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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the fiscal year ended December 31, 1997.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-7436
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REPUBLIC NEW YORK CORPORATION
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
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MARYLAND 13-2764867
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
452 FIFTH AVENUE, NEW YORK, NEW YORK 10018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 525-6100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, Par Value $5.00 Per Share New York Stock Exchange
The International Stock Exchange of
the United Kingdom & The Republic of Ireland Ltd.
Depositary Shares, each representing a one-fourth interest
in a share of Adjustable Rate Cumulative
Preferred Stock, Series D New York Stock Exchange
$1.8125 Cumulative Preferred Stock New York Stock Exchange
$2.8575 Cumulative Preferred Stock New York Stock Exchange
8 3/8% Debentures Due 2007 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ] .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of Common Stock of the registrant held by
non-affiliates at January 30, 1998 was $4,155,956,140 based on the closing price
on the New York Stock Exchange Composite Tape on such date.
The number of shares outstanding of each of the registrant's classes of
common stock, as of January 30, 1998: 54,106,826.
Documents Incorporated by Reference:
DOCUMENT LOCATION IN FORM 10-K
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Proxy Statement for 1998 Annual Meeting, to the extent
indicated Part III
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CONTENTS
PART I PAGE
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Item 1. Business
Republic New York Corporation............................... 1
Republic National Bank of New York.......................... 1
Other Financial Services.................................... 2
Competition................................................. 3
Employees................................................... 3
Customers................................................... 3
Supervision and Regulation.................................. 3
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 7
Item 6. Selected Financial Data..................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Introduction................................................ 7
Results of Operations....................................... 8
Liability and Asset Management.............................. 15
Risk Management and Control................................. 30
Capital Resources and Liquidity............................. 32
Item 8. Financial Statements and Supplementary Data................. 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 101
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 101
Item 11. Executive Compensation...................................... 103
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 103
Item 13. Certain Relationships and Related Transactions.............. 103
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 104
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PART I
ITEM 1. BUSINESS
REPUBLIC NEW YORK CORPORATION
Republic New York Corporation (the "Corporation"), incorporated in Maryland
in 1973, is a bank holding company that commenced operations in July, 1974. At
December 31, 1997, the Corporation had consolidated total assets of $55.6
billion and stockholders' equity of $3.4 billion. Its principal asset is the
capital stock of Republic National Bank of New York (the "Bank"). The Bank
accounted for approximately 90% of the consolidated assets at December 31, 1997
and approximately 90% of consolidated revenues and 95% of consolidated net
income of the Corporation for the year ended December 31, 1997. The
Corporation's other subsidiaries include Republic Business Credit Corporation
("RBCC"), a factoring and asset-based lender, Republic New York Securities
Corporation ("RNYSC"), a full service broker-dealer, and Republic Bank
California N.A. ("RBC"), a commercial bank operation in southern California.
The executive offices of the Corporation are located at 452 Fifth Avenue,
New York, New York 10018 (telephone 212-525-6100).
As used herein, the term "Corporation" includes the subsidiaries of the
Corporation and the term "Bank" includes the subsidiaries of the Bank, unless
the context indicates otherwise.
REPUBLIC NATIONAL BANK OF NEW YORK
The Bank, a national banking association, commenced operations in 1966. The
Bank provides a variety of banking and financial services worldwide to
corporations, financial institutions, governmental units and individuals.
At December 31, 1997, the Bank had total assets of $50.2 billion, total
deposits of $33.5 billion and stockholder's equity of $3.3 billion.
The Bank's headquarters and principal banking office is located at 452
Fifth Avenue, New York, New York 10018. At December 31, 1997, the Bank had 84
domestic branch banking offices in New York City and the suburban counties of
Westchester, Nassau and Suffolk, as well as eight branches in southern Florida.
INTERNATIONAL BANKING
The Bank is active in international banking where it operates principally
as a wholesale bank. It has been its policy to deal primarily with foreign
governments, their agencies, foreign central banks and foreign commercial banks
as borrowers or guarantors. At December 31, 1997, approximately 65% of the
Bank's cross-border net outstandings were to or guaranteed by such entities.
The Bank maintains wholly-owned foreign banking subsidiaries in The
Bahamas, Brazil, Canada, Cyprus, Mexico, Russia, Uruguay, Singapore and the
Cayman Islands; foreign branch offices in the Caribbean, Europe, Asia and Latin
America and representative offices in Europe, Asia and Latin America. The Bank's
facilities are supplemented by a network of correspondent banks throughout the
world. The Bank also has an Edge Act banking subsidiary in Miami, Florida, which
engages in off-shore banking activities with non-resident customers, and an Edge
Act banking subsidiary in Wilmington, Delaware.
The Bank's international banking services include accepting deposits,
extending credit, forfait financing, buying and selling foreign exchange, buying
and selling banknotes denominated in various currencies, issuing letters of
credit and bankers' acceptances and handling the collection and transfer of
money. The Bank's banknote services business ships U.S. dollars to and from
financial institutions in nearly 40 countries.
Through its international private banking department, headquartered in New
York City, the Bank offers a full range of private banking services to
individuals who are not citizens or residents of the United States, including
deposit, lending and investment management products, custody services, buying
and selling foreign exchange, banknotes denominated in various currencies,
precious metals and financial instruments, issuing letters of credit and
handling the collection and transfer of money.
DOMESTIC BANKING
The Bank provides a full range of domestic banking services, including
commercial, consumer installment and mortgage loans to individuals and
businesses. Mortgage loans are originated by its subsidiary, Republic Consumer
Lending Group, Inc. The Bank also accepts deposits, including time and savings
deposits and regular and special checking accounts, and issues large
denomination negotiable certificates of deposit of $100,000 or more.
Through its domestic corporate lending department, the Bank services the
financing requirements of large national companies, middle-market companies and
other businesses in the New York metropolitan area and selected markets outside
of New York. Other banking facilities usually associated with a full-service
commercial bank are offered, among which are safe deposit boxes, safekeeping and
custodial services, collections and remittances, letters of credit and foreign
exchange. The Bank's trust department provides a broad range of fiduciary
services to both individual and corporate accounts.
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Through its domestic private banking operation, the Bank offers an array of
private banking services, including deposit, lending and investment management
products, custody services and trust and estate planning to high net worth
individuals. The Bank's domestic private banking clients are served from
locations in New York, Los Angeles and Miami.
Republic Financial Services Corporation ("RFSC"), a wholly-owned subsidiary
of the Bank, and a broker-dealer registered with the Securities and Exchange
Commission (the "SEC") and the National Association of Securities Dealers, Inc.
(the "NASD"), provides brokerage services, through which its customers can
invest in mutual funds, stocks and fixed income instruments.
TRADING
The Bank trades gold and silver bullion, both for immediate delivery and
for delivery in the future, buys and sells options on precious metals and
engages in various arbitrage activities in the precious metals markets. The Bank
is a dealer in gold and silver bullion and coins that are sold to commercial and
industrial users and investors. The Bank generally hedges its inventory against
price fluctuations. At December 31, 1997 and 1996, approximately $162 million
and $37 million, respectively, of the Bank's inventory in precious metals were
unhedged.
The Bank's precious metals capabilities include global wholesale trading in
gold, silver, platinum and palladium, including spot, forward and options
dealing, as well as providing financial services in gold loans to central banks,
international financial institutions and institutional investors. The Bank also
offers production and inventory financing to mining companies, industrial
manufacturers and end-users.
The Bank's bullion banking operations in Sydney and Hong Kong also engage
in global wholesale trading in gold, silver, platinum and palladium, as well as
production and inventory financing. Precious metals operations are also
conducted in London by the Bank which is one of the five members of the London
Gold Fixing.
As an active participant in the foreign exchange markets, the Bank engages
in trading and market-making activities, as well as dealing in banknotes.
Republic Forex Options Corporation, an operating subsidiary of the Bank, is a
foreign currency options participant on the Philadelphia Stock Exchange, a
market-maker in foreign currency options and trades for its own account.
Trading account profits and commissions consist of income from trading
derivative products and dealing in international debt securities and securities
of the U.S. Government and its agencies. The Bank's derivative products group
acts as principal in trading interest rate and currency swaps and options on
these products as well as products related to the performance of various
indices.
The Bank acts as a dealer in certain financial instruments, such as
certificates of deposit issued by foreign banks, situated primarily in Mexico,
Brazil and Argentina, Brady Bonds, including forward sales and options on such
bonds, local currency instruments, eurobonds, syndicated bank loans and certain
other products. The Bank's customers for these products include financial
institutions, multinational corporations, other institutional investors and high
net worth individuals.
OTHER FINANCIAL SERVICES
REPUBLIC BUSINESS CREDIT CORPORATION
RBCC (formerly Republic Factors Corp.) is a wholly-owned subsidiary of the
Corporation. RBCC operates factoring, asset-based lending and accounts
receivable management businesses. As a factor, RBCC purchases, without recourse,
accounts receivable from approximately 500 clients. The terms of these
receivables average less than 60 days and are due from more than 55,000
customers, primarily retailers, located throughout the United States. RBCC also
purchases receivables due from customers throughout the world which RBCC
refactors through foreign factoring companies which are members of either the
International Factors Group or Factors Chain International. Certain clients
receive payments for their receivables prior to their collection by RBCC. From
time to time, RBCC makes advances in excess of the receivables purchased. These
advances may be secured or, in the case of seasonal overadvances, unsecured.
Letters of credit accommodations are also provided. For these services, RBCC
earns commissions, interest and service fees. RBCC's receivable management
service provides clients with back office support allowing them to monitor their
accounts receivable and collections on a daily basis.
For the year ended December 31, 1997, RBCC factored approximately $5.6
billion of sales, making it the 5th largest factoring concern in the United
States based on such sales volume.
RBCC's headquarters and principal office is located at 452 Fifth Avenue,
New York, New York 10018. In addition, RBCC has offices located in Los Angeles,
California and Charlotte, North Carolina.
