1995
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Provision for credit losses................................ $134,411 $125,149
Exempt income from subsidiary acquisition.................. 50,083 23,564
Unrealized losses on trading account assets and securities
available for sale........................................ -- 15,499
Employee benefits.......................................... 24,042 20,407
Restructuring and related charges.......................... 12,966 28,282
Other...................................................... 9,090 7,950
-------- --------
230,592 220,851
-------- --------
Deferred tax liabilities:
Depreciation............................................... 50,467 48,555
Domestic tax on overseas income............................ 99,599 87,411
Interest and discount income............................... 56,228 38,833
Unrealized gains on trading account assets and securities
available for sale........................................ 17,888 --
-------- --------
224,182 174,799
-------- --------
Net deferred tax asset....................................... $ 6,410 $ 46,052
======== ========
There was no valuation adjustment at December 31, 1996 and 1995,
respectively.
The Corporation has not recognized a deferred tax liability of approximately
$100.0 million for undistributed earnings of foreign subsidiaries for taxable
years beginning prior to 1987 because the Corporation does not expect those
earnings to be distributed and become taxable to the Corporation in the
foreseeable future. As of December 31, 1996, the undistributed earnings of
these foreign subsidiaries were approximately $365.0 million. Cumulative
foreign tax credits of approximately $28.5 million at December 31, 1996 are
available for utilization by the Corporation against U.S. income taxes that
would arise upon a dividend distribution by its foreign subsidiaries.
The following table distributes the Corporation's income before income taxes
between its domestic and foreign offices for each of the last three years.
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Foreign.............................................. $347,754 $286,576 $220,377
Domestic............................................. 242,792 111,539 271,989
-------- -------- --------
$590,546 $398,115 $492,366
======== ======== ========
14.RESTRUCTURING AND RELATED CHARGES
In the second quarter of 1995, the Corporation recorded a $120.0 million
pre-tax provision, or $1.44 per fully diluted share, for restructuring and
related charges in connection with the implementation of Project Excellence
Plus, the Corporation's company-wide project to improve operating efficiencies
and reduce costs. The implementation stage of this project began in the second
quarter of 1995 and was completed in the second quarter of 1996. Approximately
800 employees have been terminated under the restructuring plan, of which two-
thirds were non-officer level employees. Approximately 650 employees were
terminated during 1995 with the remainder terminated by the end of the second
quarter of 1996.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the restructuring charge taken during 1995 were as
follows:
1995
--------------
(IN THOUSANDS)
Salaries and employee benefits................................... $ 71,000
Occupancy, net................................................... 10,000
Other expenses................................................... 39,000
--------
$120,000
========
Salaries and employee benefits charges include the cost of terminations and
other benefits. The charge to occupancy consists of lease termination costs
for space that is expected to be vacated, space consolidation and anticipated
losses to be incurred on the sale of properties to be vacated. Other expenses
include project-related implementation costs that consist of the write-off of
obsolete equipment, legal expenses, termination costs of computer service
contracts, disposition of real estate, consulting and other professional fees.
Cash expenditures relating to the restructuring program have been made from
the Corporation's operating activities and have not had an adverse impact on
its operations, liquidity or capital requirements.
The following table presents a summary of activity in the accrual for
restructuring and related charges.
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
----------- -----------
(IN THOUSANDS)
Balance at beginning of year.......................... $ 63,963 $ --
Provision for restructuring and related charges..... -- 120,000
Payments............................................ (33,184) (46,179)
Non-cash writedowns................................. (10,047) (9,858)
----------- -----------
Balance at end of year................................ $ 20,732 $ 63,963
=========== ===========
The payments made during 1996 and 1995 related primarily to severance costs
and project-related expenses. Non-cash writedowns relate primarily to vacated
facilities and write-offs of equipment and leasehold improvements.
15.BENEFITS
Retirement Benefits
The Bank has a Retirement Plan (the "U.S. Plan") which covers substantially
all U.S. employees of the Corporation, the Bank and their respective
subsidiaries. Benefits are based on an employee's years of creditable service
and average base salary for the highest paid five consecutive years during the
last ten years of employment. The Corporation's funding policy is to
contribute annually an amount necessary to satisfy the Employee Retirement
Income Security Act ("ERISA") funding standards. The 1996 expense and
disclosure results reflect the impact of CrossLand's retirement plan.
The following table sets forth the U.S. Plan's funded status and amounts
recognized in the Corporation's Statement of Condition at respective year
ends.
1996 1995
--------- ---------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $(130,642 ) in 1996 and $(106,019) in
1995.................................................. $(144,076) $(117,545)
========= =========
Plan assets at fair value, primarily common stocks and
U.S. Government securities with the balance in mutal
funds................................................... $ 226,466 $ 175,943
Projected benefit obligation for service rendered to
date.................................................... (180,710) (155,466)
--------- ---------
Excess of plan assets over projected benefit obligation.. 45,756 20,477
Unrecognized net (gain) from past experience different
from that assumed and effects of changes in assump-
tions................................................... (37,449) (12,317)
Prior service cost not yet recognized in net periodic
pension cost............................................ 760 904
Implementation asset not yet recognized in periodic
pension cost............................................ (5,029) (6,035)
--------- ---------
Prepaid pension expense included in other assets......... $ 4,038 $ 3,029
========= =========
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net pension expense in each of the last three years consisted of the
following:
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Service cost-benefits earned during the period....... $ 7,447 $ 6,295 $ 6,250
Interest cost on projected benefit obligation........ 12,600 10,824 9,575
Actual return on plan assets......................... (27,341) (29,893) (66)
Net amortization and deferral........................ 12,185 17,471 (10,406)
------- ------- -------
Net periodic pension expense....................... $ 4,891 $ 4,697 $ 5,353
======= ======= =======
The following table presents the economic assumptions used to calculate the
projected benefit obligation and pension expense in each of the last three
years.
1996 1995 1994
---- ---- ----
Discount rate................................................. 7.5% 7.0% 8.0%
Rate of compensation increase................................. 5.0 5.0 6.0
Expected long-term rate of return on plan assets.............. 8.0 8.0 8.0
In addition to the above funded U.S. Plan, the Corporation established an
unfunded benefit maintenance plan and a supplemental pension plan for certain
employees, executive officers and directors. The expense related to these
plans amounted to $2.1 million in 1996, $2.2 million in 1995 and $2.1 million
in 1994. The unfunded liability for these plans was $9.8 million and $12.0
million at December 31,1996 and 1995, respectively.
Retirement benefits in foreign locations generally are covered by local
plans based on length of service, compensation levels and, where applicable,
employee contributions, with the funding of these plans based on local legal
requirements. The aggregate pension expense for such plans was approximately
$4.6 million in 1996 and $3.6 million in 1995 and 1994.
Postretirement Benefits
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 benefit
obligation is unfunded.
The following table sets forth information related to the Corporation's
postretirement benefit obligation at respective year ends.
1996 1995
-------- --------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees including covered dependents and beneficia-
ries................................................... $(26,841) $(24,932)
Fully eligible actives.................................. (1,176) (1,067)
Other actives........................................... (766) (691)
-------- --------
(28,783) (26,690)
Unrecognized net gain..................................... (11,757) (8,289)
Unrecognized transition obligation being recognized over
20 years................................................. 14,322 15,275
-------- --------
Postretirement benefit obligation included in other lia-
bilities............................................... $(26,218) $(19,704)
======== ========
A discount rate of 7.5% and a 5% compensation increase were used to measure
the accumulated postretirement benefit obligation in 1996. A discount rate of
7% and a 5% compensation increase were used to measure the accumulated
postretirement benefit obligation in 1995. In 1994, the rates used were 8% and
6%. The effect of raising health care gross eligible charges by 1% would
increase the aggregate of service cost and interest cost by approximately
$215,000 and the accumulated postretirement benefit obligation by
approximately $2.5 million.
The health care trend rate used to measure the expected costs of benefits
for 1997 is projected to be 10.0% for those under age 65 and 9.2% for those 65
and older. The rates for those under age 65 and for those 65 and older are
assumed to decrease by 1% and 0.4%-0.5% per year, respectively, until they
reach 6.0% for retirees under 65 and 6.9% for retirees 65 and older and
stabilize at those rates.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net postretirement benefit expense for each of the last three years was as
follows:
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
Service cost.......................................... $ 85 $ 76 $ 92
Interest cost on accumulated postretirement benefit
obligation........................................... 1,950 1,848 1,744
Amortization of transitional accumulated
postretirement benefit obligation.................... 953 953 953
Amortization of net gain.............................. (633) (436) (178)
------ ------ ------
Net periodic expense................................ $2,355 $2,441 $2,611
====== ====== ======
Postemployment Benefits
The Corporation accounts for postemployment benefits by recognizing an
obligation for the estimated cost of postemployment benefits. Postemployment
is defined as the period after employment but before retirement if certain
conditions are met. Postemployment benefits include, but are not limited to,
salary continuation, severance benefits, job training and counseling, health
care and life insurance coverage. This expense is not material to the
Corporation's results of operations.
Stock-Based Compensation
The Corporation has a Long-Term Incentive Stock Plan (the "1995 Plan"). The
1995 Plan was designed to consolidate the Corporation's 1985 Incentive Stock
Option Plan, 1985 Non-Qualified Stock Option Plan, and 1985 Restricted Stock
Plan (together, the "Prior Plans") and provides for the award of Incentive
Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights,
Restricted Stock and other stock-based awards (each, an "Award"), which may be
granted individually or in combination to eligible persons. The 1995 Plan
provides that it shall terminate on the tenth anniversary of its effective
date. At the time the 1995 Plan was established, 1,140,800 shares of the
Corporation's Common Stock were set aside for Awards pursuant to the Plan,
representing the number of shares authorized for awards, but not presently
awarded, under the Prior Plans. At December 31, 1996, an aggregate of 165,720
shares of Common Stock remained available to be awarded under the 1995 Plan.
The Prior Plans expired by their terms in 1995 and no new awards may be
granted thereunder. However, awards previously granted under the Prior Plans
that remain outstanding will continue to be administered in compliance with
the terms and conditions of the applicable Prior Plan.
During 1996, 1995 and 1994, the Corporation issued, net of cancellations,
453,164 shares, 190,365 shares and 694,207 shares of Common Stock,
respectively, with an approximate market values as of the dates of issue of
$30.5 million, $11.2 million and $33.2 million, respectively, in accordance
with the terms of Restricted Stock Awards granted under the 1995 Plan and the
1985 Restricted Stock Plan. Such market values are amortized as an expense
over the period for which such shares are restricted.
The Corporation also issues stock pursuant to the terms of the Restricted
Stock Election Plan, which allows certain officers who have earned deferred
compensation to elect to receive payment in the form of Restricted Stock of
the Corporation. During 1996, 1995 and 1994, 2,367 shares, 760 shares and 768
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 $151,000, $38,000 and $37,000, respectively.
Options to purchase Common Stock, which may be non-qualified or incentive
stock options, may be granted at an exercise price determined at the time the
option is granted by the Employee Compensation and Benefits Committee of the
Corporation's Board of Directors (the "Compensation Committee"), provided,
however, that in the case of an incentive stock option, the exercise price
must be at least 100% of the fair market value of a share of the Common Stock
on the date of grant. Incentive stock options must comply with certain
requirements in order that the holders of such options may receive certain
beneficial tax treatment in the disposition of shares acquired on the exercise
of such an option. Options become exercisable at the times and in the amounts
determined by the Compensation Committee in connection with awarding grants.
The following is a summary of options transactions in each of the last three
years. All of such options, which were last granted in 1992, were granted
pursuant to the 1985 Incentive Stock Option Plan or the 1985 Non-Qualified
Stock Option Plan. As of December 31, 1996, no options had been granted under
the 1995 Plan.
OPTION PRICE
OPTIONS PER SHARE
-------- -------------
Balance, December 31, 1993............................. 564,137 $23.61-$50.19
Exercised............................................ (80,850) 23.61- 29.12
Cancelled............................................ (3,750)
-------- -------------
Balance, December 31, 1994............................. 479,537 $23.61-$50.19
Exercised............................................ (306,850) 23.61- 32.50
Cancelled............................................ (3,000)
-------- -------------
Balance, December 31, 1995............................. 169,687 $23.61-$50.19
Exercised............................................ (73,662) 23.61- 32.50
Cancelled............................................ (2,250)
-------- -------------
Balance, December 31, 1996............................. 93,775 $28.71- 50.19
======== =============
At December 31, 1996, options for 81,025 shares were exercisable at prices
ranging from $28.71 to $40.79 per share.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation,"
was issued effective for transactions entered into for years beginning after
December 15, 1995. This SFAS establishes financial accounting and reporting
standards for employee stock-based compensation plans and applies to all
arrangements whereby an employee receives shares of stock or other equity
instruments of an employer or a liability is incurred based on the price of
the employer's stock. These arrangements include restricted stock, stock
options and stock appreciation rights. The Corporation currently expenses the
fair value of restricted stock, as determined at the grant date, over the
restricted period of such shares. The SFAS allows an entity to continue to
account for stock-based compensation plans under Accounting Principles Board
Opinion No. 25, the current method followed by the Corporation. By electing to
continue accounting under Opinion No. 25, pro forma footnote disclosures of
net income and earnings per share are required to quantify the effect of the
fair value based method for stock options and stock appreciation rights issued
after December 15, 1994, as defined in SFAS No. 123. Since no stock options or
stock appreciation rights have been issued by the Corporation after December
15, 1994, no pro forma footnote disclosure is currently required to be
presented.
In 1994, the Corporation adopted a Performance Based Incentive Compensation
Plan (the "Performance Based Plan") in order to comply with the requirements
of Section 162(m) of the Internal Revenue Code governing the deductibility of
executive officer compensation over $1 million. The Performance Based Plan is
designed to provide an incentive to officers who serve on the Management
Executive Committee of the Corporation and are in a position to make a
material contribution to the successful operation of the Corporation. The
Performance Based Plan is administered by the 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
Performance Based Plan in all other respects. The amount, if any, to be paid
pursuant to any award granted for any plan year shall be equal to the lesser
of a formula with respect to increases in earnings per share over a base year
or a specified percentage of net income of the Corporation. For the 1995 and
1994 Plan Years, the Compensation Committee certified awards in the aggregate
amount of $3.2 million and $3.9 million, respectively, a portion of which were
paid out in the form of Restricted Stock under the 1995 Plan. Awards have been
granted for the 1996 Plan Year pursuant to the Performance Based Plan but
amounts payable pursuant to such awards have not yet been certified by the
Compensation Committee in accordance with the Plan.
16.GEOGRAPHIC DISTRIBUTION OF REVENUE, EARNINGS AND ASSETS
The following geographic analysis of total assets, total operating revenue,
income (loss) before income taxes and net income (loss) is based on the
location of the customer. Charges and credits for funds employed or supplied
by domestic and international operations are based on the average internal
cost of funds. Inasmuch as the Corporation conducts a significant portion of
its international activities from its domestic offices, certain other items of
revenue and expense, including the provision for credit losses and applicable
income taxes, have been subjectively allocated, and, therefore, the data
presented may not be meaningful. Based on the above, the following table
summarizes the results of the Corporation's international and domestic
operations by geographic area for each of the years in the three-year period
ended December 31, 1996.
