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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NO. 1-7436
REPUBLIC NEW YORK CORPORATION
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
MARYLAND 13-2764867
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
452 FIFTH AVENUE, NEW YORK, NEW YORK 10018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 525-6100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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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 February 26, 1999 was $3,393,708,823 based on the closing
price on the New York Stock Exchange Composite Tape on such date.
The number of shares outstanding of each of the registrant's classes of Common
Stock, as of February 26, 1999: 106,909,606.
Documents Incorporated by Reference:
DOCUMENT LOCATION IN FORM 10-K
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Proxy Statement for 1999 Annual Meeting, to the extent Part III
indicated
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CONTENTS
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PART I
Item 1. Business
Republic New York Corporation............................. 1
Private Banking........................................... 1
Consumer Financial Services............................... 2
Lending................................................... 3
Global Treasury........................................... 3
Global Markets............................................ 4
Competition............................................... 5
Supervision and Regulation................................ 5
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 9
Item 6. Selected Financial Data..................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Introduction.............................................. 9
Results of Operations..................................... 10
Line-of-Business Information.............................. 23
Liability and Asset Management............................ 26
Risk Management and Control............................... 46
Capital Resources and Liquidity........................... 50
Recent Accounting Pronouncements.......................... 54
Forward-Looking Information............................... 55
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 55
Item 8. Financial Statements and Supplementary Data................. 56
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 141
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 141
Item 11. Executive Compensation...................................... 143
Item 12. Security Ownership of Certain Beneficial Owners and 143
Management..................................................
Item 13. Certain Relationships and Related Transactions.............. 143
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 144
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PART I
ITEM 1. BUSINESS
REPUBLIC NEW YORK CORPORATION
Republic New York Corporation (the "Corporation"), incorporated in Maryland in
1973, is a bank holding company that commenced operations in July, 1974. At
December 31, 1998, the Corporation had consolidated total assets of $50.4
billion and stockholders' equity of $3.1 billion. The executive offices of the
Corporation are located at 452 Fifth Avenue, New York, New York 10018.
The Corporation's principal asset is the capital stock of Republic National Bank
of New York (the "Bank"). The Bank, a national banking association, commenced
operations in 1966. At December 31, 1998, the Bank had total assets of $46.5
billion, total deposits of $33.5 billion and stockholder's equity of $3.1
billion. The Bank accounted for approximately 90% of the consolidated assets at
December 31, 1998 and approximately 90% of consolidated revenues and more than
100% of consolidated net income of the Corporation for the year ended December
31, 1998. The Bank's headquarters and principal banking office is located at 452
Fifth Avenue, New York, New York 10018.
In addition to its domestic branch offices in New York and Florida, the Bank
maintains foreign branch offices in the Caribbean, Europe, Asia and Latin
America; wholly-owned foreign banking subsidiaries in The Bahamas, Brazil,
Canada, Cayman Islands, Cyprus, Mexico, Russia, Singapore and Uruguay; and
representative offices in Europe, Asia and Latin America. The Bank's facilities
are supplemented by a network of correspondent banks throughout the world. The
Bank also has an Edge Act banking subsidiary in Miami, Florida, which engages in
offshore banking activities with non-resident customers, and an Edge Act
subsidiary in Wilmington, Delaware.
The Corporation's other subsidiaries include Republic Business Credit
Corporation ("RBCC"), a factoring and asset-based lender, Republic New York
Securities Corporation, a full service broker-dealer, and Republic Bank
California N.A., a commercial bank in California ("RBC").
Through the Bank and its other subsidiaries, the Corporation provides a variety
of banking and financial services worldwide to corporations, financial
institutions, governmental units and individuals. The Corporation has
strategically aligned its operations into five major segments of business,
discussed below based on the needs of its customers, clients and trading
partners. In addition, information on these segments, including the amount of
revenues earned by each, may be found in Note 16 of "Notes to Consolidated
Financial Statements" elsewhere in this Report.
PRIVATE BANKING
Private Banking offers a full range of services for high-net-worth individuals
throughout the world, including deposit, lending, trading, treasury, investment
management products (e.g., Republic Investment Management Account ("RIMA"),
Republic Selection Fund and the Republic Spectrum Account), trust, custody,
estate planning, philanthropic advisory services and asset allocation products.
The Bank's domestic private banking clients are served from locations in New
York, California and Massachusetts.
International private banking groups are located in New York and California to
provide a full range of financial services to individuals who are not citizens
or residents of the United States, along with any affiliated corporate business.
The Bank's international private banking clients are also served by its Edge Act
banking subsidiary in Florida, which has a branch in the Cayman Islands, and
from locations in North and South America, Europe and Asia.
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The Bank has a 49% investment in Safra Republic Holdings S.A. ("Safra
Republic"), a Luxembourg holding company, principally engaged, through wholly
owned banking subsidiaries in Switzerland, Luxembourg, France, Guernsey,
Gibraltar and Monaco, in international private banking, asset management and
other related investment services to high-net-worth individuals, partnerships
and closely held corporations from more than 80 countries, and also in
commercial banking. At December 31, 1998, Safra Republic had total assets of
$21.0 billion, total deposits of $16.4 billion and total shareholders' equity of
$1.9 billion. Total client assets in accounts with Safra Republic, both on- and
off-balance-sheet, amounted to $32.9 billion at year end 1998.
Safra Republic operates principally as a private bank with its primary focus on
providing its clients with a range of investment products. Safra Republic's
business activities consist principally of secured lending to customers,
accepting deposits and offering a variety of specialized portfolio and asset
management services, both discretionary and non-discretionary, investments in
proprietary and third party mutual funds and trust and fiduciary services for
which it typically earns fee or commission income. In addition, Safra Republic
invests for its own account in interbank deposits and debt securities of highly
rated financial institutions, governments and corporations; it also engages in
foreign exchange and precious metals trading.
At December 31, 1998, Saban S.A., the Corporation's principal stockholder, owned
approximately 20.8%, and international investors owned approximately 30.2% of
the outstanding shares of Safra Republic. The shares of Safra Republic are
listed on the Swiss Electronic and Luxembourg Stock Exchanges and traded
over-the-counter in London.
Safra Republic's headquarters and principal office is located at 32, Boulevard
Royal, 2449 Luxembourg. Safra Republic's subsidiary banks are headquartered or
have branches in Geneva, Lugano and Zurich, Switzerland; Paris, France; and
Monaco, Luxembourg, Gibraltar and Guernsey.
The financial statements of Safra Republic are included in "Affiliate Financial
Statements" in "Financial Statements and Supplementary Data" elsewhere in this
Report.
CONSUMER FINANCIAL SERVICES
The Consumer Financial Services group provides a full range of retail banking,
investment, insurance and home finance services and products. The services and
products offered include the traditional banking products associated with a
full-service commercial bank: checking accounts, savings accounts, money market
accounts, certificates of deposit, commercial loans, small business loans,
installment loans, credit cards, safe deposit boxes, as well as mutual funds,
fixed and variable annuities, money market funds (including Republic Spectrum
Account), PC bill payments, internet banking (starting in January 1999), ATM
access 24 hours a day and life and health insurance. The Young Investors Club,
Bank for Kids, Student$ense and Renaissance Club are special programs offering
financial products and services to specific demographic groups.
The Consumer Financial Services group offers all of the other products and
services managed by the Corporation's other divisions including trust, custody
and safekeeping services, collections, letters of credit, banker's acceptances
and foreign exchange. At December 31, 1998, the Bank offered these services
through 82 domestic branch banking locations in New York City and the suburban
counties of Westchester, Nassau and Suffolk, as well as 8 locations in southern
Florida.
Residential mortgage loans are originated by the Bank's subsidiary, Republic
Consumer Lending Group, Inc., in 16 states (Arizona, California, Connecticut,
Florida, Georgia, Illinois, Maryland, Massachusetts, Nevada, New Jersey, New
York, North Carolina, Tennessee, Texas, Utah and Washington).
Republic Financial Services Corporation ("RFSC"), a wholly owned subsidiary of
the Bank and a broker-dealer registered with the Securities and Exchange
Commission (the "SEC") and the National Association of Securities Dealers, Inc.
(the "NASD"), provides brokerage services through which its customers can invest
in mutual funds, stocks and fixed income instruments.
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LENDING
Lending is an integral part of the Corporation's overall client relationship.
Lending activities cover a variety of industries and industry segments including
domestic and international private banking, small business, middle market,
factoring, national and international corporations, commercial real estate and
precious metal lending. The Corporation is the leading provider of mortgage
financing to cooperative apartments in the country and a substantial lender and
provider of business credit to the retail and apparel industry. The market place
continues to be very competitive in the lending businesses, and the Corporation
has continued to follow a plan of diversity within businesses, the avoidance of
high risk transactions and the development of a customer base with a high level
of credit quality. Products include working capital lines, banker's acceptances,
letters of credit, factoring services, asset based lending, securities lending
and commercial mortgages.
The Lending group is active in international banking where it operates
principally as a wholesale bank. The Bank's international lending services
include extending credit, forfait financing, issuing letters of credit and
bankers' acceptances and handling the collection and transfer of money. It has
been its policy to deal primarily with foreign governments, their agencies,
foreign central banks and foreign commercial banks as borrowers or guarantors,
middle-market companies in Canada and selected major foreign corporations
primarily located in Europe. At December 31, 1998, approximately 69% of the
Bank's cross-border net outstandings were to foreign governments, foreign
central banks and foreign commercial banks.
The Corporation services the financing requirements of large national companies,
small businesses, middle-market companies, major broker-dealers and financial
institutions and other businesses in the New York metropolitan area and selected
markets outside of New York. The Bank focuses on multi-family and underlying
cooperative real estate financing.
Republic Business Credit Corporation ("RBCC") is a wholly owned subsidiary of
the Corporation. RBCC is engaged in factoring, asset-based lending and accounts
receivable management businesses. As a factor, RBCC purchases, without recourse,
accounts receivable from approximately 500 clients, primarily retailers, located
throughout the United States. RBCC also purchases receivables due from customers
throughout the world which RBCC refactors through foreign factoring companies
which are members of either the International Factors Group or Factors Chain
International. RBCC's receivables management service provides clients with back
office support, allowing them to monitor their accounts receivable and
collections on a daily basis. Letters of credit accommodations are also
provided. For these services, RBCC earns commissions, interest and service fees.