REPUBLIC NEW YORK SECURITIES CORPORATION
RNYSC, a wholly-owned subsidiary of the Corporation, is a full-service
securities broker primarily serving institutional investors and high net worth
individuals. RNYSC is a registered broker-dealer with the SEC and is a member of
the NASD and the New York Stock Exchange, Inc. RNYSC has branch offices in
Chicago, Illinois and Philadelphia, Pennsylvania.
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RNYSC is also registered with the Commodity Futures Trading Commission and
the National Futures Association as a futures commission merchant and a
commodity trading advisor. As such, RNYSC acts primarily as a commodities broker
to the Bank, executing futures contracts and options on futures contracts for
the Bank's account. RNYSC trades in futures and options on futures in
non-financial commodities, including contracts on energy products, agricultural
products and non-precious metals. RNYSC provides execution services in
connection with the Bank's activities as a dealer in precious metals, financial
instruments and foreign exchange. In addition, RNYSC acts as a futures
commission merchant and commodity trading advisor for the general public. RNYSC
is a clearing member of the Chicago Mercantile Exchange, Chicago Board of Trade
and New York Mercantile Exchange, including its Comex Division. RNYSC is a
non-clearing member of the New York Futures Exchange, the Coffee, Sugar and
Cocoa Exchange and the Philadelphia Board of Trade.
SAFRA REPUBLIC HOLDINGS S.A.
The Bank has a 49.1% investment in Safra Republic Holdings, S.A ("Safra
Republic"), a Luxembourg holding company, principally engaged, through
wholly-owned banking subsidiaries in Switzerland, Luxembourg, France, Guernsey,
Gibraltar and Monaco, in international private banking, asset management and
other related investment services to over 22,000 high net worth individuals,
partnerships and closely held corporations from over 80 countries, and
commercial banking. At December 31, 1997, Safra Republic had total assets of
$20.4 billion, total deposits of $15.4 billion and total shareholders' equity of
$1.8 billion. Total client portfolio accounts of Safra Republic at year end
1997, both on- and off-balance-sheet amounted to $29.9 billion. In July 1997,
Safra Republic established a limited purpose bank in Cyprus to facilitate, among
other things, investments in Russia.
Safra Republic operates principally as a private bank with its primary
focus on providing its customers and clients with a range of investment
products. Safra Republic's business activities consist principally of secured
lending to customers, accepting customer deposits and offering a variety of
specialized portfolio or asset management services, including non-discretionary
asset management, discretionary asset management, investments in proprietary and
third party mutual funds and trust and fiduciary services for which it typically
earns fee or commission income. In addition, Safra Republic invests for its own
account in interbank deposits and debt securities of highly rated financial
institutions, governments and corporations; it also engages in foreign exchange
and precious metals trading.
At December 31, 1997, Saban S.A., the Corporation's principal stockholder,
owned approximately 20.8%, and international investors owned approximately 30.1%
of the outstanding shares of Safra Republic. The shares of Safra Republic are
listed on the Swiss Electronic and Luxembourg Stock Exchanges and traded
over-the-counter in London.
During 1997, Safra Republic acquired Mercury Bank AG, a Swiss private bank
that specializes in investment management services with over $2.5 billion of
client funds under management.
Safra Republic's headquarters and principal office is located at 32,
Boulevard Royal, 2449 Luxembourg. Safra Republic's subsidiary banks are
headquartered or have branches in Geneva, Lugano and Zurich, Switzerland; Paris,
France; and Monaco, Luxembourg, Gibraltar and Guernsey.
The financial statements of Safra Republic are included in "Affiliate
Financial Statements" in "Financial Statements and Supplementary Data" elsewhere
in this Report.
COMPETITION
All of the Corporation's financial activities are highly competitive. It
competes actively with other commercial banks, savings and loan associations,
financing companies, credit unions and other financial service providers located
throughout the United States and, in some of its activities, with government
agencies. For international business, the Corporation competes with other United
States financial service providers which have foreign installations and with
other major foreign financial service providers located throughout the world.
EMPLOYEES
As of December 31, 1997, the Corporation had approximately 5,900 full-time
equivalent employees.
CUSTOMERS
It is the opinion of management that there is no single customer or
affiliated group of customers whose deposits, if withdrawn, would have a
material adverse effect on the business of the Corporation.
SUPERVISION AND REGULATION
As a bank holding company registered under the Bank Holding Company Act of
1956, as amended (the "BHCA"), the Corporation is subject to substantial
regulation and supervision by the Board of Governors of the Federal Reserve
System (the "FRB"). The Corporation's subsidiary banks are subject to regulation
and supervision by federal bank regulatory agencies, including the Office of the
Comptroller of the Currency (the "OCC") and the Federal Deposit Insurance
Corporation (the "FDIC"). Federal banking and other laws impose a number of
requirements and restrictions on the operations of depository institutions. In
addition, the Corporation and certain of its banking subsidiaries and
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branches located outside the United States are subject to the requirements of
and supervision by the regulatory authorities in the countries in which they
operate.
The FRB and the OCC exercise overall regulatory control over Safra
Republic. In addition, the Luxembourg Monetary Institute (the "IML"), by virtue
of the European Directive on consolidated supervision, exercises prudential
consolidated supervisory responsibilities and oversees the local subsidiaries'
compliance with local laws, regulations and banking practices.
RNYSC is subject to the supervision and regulation of the FRB, the SEC, the
New York Stock Exchange, the NASD, the National Futures Association, the
Commodity Futures Trading Commission, and other stock and commodity exchanges
and clearing houses of which it is a member. Both RNYSC and RFSC are subject to
the rules and regulations applicable to broker-dealers in each state in which
they operate. RFSC is also subject to the regulations of the SEC and the NASD.
FIRREA
Pursuant to certain provisions of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), an insured depository
institution which is commonly controlled with another insured depository
institution is generally liable for any loss incurred, or reasonably anticipated
to be incurred, by the FDIC in connection with the default of such commonly
controlled institution, or any assistance provided by the FDIC to such commonly
controlled institution, which is in danger of default. The term "default" is
defined to mean the appointment of a conservator or receiver for such
institution, and "in danger of default" is defined generally as the existence of
certain conditions indicating that a "default" is likely to occur in the absence
of regulatory assistance. Thus, the Bank could incur liability to the FDIC
pursuant to this statutory provision in the event of the default of any other
insured depository institution owned or controlled by the Corporation. Such
liability is subordinated in right of payment to deposit liabilities, secured
obligations, any other general or senior liability, and any obligation
subordinated to depositors or other general creditors, other than obligations
owed to any affiliate of the depository institution (with certain exceptions)
and any obligations to shareholders in such capacity.
In its resolution of the problems of an insured depository institution in
default or in danger of default, the FDIC is generally required to satisfy its
obligations to insured depositors at the least possible cost to the deposit
insurance fund. In addition, the FDIC may not take any action that would have
the effect of increasing the losses to the deposit insurance fund by protecting
depositors for more than the insured portion of deposits (generally $100,000) or
creditors other than depositors. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") authorized the FDIC to settle all uninsured
and unsecured claims in the insolvency of an insured bank by making a final
settlement payment after the declaration of insolvency. Such a payment would
constitute full payment and disposition of the FDIC's obligations to claimants.
The rate of such final settlement payment is to be a percentage rate determined
by the FDIC reflecting an average of the FDIC's receivership recovery
experience.
FDICIA
In general, FDICIA subjects banks to significantly increased regulation and
supervision. Among other things, FDICIA requires federal bank regulatory
authorities to take "prompt corrective action" in respect of banks that do not
meet minimum capital requirements. FDICIA establishes five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under the OCC's regulations,
a bank is defined to be well capitalized if it maintains a risk-adjusted Tier 1
capital ratio of at least 6%, a risk-adjusted total capital ratio of at least
10% and a Tier 1 leverage capital ratio of at least 5%, and is not otherwise in
a "troubled condition" as specified by its appropriate federal regulatory
agency. A bank is defined to be adequately capitalized if it maintains a
risk-adjusted Tier 1 ratio of at least 4%, a risk-adjusted total capital ratio
of at least 8%, and a Tier 1 leverage ratio of at least 4% (3% for certain
highly rated institutions), and does not otherwise meet the well capitalized
definition. The three undercapitalized categories are based upon the amount by
which the bank falls below the ratios applicable to adequately capitalized
institutions. A depository institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
receives an unsatisfactory examination rating. The capital categories are
determined solely for the purposes of applying FDICIA's prompt corrective action
("PCA") provisions, as discussed below, and such capital categories may not
constitute an accurate representation of the overall financial condition or
prospects of the Bank.
Under FDICIA's PCA system, a bank in the undercapitalized category must
submit a capital restoration plan guaranteed by its parent company. The
liability of the parent company under any such guarantee is limited to the
lesser of 5% of the bank's assets at the time it became undercapitalized or the
amount needed to bring the bank into compliance with all capital standards
applicable to the bank as of the time the bank fails to comply with the plan. A
bank in the undercapitalized category is also subject to limitations in numerous
areas including, but not limited to, asset growth, acquisitions, branching, new
business lines, acceptance of brokered deposits and borrowings from the FRB.
Progressively more burdensome restrictions are applied to banks in the
undercapitalized category that fail to submit or implement a capital plan and to
banks that are in the significantly undercapitalized or critically
undercapitalized categories. In addition, a bank's primary federal banking
agency is authorized to downgrade the bank's capital category to the next lower
category upon a determination that the bank is in an unsafe or unsound condition
or is engaged in an unsafe or unsound practice. An unsafe or unsound practice
can include receipt by the institution of a rating on its most recent
examination of 3 or worse (on a scale from 1 (best) to 5 (worst)), with respect
to its asset quality, management, earnings or liquidity.