TOTAL INCOME (LOSS)
TOTAL OPERATING BEFORE NET INCOME
ASSETS REVENUE INCOME TAXES (LOSS)
--------- --------- ------------- ----------
(IN MILLIONS)
United Kingdom.............. 1996 $ 1,295.4 $ 129.1 $ 34.7 $ 24.6
1995 1,134.8 130.8 17.9 13.0
1994 2,434.2 171.0 19.2 14.1
Europe...................... 1996 $ 4,352.7 $ 309.7 $ 52.0 $ 36.9
1995 3,449.7 293.5 32.6 23.6
1994 4,578.5 252.2 48.0 35.1
Canada...................... 1996 $ 1,144.5 $ 90.2 $ 21.7 $ 15.4
1995 1,162.7 92.7 9.2 6.7
1994 1,549.6 81.6 13.0 9.5
Far East and Australia...... 1996 $ 3,274.3 $ 249.6 $ 20.0 $ 14.2
1995 3,873.6 288.4 17.7 12.8
1994 4,392.3 227.6 17.8 13.0
Caribbean money center
locations, Central and
South America.............. 1996 $ 4,092.5 $ 321.5 $153.9 $109.1
1995 3,233.0 304.5 106.6 77.2
1994 2,741.5 331.9 161.9 98.4
Middle East and Africa...... 1996 $ 514.8 $ 18.9 $ 1.1 $ 0.8
1995 481.5 10.5 (0.8) (0.6)
1994 289.1 6.2 (0.2) (0.2)
United States............... 1996 $37,624.7 $2,160.1 $307.1 $217.8
1995 30,546.3 1,739.2 214.9 155.9
1994 25,082.7 1,489.2 232.7 170.1
Total..................... 1996 $52,298.9 $3,279.1 $590.5 $418.8
1995 43,881.6 2,859.6 398.1 288.6
1994 41,067.9 2,559.7 492.4 340.0
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17.COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of its business, the Corporation is a defendant in
various legal proceedings. Management, after reviewing with counsel all such
actions and proceedings pending against the Corporation, considers that the
aggregate liability or loss, if any, resulting from an adverse determination
would not have a material effect on the consolidated financial position of the
Corporation.
The Corporation is obligated under noncancellable leases that expire at
various times through 2017. The minimum rental commitments on noncancellable
leases for premises are $32.7 million in 1997, $30.1 million in 1998, $29.3
million in 1999, $26.3 million in 2000, $22.9 million in 2001 and an aggregate
of $86.9 million thereafter until the expiration of the leases. The minimum
rental commitments have not been reduced by aggregate minimum sublease rentals
of $23.3 million. Actual net rental expense in 1996, 1995 and 1994 aggregated
$37.6 million, $30.3 million and $28.0 million, respectively.
The subsidiary banks of the Corporation are required to maintain reserves
with the Federal Reserve Bank against certain balances. The average required
reserves maintained during 1996 totaled $39 million.
18.FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying values and estimated fair values
of the Corporation's financial instruments. The estimated fair values of
derivative financial instruments used as hedges are presented with the related
on-balance-sheet asset or liability.
DECEMBER 31,
-----------------------------------------
1996 1995
-------------------- --------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
FINANCIAL ASSETS, INCLUDING HEDGES:
Interest-bearing deposits with banks... $ 5,909 $ 5,923 $ 6,094 $ 6,111
Derivative related.................... -- (2) -- 2
Securities held to maturity............ 8,135 8,194 4,487 4,680
Derivative related.................... -- (49) -- (85)
Securities available for sale.......... 13,124 13,124 11,889 11,889
Derivative related.................... (84) (84) (137) (137)
Trading account assets................. 1,478 1,478 904 904
Derivative related.................... 3,330 3,330 3,132 3,132
Loans, net............................. 11,372 11,602 9,543 9,902
Derivative related.................... -- (2) -- --
Other financial assets................. 5,867 5,867 5,168 5,168
------- ------- ------- -------
49,131 49,381 41,080 41,566
------- ------- ------- -------
FINANCIAL LIABILITIES, INCLUDING
HEDGES:
Deposits with no stated maturity and
deposits maturing within six months... 26,445 26,445 22,277 22,277
Deposits maturing in over six months... 5,281 5,278 2,642 2,649
Derivative related.................... -- (5) -- 19
Trading account liabilities............ 838 838 513 513
Derivative related.................... 3,564 3,564 3,207 3,207
Short-term borrowings.................. 5,447 5,447 3,891 3,891
Derivative related.................... -- -- -- 1
Long-term debt, subordinated long-term
debt, perpetual capital notes and
preferred securities of subsidiary
trusts................................ 4,249 4,429 3,962 4,263
Derivative related.................... -- (45) -- (117)
Other financial liabilities............ 2,652 2,652 3,870 3,870
------- ------- ------- -------
48,476 48,603 40,362 40,573
------- ------- ------- -------
Net financial assets................... $ 655 $ 778 $ 718 $ 993
======= ======= ======= =======
Estimated net fair value--more than
carrying value........................ $ 123 $ 275
======= =======
The following presents the methodologies and assumptions used to estimate
the fair value of the Corporation's financial instruments. Financial
instruments are defined as cash, evidence of an ownership in an entity, a
contract that conveys or imposes on an entity the contractual right or
obligation to either receive or deliver cash or another financial instrument,
a derivative financial instrument, such as a futures, forward, swap or option
contract or other financial instruments with similar characteristics. Fair
value is defined as the amount at which such financial instruments could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation, and is best evidenced by a quoted market price, if
one exists. The Corporation operates as a going concern, and, except for its
investment securities portfolio, trading account assets and liabilities and
off-balance-sheet instruments that trade on an organized exchange or in an
active secondary market, no active market exists for its financial
instruments. The
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
application of the information used to determine fair value is highly
subjective and judgmental in nature, and, therefore, such valuation may not be
precise. The subjective factors include, among other things, estimates of cash
flows, risk characteristics, credit quality and interest rates, all of which
are subject to change. Since the fair value is estimated as of the statement
of condition date, the amounts which will actually be realized or paid upon
settlement or maturity of the various financial instruments could be
significantly different.
The Corporation has a significant portion of its assets and liabilities in
financial instruments that have remaining maturities of less than six months.
These short-term financial instruments, except for those financial instruments
for which an active market exists, are valued without regard to maturity and
are considered to have fair values equivalent to their carrying value.
FINANCIAL ASSETS
Interest-bearing deposits with banks, amounting to $5.6 billion in 1996 and
in 1995, mature within six months and are considered to have a fair value
equivalent to their carrying value. The fair value of interest-bearing
deposits with banks maturing in more than six months is estimated using a
discounted cash flow model based on current market rates for comparable
instruments with similar maturities.
The fair value of investment securities and trading account assets is based
on quoted market prices or dealer quotes. Unrealized gains and losses and
option premium values on derivative financial instruments related to trading
account assets are recorded as part of the on-balance-sheet value.
Performing residential mortgages and consumer installment loans, which have
similar characteristics, have been valued on a pooled basis by using market
prices for securities backed by loans with similar terms. The fair value of
all other loans, which are principally to commercial and industrial entities
and foreign governments, has been determined by discounting the estimated
future cash flows of such loans to their present value using an assigned
discount rate which may or may not be the contractual rate in effect with the
obligor. This discount rate is the rate at which a loan with similar credit
risk and remaining maturity would be entered into at the balance sheet date
and was determined based on the Corporation's internal credit quality and
pricing systems. The fair value of loans does not include any value
attributable to the FDIC loss sharing agreement.
Cash, and because of their short-term nature, due from banks, federal funds
sold and securities purchased under resale agreements, accounts receivable and
accrued interest, customers' liability on acceptances and certain other
assets, which meet the definition of financial instruments, have been valued
at their respective carrying values. These instruments are presented in the
above table as other financial assets.
FINANCIAL LIABILITIES
Deposits without a stated maturity include demand, savings and money market
accounts. These deposits amounted to $8.5 billion in 1996 and $6.2 billion in
1995 and are reported at their carrying value. No value has been assigned to
the franchise value of these deposits. The Corporation believes, however, that
significant value exists in this type of deposit and in its franchises and
individual business units. Certificates of deposit maturing within six months
aggregated $0.6 billion in 1996 and $0.7 billion in 1995, and their fair value
is considered to equal their carrying value. The fair value of deposits
maturing in more than six months is based on rates offered for deposits with
similar remaining maturities.
Trading account liabilities are carried at market value and include
securities sold short, noninterest-bearing precious metals payables and
unrealized losses and premiums received on off-balance-sheet contracts.
Short-term borrowings that mature within six months have fair values equal
to their carrying value. The fair value of long-term debt, subordinated long-
term debt and perpetual capital notes and preferred securities of subsidiary
trusts are based on market quotes obtained from independent investment
bankers.
Because of their short-term nature, acceptances outstanding, accounts
payable and accrued expenses, due to factored clients and certain other
liabilities, are considered to have fair values equal to their carrying
values. These instruments are presented in the above table as other financial
liabilities.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit, standby letters of credit and foreign office
guarantees and commercial letters of credit aggregated $5.9 billion and $5.7
billion at year end 1996 and 1995, respectively. If ultimately funded, these
commitments are priced at current market rates.
Interest rate and foreign exchange contracts entered into for hedging
purposes have fair values equivalent to the amount that would be received or
paid to terminate the contract at the reporting date.
Asset-liability management contracts, primarily interest rate swaps, are
recorded on an accrual basis as an adjustment to the interest income or
expense of the related asset or liability. These derivative contracts are used
to limit the Corporation's sensitivity to changes in interest rates, currency
exchange rates or market risks related to the corresponding on-balance-sheet
financial instrument.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Corporation's portfolio of securities available for sale is reported on
the balance sheet at estimated fair value including unrealized gains and
losses on related hedge contracts in accordance with SFAS No. 115.
19.DERIVATIVE FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET RISK
NATURE AND TERMS OF INTEREST RATE, FOREIGN EXCHANGE, PRECIOUS METALS AND OTHER
FINANCIAL INSTRUMENTS
The Corporation uses various derivative financial instruments as an end user
to manage its asset and liability exposure to interest rate and currency
fluctuations and as a dealer to meet similar needs of its customers, as well
as in trading for its own account.
Derivative instruments are contracts whose value is derived from the value
of an underlying financial instrument, currency or physical commodity or an
index thereon. Derivative instruments, with the exception of cross-currency
foreign exchange contracts, do not generally involve exchange of principal
amounts but may involve the payment of a fee or receipt of a premium at the
inception of a contract. Certain instruments, including futures and forward
contracts, commit the Corporation to buy or sell, at a future date, a
specified financial instrument, currency or precious metal or other commodity
at an agreed-to price. When traded on an organized exchange, futures contracts
require daily settlement with the exchange acting as the counterparty to each
contract. Forward contracts are customized transactions that require no cash
settlement until the end of the contract. Other contracts involve commitments
to settle in cash, on a periodic basis, differentials between specified
indices which are applied to a notional principal amount. Purchased option
contracts give the holder the right, but not the obligation, to acquire or
sell for a limited time period a financial instrument, currency, precious
metal or other commodity at a designated price upon payment of a fee at the
commencement of the contract. The writer of an option receives a premium at
the outset of a contract as payment for assuming the risk of unfavorable
changes in the price of the underlying instrument.
The Corporation is an international dealer in derivative instruments,
denominated in U.S. dollars and other currencies, which include futures,
forwards, swaps and options related to interest rates, foreign exchange rates,
equity indices and commodity prices. The Corporation focuses especially on the
structuring of customized transactions to meet client needs. Counterparties
with the Corporation are generally financial institutions, including banks,
central banks, other government agencies, both foreign and domestic, and
insurance companies.
Asset-liability management activities are conducted principally through the
use of interest rate contracts in the form of swaps. Interest rate swap
contracts obligate the Corporation to exchange the difference between fixed
rate and floating rate interest amounts based on an agreed notional amount.
These contracts are intended to reduce the impact on net interest margin of
interest rate fluctuations as assets and liabilities may reprice at different
times. Interest rate caps and floors are purchased to limit exposure to
unfavorable interest rate changes. By paying a premium to the writer, the
Corporation receives the difference between a specified market interest rate
and the fixed cap rate.
The market risk of derivatives arises principally from the potential for
changes in the prices of underlying securities, commodities or indices, or the
volatility of such prices or rates. The Corporation routinely reduces or
eliminates exposure to market risks by entering into hedging transactions. In
order to control risk, limits for all elements of market risk affecting value
are established, monitored and reviewed regularly.
The credit risk of derivatives arises principally from the potential for a
counterparty to fail to meet its obligation to settle a contract on a timely
basis. The Corporation attempts to limit credit risk by dealing with
investment grade counterparties, obtaining collateral where appropriate, as
well as using netting agreements where obtainable. The Corporation also
manages credit risk by limiting positions and using strict credit controls
when considering a counterparty.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
-------------------------------------------------
1996 1995
------------------------ ------------------------
CONTRACTUAL/NOTIONAL AMOUNTS
-------------------------------------------------
ASSET/LIABILITY ASSET/LIABILITY
TRADING MANAGEMENT TRADING MANAGEMENT
-------- --------------- -------- ---------------
(IN MILLIONS)
INTEREST RATE:
Futures and forwards...... $ 23,317 $ 450 $ 32,391 $ 450
Swaps..................... 29,516 8,024 33,094 6,722
Options written........... 7,769 -- 13,691 --
Options purchased......... 14,374 4,535 12,341 2,592
-------- ------- -------- ------
$74,976 $13,009 $ 91,517 $9,764
======== ======= ======== ======
FOREIGN EXCHANGE:
Swaps, futures and
forwards................. $106,759 $ 570 $102,365 $ 84
Options written........... 36,686 -- 22,619 --
Options purchased......... 33,428 -- 22,343 --
-------- ------- -------- ------
$176,873 $ 570 $147,327 $ 84
======== ======= ======== ======
OTHER-PRINCIPALLY PRECIOUS
METALS:
Swaps, futures and
forwards................. $ 14,575 $ -- $ 15,245 $ --
Options written........... 2,147 -- 1,780 --
Options purchased......... 2,643 -- 1,920 --
-------- ------- -------- ------
$ 19,365 $ -- $ 18,945 $ --
======== ======= ======== ======
Using replacement cost at the prevailing rate on all contracts in a gain
position, the Corporation's estimated risk of loss at year end 1996 and 1995
was $797 million and $1.153 billion, respectively, on interest rate contracts,
and $2.204 billion and $1.863 billion, respectively, on foreign exchange and
precious metals contracts.
CREDIT RELATED INSTRUMENTS
In the normal course of its business, there are various outstanding
commitments and contingent liabilities of the Corporation that are not
reflected in the consolidated financial statements. The Corporation enters
into various types of agreements with its customers which support the
customer's credit standing, guarantee customers' performance to third parties
or commit to advance funds in the form of loans. These commitments usually
have fixed expiration dates and may require the customer to pay a fee. The
aggregate of such commitments and contingent obligations represents the
maximum principal amount which the Corporation may be required to disburse and
the maximum potential exposure if all such obligations were ultimately to
become worthless. To control risk of loss, global credit limits which cover
total exposure across all products are established for each counterparty and
are monitored and reviewed regularly.
A summary of the contractual amount of credit-related instruments at
December 31, is as follows:
1996 1995
------ ------
(IN MILLIONS)
Commitments to extend credit..................................... $3,926 $3,892
Standby letters of credit and foreign office guarantees.......... 1,340 1,216
Commercial letters of credit..................................... 654 568
====== ======
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 25% of the Corporation's on-balance-sheet financial instruments
at December 31, 1996 and 1995, respectively. This exposure included
approximately 45% and 50% at year end 1996 and 1995, 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
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
approximately 25% and 23% of respective year end 1996 and 1995 on-balance-
sheet financial instruments. The Corporation's real estate loan portfolio
represented approximately 8% and 7% of on-balance-sheet financial instruments
at year end 1996 and 1995, 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 counterparties
allows the Corporation to minimize credit risk.
20.TRANSACTIONS WITH RELATED PARTIES
The following is a summary of significant balances, in the aggregate, of
transactions with related parties, primarily Safra Republic and Banco Safra
S.A. of Brazil, included in the Corporation's Consolidated Statements of
Condition at respective year ends.
1996 1995
-------- --------
(IN THOUSANDS)
ASSETS:
Interest-bearing deposits with banks....................... $221,466 $144,161
Securities available for sale.............................. 40,200 30,612
Loans...................................................... 79,496 12,034
======== ========
LIABILITIES:
Deposits................................................... $334,759 $214,360
Trading account liabilities................................ 8,872 12,890
Short-term borrowings...................................... 12,042 5,725
Long-term debt............................................. 5,846 6,821
======== ========
At December 31, 1996, Mr. Edmond J. Safra, through Saban S.A. and two other
entities, owned approximately 27.7% of the Corporation's outstanding Common
Stock and, through Saban S.A., owned approximately 20.8% of Safra Republic's
outstanding common shares.
Mr. Safra, through Saban S.A. and a subsidiary thereof, has received
approval, which expires on April 28, 1997, from the Board of Governors of the
Federal Reserve System (the "Board") to acquire up to 1,730,400 additional
shares of Common Stock of the Corporation in the open market and through
privately negotiated transactions. Through December 31, 1996, Mr. Safra had
acquired 269,600 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 30.9% of the Corporation's outstanding
Common Stock.
21.STOCKHOLDER'S EQUITY OF REPUBLIC NATIONAL BANK OF NEW YORK
A summary of changes in the stockholder's equity accounts of the Bank is as
follows:
1996 1995
---------- ----------
(IN THOUSANDS)
COMMON STOCK:
Balance at beginning of year.......................... $ 355,000 $ 355,000
Stock dividend declared, 450,000 shares............. 45,000 --
---------- ----------
Balance at end of year................................ $ 400,000 $ 355,000
========== ==========
SURPLUS:
Balance at beginning of year.......................... $1,492,278 $1,493,846
Capital contribution by parent...................... 140,447 --
Treasury stock transactions of affiliate............ (891) (1,568)
---------- ----------
Balance at end of year................................ $1,631,834 $1,492,278
========== ==========
RETAINED EARNINGS:
Balance at beginning of year.......................... $ 990,194 $ 842,250
Net income.......................................... 414,756 327,366
Dividends declared.................................. (275,000) (184,000)
Foreign currency translation, net of taxes.......... (20,437) 4,578
---------- ----------
Balance at end of year................................ $1,109,513 $ 990,194
========== ==========
NET UNREALIZED APPRECIATION (DEPRECIATION) ON
SECURITIES AVAILABLE FOR SALE, NET OF TAXES:
Balance at beginning of year.......................... $ (76,049) $ (165,675)
Unrealized appreciation............................. 176,478 125,634
Income tax expense.................................. (67,272) (36,008)
---------- ----------
Balance at end of year................................ $ 33,157 $ (76,049)
========== ==========
TOTAL STOCKHOLDER'S EQUITY:
Balance at beginning of year.......................... $2,761,423 $2,525,421
Net changes during the year......................... 413,081 236,002
---------- ----------
Balance at end of year................................ $3,174,504 $2,761,423
========== ==========
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1996, the Bank may declare dividends without the prior approval
of the Comptroller of the Currency of up to $281 million plus an additional
amount equal to the Bank's retained net profits for 1997 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 $350
million to the Corporation at December 31, 1996.
In connection with a previous acquisition, the Bank had established a
liquidation account for the benefit of all eligible deposit account holders
who continue to maintain their deposits at the Bank, as required by the
General Regulations of the New York State Banking Board. In the event of a
complete liquidation of the Bank (and only in such event), each eligible
account holder would be entitled to his interest in the liquidation account
after payment of all creditors but before any distribution to the Corporation.
At December 31, 1996, the balance of the liquidation account was less than
$20 million. The assumption and maintenance of the liquidation account does
not restrict the use or application of any of the net worth of the Bank,
except that the Bank may not declare or pay a cash dividend on any of its
capital stock if the effect of such dividend would be to cause the net worth
of the Bank to be reduced below the aggregate amount then required to be
maintained in the liquidation account.
22.REGULATORY CAPITAL REQUIREMENTS
The Corporation's leverage ratio and its risk-based capital ratios include
the assets and capital of Safra Republic on a consolidated basis in accordance
with the requirements of the FRB specifically applied to the Corporation.
These ratios do not include the effect on stockholders' equity related to the
Corporation's portfolio of securities available for sale.
The following table presents data related to regulatory capital requirements
for the Corporation and the Bank at December 31, in each of the last two
years.
FOR CAPITAL TO BE WELL
ACTUAL ADEQUACY PURPOSES: CAPITALIZED(1)
----------------- ------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------ ------------ ----------------- -----
($ IN THOUSANDS)
AS OF DECEMBER 31, 1996
Total Capital (to Risk
Weighted Assets):
Republic New York
Corp. and
Subsidiaries......... $6,338,802 23.28% $ 2,178,050 8% -- --
Republic National Bank
of New York.......... 3,616,265 18.15% 1,594,266 8% $1,992,833 10%
Tier 1 Capital (to Risk
Weighted Assets):
Republic New York
Corp. and
Subsidiaries......... $3,756,619 13.80% $ 1,089,025 4% -- --
Republic National Bank
of New York.......... 2,818,578 14.14% 797,133 4% $1,195,700 6%
Leverage Ratio--Tier 1
Capital (to Average
Assets):
Republic New York
Corp. and
Subsidiaries......... $3,756,619 5.87% $ 1,918,978 3% -- --
Republic National Bank
of New York.......... 2,818,578 6.30% 1,342,459 3% $2,237,432 5%
AS OF DECEMBER 31, 1995
Total Capital (to Risk
Weighted Assets):
Republic New York
Corp. and
Subsidiaries......... $5,832,338 24.96% $ 1,869,659 8% -- --
Republic National Bank
of New York.......... 3,230,401 22.54% 1,146,499 8% $1,433,124 10%
Tier 1 Capital (to Risk
Weighted Assets):
Republic New York
Corp. and
Subsidiaries......... $3,439,700 14.72% $ 934,830 4% -- --
Republic National Bank
of New York.......... 2,385,432 16.64% 573,250 4% $ 859,875 6%
Leverage Ratio--Tier 1
Capital (to Average
Assets):
Republic New York
Corp. and
Subsidiaries......... $3,439,700 6.24% $ 1,653,024 3% -- --
Republic National Bank
of New York.......... 2,385,432 7.37% 971,426 3% $1,619,043 5%
(1) The Corporation is not subject to a determination of "well capitalized"
and as such this calculation is not applicable to the Corporation.
As of December 31, 1996, the Bank met the minimum requirements of a "well
capitalized" institution as set forth in the above table and exceeded all
minimum regulatory capital requirements.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
23.REPUBLIC NEW YORK CORPORATION (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31,
---------------------
1996 1995
---------- ----------
(IN THOUSANDS)
ASSETS
Deposits with subsidiary bank, principally interest-
bearing................................................ $ 572,433 $ 475,542
Investment in bank subsidiaries......................... 3,233,925 2,813,864
Investment in non-bank subsidiaries..................... 1,056,783 969,964
Securities held to maturity............................. 117,771 96,108
Securities available for sale........................... 944,605 811,920
Investment in subordinated debt of subsidiary bank...... 575,000 675,000
Advances to non-bank subsidiaries....................... 370,038 304,368
Loans, net of unearned income........................... 14,341 15,492
Trading account assets.................................. 107,400 10,106
Dividends receivable from subsidiaries.................. 65,000 84,000
Other assets............................................ 189,536 168,719
---------- ----------
Total assets.......................................... $7,246,832 $6,425,083
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper........................................ $ 862,347 $ 667,563
Trading account liabilities............................. 71,872 --
Other liabilities....................................... 145,820 149,712
Long-term debt (note 10)................................ 100,000 200,000
Subordinated long-term debt and perpetual capital notes
(note 10).............................................. 2,400,000 2,400,000
Junior subordinated debt issued to subsidiary trusts
(note 11).............................................. 360,173 --
Stockholders' equity (notes 12 and 15):
Cumulative preferred stock, no par value.............. 555,800 575,000
Common stock, $5 par value............................ 275,048 281,298
Surplus............................................... 502,425 590,008
Retained earnings..................................... 1,918,880 1,636,264
Net unrealized appreciation (depreciation) on
securities available for sale, net of taxes.......... 54,467 (74,762)
---------- ----------
Total stockholders' equity............................ 3,306,620 3,007,808
---------- ----------
Total liabilities and stockholders' equity............ $7,246,832 $6,425,083
========== ==========
CONDENSED STATEMENTS OF INCOME
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
INCOME:
Dividends from bank subsidiaries............... $230,000 $184,000 $195,637
Dividends from non-bank subsidiaries........... 11,000 5,000 24,315
Interest from subsidiaries..................... 90,524 99,937 87,042
Interest and dividend income................... 59,473 55,572 47,907
Trading account profits and commissions........ 2,444 803 --
Investment securities gains (losses), net...... 108 (110) (6,669)
Other income................................... 1,538 628 371
-------- -------- --------
Total income................................. 395,087 345,830 348,603
-------- -------- --------
EXPENSES:
Salaries and employee benefits................. 38,519 35,654 30,840
Interest on long-term debt and commercial
paper......................................... 224,873 226,996 199,535
Restructuring and related charges.............. -- 42,103 5,978
Other expenses................................. 11,072 17,428 18,740
-------- -------- --------
Total expenses............................... 274,464 322,181 255,093
-------- -------- --------
Income before income tax benefit and equity in
undistributed net income of subsidiaries........ 120,623 23,649 93,510
Applicable income tax benefit-current............ 57,437 73,271 62,758
-------- -------- --------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME
OF SUBSIDIARIES................................. 178,060 96,920 156,268
Equity in undistributed net income of
subsidiaries.................................... 240,780 191,729 183,740
-------- -------- --------
NET INCOME....................................... $418,840 $288,649 $340,008
======== ======== ========
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 418,840 $ 288,649 $ 340,008
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
subsidiaries.............................. (240,780) (191,729) (183,740)
Net change in trading accounts............. (25,422) (10,106) --
Net change in dividends receivable from
subsidiaries.............................. 19,000 (64,000) 45,000
Other, net................................. (24,709) (12,782) 3,090
--------- --------- ---------
Net cash provided by operating activities.... 146,929 10,032 204,358
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits with subsidiary bank................ (96,891) 343,948 160,089
Cash contributions to bank and non-bank
subsidiaries................................ (153,752) (102,300) (315,146)
Short-term investments....................... (154,348) (82,402) (130,605)
Investment in subordinated debt of subsidiary
bank........................................ 100,000 -- (100,000)
Advances to subsidiaries..................... (65,670) 77,347 (12,440)
Loans........................................ 1,151 (7,199) (845)
Other, net................................... 16,881 109,348 (43,448)
--------- --------- ---------
Net cash provided by (used in) investing
activities.................................. (352,629) 338,742 (442,395)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Commercial paper............................. 194,784 (311,827) 97,649
Proceeds from issuance of subordinated long-
term debt................................... 100,000 -- 200,000
Proceeds from issuance of junior subordinated
debt to subsidiary trusts................... 360,173 -- --
Repayment of subordinated long-term debt..... (100,000) -- (66,000)
Repayment of long-term debt.................. (100,000) -- --
Net proceeds from issuance of cumulative
preferred stock............................. -- 72,563 146,017
Repurchase of cumulative preferred stock..... (19,200) -- (33,925)
Repurchase of common stock................... (133,724) (18,421) (39,740)
Cash dividends paid.......................... (115,136) (113,431) (98,856)
Other, net................................... 18,803 22,342 32,892
--------- --------- ---------
Net cash provided by (used in) financing
activities.................................. 205,700 (348,774) 238,037
--------- --------- ---------
Cash and due from banks at beginning and end
of year..................................... $ -- $ -- $ --
========= ========= =========
62
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS
LOGO
The Board of Directors and Stockholders Republic New York Corporation:
We have audited the accompanying consolidated statements of condition of
Republic New York Corporation (the "Corporation") as of December 31, 1996 and
1995, 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, 1996, and the consolidated statements of condition
of Republic National Bank of New York as of December 31, 1996 and 1995. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Republic
New York Corporation as of December 31, 1996 and 1995, and the results of its
operations, and its cash flows for each of the years in the three year period
ended December 31, 1996, and the consolidated financial position of Republic
National Bank of New York as of December 31, 1996 and 1995 in conformity with
generally accepted accounting principles.
LOGO
New York, New York
January 14, 1997
63
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 judgments
and estimates by management. Management's Discussion and Analysis appearing
elsewhere in this Annual Report is consistent with the content of the
financial statements.
KPMG Peat Marwick LLP, the Corporation's independent auditors, have audited
the 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 this 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, 1996. 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, 1996, 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 subsidiary, Republic National Bank of New
York, complied, in all material respects, with such laws and regulations
during the year ended December 31, 1996.
LOGO LOGO
Walter H. Weiner Kenneth F. Cooper
Chairman of the Board Executive Vice President and
Chief Financial Officer--
Financial Reporting and Control
New York, New York January 14, 1997
64
REPUBLIC NEW YORK CORPORATION INDEPENDENT ACCOUNTANTS' REPORT ON MANAGEMENT'S
ASSERTIONS RELATED TO INTERNAL CONTROLS OVER FINANCIAL REPORTING
LOGO
The Board of Directors Republic New York Corporation
We have examined management's assertion, included in the accompanying Report
of Management--Internal Control System Over Financial Reporting, that as of
December 31, 1996, Republic New York Corporation maintained an effective
internal control system 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 circumstances. 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.
LOGO
New York, New York
January 14, 1997
65
SUPPLEMENTARY DATA
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
ASSETS
Cash and due from
banks.................. $ 710,183 $ 675,683 $ 867,242 $ 636,633 $ 490,711
Interest-bearing
deposits with banks.... 5,909,195 6,094,495 10,242,061 5,346,647 10,562,885
Precious metals......... 1,231,319 1,250,038 1,456,269 1,117,610 419,132
Securities held to
maturity............... 8,135,068 4,487,022 5,887,672 1,992,847 12,011,358
Securities available for
sale................... 13,040,445 11,751,523 5,552,056 12,956,946 320,113
----------- ----------- ----------- ----------- -----------
Total investment
securities......... 21,175,513 16,238,545 11,439,728 14,949,793 12,331,471
Trading account assets.. 4,807,788 4,035,606 2,543,637 1,194,629 742,236
Federal funds sold and
securities purchased
under resale
agreements............. 2,109,109 1,749,268 1,123,925 2,322,465 1,505,274
Loans, net of unearned
income................. 11,721,936 9,843,960 8,913,490 9,508,558 8,007,457
Allowance for possible
credit losses.......... (350,358) (300,593) (319,220) (311,855) (241,020)
Customers' liability on
acceptances............ 938,615 818,007 1,514,461 1,134,294 1,611,531
Accounts receivable and
accrued interest....... 2,108,318 1,946,077 1,797,491 2,117,879 571,648
Investment in
affiliate.............. 806,274 722,466 607,818 625,333 553,315
Premises and equipment.. 469,231 436,771 428,017 399,626 385,557
Other assets............ 661,728 371,231 452,986 451,860 206,191
----------- ----------- ----------- ----------- -----------
Total assets........ $52,298,851 $43,881,554 $41,067,905 $39,493,472 $37,146,388
=========== =========== =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Noninterest-bearing
deposits:
In domestic offices... $ 2,296,267 $ 1,740,035 $ 1,701,667 $ 1,427,518 $ 1,236,451
In foreign offices.... 177,675 160,133 114,503 135,251 79,262
Interest-bearing
deposits:
In domestic offices... 12,559,554 8,471,452 8,534,562 8,724,797 9,164,704
In foreign offices.... 16,692,083 14,548,013 12,375,270 12,513,684 10,621,770
----------- ----------- ----------- ----------- -----------
Total deposits...... 31,725,579 24,919,633 22,726,002 22,801,250 21,102,187
Trading account
liabilities............ 4,402,085 3,719,651 2,087,594 177,475 62,064
Short-term borrowings... 5,446,841 3,890,768 4,969,394 4,164,419 5,736,212
Acceptances
outstanding............ 939,598 819,766 1,517,675 1,137,636 1,616,964
Accounts payable and
accrued expenses....... 1,405,822 2,840,048 1,325,953 2,873,903 1,096,163
Due to factored
clients................ 604,686 528,684 680,010 614,549 559,211
Other liabilities....... 218,910 193,645 134,792 122,203 76,737
Long-term debt.......... 1,498,710 1,555,111 2,580,831 2,582,875 2,502,497
Subordinated long-term
debt and perpetual
capital notes.......... 2,400,000 2,406,440 2,406,266 2,271,940 2,130,924
Company-obligated
mandatorily redeemable
preferred securities of
subsidiary trusts
holding solely junior
subordinated debt
securities............. 350,000 -- -- -- --
Stockholders' equity:
Preferred stock, no
par value............ 555,800 575,000 672,500 556,425 556,425
Common stock, $5 par
value................ 275,048 281,298 263,106 263,516 260,951
Surplus............... 502,425 590,008 437,653 459,713 447,691
Retained earnings..... 1,918,880 1,636,264 1,457,609 1,204,818 998,362
Net unrealized
appreciation
(depreciation) on
securities available
for sale, net of
taxes................ 54,467 (74,762) (191,480) 262,750 --
----------- ----------- ----------- ----------- -----------
Total stockholders'
equity............. 3,306,620 3,007,808 2,639,388 2,747,222 2,263,429
----------- ----------- ----------- ----------- -----------
Total liabilities
and stockholders'
equity............. $52,298,851 $43,881,554 $41,067,905 $39,493,472 $37,146,388
=========== =========== =========== =========== ===========
66
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fees on
loans.................. $ 919,230 $ 749,719 $ 696,816 $ 635,484 $ 721,909
Interest on deposits
with banks............. 376,030 526,185 414,294 295,871 385,299
Interest and dividends
on investment
securities:
Taxable............... 1,279,226 927,740 871,785 847,022 807,611
Exempt from federal
income taxes......... 93,257 89,744 76,783 65,759 63,385
Interest on trading
account assets......... 67,279 55,736 55,736 54,467 22,928
Interest on federal
funds sold and
securities purchased
under resale
agreements............. 98,061 97,547 57,915 34,323 37,460
---------- ---------- ---------- ---------- ----------
Total interest
income............. 2,833,083 2,446,671 2,173,329 1,932,926 2,038,592
---------- ---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits.... 1,282,205 1,138,075 827,790 689,234 804,906
Interest on short-term
borrowings............. 333,075 218,804 218,529 197,769 234,249
Interest on long-term
debt................... 255,618 270,893 280,536 270,072 279,073
---------- ---------- ---------- ---------- ----------
Total interest
expense............ 1,870,898 1,627,772 1,326,855 1,157,075 1,318,228
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME..... 962,185 818,899 846,474 775,851 720,364
Provision for credit
losses................. 32,000 12,000 19,000 85,000 120,000
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
credit losses.......... 930,185 806,899 827,474 690,851 600,364
---------- ---------- ---------- ---------- ----------
OTHER OPERATING INCOME:
Income from precious
metals................. 24,700 38,049 50,930 37,910 22,637
Foreign exchange trading
income................. 98,165 113,051 91,028 111,572 102,571
Trading account profits
and commissions........ 52,941 24,746 27,357 78,742 12,319
Investment securities
gains, net............. 23,247 25,663 14,971 1,295 11,232
Net gain (loss) on loans
sold or held for sale.. 974 6,765 1,763 (843) 17,089
Commission income....... 71,393 56,935 57,297 50,956 37,592
Equity in earnings of
affiliate.............. 93,418 79,481 77,376 59,463 45,220
Other income............ 81,277 68,191 65,646 56,377 53,587
---------- ---------- ---------- ---------- ----------
Total other
operating income... 446,115 412,881 386,368 395,472 302,247
---------- ---------- ---------- ---------- ----------
OTHER OPERATING
EXPENSES:
Salaries................ 256,002 237,414 238,825 203,759 180,318
Employee benefits....... 164,099 144,202 142,358 143,748 113,813
Occupancy, net.......... 72,692 57,975 55,425 48,161 45,301
Restructuring and
related charges........ -- 120,000 17,000 -- --
Other expenses.......... 292,961 262,074 267,868 239,297 215,910
---------- ---------- ---------- ---------- ----------
Total other
operating
expenses........... 785,754 821,665 721,476 634,965 555,342
---------- ---------- ---------- ---------- ----------
INCOME BEFORE INCOME
TAXES.................. 590,546 398,115 492,366 451,358 347,269
Income taxes............ 171,706 109,466 152,358 150,153 88,386
---------- ---------- ---------- ---------- ----------
NET INCOME.............. $ 418,840 $ 288,649 $ 340,008 $ 301,205 $ 258,883
========== ========== ========== ========== ==========
NET INCOME APPLICABLE TO
COMMON STOCK........... $ 387,322 $ 252,182 $ 305,598 $ 272,790 $ 230,497
========== ========== ========== ========== ==========
Net income per common
share:
Primary............... $ 6.97 $ 4.66 $ 5.79 $ 5.20 $ 4.42
Fully diluted......... 6.97 4.59 5.61 5.05 4.32
Cash dividends declared
per common share....... 1.52 1.44 1.32 1.08 1.00
Average common shares
outstanding:
Primary............... 55,595 54,060 52,736 52,466 52,204
Fully diluted......... 55,595 56,199 56,534 56,321 56,020
67
REPUBLIC NEW YORK CORPORATION
SELECTED FINANCIAL DATA--SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
1996 1995
----------------------------------- ------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Interest income......... $739,641 $721,827 $705,968 $665,647 $638,299 $613,037 $583,507 $611,828
Interest expense........ 488,941 475,343 464,053 442,561 428,205 409,421 394,281 395,865
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income..... 250,700 246,484 241,915 223,086 210,094 203,616 189,226 215,963
Provision for credit
losses................. 4,000 20,000 4,000 4,000 3,000 3,000 3,000 3,000
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income
after provision for
credit losses.......... 246,700 226,484 237,915 219,086 207,094 200,616 186,226 212,963
Other operating income.. 119,883 109,783 109,177 107,272 97,001 96,798 119,939 99,143
Other operating
expenses(1)............ 207,224 198,294 195,887 184,349 169,228 162,175 297,661 192,601
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 159,359 137,973 151,205 142,009 134,867 135,239 8,504 119,505
Income tax expense
(benefit).............. 50,813 30,321 48,155 42,417 40,010 40,051 (2,587) 31,992
-------- -------- -------- -------- -------- -------- -------- --------
Net income.............. $108,546 $107,652 $103,050 $ 99,592 $ 94,857 $ 95,188 $ 11,091 $ 87,513
======== ======== ======== ======== ======== ======== ======== ========
Net income applicable to
common stock........... $100,595 $ 99,677 $ 95,235 $ 91,815 $ 86,792 $ 87,011 $ 1,036 $ 77,343
======== ======== ======== ======== ======== ======== ======== ========
- -------
(1) Includes a provision for restructuring and related charges of $120.0
million in the second quarter of 1995.
Net income per common
share:
Primary............... $ 1.82 $ 1.80 $ 1.71 $ 1.64 $ 1.54 $ 1.57 $ 0.02 $ 1.48
Fully diluted......... 1.82 1.80 1.71 1.64 1.54 1.55 0.02 1.43
Average common shares
outstanding:
Primary............... 55,244 55,396 55,718 56,021 56,214 55,316 52,352 52,302
Fully diluted......... 55,244 55,396 55,718 56,021 56,318 56,292 56,114 56,073
68
AFFILIATE FINANCIAL STATEMENTS
SAFRA REPUBLIC HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
------------------------
NOTES 1996 1995
------ ----------- -----------
(IN THOUSANDS OF US$
EXCEPT PER SHARE DATA)
ASSETS:
Cash and due from banks....................... 80,760 54,458
Interest-bearing deposits with banks.......... 3 6,041,717 6,058,483
Investment securities: 4
Securities available for sale, at
approximate market value................... 4,916,012 5,203,181
Securities held to maturity (approximate
market value of US$3,740,434 in 1996 and
US$2,151,602 in 1995)...................... 3,749,369 2,147,919
----------- -----------
Total investment securities............... 8,665,381 7,351,100
----------- -----------
Trading account assets........................ 5 202,211 155,172
Loans, net of unearned income................. 6 1,687,050 1,443,803
Allowance for possible credit losses.......... 7 (131,071) (130,300)
Accrued interest receivable................... 227,260 237,883
Due from brokers.............................. 160,332 268,553
Premises and equipment........................ 139,341 129,226
Other assets.................................. 150,428 92,166
----------- -----------
Total assets.............................. 17,223,409 15,660,544
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Client deposits............................... 11,576,742 9,961,958
Bank deposits................................. 1,761,205 1,385,643
----------- -----------
Total deposits............................ 8 13,337,947 11,347,601
----------- -----------
Trading account liabilities................... 5 148,326 79,245
Securities sold under repurchase agreements... 9 1,508,604 1,591,338
Accrued interest payable...................... 201,600 152,476
Due to brokers................................ 40,150 685,053
Other liabilities............................. 168,672 162,024
Long-term debt................................ 10 175,000 175,000
Commitments and contingent liabilities........ 18
SHAREHOLDERS' EQUITY: 12, 13
Common stock, US$5 par value, 200,000,000
shares authorised; 17,831,012 shares issued;
17,639,725 shares outstanding in 1996 and
17,586,926 in 1995........................... 89,155 89,155
Surplus....................................... 818,793 820,119
Retained earnings............................. 658,855 530,655
Cumulative translation adjustment............. (9,150) 35,637
Less: 191,287 shares held in treasury, at
cost, in 1996 and 244,086 in 1995............ (16,857) (20,981)
Net unrealised appreciation on securities
available for sale, net of taxes............. 102,314 13,222
----------- -----------
Total shareholders' equity................ 1,643,110 1,467,807
----------- -----------
Total liabilities and shareholders'
equity................................... 17,223,409 15,660,544
=========== ===========
See accompanying notes to consolidated financial statements.
69
SAFRA REPUBLIC HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-------------------------
NOTES 1996 1995 1994
----- ------- ------- -------
(IN THOUSANDS OF US$
EXCEPT PER SHARE DATA)
INTEREST INCOME (INCLUDING FEES AND
DIVIDENDS):
Loans........................................ 94,090 90,911 80,934
Deposits with banks.......................... 331,949 364,749 244,721
Investment securities........................ 556,851 444,494 397,365
Trading account assets....................... 142 3,961 2,491
------- ------- -------
Total interest income.................... 983,032 904,115 725,511
------- ------- -------
INTEREST EXPENSE:
Deposits..................................... 624,450 594,997 409,221
Repurchase agreements and borrowings......... 81,980 61,701 84,726
Long-term debt............................... 10,422 12,015 7,086
------- ------- -------
Total interest expense................... 716,852 668,713 501,033
------- ------- -------
NET INTEREST INCOME.......................... 266,180 235,402 224,478
Provision for credit losses.................. 7 12,000 1,000 12,000
------- ------- -------
Net interest income after provision for
credit losses............................... 254,180 234,402 212,478
------- ------- -------
OTHER OPERATING INCOME:
Foreign exchange and precious metals trading
income...................................... 5 29,990 19,807 14,337
Trading account income (loss), net........... 5 9,382 7,638 (4,913)
Investment securities (losses) gains, net.... (1,042) (4,140) 2,276
Commission income, net of expense of
US$9,886, US$7,413 and US$11,496,
respectively................................ 79,765 69,764 78,476
Other income................................. 1,018 2,439 1,200
------- ------- -------
Total other operating income............. 119,113 95,508 91,376
------- ------- -------
OPERATING EXPENSES:
Salaries..................................... 59,469 60,056 51,439
Employee benefits............................ 13 30,694 26,792 25,036
Occupancy, net............................... 18 20,683 19,264 15,606
Other expenses............................... 56,675 51,523 43,963
------- ------- -------
Total operating expenses................. 167,521 157,635 136,044
------- ------- -------
INCOME BEFORE INCOME TAXES................... 205,772 172,275 167,810
Income taxes................................. 11 15,942 10,171 9,235
------- ------- -------
NET INCOME................................... 189,830 162,104 158,575
======= ======= =======
Net income per common share.................. 10.78 9.16 8.94
Average common shares outstanding (in
thousands).................................. 17,609 17,692 17,738
See accompanying notes to consolidated financial statements.
70
SAFRA REPUBLIC HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS OF US$)
COMMON STOCK.................................. 89,155 89,155 89,155
========= ========= =========
SURPLUS:
Balance at beginning of year................ 820,119 820,038 819,902
Reissuance of common stock under restricted
stock plan................................. (1,326) 81 136
--------- --------- ---------
Balance at end of year.................... 818,793 820,119 820,038
========= ========= =========
RETAINED EARNINGS:
Balance at beginning of year................ 530,655 426,298 316,512
Net income.................................. 189,830 162,104 158,575
Dividends paid.............................. (61,630) (57,747) (48,789)
--------- --------- ---------
Balance at end of year.................... 658,855 530,655 426,298
========= ========= =========
CUMULATIVE TRANSLATION ADJUSTMENT:
Balance at beginning of year................ 35,637 12,183 (29,333)
(Decrease) increase during year............. (44,787) 23,454 41,516
--------- --------- ---------
Balance at end of year.................... (9,150) 35,637 12,183
========= ========= =========
SHARES HELD IN TREASURY:
Balance at beginning of year................ (20,981) (4,743) (5,444)
Purchases................................... (2,249) (19,832) (1,049)
Reissuances under restricted stock plan..... 6,373 3,594 1,750
--------- --------- ---------
Balance at end of year.................... (16,857) (20,981) (4,743)
========= ========= =========
NET UNREALISED APPRECIATION (DEPRECIATION) ON
SECURITIES AVAILABLE FOR SALE, NET OF TAXES:
Balance at beginning of year................ 13,222 (96,578) 89,963
Change attributable to the one time transfer
of securities held to maturity to the
available for sale classification.......... -- 38,199 --
Unrealised appreciation (depreciation)
during year, net of taxes.................. 89,092 71,601 (186,541)
--------- --------- ---------
Balance at end of year.................... 102,314 13,222 (96,578)
========= ========= =========
TOTAL SHAREHOLDERS' EQUITY:
Balance at beginning of year................ 1,467,807 1,246,353 1,280,755
Net changes during year..................... 175,303 221,454 (34,402)
--------- --------- ---------
Balance at end of year.................... 1,643,110 1,467,807 1,246,353
========= ========= =========
See accompanying notes to consolidated financial statements.