For the year ended December 31, 1998, RBCC factored approximately $5.8 billion
of sales, making it the fifth largest factoring concern in the United States
based on such sales volume.
RBCC's headquarters and principal office is located at 452 Fifth Avenue, New
York, New York 10018. In addition, RBCC has offices located in Los Angeles,
California and Charlotte, North Carolina.
GLOBAL TREASURY
Global Treasury manages the Corporation's liquidity profile including its asset
and liability positions by investing the funds available to the Corporation from
deposits and other funding sources, including large denomination certificates of
deposit and notes issued pursuant to the Bank's Global Medium Term Note Program
and other structured products. Global Treasury determines the pricing of the
Bank's liability products. The proceeds are invested in various investment
securities, principally United States Government securities or securities
guaranteed by the United States Government and AAA rated asset-backed securities
and, from time to time, emerging market instruments, money market instruments
and other assets that meet the Corporation's criteria for investment. Global
Treasury also uses a variety of derivatives to manage the interest rate,
maturity and yield characteristics of the Corporation's assets and liabilities.
See "Liability and Asset Manage-
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ment" in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" elsewhere in this Report.
GLOBAL MARKETS
The Bank is active, domestically and internationally, in the precious metals
markets, the foreign currency markets and the capital markets as a dealer and as
an intermediary for its clients; institutional, corporate and individual.
The Bank's precious metals capabilities include global wholesale trading and
dealing in gold, silver, platinum and palladium, including spot, forward and
options, as well as providing financial services in gold loans to central banks,
international financial institutions and institutional investors. The Bank also
offers production and inventory financing to mining companies, industrial
manufacturers and end-users. The Bank's bullion banking operations in Sydney and
Hong Kong also engage in global wholesale trading in gold, silver, platinum and
palladium, as well as production and inventory financing. The Bank also conducts
precious metals operations in London where the Bank is one of the five members
of the London Gold Fixing. The Bank is a dealer in gold and silver bullion and
coins that are sold to commercial and industrial users and investors. The Bank
generally hedges its inventory against price fluctuations. At December 31, 1998
and 1997, approximately $11 million and $162 million, respectively, of the
Bank's inventory in precious metals was unhedged.
As an active participant in the foreign exchange markets, the Bank buys and
sells foreign exchange for customers and engages in trading and market-making
activities through its operations in Europe, Latin America, Asia and Australia.
Republic Forex Options Corporation, an operating subsidiary of the Bank, is a
foreign currency options participant on the Philadelphia Stock Exchange, a
market-maker in foreign currency options and trades for its own account.
The Bank acts as a dealer in certain financial instruments, such as certificates
of deposit issued by foreign banks, situated primarily in Mexico, Brazil and
Argentina, Brady Bonds, forward sales and options on such bonds, local currency
instruments, eurobonds, syndicated bank loans and certain other products. The
financial products group develops and offers the various investment products
that are offered to the Bank's clients. The Bank's customers for these products
include financial institutions, multinational corporations, other institutional
investors and high-net-worth individuals.
The Bank's banknote services business buys and sells banknotes denominated in
various currencies and ships U.S. dollars to and from financial institutions in
nearly 40 countries.
Republic New York Securities Corporation ("RNYSC"), a wholly-owned subsidiary of
the Corporation, is a full-service securities broker primarily serving
institutional investors and high-net-worth individuals. RNYSC is a registered
broker-dealer with the SEC and is a member of the NASD and the New York Stock
Exchange, Inc. RNYSC has branch offices in Chicago and Philadelphia.
RNYSC is also registered with the Commodity Futures Trading Commission and the
National Futures Association as a futures commission merchant and a commodity
trading adviser. As such, RNYSC acts primarily as a commodities broker to the
Bank, executing futures contracts and options on futures contracts for the
Bank's account. RNYSC trades in futures and options on futures in non-financial
commodities, including contracts on energy products, agricultural products and
non-precious metals. RNYSC provides execution services in connection with the
Bank's activities as a dealer in precious metals, financial instruments and
foreign exchange. In addition, RNYSC acts as a futures commission merchant and
commodity trading advisor for the general public. RNYSC is a clearing member of
the Chicago Mercantile Exchange, Chicago Board of Trade and New York Mercantile
Exchange, including its Comex Division. RNYSC is a non-clearing member of the
New York Futures Exchange, the Coffee, Sugar and Cocoa Exchange and the
Philadelphia Board of Trade. The Corporation, after an extensive review, has
embarked on a program which will reduce the activities of RNYSC, terminating its
stock exchange memberships and its prime brokerage service. For its
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remaining customers RNYSC will clear their transactions through BHC Inc., a NYSE
member clearing firm.
COMPETITION
All of the Corporation's financial activities are highly competitive. It
competes actively with other commercial banks, savings and loan associations,
financing companies, credit unions and other financial service providers located
throughout the United States and, in some of its activities, with government
agencies. For international business, the Corporation competes with other United
States financial service providers which have foreign installations and with
other major foreign financial service providers located throughout the world.
SUPERVISION AND REGULATION
The following discussion sets forth certain material elements of the regulatory
framework applicable to the Corporation and its subsidiaries and provides
certain information relevant to the Bank. This regulatory framework is intended
primarily for the protection of depositors and the federal deposit insurance
funds and not for the protection of security holders. To the extent that the
following information describes statutory and regulatory authority, it is
qualified in its entirety by reference to those provisions. A change in such
statutes, regulations or regulatory policies applicable to the Corporation and
the Bank, or their respective subsidiaries, may have a material effect on the
business of the Corporation or the Bank, as the case may be.
As a bank holding company registered under the Bank Holding Company Act of 1956,
as amended (the "BHCA"), the Corporation is subject to substantial regulation
and supervision by the Board of Governors of the Federal Reserve System (the
"FRB"). The Corporation's subsidiary banks, the Bank and RBC, are subject to
regulation and supervision primarily by the Office of the Comptroller of the
Currency (the "OCC") and secondarily by the Federal Deposit Insurance
Corporation (the "FDIC") and the FRB. Federal banking and other laws impose a
number of requirements and restrictions on the operations of depository
institutions. In addition, the Corporation and certain of its banking
subsidiaries and branches located outside the United States are subject to the
requirements of, and supervision by, the regulatory authorities in the countries
in which they operate.
The FRB and the OCC exercise overall regulatory authority over Safra Republic.
In addition, the Luxembourg Central Bank (the "LCB"), by virtue of the European
Directive on consolidated supervision, exercises consolidated prudential
supervisory responsibilities with respect to Safra Republic and oversees Safra
Republic's subsidiaries' compliance with local laws, regulations and banking
practices.
RNYSC is subject to the supervision and regulation of the FRB, the SEC, the New
York Stock Exchange, the NASD, the National Futures Association, the Commodity
Futures Trading Commission, and other stock and commodity exchanges and clearing
houses of which it is a member. Both RNYSC and RFSC are subject to the rules and
regulations applicable to broker-dealers in each state in which they operate.
RFSC is also subject to the regulations of the SEC and the NASD.
CAPITAL REQUIREMENTS
The Corporation is subject to risk-based capital requirements and guidelines
imposed by the FRB, which are substantially similar to the capital requirements
and guidelines imposed by the OCC and the FDIC on the depository institutions
within their respective jurisdictions. For this purpose, a depository
institution's or holding company's assets and certain specified off-balance-
sheet commitments are assigned to four risk categories, each weighted
differently based on the level of credit risk that is ascribed to such assets or
commitments. In addition, risk weighted assets are adjusted for low-level
recourse and market risk equivalent assets. A depository institution's or
holding company's capital, in turn, is divided into three tiers: (1) core ("Tier
1") capital, which includes common
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equity, non-cumulative perpetual preferred stock and a limited amount of
cumulative perpetual preferred stock and related surplus (excluding auction rate
issues) and a limited amount of cumulative perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill, certain identifiable intangible assets and certain other assets; (2)
supplementary ("Tier 2") capital, which includes, among other items, perpetual
preferred stock not meeting the Tier 1 definition, mandatory convertible
securities, subordinated debt and allowances for credit losses, subject to
certain limitations, less certain required deductions; and (3) market risk
("Tier 3") capital, which includes qualifying unsecured subordinated debt.
The Corporation, like other bank holding companies, currently is required to
maintain Tier 1 and "total capital" (the sum of Tier 1, Tier 2 and Tier 3
capital) equal to at least 4% and 8%, respectively, of its total risk-weighted
assets (including certain off-balance-sheet items, such as standby letters of
credit). At December 31, 1998, the Corporation met both requirements, with Tier
1 and total capital equal to 13.95% and 22.99%, respectively, of its total
risk-weighted assets.
The Bank is also subject to similar risk-based and leverage capital requirements
adopted by the OCC and was in compliance with the capital requirements as of
December 31, 1998 with Tier 1 capital of 13.04%, total capital of 18.26% and a
leverage ratio of 6.74%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital Resources and Liquidity --
Risk-Based Capital and Leverage Guidelines" elsewhere in this Report.
Failure to meet capital requirements could subject a bank to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business, which are described below
under "FDICIA."
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
among other things, identifies five capital categories for insured depository
institutions (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires
federal bank regulatory agencies to implement systems for "prompt corrective
action" for insured depository institutions that do not meet minimum capital
requirements, based on these categories. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Unless a bank
is "well capitalized," it is subject to restrictions on its ability to offer
brokered deposits and on certain other aspects of its operations. An
"undercapitalized" bank must develop a capital restoration plan and its parent
holding company must guarantee the bank's compliance with the plan up to the
lesser of 5% of the bank's assets at the time it became undercapitalized and the
amount needed to comply with the plan.
As of December 31, 1998, each bank subsidiary of the Corporation was "well
capitalized," based on the ratios and guidelines described above. It should be
noted, however, that a bank's capital category is determined solely for the
purpose of applying the OCC's (or the FDIC's) "prompt corrective action"
regulations and that the capital category may not constitute an accurate
representation of the Bank's overall financial condition or prospects.
LIABILITY FOR BANK SUBSIDIARIES
Under current FRB policy, the Corporation is expected to act as a source of
financial and managerial strength to each of its subsidiary banks and to
maintain resources adequate to support each such subsidiary bank. In addition,
Section 55 of the National Bank Act permits the OCC to order the pro rata
assessment of shareholders of a national bank whose capital has become impaired.