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Undercapitalized banks are subject to limitations on the payment of
dividends and on offering interest rates on deposits higher than the prevailing
rate in its market; in addition, "pass through" deposit insurance coverage may
not be available for certain employee benefit accounts. Significantly
undercapitalized banks may be subject to a number of requirements and
restrictions, including orders to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets, and cessation of
receipt of deposits from correspondent banks. Critically undercapitalized
institutions (which are defined to include institutions which still have a
positive net worth) are generally subject to the mandatory appointment of a
receiver or conservator.
FDICIA and the regulations issued thereunder also have (i) limited the use
of brokered deposits to well capitalized banks and adequately capitalized banks
that have received waivers from the FDIC, (ii) established restrictions on the
permissible investments and activities of FDIC insured state-chartered banks and
their subsidiaries, (iii) implemented uniform real estate lending rules, (iv)
prescribed standards to limit the risks posed by credit exposure between banks,
(v) revised risk-based capital rules to take account of interest rate risk,
concentrations of credit risk and certain risks arising from non-traditional
activities, and treatment of derivative financial instruments on which a bank
has credit exposure, (vi) amended various consumer banking laws, (vii) increased
restrictions on loans to a bank's insiders, (viii) established standards in a
number of areas to assure bank safety and soundness, and (ix) implemented
additional requirements for institutions that have $500 million or more in total
assets with respect to annual independent audits, audit committees, and
management reports related to financial statements, internal controls and
compliance with designated laws and regulations.
FDICIA also directs that each federal banking agency prescribe new safety
and soundness standards for depository institutions and depository institution
holding companies relating to internal controls, information systems, internal
audit systems, loan documentation, credit underwriting, interest rate exposure,
asset growth, compensation, a maximum rate of classified assets to capital,
minimum earnings sufficient to absorb losses, a minimum ratio of market value to
book value for publicly traded shares and other standards which the agencies
deem appropriate. Final interagency regulations to implement these new safety
and soundness standards were adopted by the federal banking agencies. As of
October 1, 1996, standards for asset quality and earnings have been incorporated
in the Interagency Guidelines Establishing Standards for Safety and Soundness.
The three standards for safety and soundness established by the guidelines are
(1) operational and managerial: (2) compensation: and (3) asset quality,
earnings and stock valuation. Whether these standards will have an ultimate
cumulative effect cannot currently be forecast.
DEPOSIT INSURANCE
The Bank's deposits are insured by the Bank Insurance Fund ("BIF") and by
the Savings Association Insurance Fund ("SAIF") of the FDIC and are subject to
FDIC insurance assessments. The FDIC's deposit insurance assessments have moved
under FDICIA from a flat-rate system to a risk-based system. The risk-based
system places a bank in one of nine risk categories, principally on the basis of
its capital level and an evaluation of the bank's risk to the insurance fund,
and bases premiums on the probability of loss to the FDIC with respect to each
individual bank. The annual premium schedule ranges from 0 basis points to 27
basis points (subject to a $2,000 per annum minimum). The imposition of the BIF
premium schedule will not have a material effect on the Bank's earnings. It is,
however, possible that the BIF deposit insurance premiums will be revised by the
FDIC in the future.
In October 1996 the Deposit Insurance Funds Act of 1996 (the "Funds Act")
was enacted. The Funds Act authorized the Financing Corporation ("FICO") to levy
assessments on BIF-assessable deposits and deposits assessable by the SAIF
commencing January 1, 1997. The current FICO assessment rate is 1.256 basis
points annually for BIF-assessable deposits and 6.280 basis points annually for
SAIF-assessable deposits. These rates may be adjusted quarterly. By law, the
FICO rate on BIF-assessable deposits must be one-fifth the rate on
SAIF-assessable deposits until the earlier of the merger of the insurance funds
or January 1, 2000. The Bank's deposits include both BIF-assessable deposits and
SAIF-assessable deposits and therefore the Corporation is subject to both
assessment rates. The amounts payable to FICO by the Corporation are in addition
to other FDIC deposit insurance premiums and thus represent an increased cost to
the Corporation.
OTHER DEVELOPMENTS
The Interstate Banking and Branch Efficiency Act of 1994 ("IBEA") permitted
nationwide interstate bank acquisitions beginning in 1995 and interstate
branching in 1997. The Corporation does not currently believe that the changes
to the country's banking system brought about by IBEA will have a material
effect on its business.
Various legislative proposals have been introduced in Congress in recent
years, including, among others, proposals regulating the derivatives activities
of banks and permitting affiliations between banks and commercial or securities
firms. It is impossible to predict whether or in what form these proposals may
be adopted in the future and, if adopted, what their effect will be on the
Corporation.
DIVIDENDS
The Corporation's ability to pay dividends is dependent upon its receipt of
dividends from its subsidiaries and on its earnings from investments. National
banks may use only capital surplus that represents earnings, not paid-in
capital, when calculating permissible dividends. The approval of the OCC is
required if the total of all dividends declared or proposed to be declared by
the Bank in any calendar year exceeds the Bank's net profits, as defined, for
that year,
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combined with its retained net profits for the preceding two calendar years. The
OCC also has authority to prohibit a national bank from engaging in what, in its
opinion, constitutes an unsafe or unsound practice in conducting its business.
The payment of dividends could, depending upon the financial condition of the
Bank, be deemed to constitute such an unsafe or unsound practice. Based on the
Bank's financial position at December 31, 1997, the Bank may declare dividends
in 1998, without regulatory approval, of approximately $292 million plus an
additional amount equal to its net profits for 1998 up to the date of any
dividend declaration.
There are no regulatory or contractual restrictions on RBCC's ability to
pay dividends to the Corporation.
Pursuant to the SEC's Uniform Net Capital Rule, neither RNYSC nor RFSC may
pay cash dividends if doing so would reduce the company's net capital ratio to
less than 5 percent.
ITEM 2. PROPERTIES
The Corporation has its principal offices in its world headquarters
building at 452 Fifth Avenue, New York, New York 10018, which is owned and
occupied principally by the Bank. The Bank owns properties in Miami, Florida;
Buenos Aires, Argentina; Santiago, Chile; Montevideo, Uruguay; Mexico City,
Mexico; Milan, Italy; and London, England; which house the Bank's or its
subsidiaries' offices in those locations. The Bank also owns other properties in
New York City, which are principally occupied by branches. All of the remainder
of the Corporation's offices and other facilities throughout the world are
leased.
ITEM 3. LEGAL PROCEEDINGS
The nature of its business generates a certain amount of litigation against
the Corporation involving matters arising in the ordinary course of the
Corporation's business. None of the legal proceedings currently pending or
threatened to which the Corporation or its subsidiaries is a party or to which
any of their properties are subject will have, in the opinion of management of
the Corporation, a material effect on the business or financial condition of the
Corporation or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No meetings of security holders were held during the fourth quarter of
1997.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Corporation is listed on the New York Stock
Exchange (ticker symbol RNB) and The International Stock Exchange of the United
Kingdom & The Republic of Ireland Ltd. At December 31, 1997, there were 2,836
stockholders of record of outstanding Common Stock of the Corporation.
The following table presents the range of high, low and closing sale prices
reported on the New York Stock Exchange Composite Tape and cash dividends
declared for each quarter during the past two years.
1997 1996
---------------------------------- ----------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.
------ ----- ------ ----- ------ ----- ------ -----
Common stock sale price:
High................................. $119 7/8 $116 $108 7/8 $99 1/8 $88 5/8 $71 $65 3/8 $63 1/2
Low.................................. 101 3/4 106 5/8 83 1/8 79 1/8 68 7/8 58 1/2 56 56
Close................................ 114 3/16 113 5/8 107 1/2 88 1/8 81 5/8 69 1/8 62 1/4 59 1/2
Cash dividends declared................... .46 .46 .46 .46 .38 .38 .38 .38
The dividend rate on the Common Stock has been increased annually since
such payments began in 1975. The table below shows the annual dividend rate and
dividend payout ratio, (dividends declared per common share divided by diluted
earnings per common share) in each of the last five years.
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Dividends declared per common share......................... $1.84 $1.52 $1.44 $1.32 $1.08
Dividend payout ratio....................................... 23.35% 21.50% 30.97% 23.20% 21.18%
The quarterly dividend rate on the Common Stock has been increased to $.50
per share commencing with the dividend payable April 1, 1998.
ITEM 6. SELECTED FINANCIAL DATA
For information regarding selected financial highlights, see "Supplementary
Data" in "Financial Statements and Supplementary Data" elsewhere in this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Net income was a record $449.1 million in 1997, compared to $418.8 million
in 1996 and $288.6 million in 1995. The results for 1995 included a pre-tax
provision for restructuring and related charges of $120.0 million. Diluted
earnings per share were $7.88 in 1997, $7.07 in 1996 and $4.65 in 1995 after a
$1.41 per share charge related to the restructuring.
The Corporation's risk-based capital ratios, which include the
risk-weighted assets and capital of Safra Republic, were 12.97% for Tier 1
capital and 21.58% for total capital at December 31, 1997. These ratios
substantially exceeded the regulatory minimums for bank holding companies of 4%
for Tier 1 capital and 8% for total capital.
Net interest income was $1.060 billion in 1997, compared to $994.1 million
in 1996, an increase of 6.6%.
Total average interest-earning assets were $45.0 billion in 1997, with
approximately 41% invested in securities of the U.S. Government and its agencies
and interest-bearing deposits with banks. Average loans in domestic offices of
$9.0 billion represented approximately 20% of average interest-earning assets in
1997. Average loans in foreign offices of $4.6 billion represented approximately
10% of total average interest-earning assets in 1997.
Non-accrual loans were $93.8 million at year end 1997, of which $29.7
million are covered by a loss sharing agreement with the FDIC. Non-accrual loans
were 0.76% of total loans outstanding, at year end 1997, compared to 0.90% at
year end 1996. At December 31, 1997, the allowance for possible credit losses
was $326.5 million, or 2.64% of loans outstanding and 348% of non-performing
loans.