71
SAFRA REPUBLIC HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS OF US$)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................. 189,830 162,104 158,575
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortisation, net....... 20,922 13,481 9,171
Provision for credit losses.............. 12,000 1,000 12,000
Available for sale securities gains...... (20,376) (17,511) (8,779)
Available for sale securities losses..... 21,418 21,651 6,503
Net changes in trading account assets and
liabilities............................. (10,309) (56,116) 51,658
Net change in accrued interest
receivable.............................. 5,038 (94,425) (3,575)
Net change in accrued interest payable... 51,139 25,543 (16,451)
Other, net............................... (72,768) (14,160) 26,756
---------- ---------- ----------
Net cash provided by operating activities.. 196,894 41,567 235,858
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Interest-bearing deposits with banks....... (191,709) (613,290) (1,404,591)
Purchases of securities available for
sale...................................... (2,329,695) (3,131,086) (765,984)
Proceeds from sales of securities available
for sale.................................. 1,626,652 1,587,339 894,558
Purchases of securities held to maturity... (1,920,675) (815,288) (310,802)
Proceeds from maturities of securities
available for sale........................ 569,440 751,417 518,482
Proceeds from maturities of securities held
to maturity............................... 357,067 452,626 256,894
Loans...................................... (259,441) (107,738) (43,112)
Other, net................................. (37,379) (37,026) (3,226)
---------- ---------- ----------
Net cash used by investing activities...... (2,185,740) (1,913,046) (857,781)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Client deposits............................ 1,759,823 1,636,693 1,994,515
Bank deposits.............................. 412,485 111,114 (418,147)
Repurchase agreements and borrowings....... (83,782) 166,254 (903,068)
Proceeds from issuance of long-term debt... -- 15,000 10,000
Dividends paid............................. (61,630) (57,747) (48,789)
Purchase of treasury shares................ (2,249) (19,832) (1,049)
---------- ---------- ----------
Net cash provided by financing activities.. 2,024,647 1,851,482 633,462
---------- ---------- ----------
Effect of exchange rate changes on cash and
due from banks............................ (9,499) 14,918 15,916
---------- ---------- ----------
Net increase (decrease) in cash and due
from banks................................ 26,302 (5,079) 27,455
Cash and due from banks at beginning of
year...................................... 54,458 59,537 32,082
---------- ---------- ----------
Cash and due from banks at end of year..... 80,760 54,458 59,537
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Income taxes............................... 7,951 8,732 5,231
Interest................................... 665,713 630,732 497,478
Transfer to (from) investments held to
maturity from (to) investments available
for sale.................................. 679,542 (1,487,556) 1,804,562
See accompanying notes to consolidated financial statements.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANISATION
Safra Republic Holdings S.A. ("Safra Republic"), incorporated in the Grand
Duchy of Luxembourg in May 1988, is the holding company of six European
banking subsidiaries: Republic National Bank of New York (Suisse) S.A.,
Republic National Bank of New York (Luxembourg) S.A., Republic National Bank
of New York (Monaco) S.A. (banking licence received in January 1997), Republic
National Bank of New York (France) S.A., Republic National Bank of New York
(Guernsey) Limited and Republic National Bank of New York (Gibraltar) Limited.
The Board of Directors of Safra Republic has adopted a resolution that Safra
Republic shall serve as a source of financial strength to each of its banking
subsidiaries and, for the benefit of depositors and other creditors, Safra
Republic stands ready to use its available resources to provide adequate
capital funds to enable those subsidiary banks to meet their commitments in
the normal course of business.
At December 31, 1996, Republic New York Corporation ("RNYC") owned
approximately 49.1% and Saban S.A. owned approximately 20.8% (our two largest
principal shareholders) of Safra Republic's outstanding common stock. By
virtue of these ownership interests in Safra Republic, the supervisory
responsibilities of the Board of Governors of the Federal Reserve System
("Federal Reserve") and the United States Comptroller of the Currency ("OCC")
extend to Safra Republic. It is the understanding of the bank regulators of
the countries in which Safra Republic has subsidiaries ("bank regulators")
that the Federal Reserve and the OCC exercise overall consolidated supervisory
oversight responsibilities in respect of Safra Republic and its subsidiaries,
and that the Luxembourg Monetary Institute ("IML"), by virtue of the European
Directive on Consolidated Supervision, exercises prudential consolidated
supervisory responsibilities, while the bank regulators oversee the local
subsidiaries' compliance with local laws, regulations and banking practice.
During the third quarter of 1996, the Company purchased Banque Unigestion
S.A., a Geneva based private bank which was subsequently merged into Republic
National Bank of New York (Suisse) S.A. Such transaction was accounted for
under the purchase method. Goodwill arising from the transaction is amortized
on a straight-line basis over 10 years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The accounting and reporting policies of Safra Republic and its subsidiaries
("the Company") generally reflect United States banking industry practices and
conform to United States generally accepted accounting principles ("U.S.
GAAP"). The Company adopted U.S. GAAP for its financial reporting to RNYC and
Saban S.A. and their regulatory supervisors due to the reasons set out in Note
1. A reconciliation of total assets, shareholders' equity and net income as of
and for the three years ended December 31, 1996 prepared under both U.S. GAAP
and Luxembourg generally accepted accounting principles ("Luxembourg GAAP") is
included in Note 20.
The preparation of financial statements requires that management make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts
of income and expense for the reporting period. Such estimates are subject to
change in the future as additional information becomes available or previously
existing circumstances are modified.
A summary of the significant accounting policies followed by the Company in
the preparation of the accompanying consolidated financial statements is set
forth below:
A. Basis of Consolidation: The consolidated financial statements include the
accounts of Safra Republic and its banking and non-banking subsidiaries.
Significant intercompany transactions are eliminated in consolidation.
Assets and liabilities are translated into their U.S. Dollar equivalents
based on rates of exchange prevailing at year end. Revenue and expenses are
translated at average exchange rates for the year. Net translation gains or
losses on subsidiaries' financial statements whose functional currency is not
the U.S. Dollar, are a component of the cumulative translation adjustment in
shareholders' equity net of related hedging results.
Certain of the following footnotes have been prepared on a geographical
ultimate risk basis. Geographical ultimate risk is defined as the domicile of
the guarantor or the domicile of the counterparty or the head office of the
guarantor or counterparty if it is a branch.
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
B. Securities
Investment securities: The Company designates an investment security and any
related hedge as held to maturity or available for sale at the time of
acquisition. The held to maturity classification includes debt securities,
which are carried at amortised cost, that the Company has the positive intent
and ability to hold to maturity. The available for sale classification
includes debt and marketable equity securities which are carried at estimated
fair value. Unrealised gains or losses on securities available for sale and
off-balance sheet financial instruments used to hedge these securities are
included as a separate component of shareholders' equity, net of tax effect.
Gains or losses on sales of securities available for sale are recognised by
the specific identification method and are recorded in investment securities
(losses) gains, net.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company periodically reviews its intent with respect to securities
available for sale and may redesignate these securities and related off
balance sheet financial instruments used as hedges as held to maturity. At the
time of redesignation, such securities are recorded at market value, and any
unrealised appreciation or depreciation existing with respect to such
securities and related hedges continues to be reported as a separate component
of shareholders' equity and amortised to interest income over the life of the
security.
Trading account securities: Trading securities are carried at market value
and are recorded as of their trade dates. Short trading positions are
classified as liabilities. Gains and losses on trading positions are
recognised currently as trading account income (loss), net.
C. Loans: Loans are carried at their principal amount outstanding, net of
unearned income. Unearned income on discounted loans is accreted rateably into
income.
Nonaccrual loans are those loans on which the accrual of interest ceases
when principal or interest payments are past due 90 days. A loan may be placed
on a nonaccrual status prior to the 90 day period if, in management's opinion,
conditions warrant.
Impaired loans include all loans where it is probable that the Company will
be unable to collect all contractual amounts due (principal and interest) as
scheduled in the loan agreement. Impaired loans have been placed on non-
accrual status either because interest or principal are past due or, based on
management's judgement, the Company does not expect to receive all principal
and interest in accordance with the terms of the loan agreements. Factors
involved in determining impairment include, but are not limited to, expected
future cash flows and financial condition of the borrower. The impairment of
such loans is measured based on either an estimate of the present value of
expected future cash flows at a loan's effective interest rate or the fair
value of collateral if the loan is collateral dependent. The difference
between such estimate and the carrying value of the loan is provided for in
the allowance for possible credit losses.
When a loan is placed on a nonaccrual status all accrued interest receivable
is reversed and charged against current interest income. Interest received on
nonaccrual loans is either applied against principal or credited to income,
according to management's judgement as to the collectibility of principal.
Generally, a loan may be restored to accrual status only after all delinquent
interest and principal are brought current, and, in the case of loans where
interest has been interrupted for a substantial period, a regular payment
performance is established. Management charges off non-accrual and impaired
loans based on its assessment of qualitative and quantitative factors on an
individual loan basis.
An allowance for possible credit losses is maintained that is considered
adequate to absorb losses inherent in the existing portfolios of loans and
other undertakings to extend credit, such as irrevocable unused loan
commitments, or to make payments to others for which a client is ultimately
liable, such as standby letters of credit and guarantees, commercial letters
of credit and acceptances, and other credit related exposures. A judgement as
to the adequacy of the allowance is made at the end of each quarterly
reporting period. Should the allowance be judged to be inadequate because of
changes in the size or risk characteristics of the portfolios, the allowance
is increased through a provision for credit losses that is charged to income
in the quarterly reporting period.
D. Depreciation and amortisation: Premises and equipment, including
leasehold improvements, are carried at cost less accumulated depreciation and
amortisation. Depreciation and amortisation are computed on a straight-line
basis and are charged to other operating expenses over the lesser of the
estimated useful lives of the assets or lease terms. The estimated useful
lives for premises and equipment are 25 to 40 years and 3 to 10 years,
respectively. Maintenance and repairs are expensed as incurred and
improvements are capitalised. Goodwill is amortised on a straight line basis
over a period not to exceed 15 years.
E. Securities financing arrangements: Securities sold under repurchase
agreements ("repurchase agreements") are generally treated as borrowing
transactions and are carried at the amounts at which the securities were
initially sold. Interest expense recognised under these agreements is recorded
as interest expense on repurchase agreements and borrowings. Interest income
on the related securities is recorded as interest income on investment
securities.
F. Financial instruments: Off-balance sheet financial instruments include
futures, forwards, swaps, caps and options in the interest rate, foreign
exchange, equity, and precious metals commodity markets. The Company uses
these instruments in conjunction with its overall trading and risk management
activities.
Realised and unrealised gains and losses on currency contracts designated
and effective as hedges of investments in certain subsidiaries denominated in
foreign currencies are recorded in the cumulative translation adjustment
component of shareholders' equity.
Trading: Financial instruments that are entered into for trading purposes or
to hedge other trading instruments are carried at market value, with resultant
gains and losses reported currently in foreign exchange and precious metals
trading income or in trading account income (loss).
Risk management: The financial instruments that are entered into to meet
longer-term interest rate management objectives, including maximisation of net
interest income, are accounted for on an accrual basis in the interest income
or expense caption of the related asset or liability. The notional amount of
contracts used in asset and liability management are recorded as off-balance
sheet transactions. The net settlements on such transactions are accrued as an
adjustment to interest income or expense over the lives of the related
agreements. Gains or losses on terminated contracts, where the underlying
asset or liability has not been settled, are deferred and amortised into
interest income or interest expense over the life of the original hedge.
G. Income taxes: The earnings of the Company are subject to the local income
tax regulations of the respective countries in which the subsidiaries operate.
Income tax expense in the accompanying consolidated financial statements
represents the aggregate of
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the subsidiaries' income taxes for the respective years. Deferred tax assets
and liabilities are recognised for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their tax bases.
H. Transactions with affiliates: Amounts due to and from the Company's
affiliates (primarily the two largest principal shareholders) arise from
transactions conducted in the ordinary course of business. Such transactions
are made upon substantially the same terms as those prevailing at the time for
comparable transactions with third parties. Such amounts are included in the
consolidated financial statements on a line-by-line basis.
I. Retirement plans: The employees of the Company are covered by retirement
plans which are based upon the social laws of the respective countries in
which each subsidiary operates.
J. Net income per common share: Net income per common share is computed by
dividing net income by the average number of common shares outstanding during
the year.
K. Statements of cash flows: For purposes of presenting cash flow
information, the Company defines cash and cash equivalents as the Consolidated
Statements of Condition caption cash and due from banks.
3. INTEREST-BEARING DEPOSITS WITH BANKS
The following tables provide information on the composition by ultimate risk
and maturity distribution of the Company's interest-bearing deposits with
banks at December 31:
1996 1995
---------- ----------
(IN THOUSANDS OF US$)
Ultimate risk:
United States...................................... 273,408 341,616
United Kingdom and Channel Islands................. 834,321 1,197,709
Continental Europe................................. 4,207,261 3,957,453
Japan and Southeast Asia........................... 411,856 192,725
Central and South America.......................... 59,722 42,527
Canada............................................. 204,385 264,430
Other.............................................. 50,764 62,023
---------- ----------
6,041,717 6,058,483
========== ==========
Maturity distribution:
Due within one month............................... 3,725,733 3,780,581
Due after one month but within six months.......... 2,229,055 2,143,511
Due after six months but within twelve months...... 86,285 134,391
Due after one year................................. 644 --
---------- ----------
6,041,717 6,058,483
========== ==========
4. INVESTMENT SECURITIES
The following tables provide information related to the Company's portfolio
of securities available for sale and held to maturity at respective year ends:
Securities available for sale
1996
------------------------------------------
GROSS UNREALISED
---------------- BOOK/
AMORTISED COST GAINS (LOSSES) MARKET
-------------- ------- -------- ---------
(IN THOUSANDS OF US$)
Banks......................... 1,233,818 42,714 (3,948) 1,272,584
Governments and government
agencies..................... 2,526,926 111,155 (11,426) 2,626,655
Companies..................... 1,067,558 11,355 (8,268) 1,070,645
Interest rate and currency
swaps........................ -- 13,627 (67,499) (53,872)
--------- ------- -------- ---------
4,828,302 178,851 (91,141) 4,916,012
========= ======= ======== =========
1995
------------------------------------------
GROSS UNREALISED
---------------- BOOK/
AMORTISED COST GAINS (LOSSES) MARKET
-------------- ------- -------- ---------
(IN THOUSANDS OF US$)
Banks......................... 843,803 24,729 (2,868) 865,664
Governments and government
agencies..................... 3,300,206 79,365 (38,201) 3,341,370
Companies..................... 1,040,933 19,859 (11,445) 1,049,347
Interest rate and currency
swaps........................ -- 34,954 (88,154) (53,200)
--------- ------- -------- ---------
5,184,942 158,907 (140,668) 5,203,181
========= ======= ======== =========
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Securities held to maturity
1996
-------------------------------------------
GROSS UNREALISED
BOOK/ ----------------- ESTIMATED
AMORTISED COST GAINS (LOSSES) MARKET
-------------- ------- --------- ---------
(IN THOUSANDS OF US$)
Banks............................ 60,419 2,871 (9) 63,281
Governments and government
agencies........................ 3,591,104 32,325 (28,397) 3,595,032
Companies........................ 97,846 7,460 -- 105,306
Interest rate and currency
swaps........................... -- 13,703 (36,888) (23,185)
--------- ------- -------- ---------
3,749,369 56,359 (65,294) 3,740,434
========= ======= ======== =========
1995
-------------------------------------------
GROSS UNREALISED
BOOK/ ----------------- ESTIMATED
AMORTISED COST GAINS (LOSSES) MARKET
-------------- ------- --------- ---------
(IN THOUSANDS OF US$)
Banks............................ 68,111 2,313 (1,634) 68,790
Governments and government
agencies........................ 1,987,635 38,938 (326) 2,026,247
Companies........................ 92,173 9,425 -- 101,598
Interest rate and currency
swaps........................... -- 4,822 (49,855) (45,033)
--------- ------- -------- ---------
2,147,919 55,498 (51,815) 2,151,602
========= ======= ======== =========
Total securities:
The following table provides information on all investment securities at
December 31, 1996, based on scheduled maturities. Actual maturities can be
expected to differ from scheduled maturities due to prepayment and early call
privileges of the issuer.
AVAILABLE FOR SALE HELD TO MATURITY
------------------- ------------------------
AMORTISED BOOK/ BOOK/ ESTIMATED
COST MARKET AMORTISED COST MARKET
--------- --------- -------------- ---------
(IN THOUSANDS OF US$)
Due in one year or less........ 493,894 494,501 -- --
Due after one year but within
five years.................... 1,398,658 1,438,364 180,944 193,023
Due after five years but within
ten years..................... 921,138 985,574 37,244 41,583
Due after ten years............ 642,340 674,811 8,206 9,203
Mortgage-backed securities..... 1,223,029 1,224,183 3,522,975 3,519,810
Equity securities.............. 149,243 152,451 -- --
Interest rate and currency
swaps......................... -- (53,872) -- (23,185)
--------- --------- --------- ---------
4,828,302 4,916,012 3,749,369 3,740,434
========= ========= ========= =========
Mortgage-backed securities included in the tables above in held to maturity
and available for sale have estimated average lives based on year end market
conditions of approximately 8,4 years and 7,9 years, respectively.
During the year ended December 31, 1996, the Company transferred investment
securities from the available for sale classification to the held to maturity
classification. The market value of the securities transferred was US$680
million. The unrealised holding gain at the date of transfer was US$32.9
million. The unrealised holding gain is included as a component of
shareholders equity and is being amortised over the average life of the
securities that were transferred.
In December 1995, the Company reassessed the appropriateness of its
investment securities portfolio classifications under a one-time provision
granted in a Special Report issued by the Financial Accounting Standards
Board. As a result of this portfolio reassessment, the Company transferred
certain securities with a book value of approximately US$1.5 billion from held
to maturity to available for sale. The securities transferred had a net
unrealised appreciation of US$38.2 million.
Investment securities having a book value of approximately US$1.6 billion at
December 31, 1996 were pledged to secure repurchase agreements, long-term
repurchase agreements and a securities lending program.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table provides information on the composition by ultimate risk
of the Company's total investment securities portfolio as of December 31:
1996 1995
--------------------- ---------------------
APPROXIMATE APPROXIMATE
BOOK MARKET BOOK MARKET
--------- ----------- --------- -----------
(IN THOUSANDS OF US$)
United States..................... 5,609,611 5,586,281 4,962,198 4,962,324
United Kingdom and Channel
Islands.......................... 461,526 468,378 235,867 244,221
Continental Europe................ 1,766,253 1,775,490 1,481,431 1,482,000
Japan and Southeast Asia.......... 63,176 63,176 101,684 101,684
Central and South America......... 622,331 622,331 429,319 429,319
Canada............................ 74,040 74,040 68,612 68,612
Other............................. 68,444 66,750 71,989 66,623
--------- --------- --------- ---------
8,665,381 8,656,446 7,351,100 7,354,783
========= ========= ========= =========
5. TRADING ACCOUNT ASSETS AND TRADING ACCOUNT LIABILITIES
The following table presents the composition of trading account assets and
trading account liabilities at December 31:
1996 1995
---------- ----------
(IN THOUSANDS OF US$)
Trading account assets:
Unrealised gains on forwards, swaps and options......... 141,931 103,050
Mutual funds and equity securities...................... 2,162 51,889
Debt securities......................................... 58,118 233
---------- ----------
202,211 155,172
========== ==========
Trading account liabilities:
Unrealised losses on forwards, swaps and options........ 148,326 79,245
========== ==========
The Company's trading activities consist primarily of offsetting foreign
exchange and precious metals swaps and options entered into to accommodate
clients' corresponding transactions. The Company also trades in the futures
and equity markets and in debt and equity securities. The following table
presents the results of the Company's trading activities for each of the years
in the three-year period ended December 31, 1996:
1996 1995 1994
------- ------- -------
(IN THOUSANDS OF US$)
Foreign exchange and precious metals trading
income............................................ 29,990 19,807 14,337
------- ------- -------
Trading account income (loss), net:
Mutual funds and equity securities............... 903 5,852 (3,031)
Debt securities.................................. 8,600 (697) (42)
Interest rate swaps and options.................. (121) 2,483 (1,840)
------- ------- -------
9,382 7,638 (4,913)
------- ------- -------
Total trading income........................... 39,372 27,445 9,424
======= ======= =======
The following tables present information related to the fair value, which is
also the carrying value, of swaps, forwards and options held for trading
purposes.
AVERAGE FAIR FAIR VALUE AT
VALUE DURING 1996 DECEMBER 31, 1996
------------------- -------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- ------- -----------
(IN THOUSANDS OF US$)
Interest rate swaps.................... 1,554 385 840 148
------- ------- ------- -------
Foreign exchange and precious metals:
Spot, swaps and forwards............. 94,049 88,016 114,445 122,933
Options written...................... -- 15,010 -- 20,928
Options purchased.................... 15,339 -- 22,329 --
------- ------- ------- -------
109,388 103,026 136,774 143,861
------- ------- ------- -------
Debt and equity securities:
Options written...................... -- 3,222 -- 4,317
Options purchased.................... 3,213 -- 4,317 --
------- ------- ------- -------
3,213 3,222 4,317 4,317
------- ------- ------- -------
114,155 106,633 141,931 148,326
======= ======= ======= =======
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AVERAGE FAIR FAIR VALUE AT
VALUE DURING 1995 DECEMBER 31, 1995
------------------- -------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- ------- -----------
(IN THOUSANDS OF US$)
Interest rate swaps.................... 1,235 62 3,293 --
------- ------ ------- ------
Foreign exchange and precious metals:
Spot, swaps and forwards............. 86,350 71,849 92,038 71,624
Options written...................... -- 12,250 -- 5,781
Options purchased.................... 12,638 -- 5,879 --
------- ------ ------- ------
98,988 84,099 97,917 77,405
------- ------ ------- ------
Debt and equity securities:
Options written...................... -- 5,521 -- 1,840
Options purchased.................... 5,524 -- 1,840 --
------- ------ ------- ------
5,524 5,521 1,840 1,840
------- ------ ------- ------
105,747 89,682 103,050 79,245
======= ====== ======= ======
6. LOANS
The following table presents the composition of the Company's loan portfolio
at December 31:
1996 1995
---------- ----------
(IN THOUSANDS OF US$)
Real estate............................................. 132,904 89,115
Commercial and other.................................... 1,437,281 1,248,537
Banks and other financial institutions.................. 14,820 24,055
Governments and government agencies..................... 102,163 82,161
---------- ----------
1,687,168 1,443,868
Less unearned income.................................... (118) (65)
---------- ----------
Loans, net of unearned income........................... 1,687,050 1,443,803
========== ==========
The Company grants loans in the ordinary course of business, on normal
credit terms. The Company's policy for requiring collateral is based on
management's evaluation of the counterparty; collateral may include real
estate, deposits, marketable securities, accounts receivable and inventory.
7. ALLOWANCE FOR POSSIBLE CREDIT LOSSES
Changes in the Company's allowance for possible credit losses applicable to
the operations for each of the years in the three-year period ended December
31, 1996 were as follows:
1996 1995 1994
------- ------- -------
(IN THOUSANDS OF US$)
Balance at beginning of year......................... 130,300 124,774 102,204
Provision............................................ 12,000 1,000 12,000
------- ------- -------
142,300 125,774 114,204
Loans charged-off.................................... (5,494) (8,647) (3,874)
Recoveries........................................... 3,269 5,400 5,112
------- ------- -------
Net recoveries (charge-offs)......................... (2,225) (3,247) 1,238
Translation adjustment............................... (9,004) 7,773 9,332
------- ------- -------
Balance at end of year............................... 131,071 130,300 124,774
======= ======= =======
The principal balances of the Company's non-accrual loans at December 31,
1996, 1995 and 1994 were US$10,777,000, US$19,697,000 and US$13,454,000
respectively, all of which were considered impaired. The Company has
established an allowance for possible credit losses totaling US$3,871,000
related to these impaired loans (1995: US$6,966,000). The average amount of
impaired loans, net of charge-offs, during 1996 was US$15,054,000 (1995:
US$18,543,000). At December 31, 1996 and 1995, there were US$6,045,000 and
US$12,676,000, respectively, of restructured loans considered as non-accrual.
The Company recognises interest income on non-accrual and impaired loans on
a cash basis. The following table presents the effect of non-accrual and
impaired loans on interest income for each of the years in the three-year
period ended December 31, 1996:
1996 1995 1994
------- ------- -------
(IN THOUSANDS OF US$)
Gross amount of interest that would have been
earned at original contract rates................. 753 927 509
Actual amount recorded as interest income.......... (51) (772) (304)
------ ------- -------
Foregone interest income........................... 702 155 205
====== ======= =======
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. DEPOSITS
Included in total deposits at December 31, 1996 and 1995 were US$450 million
and US$325 million of non-interest-bearing deposits, respectively.
9. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The following table provides information on securities sold under repurchase
agreements based on scheduled maturities at December 31:
1996 1995
---------- ----------
(IN THOUSANDS OF US$)
Due within 30 days........................................ 414,580 --
Due after 30 days but within 90 days...................... 448,618 626,249
Due after 90 days......................................... 645,406 965,089
---------- ----------
1,508,604 1,591,338
========== ==========
The following table provides information on securities sold under repurchase
agreements at December 31:
1996 1995
------------- -------------
(IN THOUSANDS OF US$
EXCEPT FOR INTEREST RATES)
Book value of securities sold under repurchase
agreements..................................... 1,491,710 1,586,618
Market value of securities sold under repurchase
agreements..................................... 1,530,482 1,603,912
Accrued interest receivable on securities sold
under repurchase agreements.................... 9,640 9,181
Accrued interest payable on securities sold
under repurchase agreements.................... 18,867 10,859
Average interest rate at year end............... 5.65% 5.71%
Maximum amount outstanding during year.......... 2,163,791 1,580,479
Average amount outstanding during year.......... 1,514,071 970,447
The securities sold under repurchase agreements in 1996 and 1995 consisted
principally of GNMA securities.
10. LONG-TERM DEBT
The Company's long-term debt at December 31, 1996 consists principally of
US$150,000,000 floating rate notes due in September 1998. The interest rate on
the notes is 6-month Libor, currently 5.75% at December 31, 1996. Long-term
debt also includes US$25,000,000 issued under the Euro Deposit Note Programme.
These issues mature between January 19, 2000 and July 18, 2005 and bear
interest rates ranging between 6.0% to 8.5%.
11. INCOME TAXES
Total income tax expense for each of the years in the three-year period
ended December 31, 1996 was allocated as follows:
1996 1995 1994
------- ------- -------
(IN THOUSANDS OF US$)
Income from operations................................. 15,942 10,171 9,235
Shareholders' equity:
Net unrealised appreciation (depreciation) on
securities available for sale....................... 8,311 6,810 (3,852)
The components of the Company's consolidated income tax expense from
operations for each of the years in the three-year period ended December 31,
1996, were as follows:
1996 1995 1994
------- ------- -------
(IN THOUSANDS OF US$)
Current tax expense...................................... 14,959 6,653 7,129
Deferred tax expense..................................... 983 3,518 2,106
------- ------- ------
15,942 10,171 9,235
======= ======= ======
The principal sources of deferred income taxes attributable to operations in
1996, 1995 and 1994 and the effects of each on the amount of taxes were as
follows:
1996 1995 1994
------- ------- -------
(IN THOUSANDS OF US$)
Statutory provisions for credit losses............... 3,072 2,109 2,177
Unrealised gains (losses) on securities available for
sale................................................ 55 (660) 176
Other, net........................................... (2,144) 2,069 (247)
------- ------ ------
983 3,518 2,106
======= ====== ======
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that gave rise to a significant
portion of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1995 are presented below:
1996 1995
---------- ----------
(IN THOUSANDS OF US$)
Deferred tax assets:
Allowance for credit losses.......................... 23,078 20,336
Other................................................ -- 254
---------- ----------
23,078 20,590
Less valuation allowance adjustment.................... (23,078) (20,543)
---------- ----------
-- 47
========== ==========
Deferred tax liabilities:
Net unrealised appreciation on securities available
for sale............................................ 13,532 5,221
Unrealised gains on securities....................... 668 613
Statutory allowance for credit losses................ 8,201 5,129
Other................................................ 380 2,571
---------- ----------
22,781 13,534
---------- ----------
Net deferred tax liabilities (included in other
liabilities).......................................... 22,781 13,487
========== ==========
Management does not consider that the deferred tax asset will be realisable
in the foreseeable future due to the uncertainty related to the timing of the
tax deductions and the associated benefits resulting from loans charged-off
and other loan loss provisions in the respective financial entities. At
December 31, 1996, the Company's subsidiaries had undistributed earnings of
approximately US$175 million which would be subject to a withholding tax of
approximately US$61 million upon distribution. This withholding tax liability
has not been provided for as the Company intends indefinitely to reinvest
these earnings.
12. SHAREHOLDERS' EQUITY
At December 31, 1996 and 1995, Safra Republic had US$271 million and US$465
million, respectively, in foreign exchange contracts entered into to hedge its
investments in subsidiaries whose functional currencies are other than the
U.S. dollar. At December 31, 1996 and 1995, Safra Republic's total net
unhedged equity investment in subsidiaries denominated in European currencies
was approximately 23% and 15%, respectively, of the Company's total
shareholders' equity.
Safra Republic owns all of the outstanding stock of its various consolidated
subsidiaries. Safra Republic and its subsidiaries are limited under laws in
effect in their respective countries, as to the amount of dividends which may
be distributed to Safra Republic and its shareholders. As of December 31,
1996, approximately US$46 million of consolidated retained earnings, were not
available for distribution due to these legal restrictions.
The Board of directors of Safra Republic has authorised the purchase of up
to 10% of its issued shares of common stock in open market transactions. The
Company had accumulated purchases of 414,684 shares at December 31, 1996.
13. EXECUTIVE COMPENSATION AND RETIREMENT BENEFITS
Safra Republic is authorised by its Board of Directors to award under the
1989 Stock Award and the 1989 Stock Option Plans up to 10% of its issued
shares of common stock to key employees of the Company. The terms of the Stock
Award Plan restrict the use of the grants for a specified time period
generally ranging from three to five years for each individual employee. Under
the Stock Option Plan, the options are exercisable within five years following
the date of grant. Upon exercising the option the holders are entitled to take
ownership of the shares of common stock after a specified amount of time of
continued employment. The following shares have been granted under the 1989
Stock Award Plan:
NUMBER AGGREGATE
OF SHARES COST
---------- ----------
(IN THOUSANDS OF US$
EXCEPT SHARE DATA)
Balance at December 31, 1993.......................... 169,890 10,068
Granted............................................. 56,260 3,737
Issued.............................................. (34,300) (1,820)
Cancelled........................................... (2,150) (36)
---------- ---------
Balance at December 31, 1994.......................... 189,700 11,949
Granted............................................. 44,667 3,809
Issued.............................................. (65,752) (3,610)
Cancelled........................................... (10,360) (169)
---------- ---------
Balance at December 31, 1995.......................... 158,255 11,979
Granted............................................. 40,740 3,490
Issued.............................................. (71,500) (4,867)
Cancelled........................................... (1,600) (11)
---------- ---------
Balance at December 31, 1996.......................... 125,895 10,591
========== =========
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate cost of common stock granted under the 1989 Stock Award Plan
is based on the fair market value on the date of grant and is amortised to
expense over the period under which such shares are restricted. Included in
employee benefits expense for 1996 is US$3,571,000 (1995: US$3,067,000; 1994:
US$2,225,000) related to this plan. There were no options outstanding under
the 1989 stock option plan at December 31, 1996.
Retirement benefits 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 expense for such plans was approximately US$5,547,000, US$5,400,000
and US$5,120,000 in 1996, 1995 and 1994, respectively.
14. GEOGRAPHIC DISTRIBUTION OF REVENUE, EARNINGS AND ASSETS
The following geographic analysis of total assets, total operating revenue,
income before income taxes and net income is based on the location of the
customer. Charges and credits for funds employed or supplied by domestic and
international operations are based on the average internal cost of funds.
Certain items of revenue and expense, including the provision for credit
losses and applicable income taxes, have been subjectively allocated and,
therefore, the data presented may not be meaningful. Based on the above, the
following table summarises total assets and the results of the Company's
operations by geographic area as of and for each of the years in the three-
year period ended December 31, 1996.
INCOME
(LOSS)
TOTAL BEFORE NET
TOTAL OPERATING INCOME INCOME
ASSETS REVENUE TAXES (LOSS)
---------- --------- ------- -------
(IN THOUSANDS OF US$)
United Kingdom and Channel
Islands........................... 1996 2,117,732 128,723 21,486 20,196
1995 2,405,549 120,090 17,353 16,538
1994 1,219,134 70,443 21,179 20,336
Continental Europe................. 1996 5,699,932 391,651 5,061 (7,807)
1995 4,751,947 367,877 (31,397) (37,785)
1994 4,551,051 293,747 (9,300) (17,692)
Canada............................. 1996 104,969 8,478 3,496 3,496
1995 173,363 12,008 3,208 3,208
1994 301,650 11,747 3,023 3,023
Far East........................... 1996 662,206 35,061 6,676 6,676
1995 464,501 37,011 6,063 6,063
1994 665,300 31,954 2,933 2,933
Caribbean Money Centre Locations,
Central and
South America..................... 1996 1,776,233 100,924 30,537 28,751
1995 1,422,094 102,779 25,636 22,668
1994 1,077,607 68,487 6,919 6,919
Middle East and Africa............. 1996 271,490 16,245 (798) (798)
1995 177,747 14,580 2,947 2,947
1994 206,143 12,105 (20,215) (20,215)
United States...................... 1996 6,590,848 421,064 139,316 139,316
1995 6,265,343 354,910 148,465 148,465
1994 4,466,125 328,404 163,271 163,271
Total.............................. 1996 17,223,410 1,102,146 205,774 189,830
1995 15,660,544 1,009,255 172,275 162,104
1994 12,487,010 816,887 167,810 158,575
15. OFF-BALANCE SHEET RISK
Trading and risk management financial instruments
The Company's principal objective in holding or issuing off-balance sheet
securities and certain other financial instruments is the management of
interest rate and foreign exchange risks arising out of the underlying
investment securities and to meet similar needs of its customers. To achieve
its risk management objective, the Company uses a combination of financial
instruments, particularly interest rate swaps and options, as well as other
contracts.
Interest rate swap contracts obligate the Company to exchange the difference
between fixed rate and floating rate interest amounts based on an agreed
notional amount.
Forward contracts commit the Company to buy or sell, at a future date, a
specified financial instrument, currency or precious metal or other commodity
at an agreed price. Forward contracts are customised transactions that require
no cash settlement until the end of the contract.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foreign exchange, precious metals or other commodity swaps obligate the
Company to receive or pay amounts to counterparties based on a specified
amount of currency or specified amount of a commodity.
Purchased option contracts give the holder the right, but not the
obligation, to acquire or sell for a limited time period a financial
instrument, currency, precious metal or other commodity at a designated price
upon payment of a fee at the commencement of the contract. The writer of an
option receives a premium at the outset of a contract as payment for assuming
the risk of unfavorable changes in the price of the underlying instrument.
The market risk of off-balance sheet transactions arises from the potential
for changes in value due to fluctuations in foreign exchange and interest
rates and in prices of debt securities, equities, or commodities. The Company
generally reduces its exposure to market risks by entering into off-setting
transactions.
The credit and settlement risk of off-balance sheet transactions arises from
the potential for a counterparty to default on its contractual obligations.
The effect of such defaults varies as the market value of these contracts
changes. Credit exposure exists at a particular point in time when an off-
balance sheet contract has a positive market value. The Company attempts to
limit its credit and settlement risk by dealing with highly creditworthy
counterparties rated "AA" or better, limiting individual positions, and
obtaining collateral where appropriate. The Company limits its credit risk in
relation to securities sold under repurchase agreements by monitoring the
market value of the underlying securities and requesting additional cash or
return of collateral when required.
The following table summarises the notional amounts of forward, swap and
option instruments used in trading and risk management activities and credit
exposure on instruments used in risk management activities at December 31,
1996 and 1995. 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 Company. These notional amounts do not represent
the amounts to be exchanged by the Company nor do they measure the exposure to
credit or market risk.
DECEMBER 31, 1996
--------------------------------
ASSET/LIABILITY
TRADING MANAGEMENT
----------- --------------------
CONTRACTUAL CONTRACTUAL
NOTIONAL NOTIONAL CREDIT
AMOUNTS AMOUNTS EXPOSURE
----------- ----------- --------
(IN THOUSANDS OF US$)
Interest rate:
Swaps........................................ 9,556 3,368,364 19,662
Caps purchased............................... -- 3,178,325 10,240
Foreign exchange and precious metals:
Spot, forwards and swaps..................... 8,137,569 564,196 20,467
Options written.............................. 1,438,582 -- --
Options purchased............................ 1,808,834 366,088 3,024
Debt and equity securities:
Options written.............................. 278,016 -- --
Options purchased............................ 278,016 132,000 53
DECEMBER 31, 1995
--------------------------------
ASSET/LIABILITY
TRADING MANAGEMENT
----------- --------------------
CONTRACTUAL CONTRACTUAL
NOTIONAL NOTIONAL CREDIT
AMOUNTS AMOUNTS EXPOSURE
----------- ----------- --------
(IN THOUSANDS OF US$)
Interest rate:
Swaps........................................ 115,373 2,775,872 34,163
Caps purchased............................... -- 2,018,496 5,759
Foreign exchange and precious metals:
Spot, forwards and swaps..................... 7,242,931 985,591 17,439
Options written.............................. 730,968 -- --
Options purchased............................ 766,355 -- --
Debt and equity securities:
Options written.............................. 101,211 -- --
Options purchased............................ 101,211 -- --
Credit related instruments
Credit related instruments include commitments to extend credit, commercial
and standby letters of credit and financial guarantees. The contractual
amounts of these instruments represent the amounts at risk should the
contracts be fully drawn upon, the client default, and the value of any
existing collateral become worthless. The total contractual amount of credit
related financial instruments does not represent the expected future liquidity
requirements since a significant amount of commitments to extend credit
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and standby letters of credit and guarantees are expected to expire or mature
without being drawn. The credit risk associated with these instruments varies
depending on the creditworthiness of the client and the value of any
collateral held. Commitments to extend credit generally require the client to
meet certain credit related terms and conditions before being draw-down.
An allowance for possible credit losses is maintained that is considered
adequate to absorb losses in the existing portfolios of loans and other credit
related undertakings.
A summary of the contractual amount of credit related instruments at
December 31, 1996 and 1995 is presented in the following table:
1996 1995
NOTIONAL NOTIONAL
AMOUNT AMOUNT
---------- ----------
(IN THOUSANDS OF US$)
Commitments to extend credit........................... 131,392 93,778
Standby letters of credit and financial guarantees..... 693,840 628,335
Commercial and other letters of credit................. 116,826 126,850
Commitments to purchase securities..................... 8,625 425,000
Securities lent........................................ 62,559 82,496
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarises the carrying values and estimated fair values
of the Company's financial instruments as of December 31, 1996 and 1995. The
estimated fair value of off-balance sheet financial instruments used as hedges
are reported in the related balance sheet asset or liability.
1996 1995
---------------------- ----------------------
ESTIMATED ESTIMATED
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS OF US$)
Non-trading activities:
Financial assets, including
hedges:
Interest-bearing deposits
with banks.................. 6,041,717 6,041,848 6,058,483 6,058,483
Investment securities........ 8,665,381 8,656,446 7,351,100 7,354,783
Loans (net).................. 1,555,979 1,683,179 1,313,503 1,435,022
Other financial assets....... 486,955 472,181 631,010 606,453
========== ========== ========== ==========
Financial liabilities,
including hedges:
Deposits..................... 13,337,947 13,338,687 11,347,601 11,347,743
Securities sold under
repurchase agreements....... 1,508,604 1,508,891 1,591,338 1,591,338
Long-term debt............... 175,000 175,342 175,000 175,876
Other financial liabilities.. 363,940 363,940 960,660 960,660
========== ========== ========== ==========
Trading activities:
Assets........................ 202,211 202,211 155,172 155,172
Liabilities................... (148,326) (148,326) (79,245) (79,245)
---------- ---------- ---------- ----------
Net.......................... 53,885 53,885 75,927 75,927
========== ========== ========== ==========
The table presented below summarises the estimated aggregate fair values of
off-balance sheet financial instruments which have been included in the
estimated fair value of the related balance sheet asset or liability in the
above table.
1996 1995
ESTIMATED ESTIMATED
POSITIVE (NEGATIVE) POSITIVE (NEGATIVE)
FAIR VALUE FAIR VALUE
------------------- -------------------
(IN THOUSANDS OF US$)
Off-balance sheet financial
instruments:
Interest rate contracts.............. (65,783) (88,545)
Foreign exchange and precious metals
contracts........................... 15,530 (2,052)
------- -------
(50,253) (90,597)
======= =======
Basis of presentation: The above tables comprise financial instruments,
which are defined as cash, evidence of an ownership in an entity, or a
contract that requires either the receipt or delivery of cash or another
financial instrument. Fair value is defined as the amount at which a financial
instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale, and is best evidenced by
a quoted market price, if one exists.
The Company operates as a going concern, and, except for its investment
securities portfolio, trading account assets and liabilities and off-balance
sheet instruments that trade on an organised exchange or in an active
secondary market, no active market
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
exists for its financial instruments. The application of the information used
to determine fair value is highly subjective and judgmental in nature, and,
therefore, such valuation may not be precise.
Estimation of fair values: The following notes summarise the major methods
and assumptions used in estimating the fair values of financial instruments.
Short-term financial instruments: The Company has a significant portion of
its assets and liabilities in financial instruments that have remaining
maturities of less than six months. These short-term financial instruments,
except for those financial instruments for which an active market exists, are
valued without regard to maturity and are considered to have fair values
equivalent to their carrying value.
Investment securities: The fair value of investment securities is based on
quoted market prices or dealer quotes.
Loans: The fair value of loans is estimated by discounting estimated future
cash flows at current market rates for which similar loans would be made. Non-
performing loans are valued individually, based on an estimate of ultimate
collectibility. Commitments to extend credit are valued utilising the fees
currently charged to enter into similar agreements, taking into account the
terms of the commitment and the risk characteristics of the borrower. Standby
letters of credit, guarantees and commercial letters of credit are valued
based on the fees currently charged for similar agreements or on the cost to
terminate or settle the agreement at the reporting date.
Long-term debt: Long-term repurchase agreements and long-term debt are
valued based upon rates currently available to the Company for debt with
similar terms and remaining maturities.
Other financial instruments: The fair value of interest-bearing deposits
with banks, deposits and short-term borrowings maturing in more than six
months is estimated using a discounted cash flow model based on market rates
for comparable instruments with similar maturities.
Off-balance sheet financial instruments: The fair value of interest rate and
foreign exchange contracts are estimated as the amounts that the company would
receive or pay to terminate the contracts at the reporting date. Credit
related instruments aggregated US$1.0 billion and US$1.4 billion at year end
1996 and 1995, respectively, which approximate estimated market if ultimately
funded.
17. CREDIT RELATED RISK CONCENTRATIONS
In the normal course of its business, the Company's activities include
significant amounts of credit risk to depository institutions. Such
concentrations aggregated approximately 49% and 46% of the Company's balance
sheet financial instruments at December 31, 1996 and 1995, respectively. This
exposure included approximately 80% and 84% in the form of interest-bearing
deposits with banks, respectively. The Company's credit exposure to the United
States Federal Government and its agencies, principally in the form of
securities, was approximately 31% and 29% of respective year-end balance sheet
financial instruments.
18. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are various outstanding commitments
and contingent liabilities of the Company that are not reflected in the
consolidated statements of condition.
The Company's minimum rental commitments for noncancellable operating leases
for premises and equipment at December 31, 1996 were US$16,511,000 in 1997,
US$12,314,000 in 1998, US$11,182,000 in 1999, US$10,476,000 in 2000,
US$10,415,000 in 2001 and US$27,436,000 thereafter in the aggregate. Actual
net rental expense for premises in 1996, 1995 and 1994 was US$10,905,000,
US$12,462,000 and US$10,508,000, respectively.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. TRANSACTIONS WITH AFFILIATES
The following is a summary of significant aggregate balances of transactions
with affiliates included in the Company's consolidated financial statements
for the three years ended December 31:
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS OF US$)
Assets:
Cash and due from banks..................... 20,132 14,232 22,053
Interest-bearing deposits with banks........ 253,422 216,795 247,769
Investment securities....................... 8,989 -- --
Accrued interest receivable................. 19,072 12,759 15,561
Liabilities:
Bank deposits............................... 271,257 183,707 148,137
Borrowings.................................. 5,705 2,253 10,760
Accrued interest payable.................... 16,733 17,156 9,367
Interest income:
Deposits with banks......................... 28,092 19,829 37,919
Interest expense:
Deposits and borrowings..................... 12,510 13,215 17,318
Other operating items:
Commission income (expense)................. 3,753 151 (5,966)
Occupancy, net (primarily leased office
space)..................................... (7,810) (8,225) (7,109)
Off-balance sheet:
Trading and risk management financial
instruments................................ 2,257,405 1,983,415 1,242,530
Credit related instruments.................. 199,728 210,820 256,761
Lease commitments........................... 62,002 54,496 47,124
20. RECONCILIATION WITH LUXEMBOURG GAAP
Safra Republic, as a Luxembourg holding company, should prepare consolidated
accounts in accordance with the Luxembourg law of August 10, 1915 (as
subsequently amended). As its subsidiaries are mainly banks, Safra Republic
uses the derogation of Article 319 (5) of this law and prepares consolidated
accounts which take into account specific banking operations. As indicated
under Note 2, the Company reports under U.S. GAAP. The consolidated financial
statements prepared under U.S. GAAP are equivalent to the format prescribed by
the Luxembourg law of June 17, 1992 relating to the annual accounts and
consolidated accounts of credit institutions.
Application of accounting principles generally accepted in Luxembourg would
have had the following approximate effect on total assets, shareholders'
equity and net income as of and for the years ended December 31:
1996
---------------------------------
TOTAL SHAREHOLDERS' NET
ASSETS EQUITY INCOME
---------- ------------- -------
(IN THOUSANDS OF US$)
U.S. GAAP................................... 17,223,409 1,643,110 189,830
Differences of accounting recognition for
unrealised basis differences on investment
securities available for sale, net of
taxes...................................... (172,778) (172,778) 942
Differences in basis in trading account
assets, net of taxes....................... (379) (379) 8,596
Differences of accounting for treasury share
transactions............................... 16,857 16,857 (1,326)
---------- --------- -------
Luxembourg GAAP............................. 17,067,109 1,486,810 198,042
========== ========= =======
1995
---------------------------------
TOTAL SHAREHOLDERS' NET
ASSETS EQUITY INCOME
---------- ------------- -------
(IN THOUSANDS OF US$)
U.S. GAAP................................... 15,660,544 1,467,807 162,104
Differences of accounting recognition for
unrealized basis difference on investment
securities available for sale, net of
taxes...................................... (84,629) (84,629) 45,714
Difference in basis in trading account
assets, net of taxes....................... (8,975) (8,975) (6,760)
Differences of accounting for treasury share
transactions............................... 20,981 20,981 79
---------- --------- -------
Luxembourg GAAP............................. 15,587,921 1,395,184 201,137
========== ========= =======
21. REGULATORY MATTERS
The Company's risk-based capital is included in the consolidated risk-based
capital ratio of RNYC in accordance with the requirements of the Federal
Reserve Board specifically applied to RNYC.
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
22. SAFRA REPUBLIC HOLDINGS S.A. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS OF US$)
ASSETS:
Cash and due from banks................................. 310 400
Interest-bearing deposits with banks.................... 19,690 14,562
Deposits with subsidiaries.............................. 139,108 52,880
Investment securities:
Available for sale.................................... 146,836 228,576
Held to maturity...................................... 69,744 77,795
---------- ----------
Total investment securities......................... 216,580 306,371
---------- ----------
Trading account assets.................................. -- 23,374
Investments in subsidiaries............................. 1,033,715 963,389
Loans to subsidiaries................................... 316,266 319,073
Other assets............................................ 100,699 68,877
---------- ----------
Total assets........................................ 1,826,368 1,748,926
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Due to brokers.......................................... -- 77,795
Other liabilities....................................... 33,258 53,324
Long-term debt.......................................... 150,000 150,000
SHAREHOLDERS' EQUITY (NOTES 12 AND 13):
Common stock US$ 5 par value............................ 89,155 89,155
Surplus................................................. 818,793 820,119
Retained earnings....................................... 752,019 579,514
Less shares held in treasury, at cost................... (16,857) (20,981)
---------- ----------
Total shareholders' equity.......................... 1,643,110 1,467,507
---------- ----------
Total liabilities and shareholders' equity.......... 1,826,368 1,748,926
========== ==========
Included in retained earnings at December 31, 1996 were net unrealised
appreciation on investment securities available for sale of US$102,071,000
(1995: US$11,953,000) and US$243,000 (1995: US$1,269,000), attributable to the
banking subsidiaries and parent company only, respectively.
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS OF US$)
INCOME:
Dividends from subsidiaries.......................... 95,904 82,000 88,900
Interest from subsidiaries........................... 39,682 28,822 20,203
Other interest....................................... 24,795 19,663 15,613
Other................................................ 14,228 9,309 (984)
------- ------- -------
Total income..................................... 174,609 139,794 123,732
------- ------- -------
EXPENSES:
Salaries and other employee benefits................. 10,719 8,336 11,400
Restricted stock expense............................. 3,571 3,150 2,728
Interest expense..................................... 9,001 9,723 7,086
Other expenses and provisions........................ 7,532 9,255 15,342
------- ------- -------
Total expenses................................... 30,823 30,464 36,556
------- ------- -------
Income before equity in undistributed net income of
subsidiaries........................................ 143,786 109,330 87,176
Equity in undistributed net income of subsidiaries... 46,044 52,774 71,399
------- ------- -------
Net income....................................... 189,830 162,104 158,575
======= ======= =======
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------- ------- --------
(IN THOUSANDS OF US$)
OPERATING ACTIVITIES:
Net income........................................ 189,830 162,104 158,575
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of
subsidiaries................................... (46,044) (52,774) (71,399)
Net change in trading account securities........ -- (8,842) 753
Other, net...................................... (11,994) 3,329 (31,304)
------- ------- --------
Net cash provided by operating activities..... 131,792 103,817 56,625
------- ------- --------
INVESTING ACTIVITIES:
Deposits with subsidiaries........................ (86,228) 6,912 110,616
Deposits with banks............................... (5,128) (14,562) --
Purchases of securities available for sale........ (35,035) (11,215) (40,959)
Purchases of securities held to maturity.......... (77,424) -- --
Proceeds from sales of securities available for
sale............................................. 136,730 29,539 13,246
Proceeds from maturities of securities held to
maturity......................................... 7,680 8,942 6,944
Cash contributions to subsidiaries................ (20,380) (1,131) (10,811)
Loans to subsidiaries............................. (826) (12,256) (103,000)
Other, net........................................ 12,608 (32,126) 17,198
------- ------- --------
Net cash used by investing activities......... (68,003) (25,897) (6,766)
------- ------- --------
FINANCING ACTIVITIES:
Cash dividends paid............................... (61,630) (57,747) (48,789)
Purchase of treasury shares....................... (2,249) (19,832) (1,049)
------- ------- --------
Net cash used by financing activities......... (63,879) (77,579) (49,838)
------- ------- --------
Net (decrease) increase in cash and due from
banks........................................... (90) 341 21
Cash and due from banks at beginning of year..... 400 59 38
------- ------- --------
Cash and due from banks at end of year........... 310 400 59
======= ======= ========
Supplemental Disclosure of Cash Flow Information:
Transfer from investments held to maturity to
investments available for sale................... -- 81,962 --
Transfer from trading account to investments
available for sale............................... 23,374 -- --
During 1996 and 1995, the Company increased its capital investment in its
banking subsidiaries by US$25,081,000 and US$6,383,000 respectively. During
1996, the Company received cash refunds of US$4,701,000 of previously forgiven
subordinated loans from one of its banking subsidiaries (1995: US$5,253,000).
87
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SAFRA REPUBLIC HOLDINGS S.A.
We have audited the accompanying consolidated statements of condition of
Safra Republic Holdings S.A. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Safra
Republic Holdings S.A. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with United
States generally accepted accounting principles.
Generally accepted accounting principles in the United States vary in
certain significant respects from generally accepted accounting principles in
Luxembourg. Application of generally accepted accounting principles in
Luxembourg would have affected results of operations for the years ended
December 31, 1996 and 1995 and shareholders' equity and total assets as of
December 31, 1996 and 1995, to the extent summarised in Note 20 to the
consolidated financial statements.
KPMG AUDIT
Luxembourg, January 14, 1997 Reviseurs d'entreprises
C. Nicolet D. G. Robertson
88
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
Information concerning directors of the Corporation and nominees for
election as directors is contained in the section "Election of Directors" in
the Corporation's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders to be filed pursuant to Section 14 of the Securities Exchange Act
of 1934 and is hereby incorporated herein by reference. Such definitive Proxy
Statement will be filed with the SEC on or about March 24, 1997.
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........ 66 Chairman of the Board and Chairman of the Board and
Chief Executive Officer Chief Executive Officer
Peter J. Mansbach....... 56 Chairman of the Executive Chairman of the Executive
Committee Committee
Kurt Andersen........... 52 -- Vice Chairman of the Board
Robert A. Cohen......... 48 Vice Chairman Vice Chairman of the Board
Cyril S. Dwek........... 60 Vice Chairman Vice Chairman of the Board
Ernest Ginsberg......... 66 Vice Chairman Vice Chairman of the Board
Nathan Hasson........... 51 Vice Chairman Vice Chairman of the Board
and Treasurer
Vito S. Portera......... 54 Vice Chairman Vice Chairman of the Board
Elias Saal.............. 44 Vice Chairman Vice Chairman of the Board
Dov C. Schlein.......... 49 Vice Chairman President
Paul L. Lee............. 50 Executive Vice President Executive Vice President
and General Counsel
Thomas F. Robards....... 50 Executive Vice President, Executive Vice President
Treasurer and Chief
Financial Officer--Financial
Planning and Treasury
George T. Wendler....... 52 Executive Vice President Vice Chairman of the Board
Richard C. Spikerman.... 56 International Credit Officer Executive Vice President
Each of the above-named officers is a director of both the Corporation and
the Bank, except for Messrs. Lee, Wendler, and Spikerman who are not directors
of the Corporation and except for Mr. Robards who is not a director of the
Corporation or the Bank.
The term of each officer is for a year, which runs from the annual meeting
of the Board of Directors of the Corporation and the Bank, respectively,
following the Annual Meeting of Stockholders of each, until the next such
Annual Meeting or until removed by the respective Board of Directors. Each of
the above officers' service in his current position is indicated in his
biography below.
Mr. Edmond J. Safra is the Honorary Chairman of the Board of Directors of
the Corporation and the Bank. Mr. Safra is Chairman of the Board of Safra
Republic 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.
The biographical information for the past five years for the above named
executive officers of the Corporation is as follows:
Walter H. Weiner has been a director and Chairman of the Board of the
Corporation and the Bank for over five years.
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.
Kurt Andersen has been a director of the Corporation since April 1988 and a
director of the Bank since May 1991. Mr. Andersen has been a Vice Chairman of
the Board and Regional General Manager (Asia Pacific) of the Bank since June
1995. For over five years prior thereto, Mr. Andersen served as an Executive
Vice President of the Bank.
Robert A. Cohen was elected a director of both the Corporation and the Bank
on March 5, 1997. Mr. Cohen is Vice Chairman of the Corporation and Vice
Chairman of the Board of the Bank since March 1, 1997. For the five years
prior thereto, Mr. Cohen was Chief Executive Officer of Credit Lyonnais
Americas.
Cyril S. Dwek has been a director and Vice Chairman of the Corporation and
director and a Vice Chairman of the Board of the Bank for over five years.
Ernest Ginsberg has been a director and a Vice Chairman of the Corporation
(and was General Counsel until April 1994) and a director and a Vice Chairman
of the Board of the Bank for over five years.
89
Vito S. Portera has been a director and a Vice Chairman of the Corporation
and a director and a Vice Chairman of the Board of the Bank for over five
years. Mr. Portera also has been Chairman of the Board of Republic
International Bank of New York (Miami), the Miami, Florida Edge Act subsidiary
of the Bank, for over five years.
Elias Saal has been a director and a Vice Chairman of the Corporation since
July 1995. He has been a director and Vice Chairman of the Board of the Bank
since October and June 1995, respectively. Mr. Saal was an Executive Vice
President of the Bank for over five years prior to 1995.
Dov C. Schlein has been a director and a Vice Chairman of the Corporation
and a director and President of the Bank for over five years.
Paul L. Lee has been an Executive Vice President and General Counsel of the
Corporation and a director and Executive Vice President of the Bank since
April 1994. For over five years prior thereto, Mr. Lee was a partner of
Shearman & Sterling, attorneys.
Thomas F. Robards has been Executive Vice President, Treasurer and Chief
Financial Officer--Financial Planning and Treasury of the Corporation since
July 1995. For over five years prior thereto, Mr. Robards served as Executive
Vice President and Treasurer of the Corporation. Mr. Robards has been an
Executive Vice President of the Bank for over five years.
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
and Treasurer of the Bank for over five years.
George T. Wendler has been an Executive Vice President and Chairman of the
Credit Committee of the Corporation since October 1994 and a director and Vice
Chairman of the Board of the Bank since June 1995. Prior thereto, Mr. Wendler
was an Executive Vice President of the Bank for over five years.
Richard C. Spikerman has been the International Credit Officer of the
Corporation since January 1995. Mr. Spikerman has been an Executive Vice
President of the Bank for over five years and a director of the Bank since
June 1995.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is contained in the section "Compensation
of Directors and Executive Officers--Executive Officers" in the Corporation's
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders to be
filed pursuant to Section 14 of the Securities Exchange Act of 1934 and is
hereby incorporated herein by reference. Such definitive Proxy Statement will
be filed with the SEC on or about March 24, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is contained in the sections entitled
"Election of Directors" and "Ownership of Voting Securities" in the
Corporation's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders to be filed pursuant to Section 14 of the Securities Exchange Act
of 1934 and is hereby incorporated herein by reference. Such definitive Proxy
Statement will be filed with the SEC on or about March 24, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is contained in the section entitled
"Transactions with Management and Related Persons" in the Corporation's
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders to be
filed pursuant to Section 14 of the Securities Exchange Act of 1934 and is
hereby incorporated herein by reference. Such definitive Proxy Statement will
be filed with the SEC on or about March 24, 1997.
90
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
Financial statements are listed in the index set forth in Item 8 of this
Report.
EXHIBITS
3a. Articles of Incorporation as amended through April 21, 1993 and
as supplemented by Articles Supplementary. (Incorporated herein
by reference to such exhibits filed with the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1993
and Current Reports on Form 8-K dated May 23, 1994 and June 26,
1995).
3b. By-Laws of the Corporation as amended through October 16, 1996.
4 Instruments defining the rights of security holders, including
indentures.*
10a. Form of Amended and Restated Deferral Agreement. **
(Incorporated herein by reference to such exhibit filed with
the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993).
10b. Form of Deferral Agreement. ** (Incorporated herein by
reference to such exhibit filed with the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1993).
10c. Performance Based Incentive Compensation Plan. ** (Incorporated
herein by reference to such exhibit filed with the
Corporation's definitive Proxy Statement dated March 16, 1994).
11 Computation of Earnings Per Share of Common Stock.
12 Calculation of Ratios of Earnings to Fixed Charges--
Consolidated.
21 Subsidiaries of the Corporation.
23 Consents of Experts and Counsel.
24 Form of Power of Attorney.
27 Financial Data Schedule.
- -------
* Republic New York Corporation hereby agrees to furnish to the Commission,
upon request, a copy of any unfiled agreements defining the rights of
holders of the long-term debt of Republic New York Corporation and of all
subsidiaries of Republic New York Corporation for which consolidated or
unconsolidated financial statements are required to be filed.
** Compensation Agreement.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the annual
period covered by this Report.
91
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 5, 1997
Republic New York Corporation
Walter H. Weiner
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
Walter H. Weiner Director and March 5, 1997
- ------------------------------- Chairman of the
WALTER H. WEINER Board (Principal
Executive
Officer)
Kenneth F. Cooper Executive Vice March 5, 1997
- ------------------------------- President and
KENNETH F. COOPER Chief Financial
Officer
(Principal
Financial and
Accounting
Officer)
Kurt Andersen Director
- -------------------------------
KURT ANDERSEN
Robert A. Cohen Director March 5, 1997
- -------------------------------
ROBERT A. COHEN
Cyril S. Dwek Director March 5, 1997
- -------------------------------
CYRIL S. DWEK
Ernest Ginsberg Director March 5, 1997
- -------------------------------
ERNEST GINSBERG
Nathan Hasson Director March 5, 1997
- -------------------------------
NATHAN HASSON
Jeffrey C. Keil Director March 5, 1997
- -------------------------------
JEFFREY C. KEIL
Peter Kimmelman Director March 5, 1997
- -------------------------------
PETER KIMMELMAN
Director
- -------------------------------
(RICHARD A. KRAEMER)
Leonard Lieberman Director March 5, 1997
- -------------------------------
LEONARD LIEBERMAN
William C. MacMillen, Jr. Director March 5, 1997
- -------------------------------
WILLIAM C. MACMILLEN, JR.
Director
- -------------------------------
(PETER J. MANSBACH)
Martin F. Mertz Director March 5, 1997
- -------------------------------
MARTIN F. MERTZ
James L. Morice Director March 5, 1997
- -------------------------------
JAMES L. MORICE
E. Daniel Morris Director March 5, 1997
- -------------------------------
E. DANIEL MORRIS
Janet L. Norwood Director March 5, 1997
- -------------------------------
JANET L. NORWOOD
John A. Pancetti Director March 5, 1997
- -------------------------------
JOHN A. PANCETTI
Vito S. Portera Director March 5, 1997
- -------------------------------
VITO S. PORTERA
Director
- -------------------------------
(WILLIAM P. ROGERS)
Elias Saal Director March 5, 1997
- -------------------------------
ELIAS SAAL
Dov C. Schlein Director March 5, 1997
- -------------------------------
DOV C. SCHLEIN
Director
- -------------------------------
(PETER WHITE)
92