If a shareholder fails within three months to pay such an assessment, the OCC
can order the sale of the shareholder's stock to cover the deficiency. In the
event of a bank holding company's bankruptcy, any commitment by the bank holding
company to a federal bank regulatory agency to maintain the
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capital of a subsidiary bank would be assumed by the bankruptcy trustee and
entitled to priority of payment.
Any depository institution insured by the FDIC can be held liable for any loss
incurred, or reasonably expected to be incurred, by the FDIC in connection with
(i) the default of a commonly controlled FDIC-insured depository institution or
(ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured
depository institution in danger of default. "Default" is defined generally as
the appointment of a conservator or receiver, and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance. The Bank and
RBC are FDIC-insured depository institutions. Also, if such a default occurred
with respect to a bank, any capital loans to the bank from its parent holding
company would be subordinate in right of payment to payment of the bank's
depositors and certain of its other obligations.
DEPOSITOR PREFERENCE STATUTE
Federal legislation has been enacted providing that, in the "liquidation or
other resolution" of a depository institution, domestic (U.S.) deposits and
certain claims of the FDIC as receiver, for administrative expenses and employee
compensation against an insured depository institution, would be afforded a
priority over other general unsecured claims against such institution, including
federal funds and letters of credit.
DEPOSIT INSURANCE
The Bank's and RBC's deposits are insured by the Bank Insurance Fund ("BIF"),
and certain of the Bank's deposits are insured by the Savings Association
Insurance Fund ("SAIF"), of the FDIC and are subject to FDIC insurance
assessments. The FDIC has adopted regulations establishing a permanent
risk-based deposit insurance system. The risk-based system places a bank in one
of nine risk categories, principally on the basis of its capital level and an
evaluation of the bank's risk to the insurance fund. The insurance assessment
rates are then based on the probability of loss to the FDIC with respect to each
individual bank. The annual insurance premiums of bank deposits insured by the
BIF and the SAIF vary between $0.00 per $100 of deposits for banks classified in
the highest capital and supervisory evaluation categories to $0.27 per $100 of
deposits for banks classified in the lowest capital and supervisory evaluation
categories. It is, however, possible that the BIF deposit insurance premiums
will be revised by the FDIC in the future.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") authorizes the
Financing Corporation ("FICO") to levy assessments on BIF-assessable deposits
and deposits assessable by the SAIF. The current FICO assessment rate is 1.22
basis points annually for BIF-assessable deposits and 6.10 basis points annually
for SAIF-assessable deposits. These rates may be adjusted quarterly. By law, the
FICO rate on BIF-assessable deposits must be one-fifth the rate on
SAIF-assessable deposits until the earlier of the merger of the insurance funds
or January 1, 2000. The Bank's deposits include both BIF-assessable deposits and
SAIF-assessable deposits and therefore the Corporation is subject to both
assessment rates. The amounts payable by the Corporation to FICO are in addition
to other insurance premiums, if any, and thus represents an increased cost to
the Corporation.
DIVIDENDS
The Corporation's ability to pay dividends is dependent upon its receipt of
dividends from its subsidiaries and on its earnings from investments. National
banks may use only capital surplus that represents earnings, not paid-in
capital, when calculating permissible dividends. The approval of the OCC is
required if the total of all dividends declared or proposed to be declared by
the Bank in any calendar year exceeds the Bank's net profits, as defined, for
that year, combined with its retained net profits for the preceding two calendar
years. The OCC also has authority to prohibit a national bank from engaging in
what, in its opinion, constitutes an unsafe or unsound practice in conducting
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its business. The payment of dividends could, depending upon the financial
condition of the Bank, be deemed to constitute such an unsafe or unsound
practice. Based on the Bank's financial position at December 31, 1998, the Bank
may declare dividends in 1999, without regulatory approval, of approximately
$234 million plus an additional amount equal to its net profits for 1999 up to
the date of any dividend declaration. FDICIA provides that undercapitalized
banks are also subject to limitations on the payment of dividends.
There are no regulatory or contractual restrictions on RBCC's ability to pay
dividends to the Corporation.
ITEM 2. PROPERTIES
The Corporation has its principal offices in its world headquarter building at
452 Fifth Avenue, New York, New York 10018, which is owned and occupied
principally by the Bank. The Bank owns properties in Miami, Florida, Buenos
Aires, Argentina, Santiago, Chile, Montevideo, Uruguay, Mexico City, Mexico,
Milan, Italy, and London, England, which house the Bank's or its subsidiaries'
offices in those locations. The Bank also owns other properties in New York
City, which are principally occupied by branches. All of the remainder of the
Corporation's offices and other facilities throughout the world are leased.
ITEM 3. LEGAL PROCEEDINGS
The nature of its business generates a certain amount of litigation against the
Corporation involving matters arising in the ordinary course of the
Corporation's business. None of the legal proceedings currently pending or
threatened to which the Corporation or its subsidiaries is a party or to which
any of their properties are subject will have, in the opinion of management of
the Corporation, a material effect on the business or financial condition of the
Corporation or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No meetings of security holders were held during the fourth quarter of 1998.
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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, 1998, there were 2,729 stockholders
of record of outstanding Common Stock of the Corporation.
The following table presents the range of high, low and closing sale prices
reported on the New York Stock Exchange Composite Tape and cash dividends
declared for each quarter during the past two years, all of which have been
adjusted to reflect the two-for-one Common Stock split distributed in June,
1998.
1998
-------------------------------------------------
FOURTH THIRD SECOND FIRST
QTR. QTR. QTR. QTR.
- -----------------------------------------------------------------------------------
Common stock sale price:
High $ 48 $ 71 1/2 $ 73 1/4 $ 68
Low 37 3/16 36 3/16 60 1/8 51 7/16
Close 45 9/16 39 1/2 62 15/16 66 11/16
Cash dividends declared 0.25 0.25 0.25 0.25
- -----------------------------------------------------------------------------
1997
----------------------------------------------
FOURTH THIRD SECOND FIRST
QTR. QTR. QTR. QTR.
- -------------------------- ----------------------------------------------
Common stock sale price:
High $ 59 15/16 $ 58 $ 54 7/16 $ 49 5/8
Low 50 7/8 53 5/16 41 5/8 39 5/8
Close 57 3/32 56 13/16 53 3/4 44 1/16
Cash dividends declared 0.23 0.23 0.23 0.23
- --------------------------
The dividend rate on the Common Stock has been increased annually since such
payments began in 1975. The table below shows the annual dividend rate and
dividend payout ratio, (dividends declared per common share divided by diluted
earnings per common share) in each of the last five years, adjusted for the
two-for-one stock split in June, 1998.
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
Dividends declared per common share $ 1.00 $ 0.92 $ 0.76 $ 0.72 $ 0.66
Dividend payout ratio 48.31% 23.35% 21.47% 31.03% 23.16%
- -------------------------------------------------------------------------------------------
The quarterly dividend rate on the Common Stock has been increased to $.26 per
share commencing with the dividend payable April 1, 1999.
ITEM 6. SELECTED FINANCIAL DATA
For information regarding selected financial highlights, see "Supplementary
Data" in "Financial Statements and Supplementary Data" elsewhere in this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Net income was $248.0 million in 1998, compared to $449.1 million in 1997 and
$418.8 million in 1996. The decline in earnings in 1998 from 1997 principally
reflected losses of $165.4 million, after tax, on Russian investment securities
and related hedges. Such losses stemmed from management's decision to write down
all of the Corporation's Russian investment securities to net realizable value,
which also resulted in reduced interest income. Diluted earnings per share were
$2.07 in 1998, $3.94 in 1997 and $3.54 in 1996.
The Corporation's risk-based capital ratios, which include the risk-weighted
assets and capital of Safra Republic, were 13.95% for Tier 1 capital and 22.99%
for total capital at December 31, 1998.
9
12
These ratios substantially exceeded the regulatory minimums for bank holding
companies of 4% for Tier 1 capital and 8% for total capital.
Net interest income was $1.1 billion in 1998, unchanged from net interest income
in 1997.
Total average interest-earning assets were $46.1 billion in 1998, with
approximately 41% invested in securities of the U.S. Government and its agencies
and in interest-bearing deposits with banks. Average loans in domestic offices
of $9.7 billion represented approximately 21% of average interest-earning assets
in 1998. Average loans in foreign offices of $3.9 billion represented
approximately 8% of total average interest-earning assets in 1998.
Non-accrual loans were $80.9 million at year end 1998, compared to $93.8 million
at year end 1997. Non-accrual loans were 0.59% of total loans outstanding, at
year end 1998, compared to 0.76% at year-end 1997. At December 31, 1998, the
allowance for credit losses was $294.0 million, or 2.15% of loans outstanding.
Total trading revenue, including associated net interest income was $225.8
million in 1998, compared to $231.0 million in 1997. This decline was after
increases in precious metals and foreign exchange trading which were more than
offset by reduced trading account results due to aggressive reductions in
trading positions because of high volatility and lack of liquidity during the
second half of 1998.
Earnings from Safra Republic rose 6.1% in 1998 to $132.7 million from $125.1
million in 1997.
The Corporation's returns on average total assets and average common
stockholders' equity, based on net income applicable to common stock -- diluted,
were 0.41% and 7.78%, respectively, in 1998. The book value of the Corporation's
common stock was $24.62 at year end 1998 compared to $27.03 at year end 1997.
RESULTS OF OPERATIONS
The following table presents condensed consolidated statements of income for the
Corporation for each of the years in the three-year period ended December 31,
1998. These statements differ from the Corporation's consolidated financial
statements presented elsewhere in this Report in that net interest income is
presented on a fully-taxable equivalent basis. The tax equivalent adjustment,
related to certain tax exempt instruments, permits all interest income and net
interest income to be analyzed on a comparable basis. The rate used for this
adjustment, which is reflected throughout this section, was 43% in 1998 and
1997, and 44% in 1996.