Income from trading activities including associated net interest income was
$231.0 million in 1997, compared to $196.0 million in 1996. This increase
included higher levels of net interest income from precious metals and trading
account activities, and increased revenue from foreign exchange trading income.
Earnings from Safra Republic rose to $125.1 million in 1997 from $93.4
million in 1996, an increase of 34%.
The Corporation's returns on average total assets and average common
stockholders' equity, based on net income applicable to common stock-diluted,
were 0.77% and 14.69%, respectively, in 1997. The book value per common share
rose to $54.05 at year end 1997 from $50.01 at year end 1996.
7
10
RESULTS OF OPERATIONS
The following table presents condensed consolidated statements of income
for the Corporation for each of the years in the three-year period ended
December 31, 1997. The results of Brooklyn Bancorp, Inc. ("BBI"), parent of
Crossland Federal Savings Bank ("CrossLand") its wholly-owned subsidiary, which
was acquired on February 29, 1996 and accounted for as a purchase, are included
from the date of acquisition. These statements differ from the Corporation's
consolidated financial statements presented elsewhere in this Report in that net
interest income is presented on a fully-taxable equivalent basis. The tax
equivalent adjustment, related to certain tax exempt instruments, permits all
interest income and net interest income to be analyzed on a comparable basis.
The rate used for this adjustment, which is reflected throughout this section,
was 43% in 1997 and 44% in 1996 and 1995.
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------- --------------------
1997 AMOUNT % 1996 AMOUNT % 1995
---------- ---------- ------- ---------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Interest income...................... $3,242,139 $377,107 13.2 $2,865,032 $383,073 15.4 $2,481,959
Interest expense..................... 2,182,026 311,128 16.6 1,870,898 243,126 14.9 1,627,772
---------- -------- ---------- -------- ----------
Net interest income.................. 1,060,113 65,979 6.6 994,134 139,947 16.4 854,187
Provision for credit losses.......... 16,000 (16,000) (50.0) 32,000 20,000 166.7 12,000
---------- -------- ---------- -------- ----------
Net interest income after provision
for credit losses.................. 1,044,113 81,979 8.5 962,134 119,947 14.2 842,187
Other operating income............... 528,308 82,193 18.4 446,115 33,234 8.0 412,881
Other operating expenses............. 903,843 118,089 15.0 785,754 (35,911) (4.4) 821,665
---------- -------- ---------- -------- ----------
Income before income taxes........... 668,578 46,083 7.4 622,495 189,092 43.6 433,403
---------- -------- ---------- -------- ----------
Income taxes......................... 187,222 15,516 9.0 171,706 62,240 56.9 109,466
Tax equivalent adjustment............ 32,248 299 0.9 31,949 (3,339) (9.5) 35,288
---------- -------- ---------- -------- ----------
Total applicable income taxes........ 219,470 15,815 7.8 203,655 58,901 40.7 144,754
---------- -------- ---------- -------- ----------
Net income........................... $ 449,108 $ 30,268 7.2 $ 418,840 $130,191 45.1 $ 288,649
========== ======== ===== ========== ======== ===== ==========
Net income applicable to common stock
-- diluted......................... $ 423,281 $ 37,254 9.7 $ 386,027 $129,263 50.3 $ 256,764
========== ======== ===== ========== ======== ===== ==========
NET INTEREST INCOME
The following table contains information on the Corporation's average asset
and liability structure and rates earned and paid for each of the years in the
three-year period ended December 31, 1997, which are discussed throughout this
section.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
AVERAGE AVERAGE
INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID BALANCE EXPENSE PAID
----------- ---------- ------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Interest-bearing deposits with
banks............................ $ 4,679,550 $ 298,416 6.38% $ 5,697,285 $ 376,030 6.60%
Investment securities(1):
Taxable.......................... 21,497,014 1,511,817 7.03 17,899,644 1,279,226 7.15
Exempt from federal income
taxes(2)....................... 1,510,182 122,382 8.10 1,511,573 125,206 8.28
----------- ---------- ----------- ----------
Total investment
securities................. 23,007,196 1,634,199 7.10 19,411,217 1,404,432 7.24
Trading account assets(3).......... 1,466,715 115,594 7.88 1,156,531 67,279 5.82
Federal funds sold and securities
purchased under resale
agreements....................... 2,303,429 124,347 5.40 1,773,945 98,061 5.53
Loans, net of unearned income(4):
Domestic offices................. 8,973,953 751,272 8.37 8,329,626 673,446 8.08
Foreign offices.................. 4,566,897 318,311 6.97 3,650,052 245,784 6.73
----------- ---------- ----------- ----------
Total loans, net of unearned
income..................... 13,540,850 1,069,583 7.90 11,979,678 919,230 7.67
----------- ---------- ----------- ----------
Total interest-earning
assets..................... 44,997,740 $3,242,139 7.21% 40,018,656 $2,865,032 7.16%
========== ==== ========== ====
Cash and due from banks.............. 836,889 728,185
Other assets(5)...................... 9,185,910 7,887,199
----------- -----------
Total assets................. $55,020,539 $48,634,040
=========== ===========
YEAR ENDED DECEMBER 31,
----------------------------------
1995
----------------------------------
AVERAGE
INTEREST RATES
AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID
----------- ---------- -------
Interest-earning assets:
Interest-bearing deposits with
banks............................ $ 7,627,905 $ 526,185 6.90%
Investment securities(1):
Taxable.......................... 11,687,830 927,740 7.94
Exempt from federal income
taxes(2)....................... 1,320,208 125,032 9.47
----------- ----------
Total investment
securities................. 13,008,038 1,052,772 8.09
Trading account assets(3).......... 966,483 55,736 5.77
Federal funds sold and securities
purchased under resale
agreements....................... 1,567,809 97,547 6.22
Loans, net of unearned income(4):
Domestic offices................. 6,637,384 551,579 8.31
Foreign offices.................. 2,890,341 198,140 6.86
----------- ----------
Total loans, net of unearned
income..................... 9,527,725 749,719 7.87
----------- ----------
Total interest-earning
assets..................... 32,697,960 $2,481,959 7.59%
========== ====
Cash and due from banks.............. 607,169
Other assets(5)...................... 8,209,707
-----------
Total assets................. $41,514,836
===========
8
11
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
AVERAGE AVERAGE
INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID BALANCE EXPENSE PAID
----------- ---------- ------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
Interest-bearing funds:
Consumer and other time deposits... $10,795,118 $ 433,938 4.02% $10,797,056 $ 430,416 3.99%
Certificates of deposit............ 1,598,758 81,828 5.12 1,031,044 51,618 5.01
Deposits in foreign offices........ 16,915,710 935,257 5.53 14,644,586 800,171 5.46
----------- ---------- ----------- ----------
Total interest-bearing
deposits................... 29,309,586 1,451,023 4.95 26,472,686 1,282,205 4.84
Trading account liabilities(3)..... 193,599 12,860 6.64 170,393 11,841 6.95
Short-term borrowings.............. 8,354,135 436,149 5.22 6,563,751 321,234 4.89
Total long-term debt............... 4,397,055 281,994 6.41 4,019,216 255,618 6.36
----------- ---------- ----------- ----------
Total interest-bearing
funds...................... 42,254,375 $2,182,026 5.16% 37,226,046 $1,870,898 5.03%
========== ==== ========== ====
Noninterest-bearing deposits:
In domestic offices................ 2,336,440 2,020,937
In foreign offices................. 175,332 138,352
Other liabilities.................... 6,918,856 6,132,333
Stockholders' equity:
Preferred stock.................... 454,673 574,685
Common stockholders' equity........ 2,880,863 2,541,687
----------- -----------
Total stockholders' equity... 3,335,536 3,116,372
----------- -----------
Total liabilities and
stockholders' equity....... $55,020,539 $48,634,040
=========== ===========
Interest income/earning assets....... $3,242,139 7.21% $2,865,032 7.16%
Interest expense/earning assets...... 2,182,026 4.85 1,870,898 4.68
---------- ---- ---------- ----
Net interest differential............ $1,060,113 2.36% $ 994,134 2.48%
========== ==== ========== ====
YEAR ENDED DECEMBER 31,
----------------------------------
1995
----------------------------------
AVERAGE
INTEREST RATES
AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID
----------- ---------- -------
Interest-bearing funds:
Consumer and other time deposits... $ 7,650,443 $ 318,874 4.17%
Certificates of deposit............ 871,289 48,573 5.57
Deposits in foreign offices........ 12,769,411 770,628 6.03
----------- ----------
Total interest-bearing
deposits................... 21,291,143 1,138,075 5.35
Trading account liabilities(3)..... 37,117 2,561 6.90
Short-term borrowings.............. 4,609,403 216,243 4.69
Total long-term debt............... 4,120,206 270,893 6.57
----------- ----------
Total interest-bearing
funds...................... 30,057,869 $1,627,772 5.42%
========== ====
Noninterest-bearing deposits:
In domestic offices................ 1,514,908
In foreign offices................. 116,881
Other liabilities.................... 7,039,751
Stockholders' equity:
Preferred stock.................... 635,457
Common stockholders' equity........ 2,149,970
-----------
Total stockholders' equity... 2,785,427
-----------
Total liabilities and
stockholders' equity....... $41,514,836
===========
Interest income/earning assets....... $2,481,959 7.59%
Interest expense/earning assets...... 1,627,772 4.98
---------- ----
Net interest differential............ $ 854,187 2.61%
========== ====
- ------------
(1) Based on amortized or historic cost with the mark-to-market adjustment on
securities available for sale included in other assets.
(2) Income has been fully adjusted to a fully-taxable equivalent basis. The rate
used for this adjustment was approximately 43% in 1997 and 44% in 1996 and
1995.
(3) Excludes noninterest-bearing balances which are included in other assets or
other liabilities, respectively.
(4) Including non-accrual loans.
(5) Including allowance for possible credit losses.
Net interest income increased $66.0 million, or 6.6%, to $1.060 billion in
1997, compared to $994.1 million in 1996. This increase was due to the growth in
interest-earning assets to $45.0 billion in 1997 from $40.0 billion in 1996. The
net interest rate differential declined to 2.36% in 1997, compared to 2.48% in
1996. This decline reflects an increased amount of short-term borrowings and
deposits in foreign offices that were invested in high quality assets at low
margin spreads.
Net interest income increased $139.9 million, or 16.4%, to $994.1 million
in 1996, compared to $854.2 million in 1995. While spreads narrowed in 1996 when
compared to the prior year, average interest-earning assets rose $7.3 billion in
1996, to $40.0 billion, or 22.4% over 1995. This increase was primarily due to
the additional interest-earning assets acquired from BBI, and the investment of
proceeds from deposit liabilities acquired from First Nationwide Savings Bank,
Bank Leumi Trust Company and Independence Savings Bank. Higher levels of
investment securities were funded by deposits in foreign offices and short-term
borrowings. The net interest rate differential declined to 2.48% in 1996, from
2.61% in 1995, as the rate on interest-earning assets declined more than the
rate on interest-bearing funds.
At year ends 1997 and 1996, the gross notional amount of off-balance-sheet
contracts used in asset and liability management was approximately $21.7 billion
and $13.6 billion, respectively. At year ends 1997 and 1996 the market value of
these off-balance-sheet contracts reflected unrealized losses of approximately
$120 million and $50 million, respectively.
9
12
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)
-----------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
-------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- --------- --------- ---------
(IN THOUSANDS)
Interest income from:
Interest-bearing deposits with
banks............................ $(65,080) $(12,534) $(77,614) $(127,271) $ (22,884) $(150,155)
Taxable securities.................. 254,071 (21,480) 232,591 443,820 (92,334) 351,486
Securities exempt from federal
income taxes..................... (103) (2,721) (2,824) 15,884 (15,710) 174
Trading account assets.............. 24,490 23,825 48,315 11,060 483 11,543
Federal funds sold and securities
purchased under resale
agreements....................... 28,592 (2,306) 26,286 11,332 (10,818) 514
Loans, net of unearned income:
Domestic offices................. 53,670 24,156 77,826 137,133 (15,266) 121,867
Foreign offices.................. 63,767 8,760 72,527 51,401 (3,757) 47,644
-------- -------- -------- --------- --------- ---------
Total interest on loans..... 117,437 32,916 150,353 188,534 (19,023) 169,511
-------- -------- -------- --------- --------- ---------
Total interest income....... 359,407 17,700 377,107 543,359 (160,286) 383,073
-------- -------- -------- --------- --------- ---------
Interest expense on:
Consumer and other time deposits.... 283 3,239 3,522 125,313 (13,771) 111,542
Certificates of deposit............. 29,076 1,134 30,210 7,924 (4,879) 3,045
Deposits in foreign offices......... 124,835 10,251 135,086 102,329 (72,786) 29,543
Trading account liabilities......... 1,547 (528) 1,019 9,261 19 9,280
Short-term borrrowings.............. 93,255 21,660 114,915 95,772 9,219 104,991
Total long-term debt................ 24,366 2,010 26,376 (6,623) (8,652) (15,275)
-------- -------- -------- --------- --------- ---------
Total interest expense...... 273,362 37,766 311,128 333,976 (90,850) 243,126
-------- -------- -------- --------- --------- ---------
Change in net interest income......... $ 86,045 $(20,066) $ 65,979 $ 209,383 $ (69,436) $ 139,947
======== ======== ======== ========= ========= =========
PROVISION FOR CREDIT LOSSES
The Corporation determines its aggregate provision for credit losses based
on factors such as past credit loss experience, the composition of the loan
portfolio and other potential credit exposures and prevailing worldwide economic
conditions. The total provision for credit losses was $16 million in 1997, all
of which was applied to the allowance for possible credit losses, compared to
$32 million in 1996 and $12 million in 1995. In 1997, the level of
non-performing loans, net charge-offs and the provision for credit losses
declined when compared to 1996. While no specific credit concerns existed, the
increase in the provision for credit losses in 1996 over the prior year was
considered prudent by management in consideration of increased domestic and
foreign exposures. For additional information on loan charge-offs and
recoveries, the provision for credit losses and the method of reporting the
aggregate allowance for possible credit losses see "Asset Management-Aggregate
Allowance for Possible Credit Losses" in this section of this Report.
Net charge-offs declined to $11.3 million in 1997 from $25.0 million in
1996 and $31.3 million in 1995. The allowance for possible credit losses
amounted to $326.5 million at year end 1997 or 2.64% of loans outstanding, net
of unearned income. The allowance was $350.4 million at year end 1996, or 2.99%
of loans outstanding, net of unearned income, an increase of $49.8 million from
the $300.6 million at year end 1995. The increase in the allowance in 1996 was
primarily due to the $42.6 million allowance acquired in the BBI transaction.
10
13
OTHER OPERATING INCOME
The following table presents the principal categories of other operating
income for each of the years in the three-year period ended December 31, 1997.
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------- -------------------
1997 AMOUNT % 1996 AMOUNT % 1995
-------- --------- -------- -------- --------- ------ --------
(DOLLARS IN THOUSANDS)
Trading income:
Income from precious metals................. $ 14,069 $(10,631) (43.0) $ 24,700 $(13,349) (35.1) $ 38,049
Foreign exchange trading income............. 119,642 21,477 21.9 98,165 (14,886) (13.2) 113,051
Trading account profits and commissions..... 36,964 (15,977) (30.2) 52,941 28,195 113.9 24,746
-------- -------- -------- -------- --------
Total trading income.............. 170,675 (5,131) (2.9) 175,806 (40) -- 175,846
Investment securities gains, net............ 35,117 11,870 51.1 23,247 (2,416) (9.4) 25,663
Net gain on loans sold or held for sale..... 19,838 18,864 * 974 (5,791) (85.6) 6,765
Commission income........................... 87,524 16,131 22.6 71,393 14,458 25.4 56,935
Equity in earnings of affiliate............. 125,116 31,698 33.9 93,418 13,937 17.5 79,481
Other income................................ 90,038 8,761 10.8 81,277 13,086 19.2 68,191
-------- -------- -------- -------- --------
$528,308 $ 82,193 18.4 $446,115 $ 33,234 8.0 $412,881
======== ======== ======= ======== ======== ===== ========
- ---------------
* Exceeds 200%
Total Trading Income
The following table presents the components of total trading related income
for each of the years in the three-year period ended December 31, 1997. The
items of net interest income/(expense) in the table below represent the net
interest earned/paid on trading instruments, as well as an allocation by
management to reflect the funding benefit or cost associated with the trading
positions. The previously reported amounts for 1996 and 1995 have been revised
to reflect the methodology used by management in 1997 related to the funding
benefit or cost of trading positions.
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Income from precious metals:
Trading revenue........................................ $ 14,069 $ 24,700 $ 38,049
Net interest income.................................... 42,674 21,569 6,637
-------- -------- --------
Total............................................. 56,743 46,269 44,686
-------- -------- --------
Foreign exchange trading income:
Trading revenue........................................ 119,642 98,165 113,051
Net interest (expense)................................. (9,515) (4,422) (8,451)
-------- -------- --------
Total............................................. 110,127 93,743 104,600
-------- -------- --------
Trading account profits and commissions:
Trading revenue........................................ 36,964 52,941 24,746
Net interest income.................................... 27,129 3,021 2,586
-------- -------- --------
Total............................................. 64,093 55,962 27,332
-------- -------- --------
Total:
Trading revenue........................................ 170,675 175,806 175,846
Net interest income.................................... 60,288 20,168 772
-------- -------- --------
Total............................................. $230,963 $195,974 $176,618
======== ======== ========
Total trading revenue, including associated net interest income which is
reported as net interest income, rose to $231.0 million in 1997 from $196.0
million in 1996 and $176.6 million in 1995. Net interest income from trading
activities rose to $60.3 million in 1997 from $20.2 million in 1996, compared to
net interest income of $0.8 million in 1995. The increase in net interest income
in 1997 and 1996 was due primarily to precious metals with trading account
activities also contributing a substantial portion of the 1997 increase. The
year-to-year increase in total trading income in 1997 and 1996, when compared to
the respective prior year, reflected, in part, the increased contribution of the
emerging markets trading unit and other revenue increases generated from trading
securities and derivative-related products. In 1997, trading revenue generated
in the Moscow subsidiary on Russian government securities also contributed to
the increase over 1996.
Precious Metals
Income from precious metals is derived from the Corporation's activities as
a dealer in gold and silver bullion and coins sold to commercial and industrial
users and investors, as well as its trading and arbitrage activities in the
precious metals markets. Income from precious metals was $56.7 million in 1997,
as compared to $46.3 million in 1996 and $44.7 million in 1995. The change in
both 1997 and 1996 from the respective prior year reflected lower trading
revenue,
11
14
which in each case, was offset by higher levels of net interest income from
trading and funding these activities. The fluctuations in this income in each of
the last three years reflects volatility in price and volume in the precious
metals markets and the level of funds invested in precious metals activities.
Foreign Exchange
Foreign exchange trading income is derived from trading and market-making
activities in foreign currencies, transactions that service the needs of the
Corporation's customers, including other banks and corporations, and dealings in
banknotes, principally in New York, London and locations in the Far East.
Foreign exchange trading income was $110.1 million in 1997, an increase of $16.4
million over the $93.7 million earned in 1996 which was a decrease of $10.9
million from the $104.6 million earned in 1995. In 1997, foreign exchange
trading benefited from volatility in the foreign exchange markets. The decline
in foreign exchange trading income in 1996 from 1995 reflected lower levels of
volatility in these markets in 1996.