INCREASE INCREASE
(DECREASE) (DECREASE)
------------------ -----------------
(DOLLARS IN THOUSANDS) 1998 AMOUNT % 1997 AMOUNT % 1996
- ----------------------------------------------------------------------------------------------------------------
Interest income $3,261,779 $ 19,640 0.6 $3,242,139 $377,107 13.2 $2,865,032
Interest expense 2,199,701 17,675 0.8 2,182,026 311,128 16.6 1,870,898
- ------------------------------------------------------ ---------------------- ----------
Net interest income 1,062,078 1,965 0.2 1,060,113 65,979 6.6 994,134
Provision for credit losses 8,000 (8,000) (50.0) 16,000 (16,000) (50.0) 32,000
- ------------------------------------------------------ ---------------------- ----------
Net interest income after
provision for credit losses 1,054,078 9,965 1.0 1,044,113 81,979 8.5 962,134
Other operating income 288,598 (239,710) (45.4) 528,308 82,193 18.4 446,115
Other operating expenses 978,565 74,722 8.3 903,843 118,089 15.0 785,754
- ------------------------------------------------------ ---------------------- ----------
Income before income taxes 364,111 (304,467) (45.5) 668,578 46,083 7.4 622,495
- ------------------------------------------------------ ---------------------- ----------
Income taxes 88,249 (98,973) (52.9) 187,222 15,516 9.0 171,706
Tax equivalent adjustment 27,815 (4,433) (13.7) 32,248 299 0.9 31,949
- ------------------------------------------------------ ---------------------- ----------
Total applicable income taxes 116,064 (103,406) (47.1) 219,470 15,815 7.8 203,655
- ------------------------------------------------------ ---------------------- ----------
Net income $ 248,047 $(201,061) (44.8) $ 449,108 $ 30,268 7.2 $ 418,840
================================================================================================================
Net income applicable to
common stock -- diluted $ 220,248 $(203,033) (48.0) $ 423,281 $ 37,254 9.7 $ 386,027
================================================================================================================
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13
NET INTEREST INCOME
The following table contains information on the Corporation's average asset and
liability structure and rates earned and paid for each of the years in the
three-year period ended December 31, 1998, which are discussed throughout this
section.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
AVERAGE AVERAGE
INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE PAID BALANCE EXPENSE PAID
- --------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Interest-bearing deposits with banks $ 4,174,467 $ 273,284 6.55% $ 4,679,550 $ 298,416 6.38%
Investment securities(1):
Taxable 23,001,754 1,540,161 6.70 21,497,014 1,511,817 7.03
Exempt from federal income
taxes(2) 1,414,323 109,766 7.76 1,510,182 122,382 8.10
- --------------------------------------------------------------- ------------------------
Total investment securities 24,416,077 1,649,927 6.76 23,007,196 1,634,199 7.10
Trading account assets (3) 1,090,514 77,184 7.08 1,466,715 115,594 7.88
Federal funds sold and securities
purchased under resale agreements 2,806,014 153,703 5.48 2,303,429 124,347 5.40
Loans, net of unearned income(4):
Domestic offices 9,670,968 790,173 8.17 8,973,953 751,272 8.37
Foreign offices 3,905,147 317,508 8.13 4,566,897 318,311 6.97
- --------------------------------------------------------------- ------------------------
Total loans, net of unearned
income 13,576,115 1,107,681 8.16 13,540,850 1,069,583 7.90
- --------------------------------------------------------------- ------------------------
Total interest-earning assets 46,063,187 $3,261,779 7.08% 44,997,740 $3,242,139 7.21%
- --------------------------------------------------------------- ------------------------
Cash and due from banks 877,171 836,889
Other assets(5) 6,851,680 9,185,910
- --------------------------------------------------------------------------------------------------------------
Total assets $53,792,038 $55,020,539
==============================================================================================================
Interest-bearing funds:
Consumer and other time deposits $10,364,764 $ 391,285 3.78% $10,795,118 $ 433,938 4.02%
Certificates of deposit 1,165,450 58,306 5.00 1,598,758 81,828 5.12
Deposits in foreign offices 17,433,855 1,020,394 5.85 16,915,710 935,257 5.53
- --------------------------------------------------------------- ------------------------
Total interest-bearing deposits 28,964,069 1,469,985 5.08 29,309,586 1,451,023 4.95
Trading account liabilities(3) 428,277 12,584 2.94 193,599 12,860 6.64
Short-term borrowings 7,983,363 412,734 5.17 8,354,135 436,149 5.22
Total long-term debt 4,744,518 304,398 6.42 4,397,055 281,994 6.41
- --------------------------------------------------------------- ------------------------
Total interest-bearing funds 42,120,227 $2,199,701 5.22% 42,254,375 $2,182,026 5.16%
- --------------------------------------------------------------- ------------------------
Noninterest-bearing deposits:
In domestic offices 2,680,809 2,336,440
In foreign offices 226,563 175,332
Other liabilities 5,435,071 6,918,856
Stockholders' equity:
Preferred stock 500,000 454,673
Common stockholders' equity 2,829,368 2,880,863
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,329,368 3,335,536
- --------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $53,792,038 $55,020,539
==============================================================================================================
Interest income/earning assets $3,261,779 7.08% $3,242,139 7.21%
Interest expense/earning assets 2,199,701 4.77 2,182,026 4.85
- --------------------------------------------------------------------------------------------------------------
Net interest differential $1,062,078 2.31% $1,060,113 2.36%
==============================================================================================================
YEAR ENDED DECEMBER 31,
----------------------------------
1996
----------------------------------
AVERAGE
INTEREST RATES
AVERAGE INCOME/ EARNED/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE PAID
- ------------------------------------- ----------------------------------
Interest-earning assets:
Interest-bearing deposits with banks $ 5,697,285 $ 376,030 6.60%
Investment securities(1):
Taxable 17,899,644 1,279,226 7.15
Exempt from federal income
taxes(2) 1,511,573 125,206 8.28
- ------------------------------------- ------------------------
Total investment securities 19,411,217 1,404,432 7.24
Trading account assets (3) 1,156,531 67,279 5.82
Federal funds sold and securities
purchased under resale agreements 1,773,945 98,061 5.53
Loans, net of unearned income(4):
Domestic offices 8,329,626 673,446 8.08
Foreign offices 3,650,052 245,784 6.73
- ------------------------------------- ------------------------
Total loans, net of unearned
income 11,979,678 919,230 7.67
- ------------------------------------- ------------------------
Total interest-earning assets 40,018,656 $2,865,032 7.16%
- ------------------------------------- ------------------------
Cash and due from banks 728,185
Other assets(5) 7,887,199
- ------------------------------------- ------------------------
Total assets $48,634,040
===================================== ========================
Interest-bearing funds:
Consumer and other time deposits $10,797,056 $ 430,416 3.99%
Certificates of deposit 1,031,044 51,618 5.01
Deposits in foreign offices 14,644,586 800,171 5.46
- ------------------------------------- ------------------------
Total interest-bearing deposits 26,472,686 1,282,205 4.84
Trading account liabilities(3) 170,393 11,841 6.95
Short-term borrowings 6,563,751 321,234 4.89
Total long-term debt 4,019,216 255,618 6.36
- ------------------------------------- ------------------------
Total interest-bearing funds 37,226,046 $1,870,898 5.03%
- ------------------------------------- ------------------------
Noninterest-bearing deposits:
In domestic offices 2,020,937
In foreign offices 138,352
Other liabilities 6,132,333
Stockholders' equity:
Preferred stock 574,685
Common stockholders' equity 2,541,687
- ------------------------------------- -----------
Total stockholders' equity 3,116,372
- ------------------------------------- -----------
Total liabilities and
stockholders' equity $48,634,040
===================================== ===================================
Interest income/earning assets $2,865,032 7.16%
Interest expense/earning assets 1,870,898 4.68
- ------------------------------------- -----------------------------------
Net interest differential $ 994,134 2.48%
===================================== ===================================
(1) Based on amortized or historic cost with the mark-to-market adjustment on
securities available for sale included in other assets.
(2) Income has been fully adjusted to a fully-taxable equivalent basis. The rate
used for this adjustment was approximately 43% in 1998 and 1997 and 44% in
1996.
(3) Excludes noninterest-bearing balances which are included in other assets or
other liabilities, respectively.
(4) Including non-accrual loans.
(5) Including allowance for credit losses.
Net interest income increased $2.0 million, to $1.062 billion in 1998, compared
to $1.060 billion in 1997. The modest year-to-year increase was after the loss
of income primarily from Russian treasury bill (GKO) investment securities,
generally lower levels of interest rates and a reduction in cross-border
exposure to emerging markets, as well as increased premium amortization
attributable to
11
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prepayments on mortgage-backed securities. These factors were offset by a higher
level of average interest-earning assets, which rose to $46.1 billion in 1998
from $45.0 billion in 1997. The net interest rate differential declined to 2.31%
in 1998, compared to 2.36% in 1997.
Net interest income increased $66.0 million, or 6.6%, to $1.060 billion in 1997,
compared to $994.1 million in 1996. This increase was due to the growth in
interest-earning assets to $45.0 billion in 1997 from $40.0 billion in 1996. The
net interest rate differential declined to 2.36% in 1997, compared to 2.48% in
1996. This decline reflects an increased amount of short-term borrowings and
deposits in foreign offices that were invested in high quality assets at low
margin spreads.
At year ends 1998 and 1997, the gross notional amount of off-balance-sheet
contracts used in asset and liability management was approximately $18.7 billion
and $21.7 billion, respectively. At year ends 1998 and 1997 the market value of
these off-balance-sheet contracts reflected unrealized losses of approximately
$88 million and $120 million, respectively.
The following table presents changes in the levels of interest income and
interest expense attributable to changes in volume or rate. Changes not solely
due to volume or rate are allocated to volume.