Trading Account Profits and Commissions
Total trading account profits and commissions were $64.1 million in 1997,
compared to $56.0 million in 1996 and $27.3 million in 1995. In 1997, a
substantial portion of this line of income was derived from dealings in fixed
and variable rate debt securities denominated in all major currencies with large
financial institutions, including investment banks, commercial banks and
multinational organizations, as well as with high net worth individuals. More
specifically, trading account profits and commissions include income from
trading derivative products, emerging market fixed income securities, the
securities of the U.S. Government and its agencies, and the government
securities of countries where the Corporation has an active local presence, such
as Argentina, Brazil, Italy, Uruguay and Russia. The Corporation's subsidiary in
Moscow was responsible for a significant portion of the increase in trading
account profits and commissions.
During 1997, the Corporation benefited from the 1996 expansion of its
emerging markets trading department whose activities consist of dealing in
certain financial instruments of issuers located primarily in Latin America and
other developing countries. These instruments include Brady and other sovereign
eurobonds, forward sales and options on Brady Bonds, bank certificates of
deposit, sovereign local currency obligations and certain other products.
Customers for these products include financial institutions, multinational
corporations, other institutional investors and high net worth individuals.
Trading account profits and commissions, including net interest income generated
by this group's activities increased to $33.7 million in 1997, from $16.7
million in 1996 and $1.6 million in 1995.
The Corporation's financial products group acts as a principal in providing
interest rate and currency swaps and options on these products, as well as
products related to the performance of various indices. This group operates in
New York and London. The Corporation's strategy includes providing financial
services to meet the changing needs of its customers and stresses product
innovation, both within existing product areas and between different product
areas. The level of revenues related to off-balance-sheet transactions declined
in both 1997 and 1996 from the level recorded in 1995 due to reduced market
activity for these products. For additional information related to derivative
instruments, see Notes 4, 18 and 19 of "Notes to Consolidated Financial
Statements" in "Financial Statements and Supplementary Data" elsewhere in this
Report.
Investment Securities Gains
The Corporation realized net investment securities gains of $35.1 million
in 1997, $23.2 million in 1996 and $25.7 million in 1995. In 1997 and 1996, a
substantial portion of the net gains were from the sale of securities from the
Corporation's portfolio of other securities, including emerging markets, which
offset losses from U.S. Government agency securities. In 1995, sales of emerging
market securities and securities which were redeemed by the issuer prior to
their scheduled maturity, resulted in gains of $9.8 million and $7.2 million,
respectively. In each of the last three years, the net gains were from sales of
securities available for sale. The proceeds from securities sold were reinvested
in high-quality, interest-earning assets.
Loans Sold or Held for Sale
Net gains on loans sold or held for sale were $19.8 million in 1997, $1.0
million in 1996 and $6.8 million in 1995. In 1997, the gains were primarily from
sales of commercial real estate loans due to a strengthening real estate market.
The net gains in both 1996 and 1995 resulted from the sale of originated
mortgage loans. The Corporation has retained the servicing rights on residential
mortgage loans sold.
Commission Income
Commission income, which included fees for the issuance of banker
acceptances and letters of credit, securities brokerage commissions and retail
services was $87.5 million in 1997, compared to $71.4 million in 1996 and $56.9
million in 1995. Commission income included fees for the issuance of letters of
credit and the creation of acceptances of $23.4 million in 1997, $21.7 million
in 1996 and $18.9 million in 1995. In 1997, commissions attributable to
securities clearance, funds transfer and money management activities were $37.3
million, compared to $24.8 million in 1996 and $20.1 million in 1995. Commission
income from the broker dealer business in the securities subsidiary amounted to
$5.7 million in 1997,
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compared to $5.2 million in 1996 and $4.4 million in 1995. Commission income
from the shipment of U.S.-dollar denominated banknotes was $8.6 million in 1997,
$8.5 million in 1996 and $2.6 million in 1995.
Affiliate Earnings
Equity in earnings of affiliate, representing the Corporation's share of
the earnings of Safra Republic, was $125.1 million in 1997, compared to $93.4
million in 1996 and $79.5 million in 1995. The increase in 1997 over 1996 was
34%, with 1996 an increase of 18% over 1995.
The following table presents summary information for Safra Republic for
each of the last three years.
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
At December 31:
Total assets................................................ $20,356,300 $17,223,409 $15,660,544
Interest-bearing deposits with banks........................ 7,476,969 6,041,717 6,058,483
Loans, net of unearned income............................... 2,288,896 1,687,050 1,443,803
Allowance for possible credit losses........................ 134,351 131,071 130,300
Non-performing loans........................................ 10,271 10,777 19,697
Total deposits.............................................. 15,401,065 13,337,947 11,347,601
Total shareholders' equity.................................. $ 1,760,566 $ 1,643,110 $ 1,467,807
For the year:
Net interest income......................................... $ 297,225 $ 266,180 $ 235,402
Provision for credit losses................................. 16,000 12,000 1,000
Other operating income...................................... 188,865 119,113 95,508
Other operating expenses.................................... 193,470 167,521 157,635
Net income.................................................. 255,055 189,830 162,104
Net income per common share-diluted......................... $ 7.17 $ 5.35 $ 4.54
Average shares outstanding-diluted.......................... 35,558 35,502 35,733
For additional information on Safra Republic and its relationship with the
Corporation, see Note 7 of "Notes to Consolidated Financial Statements" and
"Affiliate Financial Statements" in "Financial Statements and Supplementary
Data" elsewhere in this Report.
Other Income
Other income consists primarily of service charges on deposit accounts,
mortgage fees and trust income. In 1997, other income amounted to $90.0 million
and included a gain of $7.4 million on the unwinding of a real estate financing
transaction, $8.3 million of investment management performance fees earned at
Safra Republic Investments Limited, a subsidiary whose ownership is shared
equally with Safra Republic, and an affiliate service fee of $3.4 million as
reimbursement for prior-period shared representative office expense. Other
income was $81.3 million in 1996 and included gains of $2.7 million on the sale
of a New York retail branch, $1.1 million from the repurchase and early
extinguishment of an issue of $100 million principal amount of floating-rate
subordinated long-term debt and $4.7 million of net gains on the sale of other
real estate owned. In 1995, other income was $68.2 million and included gains of
$1.3 million on the sale of a New York retail branch, $2.4 million from the sale
of an equipment lease and $1.9 million of net gains from other real estate
owned.
OTHER OPERATING EXPENSES
The following table presents the principal categories of other operating
expenses for each of the years in the three-year period ended December 31, 1997.
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------- --------------------
1997 AMOUNT % 1996 AMOUNT % 1995
-------- ---------- ------ -------- ----------- ------ --------
(DOLLARS IN THOUSANDS)
Salaries and employee benefits............ $475,017 $ 54,916 13.1 $420,101 $ 38,485 10.1 $381,616
Occupancy, net............................ 71,325 (1,367) (1.9) 72,692 14,717 25.4 57,975
Other expenses............................ 357,501 64,540 22.0 292,961 30,887 11.8 262,074
-------- -------- -------- --------- --------
903,843 118,089 15.0 785,754 84,089 12.0 701,665
Restructuring and related charges......... -- -- -- -- (120,000) * 120,000
-------- -------- -------- --------- --------
Total other operating expenses....... $903,843 $118,089 15.0 $785,754 $ (35,911) (4.4) $821,665
======== ======== ==== ======== ========= ==== ========
- ------------
* Exceeds 200%
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Total operating expenses before restructuring and related charges were
$903.8 million in 1997, $785.8 million in 1996 and $701.7 million in 1995. The
increase in total other operating expenses before restructuring and related
charges in 1997 reflected the Corporation's ongoing investments in trading, risk
management and profitability reporting systems and other technology and
electronic banking initiatives which were begun in the second half of 1996.
Other expenses in 1997 included approximately $15.5 million related to the "Year
2000 Project", which is discussed further below. Also included in 1997 expenses
was a one-time charge of $14.2 million from an arbitration judgment and related
legal costs. The arbitration related to a dispute in 1995 with a former customer
of RNYSC involving currency futures trades. The Corporation disagrees with the
decision of the arbitration panel and has filed an appeal. The increase in total
other operating expenses before restructuring and related charges in 1996
reflected approximately $73.3 million of expenses in an expanded branch network
attributable to the acquisition of BBI and other branches purchased from Bank
Leumi, First Nationwide Bank FSB and Independence Savings Bank during the year.
During 1996, the Corporation invested in the initiatives described above
that were designed to increase revenues in future periods and in infrastructure
to support and control those operations. Retail banking expenses increased as a
result of the branch expansion mentioned above. Growth in the volumes of
mortgage and home equity loans as well as increased sales of investment products
resulted in the payment of additional fees for related services.
The Corporation continued to invest in broadening the array of its
investment product offerings, including the recent introduction of an asset
allocation product which is targeted at retail clients. RFSC saw significant
expansion during the year to include offering full-service and discount
securities brokerage services to corporate and retail clients. The Corporation
also invested in trading market services and in advanced risk management systems
to support its expanding trading operations. The development of a new
profitability measuring system which will enable the Corporation to efficiently
measure and present line of business results also contributed to the higher
expense level.
In the second quarter of 1995, the Corporation recorded a $120.0 million
pre-tax provision for restructuring and related charges as a result of the
implementation of Project Excellence Plus. For additional information on this
charge see Note 14 of "Notes to Consolidated Financial Statements" in "Financial
Statements and Supplementary Data" elsewhere in this Report. In addition, in
1995, the Corporation converted the financial reporting of its operations in
Chile and Uruguay and RBCC to a current basis in the fourth quarter of the year.
The conversion resulted in a one-time increase to expense of $3.4 million for
the year.
Salaries and Employee Benefits
Salaries and employee benefits were $475.0 million in 1997, $420.1 million
in 1996 and $381.6 million in 1995. The increase in salaries and benefits in
1997 over the prior year reflects the opening of new foreign offices and higher
levels of staff and increased provisions for incentive compensation. The
increase in salaries and benefits in 1996 over the prior year reflects staff
additions attributable to the acquisitions mentioned above, recently established
operations and to the achievement of higher revenue thresholds that required
higher provisions for incentive compensation reflecting more competitive market
conditions.
Occupancy
Occupancy costs were $71.3 million in 1997, $72.7 million in 1996 and $58.0
million in 1995. The decline in 1997 from 1996, resulted primarily from a lower
level of real estate taxes due to certain real estate tax rebates. The increase
in 1996 over 1995 was primarily due to the acquisition of 38 branches during the
year that included a one-time charge of $2.0 million related to branch
consolidations.
Other Expenses
All other expenses were $357.5 million in 1997, $293.0 million in 1996 and
$262.1 million in 1995. All other expenses in 1997 includes the one-time costs
of $14.2 million associated with the arbitration judgment mentioned above and
$15.5 million of Year 2000 expenses discussed below. Communication and equipment
expenses represent a substantial portion of other expenses which amounted to
$82.6 million, $75.8 million and $73.0 million in 1997, 1996 and 1995,
respectively. Amortization of goodwill and other intangible assets was $28.4
million in 1997, $28.7 million in 1996 and $9.9 million in 1995. The 1996
increase in this expense is primarily due to the acquisition of BBI and other
branches that occurred during the year. Also, professional fees, consisting of
consulting, external legal and audit fees, amounted to $36.0 million in 1997
compared to $29.2 million in 1996 and $30.7 million in 1995. All other expenses
include premiums for deposit insurance paid to the FDIC of $2.0 million in 1997,
compared to $0.5 million in 1996 and $11.7 million in 1995. The decline in this
expense in 1996 from 1995, was the result of a reduction of the premium rate
paid for FDIC insurance. Other expenses in 1995 also included the effect of
adopting a change in the method of accounting for charitable contributions that
resulted in a one-time charge of $7.5 million.
Year 2000 Project
The Corporation, like most commercial and financial institutions, is
working to assure that its operating and processing systems will continue to
function when the year 2000 arrives. The Corporation has developed and
implemented a comprehensive plan designed to complete substantially all system
conversions by the end of 1998. A significant part of that plan involves
contracts the Corporation has entered into with vendors to provide facilities
and manpower to
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17
carry out required conversions and follow-up testing. Operating expenses in 1997
included $15.5 million of these project costs. Based on this plan, it is
estimated that total incremental expenses for the Year 2000 Project will be
approximately $60 million. The remaining cost of approximately $45 million will
be incurred over the 8 quarters ending December 31, 1999. The exact timing and
amount of such expenses depends on the progress of converting and testing
individual systems and applications; based on its plan, the Corporation expects
that quarterly expense levels related to the Year 2000 Project will increase
from the current levels to a peak in early 1998 and then decline significantly
through 1999.
European Monetary Union
The Corporation is engaged in various efforts worldwide to prepare for the
planned introduction in January, 1999 of the single currency (known as the
Euro). The participating member states will be determined by the European
Commission in May 1998. Commencing January 1, 1999, the currencies of the
participating member states will convert (at rates of exchange to be determined)
into the Euro over a three-year transition period; the ECU will be converted
into the Euro at a rate of one-for-one. The Corporation has developed and
implemented a comprehensive plan to prepare for the introduction of the Euro and
its impact on the Corporation's products, lines of business and systems. All
major functions and product areas of the Corporation have developed action plans
to deal effectively with the implications of the introduction of the Euro.
Vendors of systems used by the Corporation have been contacted to obtain
information regarding their preparedness for the introduction of the Euro. Total
incremental expenses for the Euro conversion are currently estimated to be
approximately $1 million, most of which will be incurred during 1998.
TOTAL APPLICABLE INCOME TAXES
Total applicable income taxes, which includes the effect of a taxable
equivalent adjustment, increased $15.8 million in 1997 to $219.5 million, after
increasing $58.9 million in 1996 over 1995. The ratio of total applicable income
taxes to income before taxes has remained at approximately 33% in each of the
last three years. The increase in total applicable income taxes in 1997 and
1996, when compared to the respective prior year, reflected the higher levels of
taxable income for the year. Included in income taxes in 1997 was a tax benefit
of approximately $10.0 million related to non-taxable income from discontinued
operations of domestic subsidiaries. Income taxes in 1996 were reduced by a
one-time $12.0 million tax benefit recognized as a result of a tax law change
enacted in 1996. The 1996 income tax benefit was recognized by the Corporation
because it was no longer liable for deferred taxes which had been provided in
prior years for credit provisions.
NET INCOME APPLICABLE TO COMMON STOCK-DILUTED
Net income applicable to common stock-diluted was a record $423.3 million
in 1997, compared to $386.0 million in 1996 and $256.8 million in 1995. Diluted
earnings per common share were $7.88 in 1997, $7.07 in 1996 and $4.65 in 1995.
Dividends declared and the average annual rates paid on the Corporation's issues
of preferred stock were as follows: $24.2 million in 1997 at 5.32%, $31.5
million in 1996 at 5.48% and $36.5 million in 1995 at 5.74%.
LIABILITY AND ASSET MANAGEMENT
Changes in the level of interest rates and the relationship between rates
can affect net interest income. The structure of the Corporation's liabilities
determines the structure of its assets both on- and off-balance sheet, so that
the maturity and interest rate sensitivities are generally matched. This
practice has two important implications. First, liquidity requirements can be
met more readily because a large proportion of assets mature when liabilities
mature. Second, the impact of changes in the levels of interest rates on the
Corporation is reduced because assets and liabilities have approximately the
same interest rate sensitivity.
Diversification is another principle employed in the management of
liabilities and assets. The Corporation is active in international banking and,
in managing this activity, diversifies risks among many countries and
counterparties throughout the world. Liabilities, which are mostly
interest-bearing deposits and other purchased funds, are obtained from both
domestic and international sources. These sources of funds represent a wide
range of depositors, mostly individuals, and various types of deposits. The
Corporation also raises funds from institutional and individual investors with a
variety of marketable instruments. The diversification of the Corporation's
funding sources enhances the stability of the funding base.
From time to time, the Corporation's management may decide to mismatch on-
and off-balance-sheet liabilities and assets in a strategic gap position as a
means of managing net interest income. Interest rate sensitivity gaps occur when
interest-bearing liabilities and interest-earning assets differ in repricing
dates and anticipated maturities. Such decisions reflect management's views on
the direction of interest rates and general market conditions. The gap position
is established with marketable securities of high credit quality in liquid
markets and is carefully monitored by management. The Corporation uses
off-balance-sheet interest rate derivatives such as interest rate swaps, caps,
options and forwards as hedges or to modify the interest rate characteristics of
specific assets or liabilities, collectively referred to as a hedge. The
Corporation manages its exposure to interest rate sensitivity resulting from its
gap position with hedges and records these hedges in a manner consistent with
the accounting treatment for the underlying asset or liability.
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18
The Corporation monitors the near-term interest rate sensitivity of its
liability and asset positions by quantifying the earnings at risk to simulated
changes in interest rates. A net interest income simulation model measures this
sensitivity. This model utilizes Monte Carlo simulation, a statistical technique
that allows the Corporation to build variability around current market
conditions. Inputs include the maturity and repricing characteristics of the
Corporation's on- and off-balance-sheet liability and asset positions as well as
assumptions on interest rates, asset prepayments, inter-bank spreads and deposit
growth. Given the assumptions used, the model's output projects the variance in
net interest income over the next year. The Board of Directors adopted a limit
of 5% of annual net interest income at risk, based on this measured interest
rate sensitivity. Results are periodically presented to the Asset and Liability
Management Committee and to the Board of Directors.
Simulation modeling gives a broader view of net interest income variability
than does traditional gap analysis, allowing the Corporation to capture more
variables that are interest rate sensitive and to explore interrelationships
between variables. To complement the simulation model, the Corporation employs
traditional gap analysis to provide information on longer term interest rate
sensitivity.
The table below illustrates the Corporation's interest rate sensitivity gap
position at December 31, 1997 and 1996. The interest rate sensitivity gap, which
is the difference between interest-earning assets and liabilities, is presented
by repricing period, based upon maturity or first repricing opportunity, along
with a cumulative interest rate sensitivity gap. Factors considered are the
contractual terms of the underlying obligations, including off-balance-sheet
items such as interest rate swaps and caps, as well as management's estimates of
prepayment patterns of mortgage-backed securities and interest sensitivity of
core deposits. It is important to note that the table indicates a position at a
specific point in time and may not be reflective of positions at other times
during the year or in subsequent periods. Major changes in the gap position can
be, and are, made promptly as market outlooks change. In addition, significant
variations in interest rate sensitivity may exist within the repricing periods
presented in which the Corporation has interest rate positions.
REPRICING PERIOD AT DECEMBER 31, 1997
--------------------------------------------------------------------------------
AFTER ONE AFTER THREE AFTER SEVEN
WITHIN YEAR BUT WITHIN YEARS BUT WITHIN YEARS BUT WITHIN AFTER
ONE YEAR THREE YEARS SEVEN YEARS TEN YEARS TEN YEARS
-------- --------------- ---------------- ---------------- ---------
(IN MILLIONS)
ASSET/(LIABILITY)
Interest rate sensitivity gap......... $(468) $ (827) $ 322 $2,447 $(1,474)
----- ------- ----- ------ -------
ASSET/(LIABILITY)
Cumulative interest rate sensitivity
gap................................. $(468) $(1,295) $(973) $1,474 $ --
===== ======= ===== ====== =======
REPRICING PERIOD AT DECEMBER 31, 1996
--------------------------------------------------------------------------------
AFTER ONE AFTER THREE AFTER SEVEN
WITHIN YEAR BUT WITHIN YEARS BUT WITHIN YEARS BUT WITHIN AFTER
ONE YEAR THREE YEARS SEVEN YEARS TEN YEARS TEN YEARS
-------- --------------- ---------------- ---------------- ---------
(IN MILLIONS)
ASSET/(LIABILITY)
Interest rate sensitivity gap......... $(1,925) $ 261 $ 712 $2,020 $(1,068)
------- ------- ----- ------ -------
ASSET/(LIABILITY)
Cumulative interest rate sensitivity
gap................................. $(1,925) $(1,664) $(952) $1,068 $ --
======= ======= ===== ====== =======
In the second quarter of 1997, the Corporation began, with the use of
hedges, to reduce the interest rate gap that was allowed to widen in 1996. The
hedges had maturities between one and seven years.