INCREASE (DECREASE)
---------------------------------------------------------------
1998 VS. 1997 1997 VS. 1996
------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(IN THOUSANDS) VOLUME RATE TOTAL VOLUME RATE TOTAL
- ---------------------------------------------------------------------------------------------------
Interest income from:
Interest-bearing deposits with
banks $(33,087) $ 7,955 $(25,132) $(65,080) $(12,534) $(77,614)
Taxable securities 99,284 (70,940) 28,344 254,071 (21,480) 232,591
Securities exempt from federal
income taxes (7,481) (5,135) (12,616) (103) (2,721) (2,824)
Trading account assets (26,676) (11,734) (38,410) 24,490 23,825 48,315
Federal funds sold and
securities purchased under
resale agreements 27,513 1,843 29,356 28,592 (2,306) 26,286
Loans, net of unearned income:
Domestic offices 56,849 (17,948) 38,901 53,670 24,156 77,826
Foreign offices (53,779) 52,976 (803) 63,767 8,760 72,527
- ---------------------------------------------------------------------------------------------------
Total interest on loans 3,070 35,028 38,098 117,437 32,916 150,353
- ---------------------------------------------------------------------------------------------------
Total interest income 62,623 (42,983) 19,640 359,407 17,700 377,107
- ---------------------------------------------------------------------------------------------------
Interest expense on:
Consumer and other time deposits (16,745) (25,908) (42,653) 283 3,239 3,522
Certificates of deposit (21,603) (1,919) (23,522) 29,076 1,134 30,210
Deposits in foreign offices 31,007 54,130 85,137 124,835 10,251 135,086
Trading account liabilities 6,887 (7,163) (276) 1,547 (528) 1,019
Short-term borrowings (19,238) (4,177) (23,415) 93,255 21,660 114,915
Total long-term debt 21,964 440 22,404 24,366 2,010 26,376
- ---------------------------------------------------------------------------------------------------
Total interest expense 2,272 15,403 17,675 273,362 37,766 311,128
- ---------------------------------------------------------------------------------------------------
Change in net interest income $60,351 $(58,386) $ 1,965 $ 86,045 $(20,066) $ 65,979
===================================================================================================
AGGREGATE PROVISION FOR CREDIT LOSSES
The aggregate provision for credit losses consists of the provision for credit
losses, the provision for trading credit losses and the provision for
off-balance-sheet credit losses. The Corporation deter-
12
15
mines its aggregate provision for credit losses by monitoring its aggregate
allowance for credit losses on a quarterly basis. The Corporation, in monitoring
the aggregate allowance for credit losses, considers such factors as the
composition of the loan portfolio, including its real estate, commercial and
industrial and cross-border-exposure. Other extensions of credit related to
trading assets and off-balance-sheet commitments are also considered.
The aggregate provision for credit losses, all of which was applicable to the
allowance for credit losses related to the loan portfolio, was $8 million in
1998, $16 million in 1997 and $32 million in 1996. The allowance for credit
losses amounted to $294.0 million at year-end 1998, or 2.15% of loans
outstanding, net of unearned income compared to $326.5 million at year-end 1997,
or 2.64% of loans outstanding, net of unearned income. The decrease in the
allowance and related decline as a percentage of loans outstanding from 1997 to
1998 reflects the reduced risk profile of the Corporation's domestic loan
portfolio primarily due to increased residential real estate lending, continued
favorable loss experience for domestic loans, and reduced domestic non-accrual
and classified loans. The allowance for credit losses was $350.4 million at
year-end 1996. The decrease in the allowance from 1996 to 1997 resulted
primarily from the reclassification of $27 million of the allowance for credit
losses to the allowance for trading account credit losses and off-balance-sheet
credit losses.
In 1998, net charge-offs increased to $48.2 million from $11.3 million in 1997,
while non-accrual loans declined $13.0 million in 1998 when compared to 1997.
The increase in net charge-offs in 1998 over 1997 was principally attributable
to the charge-off of certain of the Corporation's Russian exposure.
In 1997, the level of non-performing loans declined $11.3 million when compared
to 1996 and net charge-offs declined $13.7 million in 1997 when compared to
1996.
The increase in the provision for credit losses in 1996 was primarily due to the
growth in the foreign loan portfolio of approximately 32% in 1996 compared to
1995. For additional information on charge-offs and recoveries, the aggregate
provision for credit losses and the method of reporting the aggregate allowance
for credit losses see "Asset Management-Aggregate Allowance for Credit Losses"
in this section of this Report.
OTHER OPERATING INCOME (LOSS)
The following table presents the principal categories of other operating income
(loss) for each of the years in the three-year period ended December 31, 1998.
INCREASE INCREASE
(DECREASE) (DECREASE)
------------------ ---------------
(DOLLARS IN THOUSANDS) 1998 AMOUNT % 1997 AMOUNT % 1996
- ---------------------------------------------------------------------------------------------------
Trading revenue $ 140,095 $ (30,580) (17.9) $170,675 $(5,131) (2.9) $175,806
Investment securities
transactions, net (186,086) (221,203) * 35,117 11,870 51.1 23,247
Revenue from loans sold
or held for sale 8,682 (11,156) (56.2) 19,838 18,864 * 974
Commission income 95,805 8,281 9.5 87,524 16,131 22.6 71,393
Equity in earnings of
affiliate 132,708 7,592 6.1 125,116 31,698 33.9 93,418
Other income 97,394 7,356 8.2 90,038 8,761 10.8 81,277
- ----------------------------------------------- ------------------- --------
$ 288,598 $(239,710) (45.4) $528,308 $82,193 18.4 $446,115
===================================================================================================
* Exceeds 200%
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16
Total Trading Revenue
The following table presents the components of total trading related revenue for
each of the years in the three-year period ended December 31, 1998. The items of
net interest income/(expense) in the table below represent the net interest
earned/paid on trading instruments, as well as an allocation by management to
reflect the funding benefit or cost associated with the trading positions.
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
Precious metals:
Trading revenue (loss) $ (2,112) $ 14,069 $ 24,700
Net interest income 69,689 42,674 21,569
- ----------------------------------------------------------------------------------------------
Total 67,577 56,743 46,269
- ----------------------------------------------------------------------------------------------
Foreign exchange:
Trading revenue 141,143 119,642 98,165
Net interest (expense) (7,899) (9,515) (4,422)
- ----------------------------------------------------------------------------------------------
Total 133,244 110,127 93,743
- ----------------------------------------------------------------------------------------------
Trading account profits and commissions:
Trading revenue 1,064 36,964 52,941
Net interest income 23,883 27,129 3,021
- ----------------------------------------------------------------------------------------------
Total 24,947 64,093 55,962
- ----------------------------------------------------------------------------------------------
Total:
Trading revenue 140,095 170,675 175,806
Net interest income 85,673 60,288 20,168
- ----------------------------------------------------------------------------------------------
Total $225,768 $230,963 $195,974
==============================================================================================
Total trading revenue, including associated net interest income which is
reported as net interest income, was $225.8 million in 1998, compared to $231.0
million in 1997 and $196.0 million in 1996. Total trading revenue declined in
1998 from 1997, despite improvements in precious metals and foreign exchange,
because of reduced trading account activity from reductions in trading positions
in light of the high volatility and lack of liquidity in the markets during the
second half of 1998. Net interest income from trading activities was $85.7
million in 1998, an increase of 42% from the $60.3 million earned in 1997 which
was 199% over the $20.2 million earned in 1996. The change in net interest
income in 1998 from 1997 was primarily due to precious metals arbitrage
activities. The increase in net interest income in 1997 from 1996, was due to
precious metals and trading account activities. The year-to-year increase in
total trading revenue in 1997 when compared to 1996, reflected, in part, the
increased contribution of the emerging markets trading unit and other revenue
increases generated from trading securities and derivative-related products. In
1997, trading revenue generated in the Moscow subsidiary on Russian government
securities also contributed to the increase over 1996.
Precious Metals
Income from precious metals is derived from the Corporation's activities as a
dealer in gold and silver bullion and coins sold to commercial and industrial
users and investors, as well as its trading and arbitrage activities in the
precious metals markets. Income from precious metals was $67.6 million in 1998,
as compared to $56.7 million in 1997 and $46.3 million in 1996. The change in
both 1998 and 1997 from the respective prior year reflected lower trading
revenue, which in each case, was offset by higher levels of net interest income
from arbitrage activities. The fluctuations in
14
17
this income in each of the last three years reflects volatility in price and
volume in the precious metals markets and the level of funds invested in
precious metals activities.
Foreign Exchange
Foreign exchange trading income is derived from trading and market-making
activities in foreign currencies, transactions that service the needs of the
Corporation's customers, including other banks and corporations, and dealings in
banknotes, principally in New York, London and locations in the Far East.
Foreign exchange trading income was $133.2 million in 1998, an increase of $23.1
million, or 21%, over the $110.1 million in 1997, which increased $16.4 million,
or 17%, from the $93.7 million earned in 1996. In both 1998 and 1997, foreign
exchange trading benefited from volatility in the foreign exchange markets.
Trading Account Profits and Commissions
This line of income is derived from dealings in fixed- and variable-rate debt
securities, denominated in all major currencies, with large financial
institutions, including investment banks, commercial banks and multinational
organizations, as well as high-net-worth individuals. Trading account profits
and commissions also consists of income from trading derivative products,
emerging market fixed income securities, the securities of the U.S. Government
and its agencies, and, to a lesser extent, government securities of countries
where the Corporation has an active local presence, such as Argentina, Brazil,
Italy, Russia and Uruguay. The Corporation has ceased market-making in fixed
income derivative products.
Total trading account profits and commissions were $24.9 million in 1998,
compared to $64.1 million in 1997 and $56.0 million in 1996. The decline in
trading account profits and commissions in 1998, when compared to 1997, reflects
reductions in trading positions due to the high volatility and lack of liquidity
during the second half of 1998. The Corporation substantially reduced the
activities of its Moscow subsidiary in the fourth quarter of 1998. In 1997, a
substantial portion of the increase in trading account profits and commissions
from 1996 was attributable to the Corporation's subsidiary in Moscow. The
emerging markets trading department's trading account profits and commissions,
including net interest income, declined to $13.3 million in 1998, from $33.7
million in 1997 and $16.7 million in 1996.
For additional information related to derivative instruments, see Notes 4, 18
and 19 of "Notes to Consolidated Financial Statements" in "Financial Statements
and Supplementary Data" elsewhere in this Report.
Investment Securities Transactions
Investment securities transactions in 1998 resulted in aggregate net losses of
$186.1 million and included losses of $185.5 million, $165.4 million after tax
effect, on the Corporation's Russian investment securities and related hedges.
The investment securities losses stemmed principally from management's decision
in the third quarter to write down all of the Corporation's Russian investment
securities to net realizable value. This decision included charges for the
Corporation's Russian treasury bill (GKO) investments and a mark-down of all of
the Corporation's remaining Russian investments and related hedges, to reflect
current market levels or anticipated defaults.
In 1997, the Corporation realized net investment securities gains of $35.1
million, compared to net gains of $23.2 million in 1996. In 1997 and 1996, a
substantial portion of the net gains were from the sale of securities from the
Corporation's portfolio of other securities, including emerging markets, which
offset losses from U.S. Government agency securities.
Revenue From Loans Sold or Held for Sale
Revenue from loans sold or held for sale was $8.7 million in 1998, $19.8 million
in 1997 and $1.0 million in 1996. In 1998 and 1997, the revenue was primarily
from sales of commercial real estate
15
18
loans during a period that reflected a strengthening real estate market. The net
gains in 1996 resulted from the sale of originated mortgage loans. The
Corporation has generally retained the servicing rights on the mortgage loans
sold.
Commission Income
Commission income, which included fees for the issuance of banker acceptances
and letters of credit, securities brokerage commissions and retail services was
$95.8 million in 1998, compared to $87.5 million in 1997 and $71.4 million in
1996. Commission income included fees for the issuance of letters of credit and
the creation of acceptances of $22.0 million in 1998, $23.4 million in 1997 and
$21.7 million in 1996. In 1998, commissions attributable to securities
clearance, funds transfer and money management activities were $39.1 million,
compared to $37.3 million in 1997 and $24.8 million in 1996. Commission income
from the broker dealer business of RNYSC amounted to $9.6 million in 1998,
compared to $5.7 million in 1997 and $5.2 million in 1996. Commission income
from the shipment of U.S.-dollar denominated banknotes was $8.0 million in 1998,
$8.6 million in 1997 and $8.5 million in 1996.
Affiliate Earnings
Equity in earnings of affiliate, representing the Corporation's share of the
earnings of Safra Republic, was $132.7 million in 1998, compared to $125.1
million in 1997 and $93.4 million in 1996. The increase in 1998 over 1997 was
6%, and the increase in 1997 over 1996 was 34%.
The following table presents summary information for Safra Republic for each of
the last three years.
(IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1996
- --------------------------------------------------------------------------------------------
At December 31:
Total assets $21,036,767 $20,356,300 $17,223,409
Interest-bearing deposits with banks 7,648,609 7,476,969 6,041,717
Investment securities 9,607,526 9,485,637 8,665,381
Loans, net of unearned income 2,837,277 2,288,896 1,687,050
Allowance for credit losses 78,781 134,351 131,071
Non-performing loans 9,017 10,271 10,777
Total deposits 16,447,942 15,401,065 13,337,947
Total shareholders' equity $ 1,936,791 $ 1,760,566 $ 1,643,110
For the year:
Net interest income $ 297,765 $ 297,225 $ 266,180
Provision for credit losses (48,100) 16,000 12,000
Other operating income 149,247 188,865 119,113
Other operating expenses 197,800 193,470 167,521
Net income 280,207 255,055 189,830
Net income per common share -- diluted $ 3.80 $ 3.59 $ 2.67
Average shares outstanding -- diluted 71,117 71,103 71,003
- --------------------------------------------------------------------------------------------
For additional information on Safra Republic and its relationship with the
Corporation, see Note 7 of "Notes to Consolidated Financial Statements" and
"Affiliate Financial Statements" in "Financial Statements and Supplementary
Data" elsewhere in this Report.
Other Income
Other income consists primarily of service charges on deposit accounts, mortgage
fees and trust income. In 1998, other income totaled $97.4 million and included
a gain of $4.9 million related to sales of real estate, $4.2 million of earnings
on the principal invested in a bank owned life insurance policy and $9.3 million
of equity in the earnings from Safra Republic Investments Limited, ("SRIL")
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a subsidiary whose ownership is shared equally with Safra Republic. In 1997,
other income amounted to $90.0 million and included a gain of $7.4 million on
the unwinding of a real estate financing transaction, $7.1 million of equity in
the earnings of SRIL and an affiliate service fee of $3.4 million as
reimbursement for prior-period shared representative office expense. Other
income was $81.3 million in 1996 and included gains of $2.7 million on the sale
of a New York retail branch, $1.1 million from the repurchase and early
extinguishment of an issue of $100 million principal amount of floating-rate
subordinated long-term debt and $4.7 million of net gains on the sale of other
real estate owned.
OTHER OPERATING EXPENSES
The following table presents the principal categories of other operating
expenses for each of the years in the three-year period ended December 31, 1998.
INCREASE INCREASE
(DECREASE) (DECREASE)
-------------- ----------------
(DOLLARS IN THOUSANDS) 1998 AMOUNT % 1997 AMOUNT % 1996
- ----------------------------------------------------------------------------------------------------
Salaries and employee
benefits $520,830 $45,813 9.6 $475,017 $ 54,916 13.1 $420,101
Occupancy, net 74,577 3,252 4.6 71,325 (1,367) (1.9) 72,692
Other expenses 383,158 25,657 7.2 357,501 64,540 22.0 292,961
- ------------------------------------------------- -------------------- --------
Total other operating
expenses $978,565 $74,722 8.3 $903,843 $118,089 15.0 $785,754
====================================================================================================
Total other operating expenses were $978.6 million in 1998, $903.8 million in
1997 and $785.8 million in 1996. The increase in total expenses in 1998 over
1997, was primarily due to higher staff costs and expenses related to the Year
2000 Project. The increase in total other operating expenses in 1997 over 1996,
reflected the Corporation's ongoing investments in trading, risk management and
profitability reporting systems and other technology and electronic banking
initiatives which were begun in the second half of 1996. Total other expenses in
1998 and 1997 included approximately $35.0 million and $15.5 million,
respectively, related to the Year 2000 project, which is discussed below.
One-time charges included in 1998 were $13.7 million related to certain
unauthorized overseas securities transactions and a loss on a banknote shipment
and in 1997, $14.2 million related to an arbitration judgment and related legal
costs. See "Line-of-Business Information -- Restructuring" elsewhere in this
Report.
During 1996, the Corporation invested in initiatives designed to increase
revenues in future periods and in infrastructure to support and control those
operations. Retail banking expenses increased as a result of branch expansion.
Growth in the volumes of mortgage and home equity loans, as well as increased
sales of investment products, resulted in the payment of additional fees for
related services.
Also during 1996, the Corporation invested in broadening the array of its
investment product offerings, including the introduction of an asset allocation
product which is targeted at retail clients. The Corporation also invested in
trading market services and in advanced risk management systems to support its
expanding trading operations. The development of a new profitability measuring
system which enables the Corporation to efficiently measure and present
lines-of-business results also contributed to the higher expense level. RFSC
expanded significantly in that year and began offering full-service and discount
securities brokerage services to corporate and retail clients.
Salaries and Employee Benefits
Salaries and employee benefits were $520.8 million in 1998, $475.0 million in
1997 and $420.1 million in 1996. The increase in 1998 over 1997 reflects
increases in base salaries and provisions for
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incentive compensation. The increase in salaries and benefits in 1997 over the
prior year reflects the opening of new foreign offices and higher levels of
staff and increased provisions for incentive compensation. As of year end 1998,
the Corporation had approximately 5,800 full-time equivalent employees, compared
to 5,900 at year end 1997 and 5,700 at year end 1996.
Occupancy
Occupancy costs were $74.6 million in 1998, $71.3 million in 1997 and $72.7
million in 1996. The increase in 1998 from 1997 resulted primarily from higher
real estate taxes and lower rental income. The decline in 1997 from 1996,
resulted primarily from a lower level of real estate taxes due to certain real
estate tax rebates.
Other Expenses
All other expenses were $383.2 million in 1998, $357.5 million in 1997 and
$293.0 million in 1996. All other expenses in 1998 included $33.0 million of
Year 2000 expenses and $13.7 million of one-time expenses related to certain
unauthorized overseas securities transactions, and a loss on a banknote
shipment. Included in 1997 were the one-time costs of $14.2 million associated
with the arbitration judgment mentioned above and $15.5 million of Year 2000
expenses discussed below. Communication and equipment expenses represent a
substantial portion of other expenses which amounted to $90.5 million in 1998,
$82.6 million in 1997 and $75.8 million in 1996. Amortization of goodwill and
other intangible assets was $27.3 million in 1998, $28.4 million in 1997 and
$28.7 million in 1996. Also, professional fees, consisting of consulting, legal
and audit fees, amounted to $36.4 million in 1998 compared to $36.0 million in
1997 and $29.2 million in 1996. All other expenses include premiums for deposit
insurance paid to the FDIC of $1.9 million in 1998, compared to $2.0 million in
1997 and $0.5 million in 1996.
YEAR 2000 RISK
The Corporation is managing the risks arising from the Year 2000 date change
("Year 2000 Risk") through its Ready 2000 Program Management Office ("PMO"). The
Ready 2000 PMO was established during the first quarter of 1997 and is staffed
by internal and external experts who are directing and coordinating the efforts
by the Corporation to achieve Year 2000 readiness. "Year 2000 ready" means that
computer software and hardware recognizes all date-sensitive information,
whether before, on or after January 1, 2000, accurately and makes all required
calculations or performs other date-sensitive functions correctly. The PMO
reports its progress bi-weekly to a Steering Committee comprised of members of
the Board of Directors and senior management of the Corporation and the Bank.
Progress is reported directly to the Board of the Corporation on a quarterly
basis.
State of Readiness
Scope of Program -- The Year 2000 Risk being addressed by the Corporation can be
divided into two broad categories: (1) information technology ("IT")
applications; and (2) non-information technology ("non-IT") applications. IT
applications include both hardware and software systems which perform
mathematical calculations and other data processing, such as the system used by
the Bank to maintain its clients' deposits. Non-IT applications rely upon
hardware or software components to perform their functions, however, data
processing is not their primary activity. An example of a non-IT application is
the heating, ventilation and air-conditioning systems that regulate the
environment in the main office of the Corporation. The Corporation's Ready 2000
program encompasses both IT and non-IT applications.
The Corporation identified and evaluated approximately 2,500 applications for
Year 2000 readiness as of December 31, 1998. The inventory of applications
increased by approximately 200 during the fourth quarter of 1998 as a result of
routine system upgrades, replacements and additions.
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Furthermore, the Corporation established several new offices during this period,
thereby adding new IT applications and all the non-IT facility, utility and
infrastructure applications needed to support these locations to the inventory.
Each application will be made Year 2000 ready by one of three strategies:
repair, retire or replace. Although the vast majority of applications will be
repaired, certain applications will be retired or replaced if doing so is more
cost effective to achieve Year 2000 readiness. In this regard, each new and
replacement application is certified by the Corporation, even if the vendor or
service provider states that such application is already Year 2000 ready.
At the beginning of March, 1999, the Corporation announced that it plans to
outsource its data centers and related network and communication operations. The
Corporation is discussing the terms and conditions of a definitive agreement for
providing these services with a third party service provider (the "third party
provider"). The decision to undertake this project at this time was made after
carefully evaluating and determining that it could be integrated into the
Corporation's Year 2000 readiness effort. In negotiating a definitive agreement
with the third party provider, the Corporation will obtain appropriate
assurances and protections that all aspects of the equipment and services to be
provided by the third party provider will be Year 2000 ready.
Program Description -- The Corporation has prioritized each application as high
or "mission critical," medium or low, depending on its importance to the
Corporation's operations. By categorizing an application as "mission critical,"
the Corporation has identified it as one that is vital to the successful
continuance of one of the Corporation's core business activities or interfaces
with a designated mission-critical application.
The Corporation's Ready 2000 PMO has developed ten steps or "milestones" which
each application must satisfy in order to be deemed Year 2000 ready. These
milestones are: (1) baseline testing -- a series of tests that identify and
document all functions performed by an application; (2)
pre-assessment -- identifies and documents all the components of an application
(e.g., program modules, hardware components, operating systems and interfaces);
(3) code assessment -- a detailed examination of an application to identify its
date-sensitive elements; (4) code conversion plan -- describes the process by
which the application will be made Year 2000 ready; (5) conversion -- the
process of remediating an application to make it Year 2000 ready; (6) regression
testing -- re-execution of the baseline testing to confirm that the
application's functionality was not adversely affected as a result of
conversion; (7) Year 2000 compliance testing -- testing a converted application
in a simulated Year 2000 environment; (8) Year 2000 integration
testing -- testing an application's interfaces in a simulated Year 2000
environment; (9) Year 2000 certification -- approval by senior management that
an application has successfully satisfied milestones 1 through 8; and (10) move
to production.
The Corporation has implemented quality control procedures designed to assure
that each application is subjected to, and satisfies, consistent and rigorous
milestone requirements. These procedures include the independent review of the
test plans for all mission-critical applications, and the review of the
documentation evidencing satisfaction of all milestone requirements for each
application by a quality assurance review team following the conclusion of
testing and before the application is considered for certification. In addition,
"clean management" procedures are applied to each application once it is
certified to be Year 2000 ready. Clean management means that if a certified
application is modified subsequently for any reason, the modified application
may not be returned to production without first being thoroughly re-tested in
order to confirm that the modified application remains Year 2000 ready. The
Corporation intends to apply clean management procedures to each software and
hardware application that will be migrated to the third party provider.
Program Status -- As explained above, each IT and non-IT application must
complete ten milestones required by the Ready 2000 program. The Corporation
expects to complete substantially all of the milestones for the project by June
30, 1999.
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The table below illustrates the Corporation's progress in meeting this goal as
reflected in the percentages of total milestones completed and applications
certified as of December 31, 1998.
% OF TOTAL
MILESTONES % OF APPLICATIONS
COMPLETED AT CERTIFIED AT
DECEMBER 31, 1998 DECEMBER 31, 1998
------------------- -------------------
IT NON-IT IT NON-IT
- ---------------------------------------------------------------------------------
Mission critical 70% 23% Mission critical 62% 16%
Medium 71 42 Medium 54 36
Low 80 31 Low 75 25
- ---------------------------------------------------------------------------------
The foregoing statistics demonstrate that significant overall progress has been
made by the Corporation toward making its applications Year 2000 ready.
Guidelines issued by federal banking regulators required the Corporation to
substantially complete the certification of all its internal mission-critical
applications by December 31, 1998. The Corporation successfully met this
requirement. The need to focus its resources on complying with this regulatory
milestone resulted in the Corporation not achieving the overall progress that it
had previously forecasted would be achieved by year end. However, as of January
31, 1999, the Corporation completed 90% of its total milestones and certified
84% of all applications (excluding the applications discussed above which were
added to inventory during the fourth quarter of 1998). The Corporation presently
expects to certify all applications, including the inventory additions by June
30, 1999.
The Corporation will continue testing certified applications throughout 1999 to
reaffirm that they will function properly on and after January 1, 2000. For
certain applications, this additional testing will include the Corporation's
participation in so-called "street-wide" testing with other banks and industry
participants.
In addition, the Corporation is reviewing the results of the progress of Safra
Republic's Year 2000 readiness program. Safra Republic is managing the
remediation of approximately 400 applications. As of December 31, 1998, Safra
Republic certified 42% of all its applications, which includes substantially all
of its internal mission-critical applications, and presently expects to complete
certifying the balance of its applications and to complete its business
resumption contingency planning with respect to Year 2000 Risk by June 30, 1999.
Costs
The Corporation estimates that total incremental costs associated with its Year
2000 readiness efforts through the end of the first quarter of 2000, which are
being funded through general operating funds, will be approximately $60 million.
Commencing in the second half of 1997 and through December 31, 1998, $50.5
million of these costs had been recorded, including expenses for the fourth
quarter of 1998 of $3.2 million. At the inception of the Ready 2000 program, the
Corporation did not institute a formal system for tracking all internal IT
resource costs, which would consist principally of the time of IT personnel and
certain personnel from other business units spent on Year 2000 activities.
However, management believes that these internal resources devoted to Year 2000
readiness is not a significant portion of the overall IT budget.
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The following table presents the expenses incurred by the Corporation to date,
as well as its forecast of the additional incremental expenses required to
complete its Ready 2000 program.
1999 2000
-------------------------------------- -------
1997 1998 1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR TOTAL
- -------------------------------------------------------------------------
(In millions)
$15.5 $35.0 $4.2* $2.2* $1.1* $1.0* $1.0* $60.0*
- -------------------------------------------------------------------------
* forecasted
The incremental expenses incurred by the Corporation in connection with its
Ready 2000 program as described above are not expected to include a material
amount of expenses pertaining to the accelerated replacement of any software or
hardware systems. In addition, the Corporation's Year 2000 readiness program has
not caused the deferral or cancellation of any material IT projects.
Year 2000 Risk
The Corporation is addressing Year 2000 Risk with respect to business activities
conducted through its own applications and systems and those which require
reliance upon or interaction with a third party. In either case, a partial
malfunction or total failure could cause the Corporation to suffer a business
slowdown or interruption, resulting in financial loss, legal liability or action
by its regulators that could have a material affect on the Corporation's
financial condition and operations.
Business activities conducted using applications that the Corporation owns or
whose use is licensed from a vendor include trading with counterparties, buying
and selling securities on public exchanges and in over-the-counter markets,
managing customer deposits and transactions and maintaining accurate accounting
records. The malfunction or failure of its own systems could result in a
financial loss to the Corporation and legal liability to customers and
counterparties for whom transactions could not be initiated or completed.
The Corporation also faces Year 2000 Risk arising from numerous third parties
whose services or relationships are significant to its operations. Even if the
Corporation completes its Ready 2000 program successfully, failures by such
third parties to address their Year 2000 Risk may disrupt the Corporation's
operations and cause it to incur financial losses. These third parties include
major trading counterparties, securities exchanges, clearing organizations,
service bureaus, vendors, utilities, telecommunication companies and borrowers.
Accordingly, the Corporation is assessing the readiness of such third parties in
order to confirm that they are evaluating their own Year 2000 Risk and, as
necessary, remediating or replacing their hardware and software systems, as well
as developing contingency plans addressing unexpected disruptions caused by the
Year 2000 date change.
As stated above, the Corporation is planning to migrate its data centers and
related network and communication operations to a third party provider. In order
to mitigate the Year 2000 Risk that may arise from such event, the definitive
agreement for these services will require the third party provider to adopt and
assume responsibility for the Corporation's existing disaster recovery plans for
all the applications and systems being migrated to it. These plans require
redundant data processing and back-up capabilities to be available at all times
in the event services are interrupted for any reason. The definitive agreement
will also require the third party provider to deliver its own comprehensive
disaster recovery plans with respect to the processing being done for the
Corporation which are acceptable in all respects to the Corporation.
Notwithstanding the foregoing precautions, if the disaster recovery plans
utilized by the third party provider or any other service provider do not work
as planned, the Corporation is preparing contingency plans addressing Year 2000
Risk, as more fully described below.
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Contingency Planning
Even if the Corporation's Ready 2000 program is completely successful with
respect to all its own applications, the possibility remains that the
Corporation may experience Year 2000-related disruptions caused by inadequate
preparations by third parties. The Corporation is evaluating this type of Year
2000 Risk and developing contingency plans to address it. This planning takes
two forms: remediation contingency planning and business resumption contingency
planning.
Remediation Contingency Planning -- Remediation contingency plans address the
actions to be taken if the Corporation's original plan to make a system Year
2000 ready is determined to be ineffective or cannot be completed in a timely
manner. This type of contingency planning involves hiring additional staff in
order to expedite remediation and testing activities and transferring the
processing done by certain applications to an alternative vendor or service
provider. The Corporation developed remediation contingency plans for all
mission-critical business applications which were not certified to be Year 2000
ready as of December 31, 1998.
Business Resumption Contingency Planning -- In addition to remediation
contingency planning, the Corporation has evaluated the risks of a failure by
each core business process as a result of the Year 2000 date change and is in
the process of revising its business resumption contingency plans in order to
address these risks. This evaluation includes the impact of potential failures
by the Corporation's internal systems, as well as the failure of systems
maintained by third parties, including service bureaus, electric and gas
utilities, telecommunication companies and the providers of institutional
clearing services. The Corporation has established a subcommittee of the Year
2000 Steering Committee that is overseeing this planning process. The
subcommittee has, in turn, designated business resumption planning coordinators
on divisional and departmental levels. Because the business resumption
contingency planning process presumes that ordinary data processing support is
unavailable, the anticipated migration of its data centers and related network
and communication operations to the third party provider is not expected to
affect these planning activities significantly. The Corporation will, however,
in all appropriate cases, consider the impact of the planned migration on its
business resumption contingency plans.
Year 2000 Risk constitutes a unique type of risk that must be incorporated into
the Corporation's existing contingency planning. To do so, the Corporation has
adopted a four-phase process: (1) Organizational Planning
Guidelines -- establishes the strategy for developing each plan; (2) Business
Impact Analysis -- assesses the economic impact on each business unit of the
Corporation caused by the interruption or failure of its critical systems; (3)
Contingency Plan Development -- clarifies the circumstances and timing and
procedures to be followed in the event a plan must be activated; and (4)
Methodology for Validation -- requires the design of a method to validate each
plan. The first two phases of this process were completed as of December 31,
1998. The third and fourth phases were begun prior to December 31, 1998 and are
expected to be completed by June 30, 1999.
European Monetary Union
Commencing January 1, 1999, eleven of the fifteen participating member countries
of the European Monetary Union ("EMU") adopted a single currency, known as the
"euro," as their common legal currency. On such date, each participating country
established a fixed conversion rate between its existing national currency and
the euro.
By December 31, 1998, the Corporation successfully completed the remediation of
its affected applications. In addition, the Corporation has evaluated the impact
of the introduction of the euro upon its operations and developed appropriate
contingency plans addressing euro-related disruptions to significant business
units beginning on January 1, 1999. The Corporation's incremental costs
associated with reviewing and remediating affected applications and preparing
its operations for the euro were approximately $1 million. Because the
introduction of the euro affected directly only a
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small portion of its clients and overall operations, the Corporation does not
expect any remaining impact to be significant.
TOTAL APPLICABLE INCOME TAXES
Total applicable income taxes, which includes the effect of a taxable equivalent
adjustment, declined $103.4 million in 1998 to $116.1 million, after increasing
$15.8 million in 1997 over 1996. The ratio of total applicable income taxes to
income before taxes was 32% in 1998 and 33% in 1997 and 1996. The decline in
1998 total applicable income taxes, compared to 1997, was due to the lower level
of taxable income for the year, which reflected minimal income tax
benefit/expense on Russian securities transactions, and to the reversal of
certain tax liabilities accrued in prior years. The increase in total applicable
income taxes in 1997 and 1996, when compared to the respective prior year,
reflected the higher levels of taxable income for the year. Included in income
taxes in 1997 was a tax benefit of approximately $10.0 million related to
non-taxable income from discontinued operations of domestic subsidiaries. Income
taxes in 1996 were reduced by a one-time $12.0 million tax benefit recognized as
a result of a tax law change enacted in 1996. The 1996 income tax benefit was
recognized by the Corporation because it was no longer liable for deferred taxes
which had been provided in prior years for credit provisions.
NET INCOME APPLICABLE TO COMMON STOCK -- DILUTED
Net income applicable to common stock -- diluted was $220.2 million in 1998,
compared to $423.3 million in 1997 and $386.0 million in 1996. Diluted earnings
per common share were $2.07 in 1998, $3.94 in 1997 and $3.54 in 1996. Dividends
declared and the average annual rates paid on the Corporation's issues of
preferred stock were as follows: $26.3 million in 1998 at 5.26%, $24.2 million
in 1997 at 5.32% and $31.5 million in 1996 at 5.48%.
LINE-OF-BUSINESS INFORMATION
The Corporation's businesses are organized into five major segments: Private
Banking, Consumer Financial Services, Lending, Global Treasury and Global
Markets. During 1998, the Corporation implemented an internal performance
measurement system to measure each of the major segments independently on a net
income basis along with rate of return and efficiency ratios as well as other
key performance measures. The following table presents the summary results for
the year ended December 31, 1998. Data is not available on a comparable basis
for prior periods.
CONSUMER
PRIVATE FINANCIAL GLOBAL GLOBAL
(DOLLARS IN THOUSANDS) BANKING SERVICES LENDING TREASURY MARKETS OTHER TOTAL
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 104,850 $ 84,602 $ 65,150 $ (24,634) $ 20,469 $ (2,390) $ 248,047
Average assets 2,668,607 861,250 10,367,136 31,495,660 11,837,675 (3,438,290) 53,792,038
Average liabilities
and preferred stock 10,917,021 11,495,275 8,783,465 8,350,874 14,449,615 (3,033,580) 50,962,670
Average risk-adjusted
equity 548,802 421,582 379,187 1,192,691 287,106 -- 2,829,368
Efficiency ratio 48% 71% 64% 193% 87% -- 74%
Return on average
risk-adjusted equity 19.1% 20.1% 17.2% (4.4)% 7.1% -- 7.8%
- -----------------------------------------------------------------------------------------------------------------------
The return on average risk-adjusted equity is calculated based on net income
applicable to common stock -- diluted.
PRIVATE BANKING
Private Banking offers a full range of financial services for high-net-worth
individuals around the world. The product lines include deposit, lending,
trading, treasury, investment management
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products, trust, custody, estate planning, philanthropic advisory services and
asset allocation products. Domestic Private Banking account representatives are
located in New York, California and Massachusetts. International Private Banking
account offices are located in the United States in New York, California and
Florida and in Japan, Hong Kong, Singapore, London and Taiwan. Additional
representative offices and affiliates are available in other major cities. The
Corporation offers high quality investment management products which include
Republic Investment Management Accounts (RIMA), the Republic Family of Funds and
the Republic Spectrum Account. Strategic initiatives in Private Banking will
concentrate on enhancing asset management capabilities through acquisitions and
hiring of additional account officers and increased lending activities.
The Corporation has a 49% investment in Safra Republic, a Luxembourg holding
company with subsidiary banks located in Switzerland, Luxembourg, France,
Guernsey, Gibraltar and Monaco and representative offices around the world,
providing international private banking services, asset management and other
related investment services. Safra Republic has seen net income grow at an
annual compound growth rate of 17% since 1993.
Together with Safra Republic, the Corporation had total client accounts
including deposits of $55.6 billion at December 31, l998, compared to $48.6
billion at December 31, 1997. Safra Republic had $32.9 billion and $29.9 billion
at December 31, l998 and 1997, respectively, and the Corporation had $22.7
billion and $18.7 billion at such respective dates.
CONSUMER FINANCIAL SERVICES
Consumer Financial Services provides retail banking, investment, insurance and
home finance services and products to over 1 million accounts from 82 locations
in the New York metropolitan area and from 8 locations in southern Florida.
These financial services and products are provided to individuals and small to
medium commercial customers. Consumer Financial Services has approximately $13.1
billion of assets under management, (including deposits). Average client assets
under management are now nearly $162 million per location. Major financial
products and services include deposit products: checking accounts, money market
accounts, NOW accounts, investment products: mutual funds, fixed and variable
rate annuities, the ability to purchase stocks and bonds through Republic
Financial Services, a retail broker-dealer, insurance: life and health (property
and casualty insurance will be offered in 1999), banking services: PC bill
payment services, internet banking and ATM availability along with special
programs that offer financial products and service to specific demographic
groups: Young Investor Club, Republic Bank for Kids, Student$ense and
Renaissance Club.
Consumer Financial Services provides customers with a full range of financial
services in a one-stop financial shopping environment. Consumer Financial
Services is able to provide this expertise by having 80 financial/insurance
consultants, 110 investment/insurance personnel and 250 home finance specialists
that work throughout the retail network. During 1998, Investment Lounges were
created in 10 branches to assist customers with their investment decisions, with
15 additional lounges expected to open in 1999. Results for 1998 reflect the
costs associated with investing in the infrastructure for new product offerings,
including brokerage services in 1997 and insurance products in 1998, development
of alternative delivery channels such as web-based banking, an increased number
of mortgage account executives in the 16 states where mortgages are being
originated, trained personnel and the technology to support an integrated
delivery system.
LENDING
Lending continues to be an integral part of the Corporation's overall client
relationship. Lending activities cover a variety of industries and industry
segments including domestic and international private banking, small business,
middle market, factoring, national and international corporations, commercial
real estate and precious metals lending. The Corporation is a leading provider
of mortgage financing to cooperative apartments in the country and a substantial
lender and provider of
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business credit to the retail and apparel industry. The market place continues
to be very competitive in the lending businesses, and the Corporation has
continued to follow a plan of diversity within businesses, the avoidance of high
risk transactions and the development of a customer base with a high level of
credit quality. Products include working capital lines, banker's acceptances,
letters of credit, factoring services, asset based lending, securities lending
and commercial mortgages.
GLOBAL TREASURY
Global Treasury operates in all major capital markets and is responsible for
managing the Corporation's liquidity profile, including its asset and liability
positions. Global Treasury seeks to reduce the Corporation's exposure to changes
in external interest rates, while maximizing the level of net interest income
generated. See "Liability and Asset Management" below. The 1998 results for the
Global Treasury segment reflect a $165.4 million after tax loss from
management's decision to write down all of the Corporation's Russian investment
securities to net realizable value. This write down is consistent with the
Corporation's goals of high liquidity, high asset quality and the recognition of
problem areas as early as possible.
In addition to investments in U.S. Government guaranteed and AAA rated
asset-backed securities, the Global Treasury segment invests, from time to time,
in other instruments including emerging markets paper, money market instruments,
and other assets that meet the Corporation's criteria for appropriate
investments.
GLOBAL MARKETS
Global Markets encompasses the trading and sale of foreign exchange, banknotes,
derivatives, precious metals, securities, and emerging markets instruments. With
trading centers in Europe, North and South America, Asia and Australia, the
Corporation is able to operate trading desks 24 hours a day covering the major
international cross border markets as well as many local markets. Global Markets
has been recognized as a leader in foreign exchange, precious metals, banknotes,
emerging markets debt instruments and derivatives, including swaps, options and
structured products. The Global Market desks will customize products to suit the
needs of clients, which include financial institutions, corporations,
individuals and central banks. In addition, from time-to-time, Global Markets
may take proprietary positions complying with established limits and risk
profiles.
In 1999, the Corporation announced that efficiencies have been achieved in
Global Markets by dismantling the prime brokerage activities within Republic New
York Securities Corporation and the market-making business within the
fixed-income derivative products group, consolidating back offices and
increasing automation. The Corporation will consolidate trading operations into
trading centers in the United States, Europe and Asia, while maintaining a local
marketing presence in each foreign location. The Corporation will focus its
attention on solidifying its leadership position in precious metals and foreign
exchange/banknotes. Furthermore, the Corporation will utilize its financial
engineering expertise in asset/liability management for the treasury. Finally,
Global Markets will design wealth management products for private banking
customers.
OTHER
Other includes all items that are allocated as a net amount, the residual
effects of unallocated activities and those not allocated to specific segments
such as expenses related to Year 2000 and the implementation of the euro,
intercompany eliminations, and the remaining effects at the corporate level
after implementation of management accounting policies including residual credit
provisions.
RESTRUCTURING
In March 1999, the Corporation announced the results of its line-of-business
review and restructuring plan to grow its core private banking and special niche
businesses utilizing its new reporting
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system, Republic Profit Quest. The Corporation also announced that it plans to
outsource its data centers and related network and communication operations.
Accordingly, the Corporation will take a one time restructuring charge in the
first quarter of 1999 amounting to approximately $97 million (before tax effect)
for workforce reductions, branch consolidations, the outsourcing of certain data
processing functions and the decision to exit certain activities. In addition,
the Corporation will also record an expense of approximately $7 million (before
tax effect) in the first quarter of 1