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19
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, 1997
-----------------------------------------------------
DUE IN LESS DUE IN ONE DUE AFTER
THAN ONE YEAR THRU FIVE YEARS FIVE YEARS TOTAL
------------- --------------- ---------- ------
(DOLLARS IN MILLIONS)
Receive fixed swaps:
Notional amount..... $ 756 $ 916 $ 942 $2,614
Weighted average
receive rate...... 6.84% 7.79% 6.75% 7.14%
Weighted average
pay rate.......... 5.52% 5.57% 5.89% 5.67%
Pay fixed swaps:
Notional amount..... $1,419 $3,694 $1,122 $6,235
Weighted average
receive rate...... 5.74% 5.93% 5.91% 5.89%
Weighted average
pay rate.......... 6.43% 6.89% 7.33% 6.87%
Forward contracts:
Notional amount..... $1,210 $1,282 $ -- $2,492
Interest rate caps
purchased:
Notional amount..... $ 575 $3,448 $1,650 $5,673
Other interest rate
swaps:
Notional amount..... $ 445 $1,356 $1,689 $3,490
Cross-currency swaps:
Notional amount..... $1,100 $ 120 $ 14 $1,234
DECEMBER 31, 1996
-----------------------------------------------------
DUE IN LESS DUE IN ONE DUE AFTER
THAN ONE YEAR THRU FIVE YEARS FIVE YEARS TOTAL
------------- --------------- ---------- ------
(DOLLARS IN MILLIONS)
Receive fixed swaps:
Notional amount..... $ -- $ 640 $ 950 $1,590
Weighted average
receive rate...... -- 8.43% 6.99% 7.57%
Weighted average
pay rate.......... -- 5.83% 5.56% 5.67%
Pay fixed swaps:
Notional amount..... $ 30 $3,200 $ 220 $3,450
Weighted average
receive rate...... 5.84% 5.64% 7.60% 5.76%
Weighted average
pay rate.......... 9.22% 7.01% 9.39% 7.18%
Forward contracts:
Notional amount..... $ -- $ 450 $ -- $ 450
Interest rate caps
purchased:
Notional amount..... $1,687 $2,698 $ 150 $4,535
Other interest rate
swaps:
Notional amount..... $ 223 $ 882 $1,879 $2,984
Cross-currency swaps:
Notional amount..... $ 461 $ 109 $ -- $ 570
LIABILITY MANAGEMENT
DEPOSITS
The Corporation's primary liability products are interest-bearing deposits
provided to customers in four basic areas -- international private banking,
domestic private banking, institutional and retail banking. The international
private banking group establishes relationships, on a worldwide basis, with high
net worth individuals who value safety for their funds. The Corporation's
domestic private banking group provides a focus on general banking and lending,
trusts and estates, custody and investment management relationships for high net
worth individuals. The Bank's institutional customers are pension funds, money
market funds and corporate cash accounts. The Corporation has been successful in
selling long-term deposits to institutional and corporate investors, thereby
generating a source of long-term funds. The retail area's customers are from the
New York City metropolitan area and Florida branch systems of the Bank and the
California branches of RBC. This retail customer base increased significantly
during 1996 with the addition of $4.2 billion of deposits from the thirty-eight
branches acquired in the BBI and other acquisitions during the year. RBC is a
separate banking subsidiary, servicing the California market with two banking
offices in Los Angeles County, that focuses on domestic private banking and
mortgage banking. Its customers invest in a diverse mix of retail time and
savings deposits of both short-term and long-term maturities.
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20
The following table sets forth the Corporation's deposit structure at
December 31, in each of the last three years.
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
DOMESTIC OFFICES:
Noninterest-bearing deposits:
Individuals, partnerships and corporations............. $ 2,390,591 $ 2,005,782 $ 1,494,015
Foreign governments and official institutions.......... 2,301 1,756 3,196
U.S. Government and states and political
subdivisions.......................................... 35,036 42,912 16,629
Banks.................................................. 145,962 117,857 123,133
Certified and official checks.......................... 125,929 127,960 103,062
----------- ----------- -----------
Total noninterest-bearing deposits................ 2,699,819 2,296,267 1,740,035
----------- ----------- -----------
Interest-bearing deposits:
Individuals, partnerships and corporations............. 5,828,033 6,093,852 3,989,593
Savings and NOW accounts............................... 3,174,543 3,277,077 2,428,295
Money market accounts.................................. 2,888,781 2,812,222 2,001,830
Banks and other........................................ 323,403 376,403 1,734
Deposit notes.......................................... -- -- 50,000
----------- ----------- -----------
Total interest-bearing deposits................... 12,214,760 12,559,554 8,471,452
----------- ----------- -----------
Total deposits in domestic offices................ 14,914,579 14,855,821 10,211,487
----------- ----------- -----------
FOREIGN OFFICES:
Noninterest-bearing deposits................................ 222,957 177,675 160,133
----------- ----------- -----------
Interest-bearing deposits:
Individuals, partnerships and corporations............. 10,293,904 8,010,355 7,404,510
Banks located in foreign countries..................... 6,692,620 7,784,154 5,947,085
Foreign governments and official institutions.......... 1,265,474 897,574 1,196,418
----------- ----------- -----------
Total interest-bearing deposits................... 18,251,998 16,692,083 14,548,013
----------- ----------- -----------
Total deposits in foreign offices................. 18,474,955 16,869,758 14,708,146
----------- ----------- -----------
Total deposits............................... $33,389,534 $31,725,579 $24,919,633
=========== =========== ===========
The following table presents the maturity distribution at December 31, 1997
of certificates of deposit and other time deposits of $100,000 or more included
in interest-bearing deposits in domestic offices in the previous table.
CERTIFICATES OF OTHER TIME
DEPOSITS DEPOSITS TOTAL
---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
---------- --- ---------- --- ---------- ---
(DOLLARS IN THOUSANDS)
Due in 90 days and less..................................... $ 418,559 28 $1,420,974 82 $1,839,533 56
Due in 91-180 days.......................................... 42,057 3 111,667 6 153,724 5
Due in 181-360 days......................................... 18,507 1 114,917 7 133,424 4
Due in over 360 days........................................ 1,033,662 68 90,109 5 1,123,771 35
---------- --- ---------- --- ---------- ---
Total............................................. $1,512,785 100 $1,737,667 100 $3,250,452 100
========== === ========== === ========== ===
FOREIGN DEPOSITS
The Corporation's international private banking group, headquartered in New
York City, generates a substantial portion of foreign deposits by establishing
relationships with clients throughout the world.
Deposits from foreign sources are placed by over 25,000 individuals and
foreign banks from over 80 different countries in both domestic and foreign
branch offices and in foreign banking subsidiaries. This customer base is a
stable source of funding for the Corporation. Total average deposits in foreign
offices rose $2.3 billion, to $17.1 billion in 1997, after increasing to $14.8
billion in 1996 from $12.9 billion in 1995.
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21
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.
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
Foreign deposits:
Time deposits of individuals, partnerships and
corporations.......................................... $10,853,584 $ 8,534,615 $ 7,979,187
Banks and other financial institutions................. 6,873,528 7,940,121 6,075,247
Foreign governments and official institutions.......... 1,269,209 899,742 1,197,995
Other deposits......................................... 169,805 174,800 111,132
----------- ----------- -----------
Total foreign deposits............................ $19,166,126 $17,549,278 $15,363,561
=========== =========== ===========
TRADING ACCOUNT LIABILITIES
Trading account liabilities were $5.3 billion at year end 1997, $4.4
billion at year end 1996 and $3.7 billion in 1995. In each of the last three
years, unrealized losses represent a substantial portion of these liabilities
while the unrealized gains are recorded in trading account assets. Unrealized
gains and losses on forward, swap, option and other financial instruments,
resulting primarily from the marking to estimated market value of trading
instruments, are reported on a gross basis, except when right of set-off
criteria are met.
Trading account liabilities also include the market value of securities
sold that the Corporation does not own but must deliver at a future date and
payables for precious metals. The Corporation seeks to benefit from favorable
movements in the market price of "short-sales" by purchasing the required
security at a lower price in the future. For additional information on trading
account liabilities see Note 4 of "Notes to Consolidated Financial Statements"
elsewhere in this Report.
SHORT-TERM BORROWINGS
The Corporation's short-term funding sources include federal funds
purchased and securities sold under repurchase agreements, commercial paper
issuances, local borrowings in overseas operations and interest-bearing precious
metals balances. From time to time, the Bank also issues short-term securities
in public offerings. Average short-term borrowings rose to $8.4 billion in 1997,
up from $6.6 billion in 1996 and $4.6 billion in 1995. The increase in 1997 over
1996 reflected higher levels of other borrowings for precious metals, customer
positions in the securities company and local borrowings in overseas locations,
while 1996 increased over the prior year due to increased levels of securities
sold under repurchase agreements. Short-term borrowings as a percentage of total
interest bearing funds were 20% in 1997, 18% in 1996 and 15% in 1995.
The Corporation's commercial paper is rated A-1+, F-1+, P-1 and D-1+ by
Standard & Poor's Corporation, Fitch Investors Service, Moody's Investors
Service and Duff & Phelps, respectively. Commercial paper proceeds are used
principally to finance the current operations of RBCC and RNYSC. The Corporation
has $170 million of lines of credit outstanding to provide liquidity for its
commercial paper program under which it is authorized to issue up to $2.5
billion.
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22
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.
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Federal funds purchased and securities sold under repurchase
agreements:
Average interest rate: