1
Republic New York Corporation
INTRODUCTION TO MANAGEMENT'S DISCUSSION AND ANALYSIS
The following summary of Management's Discussion and Analysis highlights the
principal activities during 1993 of Republic New York Corporation (the
"Corporation"). The Corporation reported net income for the year 1993 that was
the highest in its history.
Net income was a record $301.2 million in 1993 compared to $258.9 million and
$227.4 million in 1992 and 1991, respectively. Fully diluted earnings per
share increased to $5.05 in 1993, or 16.9%, above the $4.32 earned in 1992.
The Corporation's risk-based capital ratios, which include the risk-weighted
assets and capital of Safra Republic Holdings S.A. ("Safra Republic"), were
15.16% for Tier 1 capital and 26.20% for total capital at December 31, 1993.
These ratios substantially exceed the regulatory minimums in effect for bank
holding companies of 4% for Tier 1 capital and 8% for total capital.
Total average interest-earning assets were $32.6 billion in 1993, with
approximately 55% invested in securities of the United States Government and
its agencies and interest-bearing deposits with banks. Average loans in
domestic offices of $6.4 billion represented approximately 20% of average
interest-earning assets in 1993, relatively unchanged from 1992. Average loans
in foreign offices of $2.5 billion continued to represent less than 10% of
total average interest-earning assets in 1993.
Non-accrual loans were $94.9 million at year end 1993, or 1.00% of total loans
outstanding. At December 31, 1993, the allowance for possible loan losses was
$311.9 million, or 3.28% of loans outstanding and 329% of non-performing loans.
Income from trading activities rose to $228.2 million in 1993, a 66% increase
over the $137.5 million in 1992. In the first quarter of 1993, the Corporation
established a derivative products group to engage in interest rate and currency
swaps and other derivative products with operations in New York and London.
This group's revenue of $48.8 million was primarily responsible for the strong
increase in trading account profits and commissions from $12.3 million in 1992
to $78.7 million in 1993.
Earnings from Safra Republic, the Corporation's 48.8% owned European-based
international private banking group, were $59.5 million in 1993, an increase of
31.5% over 1992.
The Corporation's returns on average total assets and average common
stockholders' equity, based on net income applicable to common stock, were .73%
and 15.08%, respectively in 1993.
On December 31, 1993, the Corporation completed the acquisition of Mase Westpac
Limited ("Mase"), a gold bullion bank based in London with total assets of
approximately $1.4 billion. Mase is an authorized United Kingdom bank with
operations in New York, Sydney and Hong Kong and will operate under the name of
Republic Mase Bank Limited. Mase is one of the five members of the London gold
fixing.
On January 10, 1994, Republic New York Securities Corporation, our
broker-dealer subsidiary, received approval to underwrite and deal in all forms
of debt and equity securities.
28
2
Republic New York Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The following table presents condensed consolidated statements of income for
the Corporation for each of the years in the three-year period ended December
31, 1993. These statements differ from the Corporation's consolidated
financial statements presented elsewhere in this Report in that net interest
income is presented on a fully-taxable equivalent basis. The tax equivalent
adjustment, related to certain tax exempt instruments, permits all interest
income and net interest income to be analyzed on a comparable basis. The rate
used for this adjustment, which is reflected throughout this section, is 44% in
1993 and 42% in prior years.
Increase (Decrease) Increase (Decrease)
------------------- -------------------
(Dollars in thousands) 1993 Amount % 1992 Amount % 1991
================================================================================================================
Interest income $1,964,406 $(106,629) (5.1) $2,071,035 $(224,920) (9.8) $2,295,955
Interest expense 1,157,075 (161,153) (12.2) 1,318,228 (364,433) (21.7) 1,682,661
- ----------------------------------------------------- ----------------------- ---------
Net interest income 807,331 54,524 7.2 752,807 139,513 22.7 613,294
Provision for loan losses 85,000 (35,000) (29.2) 120,000 58,000 93.5 62,000
- ----------------------------------------------------- ----------------------- ---------
Net interest income after
provision for loan
losses 722,331 89,524 14.1 632,807 81,513 14.8 551,294
Other operating income 395,472 93,225 30.8 302,247 30,814 11.4 271,433
Other operating expenses 634,965 79,623 14.3 555,342 52,409 10.4 502,933
- ----------------------------------------------------- ----------------------- ---------
Income before income
taxes 482,838 103,126 27.2 379,712 59,918 18.7 319,794
- ----------------------------------------------------- ----------------------- ---------
Income taxes 150,153 61,767 69.9 88,386 28,000 46.4 60,386
Tax equivalent
adjustment 31,480 (963) (3.0) 32,443 395 1.2 32,048
- ----------------------------------------------------- ----------------------- ---------
Total applicable income
taxes 181,633 60,804 50.3 120,829 28,395 30.7 92,434
- ----------------------------------------------------- ----------------------- ---------
Net income $ 301,205 $42,322 16.3 $ 258,883 $ 31,523 13.9 $ 227,360
================================================================================================================
Net income applicable to
common stock $ 272,790 $42,293 18.3 $ 230,497 $ 25,870 12.6 $ 204,627
================================================================================================================
[NET INTEREST INCOME BAR GRAPH - SEE EDGAR APPENDIX]
NET INTEREST INCOME
Net interest income increased $54.5 million, or 7%, to $807.3 million in 1993,
compared to $752.8 million in 1992. Average interest-earning assets rose to
$32.6 billion, or 9% above the $30.0 billion in 1992. The increase in average
interest-earning assets was primarily in investment securities of U.S.
Government agencies and trading account assets. During 1993, the Corporation
continued to invest in U.S. Government agency mortgage-backed securities, which
represented 29% of average interest-earning assets in 1993, compared to 24% in
1992. Total average interest-bearing funds in 1993 included a $2.1 billion
increase in interest-bearing deposits in foreign offices.
The net interest rate differential was 2.48% in 1993 and 2.51% in 1992. The
primary factors that affected the rate differential in 1993 were the
Corporation's actions to fix the rates on a portion of its liabilities that
extend into 1994 and 1995, the addition of higher levels of matched maturity
deposits and assets at narrower spreads and the declining yields obtained on
reinvestment of scheduled and unscheduled principal payments on mortgage loans
and mortgage-backed securities.
The Corporation manages its sensitivity to interest rates by entering into
off-balance sheet contracts, including interest rate and currency swaps and
interest rate caps and floors. These contracts hedge specifically identified
assets or liabilities with the corresponding revenues or expenses reflected in
the yield of the related on-balance sheet assets or liabilities. During 1993,
the Corporation took steps to lengthen the maturity of its liabilities through
transactions in the cash and derivatives markets. At year end 1993, the gross
notional amount of contracts used in asset and liability management was
approximately $8.7 billion. At December 31, 1993, the net effect of these
hedging transactions was to decrease the net interest rate differential by 18
basis points.
29
3
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
[NET INTEREST RATE DIFFERENTIAL BAR GRAPH -- SEE EDGAR APPENDIX]
[LOAN LOSS RECOVERIES BAR GRAPH -- SEE EDGAR APPENDIX]
Net interest income increased $139.5 million, or 23%, to $752.8 million in
1992, compared to $613.3 million in 1991. Average interest-earning assets
rose to $30.0 billion, or 11% above the $27.0 billion in 1991. The major
increase in average interest-earning assets was primarily in investment
securities of U.S. Government agencies, partially offset by declines in
interest-bearing deposits with banks and loans in domestic and foreign offices.
Total average interest-bearing funds included increases in short-term
borrowings and long-term debt while deposits declined. The net interest rate
differential increased to 2.51% in 1992 from 2.27% in 1991 as rates paid on
purchased funds continued to decline faster than rates earned on
interest-earning assets. During 1992, investments in U.S. Government agency
mortgage-backed securities represented 24% of average interest-earning assets,
compared to 15% in 1991. This portfolio was funded with shorter term
liabilities at a lower cost which contributed to the improvement in the net
interest rate spread.
The "Selected Financial Data" section of this Report contains information on
the Corporation's average asset and liability structure and rates earned and
paid in each of the years in the five-year period ended December 31, 1993.
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 were allocated to volume.
Increase (Decrease)
--------------------------------------------------------------------------------------
1993 vs. 1992 1992 vs. 1991
------------------------------------------- ---------------------------------------
Average Average Average Average
(In thousands) Volume Rate Total Volume Rate Total
==============================================================================================================================
Interest income from:
Interest-bearing deposits with
banks $ (13,838) $ (75,590) $ (89,428) $ (37,151) $(168,596) $(205,747)
Taxable securities 130,819 (91,408) 39,411 288,142 (118,450) 169,692
Securities exempt from federal
income taxes 20,231 (18,812) 1,419 8,207 (4,638) 3,569
Trading account assets 26,988 4,551 31,539 16,727 (79) 16,648
Federal funds sold and securities
purchased under resale
agreement 1,556 (4,693) (3,137) 7,418 (19,017) (11,599)
Loans, net of unearned income:
Domestic offices 8,783 (54,879) (46,096) (50,400) (73,213) (123,613)
Foreign offices 2,819 (43,156) (40,337) (23,343) (50,527) (73,870)
- ------------------------------------------------------------------------------------------------------------------------------
Total interest on loans 11,602 (98,035) (86,433) (73,743) (123,740) (197,483)
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income 177,358 (283,987) (106,629) 209,600 (434,520) (224,920)
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense on:
Consumer and other time
deposits 3,766 (80,658) (76,892) 11,023 (162,393) (151,370)
Certificates of deposit (6,391) (6,338) (12,729) (21,139) (31,898) (53,037)
Deposits in foreign offices 83,135 (109,186) (26,051) (29,323) (167,353) (196,676)
Short-term borrowings (5,557) (30,923) (36,480) 61,108 (84,869) (23,761)
Total long-term debt 28,750 (37,751) (9,001) 106,530 (46,119) 60,411
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 103,703 (264,856) (161,153) 128,199 (492,632) (364,433)
- ------------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 73,655 $ (19,131) $ 54,524 $ 81,401 $ 58,112 $ 139,513
==============================================================================================================================
PROVISION FOR LOAN LOSSES
The Corporation determines its provision for loan losses based on factors such
as past loan loss experience, the composition of the loan portfolio and other
contracts which create potential credit exposure and prevailing worldwide
economic conditions. The provision for loan losses was $85 million in 1993,
down $35 million from the $120 million in 1992. The total provision was $62
million in 1991. Net charge-offs were $13.3 million in 1993, compared to
$105.8 million in 1992.
The allowance for possible loan losses was $311.9 million at year end 1993, or
3.28% of loans outstanding, net of unearned income, an increase of $70.9
million from the $241.0 million at year end 1992. The allowance was $227.5
million at year end 1991.
30
4
The lower levels of the provision and net charge-offs in 1993 reflects the
gradual economic improvement in domestic markets during the year. In 1992,
economic difficulties were experienced by a limited number of domestic
commercial businesses and a limited number of international loans. While the
impact of economic conditions on future operations cannot be predicted, the
Corporation believes that its provisions and charge-offs before recoveries in
the future should be lower than the levels of 1993.
OTHER OPERATING INCOME
The following table presents the principal categories of other operating income
and the increase (decrease) for each of the years in the three year period
ended December 31, 1993.
Increase (Decrease) Increase (Decrease)
------------------- -------------------
(Dollars in thousands) 1993 Amount % 1992 Amount % 1991
==================================================================================================================================
Trading income:
Income from precious metals $ 37,910 $15,273 67.5 $ 22,637 $(16,812) (42.6) $ 39,449
Foreign exchange trading income 111,572 9,001 8.8 102,571 21,220 26.1 81,351
Trading account profits and
commissions 78,742 66,423 * 12,319 (10,125) (45.1) 22,444
- ------------------------------------------------------------------- ------------------------ ---------
Total trading income 228,224 90,697 65.9 137,527 (5,717) (4.0) 143,244
Investment securities gains, net 1,295 (9,937) (88.5) 11,232 6,968 163.4 4,264
Net gain (loss) on loans sold or
held for sale (843) (17,932) (104.9) 17,089 14,058 * 3,031
Commission income 50,956 13,364 35.6 37,592 2,964 8.6 34,628
Equity in earnings of affiliate 59,463 14,243 31.5 45,220 4,137 10.1 41,083
Other income 56,377 2,790 5.2 53,587 8,404 18.6 45,183
- ------------------------------------------------------------------- ------------------------ ---------
Total other operating income $395,472 $93,225 30.8 $302,247 $ 30,814 11.4 $271,433
==================================================================================================================================
*Exceeds 200%
Income from precious metals is derived from the Corporation's activities as a
dealer in gold and silver bullion and coins sold to commercial and industrial
users and investors and its trading and arbitrage activities in the precious
metals markets. The improvement in the level of income from precious metals to
$37.9 million in 1993 reverses the trend of recent years and is attributable to
increased price volatility and volume in the precious metals markets. In each
of the last three years, arbitrage activity, as opposed to trading, contributed
a substantial portion of income from precious metals.
Effective December 31, 1993, Republic National Bank of New York completed the
purchase of Mase Westpac Limited ("Mase"), an authorized United Kingdom gold
bullion bank with operations in London, New York, Sydney and Hong Kong. Mase
engages in global wholesale trading in precious metals and in production and
inventory financing. Mase is one of the five members of the London Gold
Fixing. Mase will operate as Republic Mase Bank Limited. Included in the
Corporation's statement of condition at December 31, 1993, are Mase's assets of
approximately $1.4 billion. The acquisition of Mase had no effect on the
Corporation's results of operations for 1993.
Foreign exchange trading income is derived from trading and arbitrage
activities in foreign currencies, transactions that service the needs of the
Corporation's customers, including other banks and corporations, and dealings
in foreign currency banknotes, principally in New York, London, Hong Kong,
Singapore and Tokyo. The increase in foreign exchange trading income in 1993,
to a record level of $111.6 million, resulted from expanded global foreign
exchange operations and growth in the global demand for banknotes. The
substantial increase in foreign exchange trading income in 1992 over the prior
year resulted from opportunities created by turbulence in European currency
markets in the third quarter of such year. While this turbulence also occurred
in foreign exchange markets in 1993, resulting in higher levels of income, it
did not approach the levels of 1992.
31
5
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
In the fourth quarter of 1993, the Corporation acquired Citibank's World
Banknote Services business which ships U.S. dollars to and from financial
institutions in nearly 40 countries. The Corporation will offer continued
worldwide, point-to-point banknote services to the institutional customers of
Citibank's World Banknote Services business and also will become the preferred
global provider for the sale and purchase of U.S. and foreign banknotes to all
Citibank branches and subsidiaries in 93 countries.
Trading account profits and commissions are generated by trading derivative
products, dealing in international debt securities and trading in obligations
of emerging market countries. In January 1993, the Corporation established a
derivative products group, comprised of an experienced staff with operations in
New York and London, to act as principal in trading interest rate and currency
swaps and options on these products as well as products related to the
performance of various indices. The group's activities, which resulted in
revenues of $48.8 million, are principally responsible for the substantial
increase in trading account profits and commissions in 1993 over the prior
year. The Corporation expanded its derivative products capabilities to Hong
Kong in the fourth quarter of 1993. Additional information related to
derivative products is contained elsewhere in this section and in Notes 15 and
16 of "Notes to Consolidated Financial Statements".
Trading account profits and commissions income also includes the results of
dealing in fixed and variable rate debt securities denominated in all major
currencies with large financial institutions, including investment banks,
multinational organizations and high net worth individuals, as well as dealing
in other financial market instruments such as forward rate agreements,
principally through the Corporation's London Eurobond trading subsidiary. A
specialized group to trade obligations of emerging market countries, including
loans, Eurobonds and other fixed income products, also contributed to trading
account profits and commissions in 1993. The fluctuation between 1992 and 1991
was due principally to the levels of business conducted by the London
subsidiary.
The Corporation realized net investment securities gains of $1.3 million in
1993, $11.2 million in 1992 and $4.3 million in 1991. In 1992, maturities,
calls and mandatory redemptions and sales made as a result of changes in the
credit worthiness of the obligor, contributed to the higher amounts reported
for that year. The proceeds from securities sold are reinvested in other high
quality interest-earning assets.
Net losses on loans sold or held for sale, principally debt obligations of
restructuring countries, were $.8 million in 1993, compared to net gains of
$17.1 million in 1992 and $3.0 million in 1991. The net gains in 1992 were
attributable primarily to the sale of foreign currency denominated Argentine
loans which had been designated as held for sale due to the inability to
exchange these obligations for foreign currency denominated bonds. In 1991,
the net gains recorded were principally due to sales of debt obligations of
restructuring countries.
Commission income amounted to $51.0 million in 1993. Fees earned from newly
established full-service brokerage and investment management activities
contributed to a significant portion of the increase in commission income
between 1993 and 1992. Fees for the issuance of letters of credit and the
creation of acceptances are also included in commission income. These fees
generate the largest portion of this income, but with the addition of revenues
generated during 1993 by newly established activities, such fees represent a
smaller percentage of total commission income than in prior years.
While the amount of fees from letters of credit and acceptances increased in
1992, such fees represented approximately 50% of total commission income
compared to 60% in 1991. This decline was due to the higher level of
commissions earned from other fee-based services and products, including
domestic banknote shipments.
Equity in earnings of affiliate representing the Corporation's share of the
earnings of Safra Republic Holdings S.A. ("Safra Republic"), a European
international private banking group 48.8% owned by the Corporation, was $59.5
million in 1993, compared to $45.2 million in 1992 and $41.1 million in 1991.
32
6
The following table presents summary information for Safra Republic for each of
the last three years.
(In thousands except per share data) 1993 1992 1991
============================================================================================================
At December 31:
Total assets $11,299,349 $10,351,859 $9,066,960
Interest-bearing deposits with banks 3,660,414 3,759,581 3,276,098
Loans, net of unearned income 1,128,746 1,101,451 1,328,848
Allowance for possible loan losses 102,204 52,376 13,805
Non-performing loans 23,190 48,777 15,342
Total deposits 7,344,562 6,897,172 6,945,948
Shareholders' equity 1,280,755 1,131,747 1,099,544
For the year:
Net interest income $ 221,188 $ 189,268 $ 149,786
Provision for loan losses 80,987 62,325 18,991
Other operating income 114,400 84,776 58,072
Other operating expenses 124,887 116,635 102,142
Net income 121,595 92,466 84,475
Earnings per common share 6.87 5.22 4.75
Average common shares outstanding 17,703 17,709 17,799
============================================================================================================
For additional information on Safra Republic and its relationship with the
Corporation see Note 7 of the "Notes to Consolidated Financial Statements."
Other income in 1993 was $56.4 million, after deducting a $4.0 million loss on
the early extinguishment of $234 million principal amount of long-term debt.
Excluding the effect of the debt extinguishment, other income increased 13%
over the $53.6 million in 1992. This income includes service charges on
deposit accounts, trust department income, other income from factoring
activities and fees for precious metals storage. The level of this income in
1992 included penalty fees charged on the prepayment of commercial mortgages
and the receipt of a one-time fee of $3.2 million related to a lease
termination payment.
OTHER OPERATING EXPENSES
The following table presents the principal categories of other operating
expenses for each of the years in the three year period ended December 31,
1993.
Increase (Decrease) Increase (Decrease)
------------------- -------------------
(Dollars in thousands) 1993 Amount % 1992 Amount % 1991
==================================================================================================================================
Salaries and employee benefits $347,507 $53,376 18.1 $294,131 $30,456 11.6 $263,675
Occupancy, net 48,161 2,860 6.3 45,301 7,253 19.1 38,048
Other expenses 239,297 23,387 10.8 215,910 14,700 7.3 201,210
- ------------------------------------------------------------------- ----------------------- --------
Total other operating expenses $634,965 $79,623 14.3 $555,342 $52,409 10.4 $502,933
==================================================================================================================================
Total operating expenses increased $79.6 million in 1993 to $635.0 million,
from $555.3 million in 1992. Of this increase, approximately $50 million is
associated with investments in new businesses, including full service
brokerage, derivative products, investment management and retail branch
expansion in the New York metropolitan area, Florida and California, as well as
growth in consumer lending, primarily residential mortgages and credit card
operations.
Total operating expenses increased $52.4 million in 1992 to $555.3 million from
$502.9 million in 1991. Of this increase, $20.0 million was associated with
investments in new businesses, including securities brokerage and investment
management, bank trust services and bank franchise expansion, including the
acquisitions of American Savings Bank branches and SafraBank (Florida). Also
contributing to the increase were expenses related to domestic residential
mortgage origination and servicing capabilities, increased staff for control,
compliance and credit review functions and a one-time $10.0 million charge
related to the settlement of litigation.
Salaries and employee benefits were $347.5 million in 1993, $294.1 million in
1992 and $263.7 million in 1991. Year-to-year, these expenses increased 18%
in 1993 and 12% in 1992. The 1993 increase in staff expense was attributable
to additions to staff in the trading and investment management areas and to
higher levels of incentive-based compensation resulting primarily from increased
revenues earned in trading areas.
33
7
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Approximately one-third of the 1992 salaries and employee benefits increase of
$30.5 million was attributable to investments in new businesses and franchise
expansion. Performance-related compensation and general increases in salaries
and benefits also contributed to the increases in 1992.
Occupancy costs were $48.2 million in 1993, compared to $45.3 million in 1992
and $42.0 million in 1991 before deduction of the one-time recognition of
rental income of $4.0 million. The increase in 1993 was primarily due to the
additional costs of occupying newly-acquired retail branches, as well as
general increases to operate existing premises. The costs of occupying
additional American Savings Bank branches contributed to the 1992 increase.
All other expenses were $239.3 million in 1993, $215.9 million in 1992 and
$201.2 million in 1991. All other expenses include premiums for deposit
insurance paid to the Federal Deposit Insurance Corporation. This expense
represented approximately 10% of all other expenses in 1993 and 11% in 1992.
Due to a stabilization in the level of insured deposits, this expense increased
only nominally in 1993. For the period covering the first six months of 1994,
there will be no change in the rate paid by the Corporation's subsidiary banks
for deposit insurance.
Costs applicable to other real estate owned declined to $2.1 million in 1993,
primarily from gains on sales of premises owned and a declining level of assets
classified as other real estate. These costs were $7.7 million in 1992 and
$8.0 million in 1991. Included in 1992 were the costs related to a new
accounting interpretation that required selling expenses to be provided on
other real estate owned for properties carried at the lower of cost or fair
value on an individual basis. Those selling expenses were partially reduced by
gains from the sale of properties during the year.
Communication and equipment expenses represent a substantial portion of other
expenses and amounted to $61.2 million, $54.7 million and $50.3 million in
1993, 1992 and 1991, respectively. Also, professional fees, consisting of
consulting, legal and audit fees, rose to $31.9 million in 1993, from $23.1
million in 1992 and $27.0 million in 1991, which included $3.7 million incurred
in connection with possible acquisitions and new product development.
In June 1993, SFAS No. 116, "Accounting for Contributions Received and
Contributions Made", was issued. SFAS No. 116 is effective for fiscal years
beginning after December 15, 1995 and will require that unconditional promises
to make contributions be recognized on an accrual basis. The Corporation is
reviewing the impact of adopting this SFAS on its results of operations.
[NET INCOME APPLICABLE TO COMMON STOCK BAR GRAPH -- SEE EDGAR APPENDIX]
TOTAL APPLICABLE INCOME TAXES
Total applicable income taxes, which include the taxable equivalent adjustment,
increased $60.8 million to $181.6 million in 1993, after increasing $28.4
million between 1992 and 1991. The ratio of total applicable income taxes to
income before taxes was 38% in 1993 and 32% in 1992. The 1993 effective income
tax rate increase, when compared to 1992, is a result of the higher level of
income subject to income taxes, the adoption of SFAS No. 109, "Accounting for
Income Taxes", on January 1, 1993, and the retroactive effect to January 1,
1993 of applying a higher U.S. statutory rate in accordance with the Omnibus
Budget Reconciliation Act of 1993. It is anticipated that the effective tax
rate in the future will approximate the rate in 1993. In 1992 and 1991, this
ratio was less than the effective statutory rates because of the effect in
income taxes of tax benefits of $9.6 and $ 11.4 million related primarily to
loan sales and charge-offs in instances in which the loan's book basis was
different from the tax basis.
NET INCOME APPLICABLE TO COMMON STOCK
Net income applicable to common stock was a record $272.8 million in 1993,
compared to $230.5 million in 1992 and $204.6 million in 1991. On a fully
diluted basis, earnings per common share were $5.05 in 1993, $4.32 in 1992 and
$3.90 in 1991. Dividends declared on the Corporation's issues of preferred
stock and the average annual rates paid were as follows: $28.4 million or 5.11%
in 1993; $28.4 million or 5.25% in 1992 and $22.7 million or 5.64% in 1991.
34
8
LIABILITY AND ASSET MANAGEMENT
In general, the Corporation's assets are selected to match both the maturity
and interest rate sensitivity of the Corporation's liabilities. Thus, the
structure of the Corporation's liabilities determines the structure of its
assets. This management policy has two important implications. First,
liquidity requirements can be met more readily because a large proportion of
assets mature when liabilities mature. Second, the impact of changes in the
levels of interest rates on the Corporation is reduced because both assets and
liabilities have approximately the same interest rate sensitivity.
From time to time, the Corporation's management may decide to deliberately
mismatch liabilities and assets in a strategic gap position as a means of
managing net interest income. Interest rate sensitivity gaps occur when
interest-bearing liabilities and interest-earning assets differ in repricing
dates and anticipated maturities. Such decisions reflect management's views on
the direction of interest rates and general market conditions. The gap
position is established with marketable securities of high credit quality in
liquid markets and is carefully monitored by management.
The table below illustrates the Corporation's interest rate sensitivity gap
position at December 31, 1993. The interest rate sensitivity gap, which is the
difference between interest-earning assets and liabilities is presented by
repricing period, based upon maturity or first repricing opportunity, along
with a cumulative interest rate sensitivity gap. Factors considered are the
contractual terms of the underlying obligations, including off-balance sheet
items such as interest rate swaps and caps, as well as management's estimates
of prepayment patterns of mortgage-backed securities and interest sensitivity
of core deposits.
It is important to note that the table indicates a position at a specific point
in time, and may not be reflective of positions during the year or in
subsequent periods. Major changes in position can be, and are, made promptly
as market outlooks change. In addition, significant variations in interest
rate sensitivity may exist within the repricing periods presented in which the
Corporation has interest rate positions.
Repricing Period at December 31, 1993
------------------------------------------------------------------------------------
After three After six After one
Within months months year but After
three but within but within within five
(In millions) months six months one year five years years
====================================================================================================================================
ASSET/(LIABILITY)
Interest rate sensitivity gap $(2,431) $ 919 $ 487 $ (906) $1,931
- ------------------------------------------------------------------------------------------------------------------------------------
ASSET/(LIABILITY)
Cumulative interest rate sensitivity gap $(2,431) $(1,512) $(1,025) $(1,931) $ -
- ------------------------------------------------------------------------------------------------------------------------------------
Diversification is another principle employed in the management of liabilities
and assets. The Corporation is active in international banking and, in
managing this activity, diversifies risks among many countries and
counterparties throughout the world. Liabilities, which are mostly
interest-bearing deposits and other purchased funds, are obtained from both
domestic and international sources. These sources of funds represent a wide
range of depositors, mostly individuals, and various types of deposits. The
Corporation also raises funds from institutional and individual investors with
a variety of marketable instruments. The diversification of the
Corporation's funding sources provides stability of the funding base.
[AVERAGE DEPOSITS BAR GRAPH -- SEE EDGAR APPENDIX]
LIABILITY MANAGEMENT
DEPOSITS
The Corporation's primary liability products are interest-bearing deposits
provided to customers in three basic franchises. The International Private
Banking Group establishes relationships with high net worth individuals on a
worldwide basis who value safety for their funds. The retail franchise
comprises the New York City metropolitan area, Florida and California branch
systems of Republic National Bank of New York (the "Bank"), Republic Bank for
Savings ("RBS") and Republic Bank California N.A. In addition to its New York
City branches RBS also operates a retail franchise in south central Florida
with ten branches. These depositors invest in a diverse mix of retail time and
savings deposits of both short-term and long-term maturities. The
institutional franchise represents deposits from pension funds,
35
9
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
money market funds and corporate cash accounts. The Corporation has been
successful in selling long-term deposits to institutional and corporate
investors, thereby generating a source of long-term funds.
In the fourth quarter of 1993, Republic National Bank of New York (Canada)
acquired Bank Leumi (Canada) with assets of $100 million. This transaction
provides the Corporation with an entry into the Toronto market with a new
branch and expands its Montreal operations from two branches to three.
In the third quarter of 1993, the Corporation increased its presence in the
California market with the acquisition of SafraCorp California and its wholly
owned subsidiary SafraBank (California). This bank now operates as Republic
Bank California, N.A., an independent banking subsidiary, with three banking
offices in Los Angeles County that will focus on domestic private banking and
mortgage banking.
The Corporation recently established a specialized domestic private banking
group. This group will seek to establish banking, trust and investment
management relationships with high net worth individuals.
The following table sets forth the Corporation's deposit structure at December
31, in each of the last three years.
(In thousands) 1993 1992 1991
==========================================================================================================
DOMESTIC OFFICES:
Noninterest-bearing deposits:
Individuals, partnerships and corporations $ 1,188,773 $ 993,244 $ 771,773
Foreign governments and official institutions 912 1,996 1,135
U.S. Government and states and political subdivisions 21,540 8,583 16,000
Banks 86,030 107,749 59,593
Certified and official checks 130,263 124,879 104,820
- ----------------------------------------------------------------------------------------------------------
Total noninterest-bearing deposits 1,427,518 1,236,451 953,321
- ----------------------------------------------------------------------------------------------------------
Interest-bearing deposits:
Savings and NOW accounts 2,823,010 2,687,431 1,967,415
Money market accounts 2,192,113 2,228,807 2,151,891
Deposit notes 50,000 50,000 150,000
Individuals, partnerships and corporations 3,653,047 4,190,729 4,618,023
U.S. Government and states.and political subdivisions - 5,562 81,919
Banks 6,627 2,175 2,532
- ----------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 8,724,797 9,164,704 8,971,780
- ----------------------------------------------------------------------------------------------------------
Total deposits in domestic offices 10,152,315 10,401,155 9,925,101
- ----------------------------------------------------------------------------------------------------------
FOREIGN OFFICES:
Noninterest-bearing deposits 135,251 79,262 95,446
- ----------------------------------------------------------------------------------------------------------
Interest-bearing deposits:
Time deposits of individuals, partnerships and corporations 6,157,472 7,548,411 6,753,773
Banks located in foreign countries 6,142,823 2,661,277 3,221,938
Foreign governments and official institutions 117,063 120,701 386,644
Demand deposits 96,326 291,381 -
- ----------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 12,513,684 10,621,770 10,362,355
- ----------------------------------------------------------------------------------------------------------
Total deposits in foreign offices 12,648,935 10,701,032 10,457,801
- ----------------------------------------------------------------------------------------------------------
Total deposits $22,801,250 $21,102,187 $20,382,902
==========================================================================================================
The following table presents the maturity distribution, at December 31, 1993,
of certificates of deposit, deposit notes and other time deposits of $100,000
or more included in interest-bearing deposits in domestic offices in the table
above.
Certificates of Deposit
and Deposit Notes Other Time Deposits
----------------------- -------------------
(Dollars in thousands) Amount % Amount %
===========================================================================================================
Due in 90 days and less $488,277 65 $1,005,409 92
Due in 91-180 days 69,630 9 31,461 3
Due in 181-360 days 18,402 3 14,203 1
Due in over 360 days 171,403 23 42,011 4
- -------------------------------------------------------------------------------- -----------------
TOTAL $747,712 100 $1,093,084 100
===========================================================================================================
36
10
FOREIGN DEPOSITS
The Corporation's International Private Banking Group, headquartered in New
York City, generates a substantial portion of foreign deposits by establishing
relationships with clients throughout the world.
Deposits from foreign sources are cross-border deposits placed by over 24,000
individuals and foreign banks, in both domestic and foreign branch offices and
foreign banking subsidiaries. They are a stable source of funding for the
Corporation. Total average deposits in foreign offices were $10.8 billion in
1993, $8.6 billion in 1992 and $9.2 billion in 1991. These deposits increased
to 51% of total average deposits in 1993, compared to 46% in 1992 and 47% in
1991. During 1993, the Corporation relied more on foreign office deposits as a
source of funds than in 1992.
The following table distributes, by type, the Corporation's foreign deposits at
December 31 in each of the last three years. The majority of the deposits in
each category at the indicated dates were in amounts in excess of $100,000.
(In thousands) 1993 1992 1991
==========================================================================================================
Foreign deposits:
Time deposits of individuals, partnerships and corporations $ 6,755,821 $ 8,344,276 $ 7,855,509
Banks and other financial institutions 6,281,266 2,751,181 3,278,950
Foreign governments and official institutions 118,387 122,257 388,003
Other deposits 170,230 362,302 89,028
- ----------------------------------------------------------------------------------------------------------
Total foreign deposits $13,325,704 $11,580,016 $11,611,490
==========================================================================================================
SHORT-TERM BORROWINGS
The Corporation's principal short-term funding sources are federal funds
purchased and securities sold under repurchase agreements, issuing commercial
paper and local borrowings in overseas operations. The Bank, from time to
time, also issues short-term securities in public offerings.
Average short-term borrowings of $5.4 billion in 1993 were little changed from
the $5.5 billion in 1992. Average short-term borrowings in 1992 reflected an
increase of $1.4 billion over 1991, primarily from the effect of the issuance
in a public offering in January, 1992 of $1.5 billion principal amount of 4.50%
Notes that were repaid on January 6, 1993.
The Corporation's commercial paper is rated A-1+, F-1+ and P-1 by Standard &
Poor's Corporation, Fitch Investors Service and Moody's Investor Service,
respectively. Commercial paper proceeds are used principally to finance the
current operations of Republic Factors Corp. and Republic New York Securities
Corporation. The Corporation has $125 million of lines of credit to provide
support for its commercial paper program, under which it is authorized to issue
up to $1.0 billion.
The following table is a summary of short-term borrowings for each of the last
three years. Other borrowings reflect rates paid for local borrowing in
certain overseas locations.
(Dollars in thousands) 1993 1992 1991
==================================================================================================================
Federal funds purchased and securities sold under repurchase agreements:
Average interest rate:
At year end 2.94% 3.25% 5.18%
For the year 3.03% 3.12% 5.85%
Average amount outstanding during the year $3,403,240 $2,558,208 $2,988,412
Maximum amount outstanding at any month end 5,315,974 6,610,534 5,487,018
Amount outstanding at year end 999,149 2,266,004 829,379
Commercial paper:
Average interest rate:
At year end 3.29% 3.40% 5.11%
For the year 3.32% 3.90% 6.43%
Average amount outstanding during the year $ 606,088 $ 562,634 $ 600,030
Maximum amount outstanding at any month end 897,672 741,329 724,203
Amount outstanding at year end 881,741 720,308 524,047
Other borrowings:
Average interest rate:
At year end 4.35% 4.80% 9.97%
For the year 5.44% 5.52% 9.09%
Average amount outstanding during the year $1,371,131 $2,401,171 $ 491,790
Maximum amount outstanding at any month end 2,394,549 2,897,957 672,423
Amount outstanding at year end 2,394,549 2,752,510 449,318
==================================================================================================================
37
11
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
ASSET MANAGEMENT
The management of the Corporation's assets is based on three principal
criteria: creditworthiness, diversification and structural characteristics,
including maturity and interest rate sensitivity. A significant portion of its
interest-earning assets are invested in U.S. Government agency securities,
including mortgage-backed securities. International banking activities also
comprise a substantial portion of the Corporation's business and involve
factors other than the normal credit risk associated with domestic lending. In
determining the creditworthiness of international borrowers, the economic,
political and social conditions that affect the ability to repay obligations
must be taken into account. Through country and political analysis and
diversification of activities across a wide geographic distribution and within
exposure limits set on a country-by-country basis, the Corporation reduces the
unique risks of extending international credit. The Corporation endeavors to
reflect risk in its pricing policy.
The Corporation's domestic lending business includes the $2.9 billion RBS loan
portfolio with a concentration in single and multifamily residential real
estate loans and, to a lesser extent, commercial real estate and consumer
loans.
The following table sets forth the Corporation's interest-earning assets by
category at December 31, in each of the last three years. Additional details
related to maturity distribution, interest rate sensitivity and
creditworthiness are discussed in this section.
(In thousands) 1993 1992 1991
==================================================================================================================
Interest-bearing deposits with banks $ 5,346,647 $10,562,885 $ 8,776,578
Total investment securities 14,949,793 12,331,471 9,666,692
Trading account assets 1,182,093 702,479 268,950
Federal funds sold and securities purchased under resale agreements 2,322,465 1,505,274 10,546
Loans:
Real estate 3,310,585 3,711,428 3,730,939
Government and official institutions 429,232 341,320 453,639
Broker loans 1,411,302 307,018 250,000
Banks and other financial institutions 75,800 303,523 298,021
Commercial and other 4,376,464 3,492,890 4,048,074
- ------------------------------------------------------------------------------------------------------------------
Total loans 9,603,383 8,156,179 8,780,673
Less unearned income (94,825) (148,722) (211,715)
- ------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 9,508,558 8,007,457 8,568,958
- ------------------------------------------------------------------------------------------------------------------
Interest earning assets $33,309,556 $33,109,566 $27,291,724
==================================================================================================================
[AVERAGE INTEREST-EARNING ASSETS BAR GRAPH -- SEE EDGAR APPENDIX]
INTEREST-BEARING DEPOSITS WITH BANKS
Interest-bearing deposits with banks are placed with major international and
domestic banking organizations on a short-term basis, thereby insuring
liquidity while reducing credit risk. As a percentage of average
interest-earning assets, investments in interest-bearing deposits with banks
declined to approximately 23% in 1993, compared to 26% in 1992 and 30% in 1991.
During this period, as interest rates declined, the Corporation decided to
invest a greater proportion of funds in higher yielding U.S. Government agency
securities.
The following tables provide information on the composition and maturity
distribution of the Corporation's interest-bearing deposits with banks at
December 31, 1993.
Maturity
(Dollars in millions) Composition % (Dollars in millions) Distribution %
=================================================== ====================================================
United States financial institutions $ 703.1 13 Due within one month $3,076.9 58
Branches and agencies of foreign
banks located in the United States 863.6 16 Due after one but within six months 1,679.6 31
Foreign government banks and
official institutions 522.7 10 Due after six but within twelve months 548.3 10
Banks located in the United Kingdom 287.4 5
Other foreign banks 2,969.8 56 Due after one year 41.8 1
- --------------------------------------------------- ----------------------------------------------------
$5,346.6 100 $5,346.6 100
=================================================== ====================================================
38
12
INVESTMENT PORTFOLIO
On December 31, 1993, the Corporation adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". This change in accounting
policy required that securities designated as available for sale be carried at
fair value with the results of any unrealized gains or losses reflected in
stockholders' equity, net of taxes. In connection with this policy, management
reviewed the composition of the investment portfolio and designated all
municipal securities, certain fixed-rate mortgage-backed and non-marketable
equity securities as held to maturity. These securities are being carried at
amortized cost. All other securities amounting to approximately $12.3 billion
were designated as available for sale and marked to their estimated market
values. Prior to the adoption of SFAS No. 115, securities available for sale
were carried at the lower of cost or market value in the aggregate, with
adjustments to the carrying value recorded as investment securities losses.
At year end 1993, the total investment securities portfolio was $14.9 billion,
or 45% of interest earning assets, up from $12.3 billion, or 37%, in 1992. The
principal component of the investment portfolio is obligations of U.S.
Government agencies, substantially all of which are mortgage-backed securities.
These securities amounted to $10.7 billion at year end 1993 and $8.3 billion
at year end 1992, or approximately 70% of total investment securities. The
$2.4 billion increase in this investment during 1993 was funded with shorter
term liabilities at lower rates that provided favorable spreads.
The following table presents the composition of the book/carrying value of the
Corporation's total investment securities portfolio at December 31, in each of
the last three years.
(In thousands) 1993 1992 1991
==================================================================================================================
U.S. Government obligations $ 425,352 $ 726,997 $ 90,844
Obligations of U.S. Government agencies 10,713,977 8,327,119 5,800,871
Obligations of states and political subdivisions 584,302 543,005 540,506
Other investment securities 3,226,162 2,734,350 3,234,471
- ------------------------------------------------------------------------------------------------------------------
$14,949,793 $12,331,471 $9,666,692
==================================================================================================================
The following tables present, by maturity distribution, the book
value/amortized cost and estimated market value of the Corporation's portfolio
of securities held to maturity and available for sale at December 31, 1993.
The Corporation has identified certain interest rate swaps as hedges against
market risks of the available for sale portfolio. The market value of those
swaps is included in the mark-to-market calculation of the portfolio for SFAS
No. 115 purposes. The weighted average yields on these instruments are
presented based on scheduled maturity. Based on current market conditions,
mortgage backed securities included in U.S. Government agencies held to
maturity and available for sale have estimated average lives of approximately 8
years and 7 years, respectively. Yields on obligations of states and political
subdivisions and investments in certain preferred stock issues are adjusted to
a fully-taxable equivalent basis using a rate of 44%.
Held to Maturity
---------------------------------------
Estimated Weighted
Book Market Average
(Dollars in thousands) Value Value Yield
==================================================================================================================
Obligations of U.S. Government agencies:
Mortgage-backed securities $1,357,279 $1,389,619 6.96%
Obligations of states and political subdivisions:
Due within 1 year 1,975 1,823 13.38%
Due after 1 year but within 5 years 12,791 13,802 14.90
Due after 5 years but within 10 years 112,779 128,593 13.22
Due after 10 years 456,757 503,867 10.16
- ---------------------------------------------------------------------------------------------------
Total 584,302 648,085
- ---------------------------------------------------------------------------------------------------
Other investment securities:
Due after 10 years* 51,266 51,101 6.04%
- ---------------------------------------------------------------------------------------------------
Total held to maturity $1,992,847 $2,088,805
===================================================================================================
*Includes securities with no stated maturity.
39
13
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Available for Sale
----------------------------------------
Book/ Weighted
Amortized Market Average
(Dollars in thousands) Cost Value Yield
==================================================================================================================
U.S. Government obligations:
Due within 1 year $ 362,564 $ 363,604 4.24%
Due after 10 years 55,611 61,748 7.43
- ---------------------------------------------------------------------------------------------------
Total 418,175 425,352
- ---------------------------------------------------------------------------------------------------
Obligations of U.S. Government agencies:
Due after 1 year but within 5 years 55,142 55,143 7.48%
Due after 5 years but within 10 years 385 425 11.10
Mortgage-backed securities 9,041,378 9,344,409 7.37
Interest rate swaps -- (43,279)
- ---------------------------------------------------------------------------------------------------
Total 9,096,905 9,356,698
- ---------------------------------------------------------------------------------------------------
Other investment securities:
Due within 1 year 814,410 818,117 5.27%
Due after 1 year but within 5 year 988,754 1,030,087 7.88
Due after 5 years but within 10 years 282,950 314,741 12.66
Due after 10 years 961,831 1,042,443 7.94
Interest rate swaps -- (30,492)
- ---------------------------------------------------------------------------------------------------
Total 3,047,945 3,174,896
- ---------------------------------------------------------------------------------------------------
Total available for sale $12,563,025 $12,956,946
===================================================================================================
[AVERAGE INTEREST-EARNING ASSETS BAR GRAPH -- SEE EDGAR APPENDIX]
The following table presents the book value/amortized cost and estimated market
value of the Corporation's other investment securities by type at December 31,
1993.
Available for Sale Held to Maturity
----------------------- --------------------
Book/ Estimated
Amortized Market Book Market
(In thousands) Cost Value Value Value
=================================================================================================================================
Bonds, debentures and other securities of:
Foreign banks $ 612,888 $ 647,393 $ -- $ --
Foreign governments and government agencies 1,005,534 1,076,173 -- --
Foreign companies 576,041 598,420 1,666 1,666
Domestic companies 269,057 284,992 2,783 2,783
U.S. financial organizations 584,425 598,410 46,817 46,652
Interest rate swaps -- (30,492) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
$3,047,945 $3,174,896 $ 51,266 $ 51,101
=================================================================================================================================
TRADING ACCOUNT ASSETS
Trading account assets include securities of the U.S. Government, foreign
governments, restructuring countries and corporations recorded at market value
with the resultant gains or losses recorded as trading account profits and
commissions. Trading account assets also include loans to borrowers in
restructuring countries which are marked to market, with the resultant gains or
losses included in gain or loss on loans sold or held for sale. At year end
1993, trading account assets included approximately $18.2 million of
restructuring countries' obligations carried at their estimated market value.
PRECIOUS METALS
In considering where to invest funds from deposits and other liabilities
maturing within one year, precious metals arbitrage frequently offers an
attractive investment alternative for the Corporation. The Corporation trades
gold and silver bullion, both for immediate delivery and for delivery in the
future and also buys and sells options on precious metals. The Corporation is
a dealer in gold and silver bullion and coins that are sold to commercial and
industrial users and investors. In this activity, the Corpora-
40
14
tion also receives or delivers gold on consignment and maintains its own
inventory. The Corporation generally hedges its inventory against price
fluctuations. At December 31, 1993 and 1992, approximately $24.8 million and
$14.9 million, respectively, of the Corporation's inventory in precious metals
was unhedged.
The Corporation expanded its precious metals capabilities with the acquisition
of Mase. Mase engages in global wholesale trading in gold, silver, platinum
and palladium, including spot, forward and options dealing, and providing
financial services in gold loans to central banks, international financial
institutions and institutional investors; it also offers production and
inventory financing to mining companies, industrial manufacturers and
end-users.
LOAN PORTFOLIO
Average loans in domestic offices showed a modest increase in 1993, after a
decline of $.6 billion in 1992. Average loans in foreign offices in 1993
remained stable after the modest decline of $.3 billion in 1992 from 1991. As
a percentage of average loans outstanding, domestic office loans represented
approximately 70% of the total loan portfolio in each of the last two years.
At year end 1993, the domestic loan portfolio consisted of $1.3 billion of
one-four family residential mortgages and $1.9 billion of commercial real
estate loans.
The following tables present loan portfolio information related to maturity
distribution and interest rate sensitivity, based on scheduled repayments.
These tables exclude consumer loans and residential mortgage loans totaling
$1.4 billion at December 31, 1993.
Due After One
Due in One Year Through Due After
(In thousands) Year Or Less Five Years Five Years Total
=================================================================================================================================
Domestic:
Commercial and other $1,819,634 $180,624 $183,241 $2,183,499
Real estate - commercial 426,726 715,847 711,804 1,854,377
Banks and other financial institutions 7,384 --- --- 7,384
Broker loans 678,490 --- --- 678,490
- ---------------------------------------------------------------------------------------------------------------------------------
Total domestic loans 2,932,234 896,471 895,045 4,723,750
- ---------------------------------------------------------------------------------------------------------------------------------
Foreign:
Commercial and other 1,818,575 262,666 34,166 2,115,407
Real estate - commercial 43,410 47,446 65 90,921
Banks and other financial institutions 50,331 11,939 6,146 68,416
Foreign governments and government agencies 317,512 96,524 15,196 429,232
Broker loans 724,120 8,692 --- 732,812
- ---------------------------------------------------------------------------------------------------------------------------------
Total foreign loans 2,953,948 427,267 55,573 3,436,788
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans $5,886,182 $1,323,738 $950,618 $8,160,538
=================================================================================================================================
At December 31, 1993, 72% of the loan portfolio presented above was due in one
year or less compared to 63% in 1992. Of the total loan portfolio due in one
year or less, 50% were domestic loans and 50% were foreign loans.
The following table is an analysis, at December 31, 1993, of loans due after
one year which have fixed interest rates and those with interest rates
that vary directly in relation to the Corporation's reference rate, an
international money market rate or some other similar variable base rate.
Loans with variable rates amounting to $1.1 billion are due after one year.
(In thousands) Fixed Rate Variable Rate Total
=================================================================================================================================
Loans due after one year:
Domestic loans $1,008,700 $ 782,816 $1,791,516
Foreign loans 170,137 312,703 482,840
- ---------------------------------------------------------------------------------------------------------------------------------
$1,178,837 $1,095,519 $2,274,356
=================================================================================================================================
41
15
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
ALLOWANCE FOR POSSIBLE LOAN LOSSES
[ALLOWANCE FOR POSSIBLE LOAN LOSSES BAR GRAPH -- SEE EDGAR APPENDIX]
The allowance for possible loan losses increased $70.9 million to $311.9
million at year end 1993, representing 3.28% of loans outstanding, net of
unearned income, compared to $241.0 million, or 3.01%, at year end 1992. In
1993, the Corporation's provision for loan losses was $85.0 million and net
loan charge-offs, excluding restructuring country debt, were $34.5 million.
The Corporation had $21.2 million of net recoveries related to restructuring
country debt in 1993, primarily related to the sale of Argentine Interest Bonds
received in connection with its debt restructuring.
In 1992, the Corporation's provision, for loan losses was $120.0 million and
net loan charge-offs were $105.8 million. Net charge-offs of restructuring
country debt of $6.6 million included recoveries of $11.7 million related to
Brazil and Argentine obligors. The charge-offs of restructuring country debt
was primarily related to eastern European countries. During 1992, economic
difficulties were experienced by a limited number of domestic commercial
businesses and a limited number of international loans which resulted in
increased charge-offs and an increased provision for loan losses.
In May 1993, SFAS No. 114, "Accounting by Creditors for Impairment of a Loan",
was issued and is effective for fiscal years beginning after December 15, 1994.
This SFAS prescribes the recognition criteria and measurement methods for
certain impaired loans and loans modified in troubled debt restructurings.
Under the SFAS, impairment would be measured based on management's estimate of
the discounted value of expected future cash flows at a loan's effective
interest rate or an existing market price or the fair value of collateral. The
amount of impairment would be recorded as a charge to earnings. The
Corporation is currently reviewing the impact of adopting this SFAS, which,
based on the current level of non-performing loans, should not have a material
impact on the Corporation's results of operations.
The following table presents data related to the Corporation's allowance for
possible loan losses for each of the years in the five-year period ended
December 31, 1993.
(Dollars in thousands) 1993 1992 1991 1990 1989
=================================================================================================================================
Balance at beginning of year $241,020 $227,454 $236,634 $287,501 $180,446
Charge-offs:
Domestic:
Commercial and industrial 11,947 51,956 65,363 42,548 11,227
Installment loans to individuals 1,757 2,396 3,028 1,987 2,091
Secured by real estate 32,466 36,022 6,310 7,066 --
Foreign 12,731 20,257 6,603 2,127 2,644
Losses on sale, swap and charge-off of
restructuring countries' debt 9,729 18,477 4,304 63,939 90,908
- ---------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 68,630 129,108 85,608 117,667 106,870
- ---------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Domestic:
Commercial and industrial 15,281 9,498 8,505 1,329 722
Installment loans to individuals 661 680 690 812 1,176
Secured by real estate 2,731 289 38 254 --
Foreign* 36,693 12,849 5,761 3,251 3,800
- ---------------------------------------------------------------------------------------------------------------------------------
Total recoveries 55,366 23,316 14,994 5,646 5,698
- ---------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (13,264) (105,792) (70,614) (112,021) (101,172)
Provision charged to operating expense 85,000 120,000 62,000 40,000 209,000
Allowance of acquired companies 297 764 -- 21,887 --
Translation adjustment (1,198) (1,406) (566) (733) (773)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $311,855 $241,020 $227,454 $236,634 $287,501
=================================================================================================================================
*Primarily restructuring country debt in 1993, 1992 and 1991.
42
16
The following table presents loan data and ratios related to the allowance for
possible loan losses and charge-offs for each of the years in the five-year
period ended December 31, 1993.
(Dollars in millions) 1993 1992 1991 1990 1989
===================================================================================================================================
LOANS
Loans outstanding, net of unearned income, at end of year $9,509 $8,007 $8,569 $9,005 $6,580
Average loans outstanding, net of unearned income,
during the year $8,891 $8,732 $9,623 $10,603 $8,367
RATIOS
Allowance for possible loan losses to loans outstanding, net of
unearned income, at end of year 3.28% 3.01% 2.65% 2.63% 4.37%
Net charge-offs to average loans outstanding, net of unearned
income, during the year:
Including restructuring countries' charge-offs .15% 1.21% .73% 1.06% 1.21%
Excluding restructuring countries' charge-offs .39% 1.14% .73% .45% .12%
Net charge-off coverage(1)
Including restructuring countries' charge-offs 40.44x 4.42x 4.95x 2.35x 2.62x
Excluding restructuring countries' charge-offs 15.55x 4.71x 5.01x 5.48x 25.82x
====================================================================================================================================
(1) Calculated by dividing net charge-offs into income before income taxes plus
the provision for loan losses.
The following table presents information related to the Corporation's
non-accrual loans (90 days past due) and other non-performing assets at
December 31, in each of the last five years.
(In thousands) 1993 1992 1991 1990 1989
====================================================================================================================================
Non-accrual loans:
Domestic $ 48,084 $ 49,929 $ 68,571 $113,492 $ 19,448
Foreign-restructuring countries 33,853 42,123 42,836 33,776 66,558
Foreign -- other 12,956 38,276 18,054 1,588 2,157
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans 94,893 130,328 129,461 148,856 88,163
- ------------------------------------------------------------------------------------------------------------------------------------
Other non-performing assets:
Other real estate owned 23,338 55,551 41,401 7,661 1,342
Other non-accrual assets --- 4,572 3,125 7,904 5,860
- ------------------------------------------------------------------------------------------------------------------------------------
Total other non-performing assets 23,338 60,123 44,526 15,565 7,202
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans and other
non-performing assets $118,231 $190,451 $173,987 $164,421 $95,365
====================================================================================================================================
The above table excludes domestic restructured performing loans amounting to
$63.0 million, $58.5 million and $27.0 million in 1993, 1992 and 1991,
respectively. Foreign loans to obligors in restructuring countries in the
above table, principally Brazil and Argentina, have market values in excess of
their carrying value at December 31, 1993.
Total non-performing assets declined to $118.2 million at December 31, 1993,
from $190.5 million at year end 1992, principally due to the reductions in
other foreign non-performing loans and other real estate owned. At year end
1993 other non-accrual assets, which consisted of securities classified as
available for sale that have been marked to market with the adoption of SFAS
No. 115, were excluded from the classification of non-performing assets.
CROSS-BORDER OUTSTANDINGS
The following tables present information related to the Corporation's
cross-border net outstandings denominated in dollars or other non-local
currencies, including the excess of local currency outstandings over local
currency liabilities. Outstandings are classified by type of borrower, based
on ultimate risk, and are defined as loans, acceptances, interest-bearing
deposits with banks, investment securities and accrued interest receivable,
after deducting cash collateral. Countries where such outstandings exceeded
43
17
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
1.0% of consolidated total assets of $39.5 billion, $37.1 billion and $31.2
billion at December 31, 1993, 1992 and 1991, respectively, were as follows:
Commercial Total
Banks and Other Government and and ----------------------------
(In millions) Financial Institutions Official Institutions Industrial(1) 1993 1992 1991
====================================================================================================================================
France $ 744 $ 901 $ 622 $ 2,267 $ 3,309 $ 2,113
Japan 1,661 --- 144 1,805 2,711 4,667
Canada 618 96 216 930 1,941 1,266
Belgium/Luxembourg 248 --- 632 880 913 934
Netherlands 600 --- 41 641 1,129 674
United Kingdom 398 1 239 638 1,370 1,271
Germany 597 --- 26 623 1,059 691
- ------------------------------------------------------------------------------------------------------------------------------------
$4,866 $ 998 $1,920 $ 7,784 $12,432 $11,616
====================================================================================================================================
(1) Includes excess of local currency outstandings over local currency
liabilities.
At December 31, 1992 and 1991, the only other countries with cross-border net
outstandings exceeding 1.0% of consolidated total assets which are excluded
from the table above were Italy with $506 million in 1992 and $957 million in
1991, Taiwan with $416 million in 1992 and Spain with $399 million in 1991.
At December 31, in each of the last three years, countries with cross-border
net outstandings representing between .75% and 1.0% of consolidated total
assets were: Spain with $326 million and Taiwan with $384 million in 1993,
Spain with $358 million in 1992 and Taiwan with $238 million in 1991.
At December 31, 1993, medium and long-term outstandings to restructuring
countries were 1.46% of total assets, with no individual country's outstandings
representing more than 0.42% of total assets at such date.
The following table presents the distribution of the Corporation's total
cross-border net outstandings at December 31, in each of the last two years,
based on the annual gross national product per capita of the borrower's or
guarantor's country of residence. Classifications of countries are derived,
for each year, from data available from the International Bank for
Reconstruction and Development.
1993 1992
--------------------- --------------------
(Dollars in millions) AMOUNT % Amount %
======================================================================================================================
High Income:
OECD countries $ 9,320 80.7 $13,932 89.6
Non-OECD countries 854 7.4 710 4.6
Middle Income:
Upper 919 8.0 620 4.0
Lower 432 3.7 265 1.7
Low Income 21 .2 17 .1
- ----------------------------------------------------------------------------------------------------------------------
Total $11,546 100.0 $15,544 100.0
======================================================================================================================
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
As a result of the Corporation's strategy of providing financial services to
meet the changing needs of its various customer franchises, the level of
activity and revenues related to off-balance sheet activities is higher in 1993
than in 1992. Revenue increases occurred in foreign exchange and precious
metals activities in which the Corporation has been active for several years,
as well as in derivative products where a new trading activity was established
in 1993. See "Other Operating Income" in Management's Discussion and Analysis.
It is expected that client demand for these products will continue to grow and
will result in increases in related revenues in 1994.
44
18
Derivative instruments are contracts whose value is derived from the value of
an underlying financial instrument or physical commodity, or an index thereon.
Derivative instruments do not generally involve exchange of principal amounts
but may involve the payment of a fee or premium.
The Corporation is an international dealer in such instruments including
futures, forwards, swaps and options related to interest rates, foreign
exchange rates, equity indices and commodity prices in contracts denominated in
U.S. dollars and other currencies. The Corporation focuses especially on the
structuring of customized transactions to meet client needs. Counterparties
with the Corporation are generally financial institutions, including banks,
central banks, other government agencies both foreign and domestic, insurance
companies, and investment managers.
The Corporation accounts for its dealer activities in derivative instruments on
a mark to market basis. Derivative transactions executed as part of the
Corporation's asset-liability management are accounted for on an accrual basis
in the interest income or expense of the related asset or liability. For
further discussion of accounting for derivatives see Note 1G. of "Notes to
Consolidated Financial Statements."
The market risk of derivatives arises principally from the potential for
changes in the prices of underlying securities, commodities or indices, or the
volatility of such prices. The Corporation routinely reduces or eliminates
exposure to market risks by entering into hedging transactions. In order to
control risk, limits for all elements of market risk impacting value are
established, monitored and reviewed regularly.
The credit risk of derivatives arises from the potential for a counterparty to
default on its contractual obligations. The Corporation attempts to limit
credit risk by dealing with investment grade counterparties and obtaining
collateral where appropriate. It is the Corporation's policy to use netting
agreements where obtainable. Global credit limits, which cover total exposure
across all products, including derivative products, are established for each
counterparty. These limits are monitored and reviewed regularly.
The notional amounts of derivatives outstanding is not indicative of the
potential for gain or loss on such transactions. The notional amounts shown in
the table in Note 16 of "Notes to Consolidated Financial Statements" reflect
all contracts, both with and without credit exposure. Credit exposure exists
whenever a contract has a positive market value. At December 31, 1993, gross
credit exposure associated with derivative contracts was $1.520 billion.
Credit related financial instruments include commitments to extend credit,
standby letters of credit and guarantees. These commitments have fixed
expiration dates and require the payment of a fee, that is recorded as
commission income over the life of the commitment period. The Corporation
issues such instruments in the normal course of business to financial and
commercial counterparties.
Credit risk associated with credit related financial instruments is limited to
the contractual amounts of these instruments. Global credit limits which cover
total exposure across all products, including these types of commitments, are
established for each counterparty. These limits are monitored and reviewed
regularly. Additional information related to these instruments is contained in
Note 16 of "Notes to Consolidated Financial Statements."
45
19
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
RISK MANAGEMENT
Many risks arise in the ordinary conduct of banking business. The Corporation
manages several types of risks, principally credit and market risks, in the
interest of reducing uncertainty as to the level of future earnings and as to
the book value of the Corporation. Credit risk arises whenever the Corporation
owns a commitment of another party that has a positive value. Market risk
arises from the Corporation's trading activities and asset-liability
management. The Corporation seeks to control these risks by diversifying its
exposures and activities over many instruments, markets, clients and geographic
regions and by limiting risk positions.
In 1993, the Corporation established the Risk Assessment Committee of the Board
of Directors and a Risk Assessment and Control Department, that reports
directly to the Board Committee. It is the task of this department to enhance
existing effective methods and processes for defining, measuring, monitoring
and limiting risk within the Corporation.
The processes and procedures by which the Corporation manages its risk profile
continually evolves as the Corporation's business activities change in response
to market and product developments. The Corporation routinely reviews its
procedures in order to ensure that they are comprehensive with respect to all
major risks, and that a consistent approach is followed throughout the
organization.
To enhance the control environment for the Corporation's activities and assist
in decision making, significant investments have been made in the training of
personnel and in the development of information technology. Proprietary
trading and analytical systems have been developed for the Corporation's
existing and future business. This control environment is subject to periodic
review by regulators, internal auditors and independent outside auditors.
CREDIT RISK
The Credit Review Committee establishes policies and procedures to define,
quantify, and monitor the credit risks, including settlement risk, arising from
the Corporation's diverse activities.
Global limits are established to control these risks and it is the
responsibility of each operating unit to conduct its business activity within
pre-established limits. Overages with respect to customer credit, currency or
transaction exposure must be approved by senior management.
The Credit Review Department provides an independent evaluation of the loan
portfolio and assures ongoing credit quality by reviewing individual credits
and concentrations with a focus on operating units where risk is at a higher
level, and monitoring of corrective action where necessary. Additionally, the
Credit Review Department evaluates documentation, adherence to laws and
regulations, and to Bank policy as stated in the Corporation's Credit Policy
Manual. The Credit Review Department also prepares monthly and quarterly
portfolio review summaries for executive management and the Board of Directors.
On a quarterly basis the adequacy of the Corporation's allowance for loan
losses on both a consolidated and stand-alone entity basis is assessed using
historical loss analysis and a variety of other measurement techniques.
MARKET RISK
To manage market risk the Corporation establishes limits for interest rate,
foreign currency, and other market exposures. An important tool in monitoring
exposures and establishing limits for substantially all of our products is the
estimation of the potential loss of current and future earnings on existing
positions under a range of assumptions within the markets being measured.
The Management Asset and Liability Committee provides a forum for reviewing the
Corporation's liquidity profile and the market risk in its asset and liability
management and trading positions. The Management Asset and Liability Committee
regularly reviews the Corporation's market exposures and analyzes the effects
of actual or projected changes in rates, prices or market liquidity on the
value of these positions. Such committee also reviews the Corporation's
liquidity profile by monitoring the differences in maturities between assets
and liabilities and by analyzing the future level of funds required based on
various assumptions, including its ability to liquidate investment and trading
positions and its ability to access the markets.
46
20
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL FINANCING POLICY
The Corporation's policy is to obtain capital externally when opportunities
arise, if the cost of such capital is reasonable and the form is appropriate
for the Corporation's needs and overall capital structure. In keeping with
this policy, capital has been obtained externally on several occasions
although, at such times, the Corporation, relative to other major bank holding
companies, was considered to be well capitalized.
The Corporation conducts its business through its subsidiaries. Thus, the
Corporation frequently provides capital and financing to these subsidiaries to
support their operations and to permit expansion.
In formulating its dividend policy, the Corporation's Board of Directors
considers historical financial results, future prospects and anticipated needs
for capital. The current policy, which is reviewed annually, is to pay out
approximately 25% to 30% of the prior year's earnings. This policy is intended
to provide stockholders with increasing dividend income while allowing the
Corporation to maintain its desired internal capital generation rate. Future
dividends are dependent upon the Corporation's financial results, capital
requirements and economic conditions in general.
CAPITAL TRANSACTIONS
In May 1993, in anticipation of future opportunities in the capital markets,
the Corporation filed a shelf registration statement to offer publicly,
separately or together, in one or more series, from time to time, debt
securities, warrants on debt securities, currency warrants, stock-index
warrants, other warrants, preferred stock, depositary shares representing
preferred stock and preferred or common stock warrants up to an aggregate, of
initial offering prices of $1.0 billion.
On October 21, 1993, the Corporation sold, in a public offering, $250 million
principal amount of 5 7/8% Subordinated Notes due 2008 under the above shelf
registration statement. The Notes are not redeemable prior to maturity and are
direct unsecured general obligations of the Corporation, subordinated to all of
its present and future Senior Indebtedness. The net proceeds received by the
Corporation from the sale of the Notes were used to redeem, prior to maturity,
all of its outstanding issues of Floating Rate Notes due 2004 and Floating Rate
Subordinated Notes due 2009 and 2010 in the aggregate principal amount of
$224.8 million.
[EARNINGS AND DIVIDENDS PER COMMON SHARE BAR GRAPH -- SEE EDGAR APPENDIX]
The Corporation was active in the capital markets during 1992, obtaining
capital with varying characteristics in public offerings. The Corporation
publicly sold, 4,000,000 shares of $1.9375 Cumulative Preferred Stock (the
"Preferred Stock"), which is a dividend yield of 7 3/4% on the stated value of
$25 per share. The Preferred Stock may be redeemed at the option of the
Corporation with the proceeds from an equal or higher ranked capital security,
in whole or in part, at any time or from time to time, on or after February 27,
1997 at $25 per share, plus accrued dividends to the redemption date. For the
purpose of risk-based capital requirements of bank regulatory authorities, the
Preferred Stock qualifies as Tier 1 capital. The net proceeds of $96.7 million
were used for general corporate purposes. These shares were issued under an
existing shelf registration statement which provides for public offerings of up
to an additional 6 million shares of preferred stock without par value, with a
maximum aggregate offering price of $150 million.
During 1992, an aggregate of $750 million of subordinated notes were issued in
several public offerings. All of these notes are subordinated obligations of
the Corporation and are not redeemable prior to maturity. The proceeds from
these offerings were used for general corporate purposes.
The Corporation measures how effectively it utilizes capital by two widely used
performance ratios (based on net income applicable to common stock), return on
average total assets and return on average common stockholders' equity. In
1993, return on average total assets was .73% and return on average common
stockholders' equity was 15.08% compared to .68% and 14.18%, respectively, in
1992. In 1991, average total assets returned .66% and average common
stockholders' equity returned 14.20%.
47
21
RISK-BASED CAPITAL/LEVERAGE GUIDELINES
The Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") has established guidelines that mandate risk-based capital
requirements for bank holding companies. The guidelines require a minimum
ratio of capital to risk-weighted assets (including certain off-balance-sheet
activities, such as standby letters of credit and derivative instruments) of
8.0%. At least half of the total capital ratio is to be composed of common
equity, noncumulative perpetual preferred stock and a limited amount of
cumulative perpetual preferred stock, less goodwill ("Tier 1" or "core
capital"). The remainder may consist of limited amounts of subordinated debt,
the balance of cumulative preferred stock and the allowance for loan losses
("Tier 2 capital"). A final rule that became effective in 1993 requires the
deduction of intangible assets recorded prior to February 19, 1992, purchased
mortgage servicing rights and purchased credit card relationships subject to
certain minimums.
As a supplement to its risk-based capital ratios, the Federal Reserve Board
established a minimum leverage ratio of 3.0% (Tier 1 capital to average total
assets, with Tier 1 capital being determined for this purpose in a manner
consistent with the risk-based capital guidelines). Each of the Corporation's
banking subsidiaries complies with all applicable regulatory capital
requirements. The Financial Accounting Standards Board Interpretation No. 39,
"Offsetting of Amounts Related to Certain Contracts", was issued in March 1992
and must be implemented beginning in 1994. This interpretation permits the
netting of unrealized gains and losses on certain off-balance sheet financial
instruments only when a legally enforceable netting agreement with a
counterparty exists. The Corporation currently follows the industry practice
of netting unrealized gains and losses without netting arrangements in force.
At December 31, 1993, the adoption of this accounting practice would have
increased the total assets and liabilities of the Corporation by approximately
$1.0 billion.
The Corporation's leverage ratio and its risk-based capital ratios include the
assets and capital of Safra Republic on a consolidated basis in accordance with
the requirements of the Federal Reserve Board specifically applied to the
Corporation.
The Corporation's core capital was $2.7 billion and total qualifying capital
was $4.7 billion at year end 1993, compared to $2.6 billion and $4.5 billion
in 1992. At December 31, 1993, the Corporation's ratios of core capital and
total qualifying capital to risk-weighted assets were 15.16% and 26.20%,
respectively, compared to 16.56% and 28.66% in 1992. The Corporation's
leverage ratio was 5.61% at year end 1993 compared to 5.64% at year end 1992.
These ratios substantially exceed the minimums in effect for bank holding
companies. Tier 1 capital excludes the effect of the Corporation's year end
1993 adoption of SFAS No. 115. Under this SFAS at December 31, 1993, $263
million of net unrealized gains, after tax effect, on securities available for
sale are included as a component of stockholders' equity.
The following table presents the components of the Corporation's risk-based
capital at December 31, in each of the last three years.
(In thousands) 1993 1992 1991
==================================================================================================================
Tier 1:
Common stockholders' equity $1,928,047* $1,707,004 $1,540,670
Preferred stock 306,425 306,425 206,925
Equity of Safra Republic** 609,384 578,432 564,800
Other net-goodwill, minority interest and intangible assets (98,252) (8,930) (217)
Less: 50% of investment in unconsolidated subsidiaries (2,926) (2,739) (2,536)
- ------------------------------------------------------------------------------------------------------------------
Total tier 1 2,742,678 2,580,192 2,309,642
- ------------------------------------------------------------------------------------------------------------------
Tier 2:
Qualifying preferred stock and perpetual capital notes 400,000 400,000 400,000
Qualifying long-term debt 1,372,802 1,291,466 1,156,089
Allowance for possible loan losses 228,531 195,974 196,190
Less: 50% of investment in unconsolidated subsidiaries (2,925) (2,738) (2,535)
- ------------------------------------------------------------------------------------------------------------------
Total tier 2 1,998,408 1,884,702 1,749,744
- ------------------------------------------------------------------------------------------------------------------
Total risk-based capital $4,741,086 $4,464,894 $4,059,386
==================================================================================================================
* Excluding the net unrealized gain on securities available for sale, net of
taxes of $262.8 million.
** Excluding the Corporation's investment in Safra Republic, after elimination
of the net unrealized gain on securities available for sale, net of taxes,
of $581.4 million in 1993, $553.3 million in 1992 and $534.7 million in
1991.
48
22
LIQUIDITY
Of primary importance to depositors, creditors and regulators is the ability of
the Corporation to have sufficient funds readily available to repay maturing
liabilities. In order to insure funds are available at all times, the
Corporation devotes substantial resources to projecting the amount of funds
which will be required on a daily basis and maintains relationships with a
diversity of sources so that funds are available on a global basis. Through
its worldwide network, the Corporation obtains funds from a large and varied
customer base that provides a stable source of domestic demand and consumer
deposits and foreign office deposits. Other sources provide short-term
borrowings, including the sale of commercial paper, as well as long-term
liabilities in the form of notes and debentures. Liquidity requirements can
also be met through the disposition of short-term assets that are generally
matched to the maturity of liabilities. Liquid assets include cash and due
from banks, interest-bearing deposits with banks, federal funds sold and
securities purchased under resale agreements, trading account assets and
precious metals. Average total liquid assets equaled approximately one-third
of average total assets in 1993 and 1992.
SECURITY MARKET INFORMATION
The Common Stock of the Corporation is listed on the New York Stock Exchange
(ticker symbol RNB) and the London Stock Exchange. At December 31, 1993, there
were 2,713 stockholders of record of the outstanding Common Stock of the
Corporation.
The following table presents the range of high and low sale prices reported on
the New York Stock Exchange Composite Tape and cash dividends declared for each
quarter during the past two years.
1993 1992
------------------------------------------- ---------------------------------------------
FOURTH THIRD SECOND FIRST Fourth Third Second First
QTR. QTR. QTR. QTR. Qtr. Qtr. Qtr. Qtr.
============================================================================================================================
Common stock sale price:
High $53 3/8 $53 3/4 $52 3/4 53 3/8 $47 1/2 $44 $44 3/4 $48 1/4
Low 44 7/8 50 3/4 46 1/4 44 3/8 42 1/4 40 1/4 38 39 3/8
Cash dividends declared .27 .27 .27 .27 .25 .25 .25 .25
============================================================================================================================
The dividend rate on Common Stock has been increased annually since such
payments began in 1975. The table below shows the annual dividend rate and
dividend payout ratio, Common Stock dividends declared divided by net income
applicable to common stock, in each of the last five years adjusted for a
three-for-two stock split in 1991.
[BOOK VALUE PER COMMON SHARE AT YEAR END BAR GRAPH -- SEE EDGAR APPENDIX]
1993 1992 1991 1990 1989
==================================================================================================
Dividends declared per common share $1.08 $1.00 $.95 $.88 $.85
Dividend payout ratio 20.80% 22.67% 24.10% 24.56% *
==================================================================================================
*Not meaningful
The quarterly dividend rate on Common Stock has been increased to $.33 per
share commencing with the dividend to be paid April 1, 1994.
49
23
Republic New York Corporation
CONSOLIDATED STATEMENTS OF CONDITION
December 31,
-----------------------------------
(Dollars in thousands) 1993 1992
============================================================================================================
ASSETS
Cash and due from banks $ 636,633 $ 490,711
Interest-bearing deposits with banks (note 17) 5,346,647 10,562,885
Precious metals 1,110,434 412,105
Securities held to maturity (approximate market value of $2,088,805
in 1993 and $12,363,729 in 1992) 1,992,847 12,011,358
Securities available for sale (approximate market value of $12,956,946
in 1993 and $320,970 in 1992) 12,956,946 320,113
- ------------------------------------------------------------------------------------------------------------
Total investment securities (note 3) 14,949,793 12,331,471
Trading account assets 1,182,093 702,479
Federal funds sold and securities purchased under resale agreements 2,322,465 1,505,274
Loans (net of unearned income of $94,825 in 1993 and $148,722 in
1992) (notes 4, 5 and 17) 9,508,558 8,007,457
Allowance for possible loan losses (note 5) (311,855) (241,020)
- ------------------------------------------------------------------------------------------------------------
Loans (net) 9,196,703 7,766,437
Customers' liability on acceptances 1,134,294 1,611,531
Premises and equipment (note 6) 399,626 385,557
Accounts receivable and accrued interest 2,117,879 571,648
Investment in affiliate (note 7) 625,333 553,315
Other assets 471,572 252,975
- ------------------------------------------------------------------------------------------------------------
Total assets $39,493,472 $37,146,388
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits:
In domestic offices $ 1,427,518 $ 1,236,451
In foreign offices 135,251 79,262
Interest-bearing deposits:
In domestic offices 8,724,797 9,164,704
In foreign offices 12,513,684 10,621,770
- ------------------------------------------------------------------------------------------------------------
Total deposits (note 17) 22,801,250 21,102,187
Short-term borrowings (note 8) 4,275,439 5,738,822
Acceptances outstanding 1,137,636 1,616,964
Accounts payable and accrued expenses 2,873,903 1,096,163
Due to factored clients 614,549 559,211
Other liabilities 188,658 136,191
Long-term debt (notes 9 and 17) 2,582,875 2,502,497
Subordinated long-term debt and perpetual capital notes (note 9) 2,271,940 2,130,924
Commitments and contingent liabilities (note 14) --
Stockholders' equity (notes 10 and 12):
Cumulative preferred stock, no par value 8,131,000 shares
outstanding 556,425 556,425
Common stock, $5 par value 150,000,000 shares
authorized; 52,703,271 shares outstanding in 1993 and
52,190,243 in 1992 263,516 260,951
Surplus 459,713 447,691
Retained earnings 1,204,818 998,362
Net unrealized gain on securities available for sale, net of taxes 262,750 --
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,747,222 2,263,429
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $39,493,472 $37,146,388
============================================================================================================
See accompanying notes to consolidated financial statements.
50
24
Republic New York Corporation
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data) 1993 1992 1991
================================================================================================================
INTEREST INCOME:
Interest and fees on loans $ 635,484 $ 721,909 $ 919,342
Interest on deposits with banks 295,871 385,299 591,046
Interest and dividends on investment securities:
Taxable 847,022 807,611 637,919
Exempt from federal income taxes 65,759 63,385 60,261
Interest on trading account assets 54,467 22,928 6,280
Interest on federal funds sold and securities purchased
under resale agreements 34,323 37,460 49,059
- ----------------------------------------------------------------------------------------------------------------
Total interest income 1,932,926 2,038,592 2,263,907
- ----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 689,234 804,906 1,205,989
Interest on short-term borrowings 197,769 234,249 258,010
Interest on long-term debt 270,072 279,073 218,662
- ----------------------------------------------------------------------------------------------------------------
Total interest expense 1,157,075 1,318,228 1,682,661
- ----------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 775,851 720,364 581,246
Provision for loan losses (note 5) 85,000 120,000 62,000
- ----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 690,851 600,364 519,246
- ----------------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME:
Income from precious metals 37,910 22,637 39,449
Foreign exchange trading income 111,572 102,571 81,351
Trading account profits and commissions 78,742 12,319 22,444
Investment securities gains, net 1,295 11,232 4,264
Net gain (loss) on loans sold or held for sale (843) 17,089 3,031
Commission income 50,956 37,592 34,628
Equity in earnings of affiliate (note 7) 59,463 45,220 41,083
Other income 56,377 53,587 45,183
- ----------------------------------------------------------------------------------------------------------------
Total other operating income 395,472 302,247 271,433
- ----------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSES:
Salaries 203,759 180,318 166,107
Employee benefits (note 12) 143,748 113,813 97,568
Occupancy, net (notes 6 and 14) 48,161 45,301 38,048
Other expenses 239,297 215,910 201,210
- ----------------------------------------------------------------------------------------------------------------
Total other operating expenses 634,965 555,342 502,933
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 451,358 347,269 287,746
Income taxes (note 11) 150,153 88,386 60,386
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $ 301,205 $ 258,883 $ 227,360
================================================================================================================
NET INCOME APPLICABLE TO COMMON STOCK $ 272,790 $ 230,497 $ 204,627
================================================================================================================
Net income per common share:
Primary $5.20 $4.42 $3.95
Fully diluted 5.05 4.32 3.90
Average common shares outstanding:
Primary 52,466 52,204 51,852
Fully diluted 56,321 56,020 54,292
================================================================================================================
See accompanying notes to consolidated financial statements.
51
25
Republic New York Corporation
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands) 1993 1992 1991
==============================================================================================================
CUMULATIVE PREFERRED STOCK:
Balance at beginning of year $ 556,425 $ 456,925 $ 309,425
Issuance of 4,000,000 shares of $1.9375 cumulative
preferred stock in 1992 and 3,450,000 shares of
$3.375 cumulative convertible preferred stock in 1991 -- 100,000 172,500
Repurchase of 10,000 shares of floating rate series B
preferred stock in 1992 and 250 shares of remarketed
preferred stock in 1991 -- (500) (25,000)
- --------------------------------------------------------------------------------------------------------------
Balance at end of year $ 556,425 $ 556,425 $ 456,925
==============================================================================================================
COMMON STOCK:
Balance at beginning of year $ 260,951 $ 260,227 $ 172,027
Stock dividend of 17,351,213 shares pursuant to a three-
for-two stock split -- -- 86,756
Net issuance under stock option, restricted stock and
restricted stock election plans of 513,028 shares in 1993,
353,957 shares in 1992 and 359,731 shares in 1991 2,565 1,770 1,799
Retirement of 209,083 common shares in 1992 and
71,045 common shares in 1991 -- (1,046) (355)
- --------------------------------------------------------------------------------------------------------------
Balance at end of year $ 263,516 $ 260,951 $ 260,227
==============================================================================================================
SURPLUS:
Balance at beginning of year $ 447,691 $ 448,303 $ 531,156
Cost of issuing preferred stock -- (3,340) (3,825)
Net issuance of common stock under stock option,
restricted stock and restricted stock election plans
of 513,028 shares in 1993, 353,957 shares in 1992
and 359,731 shares in 1991 12,247 11,013 10,785
Treasury stock transactions of affiliate (225) 441 (8)
Transfer to common stock on declaration of stock
dividend -- -- (86,756)
Retirement of 209,083 common shares in 1992 and
71,045 common shares in 1991 -- (8,726) (3,049)
- --------------------------------------------------------------------------------------------------------------
Balance at end of year $ 459,713 $ 447,691 $ 448,303
==============================================================================================================
RETAINED EARNINGS:
Balance at beginning of year $ 998,362 $ 832,140 $ 670,342
Net income 301,205 258,883 227,360
Foreign currency translation, net of taxes (9,588) (21,014) (2,755)
Dividends declared on common stock (56,746) (52,256) (49,324)
Dividends declared on issues of preferred stock (28,415) (28,386) (22,733)
Allowance for unrealized loss on marketable equity
securities -- 8,995 9,250
- --------------------------------------------------------------------------------------------------------------
Balance at end of year $1,204,818 $ 998,362 $ 832,140
==============================================================================================================
NET UNREALIZED GAIN ON SECURITIES
AVAILABLE FOR SALE, NET OF TAXES:
Balance at beginning of year $ -- $ -- $ --
Unrealized gains 437,845 -- --
Income tax expense (175,095) -- --
- --------------------------------------------------------------------------------------------------------------
Balance at end of year $ 262,750 $ -- $ --
==============================================================================================================
TOTAL STOCKHOLDERS' EQUITY:
Balance at beginning of year $2,263,429 $1,997,595 $1,682,950
Net changes during year 483,793 265,834 314,645
- --------------------------------------------------------------------------------------------------------------
Balance at end of year $2,747,222 $2,263,429 $1,997,595
==============================================================================================================
See accompanying notes to consolidated financial statements.
52
26
Republic New York Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) 1993 1992 1991
==================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 301,205 $ 258,883 $ 227,360
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization, net 48,337 30,829 14,187
Provision for loan losses 85,000 120,000 62,000
Gain on sales of investment securities, net (1,295) (11,232) (4,264)
Net (gain) loss on loans sold or held for sale 843 (17,089) (3,031)
Equity in earnings of affiliate (59,463) (45,220) (41,083)
Net increase in trading account assets (479,614) (433,529) (170,802)
Net (increase) decrease in accounts receivable
and accrued interest (1,494,586) (46,121) 45,773
Net increase in accounts payable and accrued expenses 1,390,159 244,611 42,504
Other, net (272,253) (89,232) (22,635)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (481,667) 11,900 150,009
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits with banks 5,948,015 (1,786,307) (1,647,404)
Net (increase) decrease in precious metals (386,014) (133,796) 180,587
Net (increase) decrease in federal funds sold and securities
purchased under resale agreements (817,191) (1,494,728) 1,071,173
Net (increase) decrease in short-term investments (289,355) (150,128) 309,402
Purchases of securities available for sale (665,347) (323,013)
Proceeds from sales of securities available for sale 346,909 -- --
Purchases of securities held to maturity (3,740,678) (5,066,901) (3,059,390)
Proceeds from sales of securities held to maturity 89,150 609,538 361,685
Proceeds from maturities of securities held to maturity 2,828,748 2,042,597 1,405,030
Net (increase) decrease in loans (1,983,538) 109,710 187,995
Payment for purchase of Mase Westpac Limited,
net of cash received (144,596) -- --
Investment in affiliate 19,477 17,312 17,312
- ------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 1,205,580 (6,175,716) (1,173,610)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 893,418 719,253 396,196
Net increase (decrease) in short-term borrowings (1,663,448) 3,936,078 (160,274)
Net increase (decrease) in due to factored clients 55,338 65,567 (5,810)
Proceeds from issuance of long-term debt 654,470 1,504,600 957,509
Repayment of long-term debt (580,071) (712,781) (786,820)
Proceeds from issuance of subordinated long-term debt 250,000 750,000 550,000
Repayment of subordinated long-term debt (108,750) (20,000) (15,000)
Net proceeds from issuance of cumulative preferred stock -- 96,660 168,675
Repurchase of cumulative preferred stock -- (500) (25,000)
Cash dividends paid (83,945) (78,952) (68,236)
Other, net 3,783 (10,257) 11,846
- ------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (579,205) 6,249,668 1,023,086
Effect of exchange rate changes on cash and due from banks. 1,214 (7,167) (12,358)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks 145,922 78,685 (12,873)
Cash and due from banks at beginning of year 490,711 412,026 424,899
- ------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 636,633 $ 490,711 $ 412,026
==================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $1,210,546 $1,265,460 $1,666,700
Income taxes 157,252 55,376 21,070
Transfers from securities held to maturity to
securities available for sale 12,318,395 -- --
==================================================================================================================
See accompanying notes to consolidated financial statements
53
27
Republic National Bank of New York
CONSOLIDATED STATEMENTS OF CONDITION
December 31,
-------------------------
(Dollars in thousands) 1993 1992
========================================================================================================
ASSETS
Cash and due from banks $ 591,112 $ 433,264
Interest-bearing deposits with banks 5,174,561 10,346,583
Precious metals 1,102,664 412,105
Securities held to maturity (approximate market value of $965,293
in 1993, and $9,768,369 in 1992) 902,903 9,529,834
Securities available for sale (approximate market value of $9,857,210
in 1993 and $320,970 in 1992) 9,857,210 320,113
- --------------------------------------------------------------------------------------------------------
Total investment securities 10,760,113 9,849,947
Trading account assets 1,138,760 637,597
Federal funds sold and securities purchased under resale agreements 2,743,692 1,355,274
Loans (net of unearned income of $45,249 in 1993 and $60,195
in 1992) 5,425,719 3,959,358
Allowance for possible loan losses (233,124) (175,990)
- --------------------------------------------------------------------------------------------------------
Loans (net) 5,192,595 3,783,368
Customers' liability on acceptances 1,134,294 1,611,531
Premises and equipment 300,246 298,451
Accounts receivable and accrued interest 634,213 444,104
Investment in affiliate (note 7) 625,333 553,315
Other assets 328,455 148,493
- --------------------------------------------------------------------------------------------------------
Total assets $29,726,038 $29,874,032
========================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Noninterest-bearing deposits:
In domestic offices $ 1,069,325 $ 962,600
In foreign offices 146,431 80,262
Interest-bearing deposits:
In domestic offices 4,255,497 4,276,544
In foreign offices 13,694,638 12,480,779
- --------------------------------------------------------------------------------------------------------
Total deposits 19,165,891 17,800,185
Short-term borrowings 2,870,290 4,897,401
Acceptances outstanding 1,137,636 1,616,964
Accounts payable and accrued expenses 1,321,915 968,560
Other liabilities 152,648 100,672
Long-term debt 2,257,847 2,002,497
Subordinated long-term debt, primarily with parent 580,940 581,174
Stockholder's equity (note 18):
Common stock, $100 par value 4,800,000 shares authorized;
3,550,000 shares outstanding 355,000 355,000
Surplus 1,160,436 1,160,661
Retained earnings 511,851 390,918
Net unrealized gain on securities available for sale, net of taxes 211,584 --
- --------------------------------------------------------------------------------------------------------
Total stockholder's equity 2,238,871 1,906,579
- --------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $29,726,038 $29,874,032
========================================================================================================
See accompanying notes to consolidated financial statements.
54
28
Republic New York Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Republic New York Corporation and its
subsidiaries (the "Corporation") reflect banking industry practices and conform
to generally accepted accounting principles. A summary of the significant
accounting policies followed by the Corporation in the preparation of the
accompanying consolidated financial statements is set forth below.
A. Basis of Consolidation. The consolidated financial statements include the
accounts of the Corporation and its subsidiaries, principally Republic National
Bank of New York (the "Bank"), Republic Bank for Savings ("RBS"), formerly The
Manhattan Savings Bank, Republic New York Securities Corporation and Republic
Factors Corp. Investments in affiliates which are less than majority-owned but
more than 20% owned are accounted for by the equity method. Significant
intercompany transactions are eliminated in consolidation.
B. Foreign Operations. Foreign currency assets and liabilities are translated
into their U.S. dollar equivalents based on rates of exchange generally
prevailing at year end. Revenue and expense accounts are generally translated
at average exchange rates for the year. Net translation gains or losses on
foreign currency financial statements of operations whose functional currency
is the U.S. dollar, including those financial statements of operations in
highly inflationary economies, are included in other income or other expenses
together with net gains or losses from related hedges. Net translation gains
or losses on foreign currency financial statements of operations whose
functional currency is not the U.S. dollar are a component of retained
earnings, net of related hedging results, after tax effect.
Foreign currency amounts of foreign currency denominated assets and liabilities
are generally sold/purchased under fixed forward contracts at prices which
differ from cost. Such differences, which are considered part of the interest
yields, are reflected in net interest income ratably over the life of the
contracts.
C. Statement of Cash Flows. For purposes of the Statement of Cash Flows the
Corporation defines cash and cash equivalents as the Statement of Condition
caption cash and due from banks.
D. Investment Securities. Effective December 31, 1993, the Corporation adopted
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This SFAS requires, among other things, that securities designated
as available for sale be revalued at each period end with the unrealized gain
or loss, net of tax effect, recorded as an element of stockholders' equity.
The designation of a security as held to maturity or available for sale is made
at the time of acquisition. The held to maturity classification includes debt
securities that the Corporation has the positive intent and ability to hold to
maturity which are carried at amortized cost. The available for sale
classification includes debt and equity securities which are carried at fair
value. Unrealized gains or losses on securities available for sale and
derivative instruments used to hedge these securities are included as a
separate component of stockholders' equity, net of tax effect. Gains or losses
on sales of securities are recognized by the specific identification method and
are recorded in investment securities gains, net.
Prior to December 31, 1993, debt securities available for sale were carried at
the lower of cost or market value in the aggregate with adjustments to the
carrying value recorded as investment securities losses, net. Marketable
equity securities were carried at the lower of cost or market value in the
aggregate. The aggregate unrealized losses on marketable equity securities
were included in a valuation allowance account and shown as a reduction of
retained earnings.
E. Trading Account Assets. Trading account securities are held to benefit
from short-term changes in market prices. Trading account securities and
liabilities incurred in short-sale transactions are carried at market. Such
liabilities are included in short-term borrowings. Gains and losses on trading
account activities, including market value adjustments, are reported as trading
account profits and commissions. Trading account loans are marked to market
with the resultant gains or (losses) included in net gain (loss) on loans sold
or held for sale.
F. Loans. Loans are carried at their principal amount outstanding, net of
unearned income. Unearned income on discounted loans is accreted monthly into
interest income.
Non-accrual loans are those loans (other than consumer installment and
residential mortgage loans) on which the accrual of interest ceases when
principal or interest payments are past due 90 days or more. When a loan is
placed on a non-accrual basis all accrued interest receivable is reversed and
charged
55
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
against current interest income. Thereafter, interest income on non-accrual
loans is recorded only when received in cash. A loan may be placed on a
non-accrual status prior to the 90 day period if, in management's opinion,
conditions warrant.
Residential mortgage loans are placed on non-accrual status when the mortgagor
is in bankruptcy or foreclosure proceedings are instituted. Any accrued
interest receivable remains in interest income as an obligation of the
borrower. The Corporation charges off any consumer installment loan which is
past due 90 days or more.
G. Derivative Products. The Corporation's use of derivatives includes futures,
forwards, swaps, caps, floors, and options in the interest rate, foreign
exchange, equity, and precious metals commodity markets. The Corporation uses
these instruments for trading and to assist in its asset and liability
management.
Derivatives that are used for trading or to hedge other trading instruments are
carried on a mark to market basis with resultant gains and losses included in
trading account profits and commissions, foreign exchange trading income and
income from precious metals. Unrealized gains and losses and option premium
values are recorded on the balance sheet in other assets or other liabilities.
In valuing such contracts, the Corporation considers potential credit costs,
future servicing costs, future capital costs and transaction hedging costs
which are recognized over the life of the contracts.
Foreign exchange trading positions are revalued monthly by pricing spot foreign
exchange and forward contracts for foreign exchange at prevailing market rates.
The Corporation's precious metals activities include arbitrage, purchases and
sales of precious metals for forward delivery, options on precious metals and
precious metals loans. Precious metals, outstanding open positions in
contracts for forward delivery, option contracts and precious metals loans are
revalued monthly at prevailing market rates. Precious metals interest
arbitrage balances are recorded at cost, with the difference of the fixed
forward contract price over cost accreted into income from precious metals
ratably over the life of the contract.
Additionally, the Bank is a licensed depository for the storage of gold and
silver bullion and coins traded on various commodity exchanges. Fees derived
from such storage are included in other income. The Corporation substantially
hedges its total investments in precious metals by forward sales. The unhedged
portion of these investments was $24,820,000 and $14,877,000 at December 31,
1993 and 1992, respectively.
The Corporation enters into interest rate and foreign currency swap and option
transactions as part of its asset and liability exposure management. The
notional amount of these contracts are recorded as off-balance sheet
transactions. The net settlements on such transactions are accrued as an
adjustment to interest income or expense over the lives of the agreements.
Gains or losses on terminated derivative product contracts used as hedges of
non-trading assets or liabilities are deferred over the life of the
original hedge.
H. Allowance for Possible Loan Losses. The allowance for possible loan losses
is increased by provisions charged to operating expense and decreased by
charge-offs, net of recoveries. The provision for loan losses is based on the
Corporation's past loan loss experience and other factors which, in
management's judgment, deserve current recognition in estimating possible loan
losses. Such other factors considered by management include the composition of
the loan portfolio and worldwide economic conditions.
I. Income Taxes. The Corporation files a consolidated Federal income tax
return. The Corporation adopted on a prospective basis SFAS No. 109,
"Accounting for Income Taxes", effective January 1, 1993. The cumulative
effect of that change in the method of accounting for income taxes was not
material. Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of changes in tax rates is recognized in
income in the period the change occurs. The earnings of the Corporation's
foreign subsidiaries were not subject to U.S. income taxes for taxable years
beginning prior to 1987, except to the extent that they were remitted as
dividends. The undistributed earnings prior to 1987 of the Corporation's
foreign subsidiaries are expected to be reinvested indefinitely in the
subsidiaries' operations; accordingly, no taxes have been provided on such
undistributed earnings.
56
30
J. Earnings Per Common Share. Primary earnings per common share are computed
by dividing net income, less preferred stock dividend requirements, by the
average number of common shares outstanding during each of the years.
Fully diluted earnings per share are based on the average number of common
shares outstanding adjusted for the assumed conversion of outstanding
convertible preferred stock from the date of issuance and the additional shares
assumed to be issued under stock option plans, if dilutive. Net income
applicable to common stock is adjusted by adding back the dividends on the
convertible preferred stock.
K. Reclassification. Certain amounts from prior years have been reclassified
to conform with 1993 classifications.
2. ACQUISITION OF MASE WESTPAC LIMITED
On December 31, 1993, the Corporation completed the acquisition of Mase Westpac
Limited, ("Mase") by its wholly owned subsidiary, Republic National Bank of New
York. The transaction was accounted for as a purchase and, as such, the assets
and liabilities of Mase were recorded at their estimated fair values. The
excess of cost over the net assets acquired, goodwill, amounted to
approximately $55 million and will be amortized to expense on a straight-line
basis over a period of 15 years. Mase's assets of approximately $1.4 billion
are included in the Corporation's statement of condition at December 31, 1993.
Mase had no effect on the Corporation's results of operations for 1993.
3. INVESTMENT SECURITIES
On December 31, 1993, the Corporation adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The following table
presents information related to the Corporation's portfolio of securities held
to maturity and available for sale at respective year ends.
1993
---------------------------------------------------------
Gross Unrealized Estimated
Book ------------------------ Market
(In thousands) Value Gains (Losses) Value
=========================================================================================================================
Securities held to maturity:
U.S. Government and federal agency obligations $ 1,357,279 $ 35,309 $ (2,969) $ 1,389,619
Obligations of U.S. states and political subdivisions 584,302 64,161 (378) 648,085
Other 51,266 -- (165) 51,101
- -------------------------------------------------------------------------------------------------------------------------
$ 1,992,847 $ 99,470 $ (3,512) $ 2,088,805
=========================================================================================================================
1993
---------------------------------------------------------
Gross Unrealized Book/
Amortized ------------------------ Market
(In thousands) Cost Gains (Losses) Value
=========================================================================================================================
Securities available for sale:
U.S. Government and federal agency obligations $ 9,515,080 $316,706 $ (6,457) $ 9,825,329
Other bonds, debentures and redeemable preferred stocks 2,922,793 184,732 (30,724) 3,076,801
Equity securities 125,152 3,537 (102) 128,587
Interest rate swaps --- --- (73,771) (73,771)
- -------------------------------------------------------------------------------------------------------------------------
$12,563,025 $504,975 $(111,054) $12,956,946
=========================================================================================================================
1992
---------------------------------------------------------
Gross Unrealized Estimated
Book ------------------------ Market
(In thousands) Value Gains (Losses) Value
=========================================================================================================================
Securities held to maturity:
U.S. Government and federal agency obligations $ 8,750,958 $299,402 $(10,378) $ 9,039,982
Obligations of U.S. states and political subdivisions 543,005 53,430 (567) 595,868
Other bonds, debentures and redeemable preferred stocks 2,515,890 67,130 (57,897) 2,525,123
Equity securities 201,505 3,994 (2,743) 202,756
- -------------------------------------------------------------------------------------------------------------------------
$12,011,358 $423,956 $(71,585) $12,363,729
=========================================================================================================================
57
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1992
----------------------------------------------------
Gross Unrealized Estimated
Book ---------------------- Market
(In thousands) Value Gains (Losses) Value
=========================================================================================================================
Securities available for sale:
U.S. Government and federal agency obligations $303,158 $857 $ -- $304,015
Other bonds, foreign 16,955 -- -- 16,955
- -------------------------------------------------------------------------------------------------------------------------
$320,113 $857 $ -- $320,970
=========================================================================================================================
The following table presents information for investments in securities held to
maturity and securities available for sale at December 31, 1993, based on
scheduled maturities. Actual maturities can be expected to differ from
scheduled maturities due to prepayment or early call privileges of the issuer.
Held To Maturity Available For Sale
----------------------- -----------------------------
Book Estimated Amortized Book/Market
(In thousands) Value Market Value Cost Value
===========================================================================================================================
Due in one year or less $ 1,975 $ 1,823 $ 1,176,974 $ 1,181,721
Due after one year through five years 12,791 13,802 1,043,896 1,085,230
Due after five years through ten years 112,779 128,593 283,335 315,166
Due after ten years 508,023 554,968 1,017,442 1,104,191
Mortgage-backed securities 1,357,279 1,389,619 9,041,378 9,344,409
Interest rate swaps -- -- -- (73,771)
- -------------------------------------------------------------------------------------------------------------------------
$1,992,847 $2,088,805 $12,563,025 $12,956,946
=========================================================================================================================
The following table presents the components of net investment securities gains
for each of the last two years:
(In thousands) 1993 1992
=========================================================================================================================
Gross gains on:
Sales of securities $ 5,646 $ 28,577
Maturities, calls and mandatory redemptions 8,124 3,196
Gross losses on:
Sales of securities (11,042) (18,284)
Maturities, calls and mandatory redemptions (1,433) (2,257)
- -------------------------------------------------------------------------------------------------------------------------
$ 1,295 $ 11,232
=========================================================================================================================
Investment securities having a book value of approximately $2.1 billion at
December 31, 1993, were pledged to secure public deposits, short-term
borrowings and for other purposes required or permitted by law.
4. LOANS
The following table sets forth the composition of the Corporation's loan
portfolio at respective year ends.
(In thousands) 1993 1992
=========================================================================================================================
Domestic:
Real estate - residential mortgage $1,310,718 $1,454,416
Real estate - commercial 1,854,377 2,107,112
Banks and other financial institutions 7,384 14,841
Broker loans 678,490 307,018
Commercial and industrial 2,152,691 1,859,595
Individuals 90,218 51,305
All other 16,915 59,852
Foreign 3,492,590 2,302,040
- -------------------------------------------------------------------------------------------------------------------------
9,603,383 8,156,179
Less unearned income (94,825) (148,722)
- -------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income $9,508,558 $8,007,457
=========================================================================================================================
58
32
5. ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Corporation's allowance for possible loan losses is determined by
management based on previous loan loss experience, prevailing and anticipated
economic conditions and the composition of the loan portfolio, all of which are
continuously reviewed. The allowance is viewed by management to be an
adequate, single, unallocated reserve, available for potential loan losses. To
comply with regulatory reporting requirements, management has allocated the
allowance for possible loan losses between domestic and foreign components. By
such allocation, management does not intend to imply that future charge-offs
will necessarily follow the same pattern or that any portion of such allowance
is restricted in any way.
Changes in the Corporation's allowance for possible loan losses applicable to
domestic and foreign operations for each of the years in the three-year period
ended December 31, 1993 were as follows:
1993 1992 1991
---------------------------- ---------------------------- -----------------------------
(In thousands) Domestic Foreign Total Domestic Foreign Total Domestic Foreign Total
===================================================================================================================================
Balance, Jan. 1 $161,699 $ 79,321 $241,020 $100,842 $126,612 $227,454 $ 41,310 $195,324 $236,634
Provision 55,000 30,000 85,000 140,000 (20,000) 120,000 125,000 (63,000) 62,000
- -----------------------------------------------------------------------------------------------------------------------------------
216,699 109,321 326,020 240,842 106,612 347,454 166,310 132,324 298,634
- -----------------------------------------------------------------------------------------------------------------------------------
Charge-offs (46,170) (12,731) (58,901) (90,374) (20,257) (110,631) (74,701) (6,603) (81,304)
Losses on sale, swap
and net (charge-offs)
recoveries of
restructuring
countries debt --- 21,238 21,238 --- (6,642) (6,642) --- (789) (789)
Recoveries 18,673 5,726 24,399 10,467 1,014 11,481 9,233 2,246 11,479
- -----------------------------------------------------------------------------------------------------------------------------------
Net (charge-offs)
recoveries (27,497) 14,233 (13,264) (79,907) (25,885) (105,792) (65,468) (5,146) (70,614)
Allowance of acquired
companies 297 --- 297 764 --- 764 --- --- ---
Translation
adjustment --- (1,198) (1,198) --- (1,406) (1,406) --- (566) (566)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, Dec. 31 $189,499 $122,356 $311,855 $161,699 $79,321 $241,020 $100,842 $126,612 $227,454
===================================================================================================================================
The following table shows the book balances of the Corporation's non-accrual
and restructured loans (excluding consumer installment loans) at respective
year ends.
(In thousands) 1993 1992 1991
===================================================================================================================================
Domestic $ 48,084 $ 49,929 $ 68,571
Foreign restructuring countries 33,853 42,123 42,836
Foreign - other 12,956 38,276 18,054
- -----------------------------------------------------------------------------------------------------------------------------------
Non-accrual loans 94,893 130,328 129,461
Restructured loans 63,008 58,458 26,991
- -----------------------------------------------------------------------------------------------------------------------------------
Total $157,901 $188,786 $156,452
===================================================================================================================================
The following table presents the effect of non-accrual and restructured loans
on interest income for each of the years in the three-year period ended
December 31, 1993.
(In thousands) 1993 1992 1991
===================================================================================================================================
Gross amount of interest that would have been earned at original contract rates:
Domestic $11,321 $ 4,810 $ 7,557
Foreign 6,685 8,863 4,832
- -----------------------------------------------------------------------------------------------------------------------------------
$18,006 $13,673 $12,389
===================================================================================================================================
Actual amount recorded as interest income:
Domestic $ 7,368 $ 1,672 $ 2,495
Foreign 1,654 2,226 1,283
- -----------------------------------------------------------------------------------------------------------------------------------
$ 9,022 $ 3,898 $ 3,778
===================================================================================================================================
Foregone interest income:
Domestic $ 3,953 $ 3,138 $ 5,062
Foreign 5,031 6,637 3,549
- -----------------------------------------------------------------------------------------------------------------------------------
$ 8,984 $ 9,775 $ 8,611
===================================================================================================================================
59
33
NOTES TO CONSOLIDATED FINANCIAL STATEMONTS (continued)
6. PREMISES AND EQUIPMENT
A summary of the Corporation's premises and equipment at respective year ends
follows.
(In thousands) 1993 1992
====================================================================================================================
Premises $434,264 $423,892
Equipment 127,268 110,534
- --------------------------------------------------------------------------------------------------------------------
561,532 534,426
Less accumulated depreciation and amortization (161,906) (148,869)
- --------------------------------------------------------------------------------------------------------------------
$399,626 $385,557
====================================================================================================================
Other operating expenses included depreciation and amortization of $32,491,000
in 1993, $27,579,000 in 1992 and $24,844,000 in 1991. The estimated useful
lives are 10 to 50 years for premises and 3 to 10 years for equipment.
7. INVESTMENT IN AFFILIATE
In 1988, the Corporation established Safra Republic Holdings S.A. ("Safra
Republic"), a Luxembourg holding company, to which the Bank contributed its
European banking subsidiaries in Switzerland, Luxembourg, France, Guernsey and
Gibraltar. The Corporation, Saban S.A. (see Note 17), a Panamanian holding
company wholly owned by Mr. Edmond J. Safra, and international investors own
approximately 48.8%, 20.7% and 30.5%, respectively, of the outstanding common
shares of Safra Republic.
The following table presents summary financial data for Safra Republic at
December 31, 1993 and 1992 and for each of the years then ended.
(In thousands) 1993 1992
====================================================================================================================
Total assets $11,299,349 $10,351,859
Total deposits 7,344,562 6,897,172
Shareholders' equity 1,280,755 1,131,747
Operating revenue 789,490 802,486
Net income 121,595 92,466
====================================================================================================================
8. SHORT-TERM BORROWINGS
The following table presents the Corporation's short-term borrowings at
respective year ends.
(In thousands) 1993 1992
====================================================================================================================
Federal funds purchased and
securities sold under
repurchase agreement $ 999,149 $2,266,004
Commercial paper 881,741 720,308
Other borrowings 2,394,549 2,752,510
- --------------------------------------------------------------------------------------------------------------------
$4,275,439 $5,738,822
====================================================================================================================
Federal funds purchased generally mature one business day following the sale
date. Securities sold under repurchase agreements and commercial paper
generally mature within 30 days and 90 days, respectively, from the related
dates of sale. Other borrowings generally mature within twelve months.
The Corporation has $125 million of lines of credit to support its commercial
paper program, for which it has authority to issue up to $1 billion, which was
increased from $750 million at year end 1992.
60
34
9. LONG-TERM DEBT
The following tables present a summary of long-term debt and subordinated
long-term debt and perpetual capital notes at respective year ends.
Long-Term Debt:
(In thousands) 1993 1992
======================================================================================================
Republic New York Corporation:
8 3/8 Notes due May 1, 1996 $100,000 $100,000
Floating Rate Notes due March 2004 -- 50,000
8 3/8% Debentures due February 15, 2007 100,000 100,000
- ------------------------------------------------------------------------------------------------------
200,000 250,000
Republic National Bank of New York:
4% SFr. Notes 1988-1993 -- 95,481
Floating Rate Notes due March 21, 1994 (3.5625%) 100,000 100,000
5.20% Notes due January 17, 1995 250,000 250,000
5 3/4% Notes due February 1, 1995 500,000 500,000
6.40% Notes due April 15, 1995 200,000 200,000
4.90% Notes due July 27, 1995 100,000 100,000
New Zealand Dollar Floating Rate Notes due August 4, 1995 (8.95%) 54,600 540,600
4 3/4% Notes due October 15, 1995 191,000 200,000
9% Notes 1988 Series 1 due February 24, 1998 -- 100,000
Other long-term debt 18,885 19,744
- ------------------------------------------------------------------------------------------------------
1,414,485 1,619,825
Collateralized repurchase agreements:
Republic National Bank of New York 843,362 382,672
Republic Bank for Savings 125,028 250,000
- ------------------------------------------------------------------------------------------------------
Total collateralized repurchase agreements 968,390 632,672
- ------------------------------------------------------------------------------------------------------
$2,582,875 $2,502,497
======================================================================================================
The rates in effect at December 31, 1993 for floating rate issues are shown in
parentheses.
The Floating Rate Notes due 2004 were redeemed by the Corporation, at its
option, on November 30, 1993 at a redemption price equal to par. The
Corporation also repurchased $9.0 million principal amount of the 4 3/4% Notes
due 1995.
The New Zealand Dollar Floating Rate Notes were sold in a public offering and
are not redeemable prior to maturity. The applicable interest rate is
determined semi-annually by reference to the relevant rate of certain six-month
instruments. Under certain conditions, holders of the Notes may elect to
convert irrevocably to a fixed interest rate. The Bank entered into an
interest rate and currency exchange agreement that converted the Bank's payment
obligations on such Notes into U.S. dollars.
All other outstanding notes of the Bank were issued under an authorization by
its Board of Directors which allows for an aggregate of up to $7 billion of
such obligations to be outstanding at any time. All such outstanding notes of
the Bank are unsecured debt obligations and are not subject to redemption prior
to maturity except for the 9% Notes 1988 Series 1, which were redeemed at the
option of the Bank at par on February 24, 1993. The quarterly interest rate on
the $100 million Floating Rate Notes due March 1994 is determined by reference
to certain money market rates subject to a maximum of 6.25%.
In connection with the early extinguishment of the Floating Rate Notes due 2004
and the 4 3/4 Notes due 1995, the Corporation recorded a loss amounting to
$589,000.
Collateralized repurchase agreements consist of securities repurchase
agreements with initial maturities exceeding one year.
All of the outstanding long-term notes and debentures of the Corporation are
direct unsecured obligations and are not subordinated in right of payment to
any other unsecured indebtedness of the Corporation.
The Corporation and the Bank are obligated with respect to the above long-term
debt to make aggregate principal payments in each of the next five years as
follows: $558,153,000 in 1994, $1,388,236,000 in 1995, $187,628,000 in 1996,
$50,974,000 in 1997 and $974,000 in 1998.
61
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
===============================================================================
Subordinated Long-Term Debt and Perpetual Capital Notes:
(In thousands)
=========================================================================================================
Republic New York Corporation: 1993 1992
9 1/2% Subordinated Notes due July 1, 2000 $ 100,000 $ 100,000
9 3/4% Subordinated Notes due December 1, 2000 100,000 100,000
7 7/8% Subordinated Notes due 2001 100,000 100,000
8.25% Subordinated Notes due 2001 150,000 150,000
8 7/8% Subordinated Notes due 2001 100,000 100,000
7 3/4% Subordinated Notes due May 15, 2002 150,000 150,000
7 1/4% Subordinated Notes due July 15, 2002 250,000 250,000
Floating Rate Subordinated Notes due August 2002 (5.00%) 100,000 100,000
Floating Rate Subordinated Notes due October 2002 (5.00%) 150,000 150,000
Subordinated Floating Rate Yield Curve Notes due 2002 (3.65%) 100,000 100,000
5 7/8% Subordinated Notes due 2008 250,000 --
9.70% Subordinated Notes due February 1, 2009 150,000 150,000
Floating Rate Subordinated Notes due December 2009 -- 108,750
Floating Rate Subordinated Notes due July 2010 (5.25%)* 66,000 66,000
9 1/2% Subordinated Debentures due April 15, 2014 150,000 150,000
9 1/8% Subordinated Notes due 2021 100,000 100,000
9.30% Subordinated Notes due 2021 100,000 100,000
Perpetual Capital Notes (3.8125%)* 150,000 150,000
- ---------------------------------------------------------------------------------------------------------
Republic National Bank of New York: 2,266,000 2,124,750
Other subordinated long-term debt
5,940 6,174
- ---------------------------------------------------------------------------------------------------------
$2,271,940 $2,130,924
=========================================================================================================
*These notes are redeemable prior to maturity.
The rates in effect at December 31, 1993 for floating rate issues are shown in
parentheses.
The Corporation's outstanding issues of subordinated notes and debentures are
all direct unsecured obligations of the Corporation. Interest rates on
subordinated floating rate note issues are determined quarterly or
semi-annually by formulas based on certain money market rates and are subject
to minimum rates of 5% per annum for the Floating Rate Notes due 2002 and 5 1/4%
per annum for the Floating Rate Notes due 2010.
The Corporation redeemed all of the outstanding Floating Rate Subordinated
Notes due 2009 on December 22, 1993 and on January 22, 1994, redeemed all of
the outstanding Floating Rate Subordinated Notes due 2010. In connection with.
the early extinguishment of these instruments, the Corporation recorded a loss
amounting to $3,450,000.
On May 7, 1993, a shelf registration statement became effective pursuant to
which the Corporation may issue, from time to time in public offerings, debt
securities, warrants on debt securities, currency warrants, stock-index
warrants, other warrants, preferred stock, depositary shares representing
preferred stock, preferred stock warrants or common stock warrants. Such
securities may be offered separately or together, in one or more series, up to
an aggregate of initial public offering prices of $ 1.0 billion. At December
3l, 1993 an aggregate of $250 million principal amount of outstanding debt
securities had been issued pursuant to such registration statement.
On October 21, 1993, the Corporation sold, in a public offering, $250 million
principal amount of 5 7/8% Subordinated Notes due 2008 under the above shelf
registration statement. The Notes are not redeemable prior to maturity. The
Notes are direct unsecured general obligations of the Corporation and are
subordinated to all present and future Senior Indebtedness of the Corporation.
The net proceeds received by the Corporation from the sale of the Notes were
used to redeem, in the aggregate principal amount of $225 million, its
outstanding issues of Floating Rate Notes due 2004 and Floating Rate
Subordinated Notes due 2009 and 2010.
62
36
An existing shelf registration statement authorizes the Corporation to issue,
from time to time, in a public offering, debt securities and warrants to
purchase debt securities in an aggregate principal amount of up to $750
million. At December 31, 1993, an aggregate of $600 million principal amount
of outstanding debt securities had been issued under such registration
statement.
The Corporation's $150 million principal amount of Putable Capital Notes (the
"PCNs") are a component of total qualifying capital under applicable risk-based
capital rules. The principal amount of each PCN will be payable as follows:
(1) at the option of the holder on the put date in each year commencing in
2012, PCNs may be exchanged for securities that constitute permanent primary
capital securities (the "capital securities") for regulatory purposes, (2) at
the option of the Corporation on 90 days prior notice, the PCNs may be either
(i) redeemed on the specified redemption date, in whole, for cash and at par,
but only with the proceeds of a substantially concurrent sale of capital
securities issued for the purpose of such redemption or (ii) exchanged, in
whole, for capital securities having a market value equal to the principal
amount of the PCNS, and, in each case, the payment of accrued interest in cash
or (3) in the event that the sum of the Corporation's consolidated retained
earnings and surplus accounts becomes less than zero, the PCNs will
automatically be exchanged, in whole, for capital securities having a market
value equal to the principal amount of the PCNs and the payment of accrued
interest in cash.
The PCNs are unsecured and subordinated in right of payment to all Senior
Indebtedness of the Corporation. The interest rate for each six-month interest
period is determined by a formula based on certain money market rates.
The Corporation and the Bank are obligated with respect to the above
subordinated long-term debt to make principal payments of $66,000,000 in 1994.
10. PREFERRED STOCK
The Corporation's authorized preferred stock was increased to 20 million shares
from 15 million shares in 1993. The following table presents information
related to the Corporation's issues of preferred stock outstanding at
respective year ends.
Dividend
Shares Rate at Amount
Outstanding December 31, Outstanding
----------- ------------ -----------------------
(Dollars in thousands) 1993 1993 1993 1992
===============================================================================================================================
$1.9375 Cumulative Preferred Stock ($25 stated value) 4,000,000 7.75% $100,000 $100,000
$3.375 Cumulative Convertible Preferred Stock
($50 stated value) 3,450,000 6.75% 172,500 172,500
Cumulative Floating Rate Series B
($50 stated value) 678,500 6.50% 33,925 33,925
Dutch Auction Rate Transferable Securities Preferred
Stock ("DARTS(TM)")
Series A ($100,000 stated value) 625 2.94% 62,500 62,500
Series B ($100,000 stated value) 625 2.92% 62,500 62,500
Remarketed Preferred ("RP")
($100,000 per share liquidation preference) 750 2.75%-3.00% 75,000 75,000
Money Market Cumulative Preferred ("MMP")
($100,000 per share liquidation preference) 500 2.99% 50,000 50,000
- -------------------------------------------------------------------------------------------------------------------------------
8,131,000 $556,425 $556,425
===============================================================================================================================
For the purpose of regulatory risk-based capital requirements, the Cumulative
Preferred Stock, the Cumulative Convertible Preferred Stock and the Cumulative
Floating Rate Series B all qualify as Tier 1 capital.
63
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The shares of $1.9375 Cumulative Preferred Stock with a stated value of
$25 per share may be redeemed on or after February 27, 1997, at the option of
the Corporation, in whole or in part, at $25 per share, plus, in all cases,
accrued and unpaid dividends to the redemption date.
The shares of the $3.375 Cumulative Convertible Preferred Stock, stated value
of $50 per share are convertible at the option of the holder into shares of the
Corporation's Common Stock at A conversion price of $48.33 per share. The
Convertible Preferred Stock may be redeemed at the option of the Corporation,
in whole or in part, at any time, on or after May 15, 1995, at $52.025 per
share through May 14, 1996 and thereafter at prices which decline annually to
May 15, 2001, to the stated value of $50 per share plus, in all cases, accrued
and unpaid dividends.
Dividend rates for each dividend period are set pursuant to an auction
procedure for the DARTS(TM) and the MMP, by a remarketing through the
remarketing agent for the RP and quarterly for the Floating Rate Series B
shares by reference to a formula based on certain money market rates.
The maximum applicable dividend rate on the shares of DARTS(TM) RP and MMP range
from 110% to 175% of the 60-day "AA" composite commercial paper rate. The
applicable dividend rate on the Floating Rate Series B shares can be no less
than 6.50% nor more than 12.50% per annum.
The Corporation, at its option, may redeem the outstanding Cumulative Floating
Rate Series B shares at $51.50 per share through March 31, 1994 and thereafter
at its stated value, plus, in all cases, accrued and unpaid dividends. During
1992, the Corporation repurchased 10,000 shares in an open market transaction
at a price of $49.88 per share.
DARTS(TM) of each series are redeemable in whole or in part, at the option of
the Corporation, at $100,000 per share plus accrued and unpaid dividends to the
redemption date. DARTS(TM) are also redeemable, at the option of the
Corporation, on any dividend payment date for such series, in whole but not
in part, at a redemption price of $100,000 per share plus the payment of
accrued and unpaid dividends, if the applicable rate for such series fixed
with respect to the dividend period for such series ending on such dividend
payment date equals or exceeds the 60-day "AA" composite commercial paper
rate on the date of determination of such applicable rate.
The shares of RP are redeemable, in whole or in part, at the option of the
Corporation, at a redemption price of $100,000 per share plus the payment of
accrued and unpaid dividends to the date fixed for redemption.
The shares of MMP are redeemable, in whole or in part, at the option of the
Corporation, at a redemption price of $100,000 per share plus the payment of
accrued and unpaid dividends to the redemption date. The shares of MMP are
also redeemable, at the option of the Corporation, on any dividend payment
date, in whole but not in part, at a redemption price of $100,000 per share
plus accrued and unpaid dividends, if the applicable rate fixed for the
dividend period ending on the day preceeding such dividend payment date equals
or exceeds the 60-day "AA" composite commercial paper rate on the date
determination of such applicable rate.
11. INCOME TAXES
As described in Note 1, the Corporation adopted SFAS No. 109 on January 1,
1993. The Corporation had previously used SFAS No. 96 to account for income
taxes. The cumulative effect of this change in accounting, determined as of
January 1, 1993, was immaterial to the consolidated financial statements.
Prior years financial statements have not been restated to apply the provisions
of SFAS No. 109.
Total income tax expense for the year ended December 31, 1993 was allocated as
follows:
(In thousand) 1993
=============================================================================
Income from operations $150,153
Stockholders' equity:
Net unrealized gain on securities available for sale, net of taxes 175,095
Foreign currency translation, net (8,653)
- -----------------------------------------------------------------------------
$316,595
=============================================================================
64
38
The components of the Corporation's consolidated income tax expense, from
operations were as follows:
(In thousands) 1993 1992 1991
==================================================================================================================
Current Tax Expense:
Federal $129,856 $58,524 $13,186
Foreign 27,980 13,524 11,287
State and other 34,085 17,848 6,480
- ------------------------------------------------------------------------------------------------------------------
191,921 89,896 30,953
- ------------------------------------------------------------------------------------------------------------------
Deferred Tax Expense (Benefit):
Federal (29,312) 2,790 29,433
State and other (12,456) (4,300) --
- ------------------------------------------------------------------------------------------------------------------
(41,768) (1,510) 29,433
- ------------------------------------------------------------------------------------------------------------------
$150,153 $88,386 $60,386
==================================================================================================================
The principal sources of deferred income taxes attributable to income from
operations in 1992 and 1991 and the effects of each on the amount of taxes were
as follows:
(In thousands) 1992 1991
==================================================================================================================
Unrealized net gains on trading activities $ (5,728) $ 7,061
Provision for loan lossess (20,279) (4,035)
Interest and discount income 1,316 (1,297)
Employee benefits 888 (2,173)
Depreciation 1,735 1,513
Non-accrued interest 1,610 (1,156)
Domestic tax on overseas earnings, net of foreign tax credits 19,792 22,612
Net operating loss carryover -- 5,963
Other - net (844) 945
- ------------------------------------------------------------------------------------------------------------------
$ (1,510) $29,433
==================================================================================================================
Income tax expense amounted to $150,153,000 for 1993, $88,386,000 for 1992 and
$60,386,000 for 1991, representing effective tax rates of 33.3%, 25.5% and
21.0%, respectively. Total tax expense differs from the amounts computed by
applying the statutory U.S. Federal income tax rate because of the following:
% of Pretax Income
----------------------------------
1993 1992 1991
==================================================================================================================
Federal tax expense at statutory rates 35.0% 34.0% 34.0%
State and local income tax, net of federal tax benefit 2.6 2.6 1.5
Interest and dividend income exempt from federal tax (4.4) (5.6) (6.4)
Deferred tax benefits recognized -- (1.4) (2.5)
Exempt income through acquisition of subsidiary -- (4.0) (6.4)
Other - net .1 (.1) .8
- ------------------------------------------------------------------------------------------------------------------
Income tax expense as reported 33.3% 25.5% 21.0%
==================================================================================================================
The tax effects of temporary differences that gave rise to a significant
portion of the deferred tax assets and deferred tax liabilities at December 31,
1993 are presented below.
(In thousands) 1993
==================================================================================================================
Deferred tax assets:
Provision for loan losses $ 127,752
Interest and discount income 16,349
Exempt income from subsidiary acquisition 37,074
Other 10,006
- ------------------------------------------------------------------------------------------------------------------
191,181
- ------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation 44,884
Unrealized profits on trading account assets and securities available for sale 178,615
Domestic tax on overseas income 58,047
- ------------------------------------------------------------------------------------------------------------------
281,546
- ------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 90,365
==================================================================================================================
65
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
There was no valuation adjustment at January 1, 1993 and December 31, 1993,
respectively.
The Corporation has not recognized a deferred tax liability of approximately
$100.0 million for undistributed earnings of foreign subsidiaries for taxable
years beginning prior to 1987 because the Corporation does not expect those
unremitted earnings to reverse and become taxable to the Corporation in the
foreseeable future. As of December 31, 1993 the undistributed earnings of
these foreign subsidiaries were approximately $365.1 million. Cumulative
foreign tax credits of approximately $28.5 million at December 31, 1993 are
available for utilization by the Corporation against U.S. income taxes that
would arise upon a dividend distribution by its foreign subsidiaries.
The following table distributes the Corporation's Income before income taxes
between its domestic and foreign offices for each of the last three years.
(In thousands) 1993 1992 1991
===========================================================================================================================
Foreign $ 230,523 $ 125,697 $ 107,498
Domestic 220,835 221,572 180,248
- ---------------------------------------------------------------------------------------------------------------------------
$ 451,358 $ 347,269 $ 287,746
===========================================================================================================================
12. BENEFITS
RETIREMENT PLAN
The Bank's retirement plan (the "U.S. Plan") covers substantially all U.S.
employees of the Bank, RBS, and the Corporation and their subsidiaries.
Benefits are based on years of service and the employee's compensation during
the highest consecutive five years of the last ten years of employment. The
Corporation's funding policy is to contribute annual,ly an amount necessary to
satisfy the Employee Retirement Income Security Act (ERISA) funding standards.
The following table sets forth the U.S. Plan's funded status and amounts
recognized in the Corporation's Statement of Condition at respective year ends.
(In thousands) 1993 1992
===========================================================================================================================
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $(91,834) in 1993 and
$(67,834) in 1992 $(100,307) $ (73,564)
===========================================================================================================================
Plan assets at fair value, primarily mutual funds and the balance in listed stocks and bonds $151,105 $ 141,942
Projected benefit obligation for service rendered to date (132,695) (103,501)
- ---------------------------------------------------------------------------------------------------------------------------
Excess of plan assets over projected benefit obligation 18,410 38,441
Unrecognized net (gain) from past experience different from that assumed and effects of
changes in assumptions (3,760) (15,490)
Prior service cost not yet recognized in net periodic pension cost 4,371 2,018
Unrecognized net asset being recognized over 16 years (8,047) (9,053)
- ---------------------------------------------------------------------------------------------------------------------------
Prepaid pension expense included in other assets $ 10,974 $ 15,916
===========================================================================================================================
Net pension expense in each of the last three years consisted of the following:
(In thousands) 1993 1992 1991
===========================================================================================================================
Service cost-benefits earned during the period $ 5,754 $ 4,423 $ 4,013
Interest cost on projected benefit obligation 8,825 8,266 7,618
Actual return on plan assets (14,105) (12,293) (23,399)
Net amortization and deferral 4,469 980 12,713
- ---------------------------------------------------------------------------------------------------------------------------
Net periodic pension expense $ 4,943 $ 1,376 $ 945
===========================================================================================================================
66
40
The following table presents the economic assumptions used to calculate the
projected benefit obligation and pension expense in each of the last three
years.
1993 1992 1991
====================================================================================================================
Discount rate 7.0% 8 1/2% 8 1/2
Rate of compensation increase 5.0 6 1/2 6 1/2
Expected long-term rate of return on plan assets 7.0 8 3/4 8 3/4
====================================================================================================================
In addition to the above funded U.S. Plan, the Corporation established an
unfunded benefit maintenance plan and a supplemental pension plan for certain
employees, executive officers and directors of a certain banking subsidiary.
The expense related to these plans amounted to $1,982,000 in 1993, $2,088,000
in 1992 and $1,040,000 in 1991.
Retirement benefits in foreign locations generally are covered by local plans
based on length of service, compensation levels and, where applicable, employee
contributions, with the funding of these plans based on local legal
requirements. The aggregate pension expense for such plans was approximately
$3,700,000 in 1993, $3,600,000 in 1992 and $3,300,000 in 1991.
The Corporation provides postretirement life insurance benefits to its current
employees and provides certain retired employees with health care and life
insurance benefits. The Corporation's plan for its postretirement obligation
is unfunded.
The following tables set forth information related to the Corporation's
postretirement benefit obligation at respective year ends.
(In thousands) 1993 1992
==========================================================================================
Accumulated postretirement benefit obligation:
Retirees including covered dependents and beneficiaries $(26,979) $(27,846)
Fully eligible actives (934) (898)
Other actives (581) (508)
- ------------------------------------------------------------------------------------------
(28,494) (29,252)
Unrecognized net gain (2,445) --
Unrecognized transition obligation being recognized over 20 years 17,181 18,134
- ------------------------------------------------------------------------------------------
Postretirement benefit obligation included in other liabilities $(13,758) $(11,118)
==========================================================================================
A discount rate of 7% and a 7% compensation increase were used to measure the
accumulated postretirement benefit obligation in 1993. The rates used in 1992
were 8 1/2% and 7%, respectively. The effect of raising health care gross
eligible charges by 1% will increase the aggregate of service cost and interest
cost by approximately $240,000, and the accumulated postretirement benefit
obligation by approximately $2.8 million.
The health care trend rate used to measure the expected costs of benefits for
1994 is projected to be 13.0% for those under age 65 and 10.3% for those 65
and older. The rates for those under age 65 and for those 65 and older are
assumed to decrease by 1% and .6% per year, respectively, until they reach 6%
and stabilize at that rate.
Net postretirement benefit expense for 1993 and 1992 was as follows:
(In thousands) 1993 1992
=========================================================================================
Service cost $ 92 $ 104
Interest cost on accumulated postretirement benefit obligation 1,910 2,345
Amortization of transitional accumulated postretirement benefit
obligation 953 953
- -----------------------------------------------------------------------------------------
Net periodic expense $2,955 $3,402
=========================================================================================
67
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In November 1992, SFAS No. 112, "Employers' Accounting for Postemployment
Benefits" was issued. SFAS No. 112, effective for fiscal years beginning after
December 15, 1993, requires recognizing an obligation for the estimated cost of
postemployment benefits. Postemployment is defined as the period after
employment but before retirement if certain conditions are met. Postemployment
benefits include, but are not limited to, salary continuation, severance
benefits, job training and counseling and health care and life insurance
coverage. The impact of adopting SFAS No. 112 will not have a material effect
on the Corporation's result of operations.
EXECUTIVE COMPENSATION
The Corporation has a Restricted Stock Plan (the "Plan") for selected employees
of the Corporation and its subsidiaries. The Plan, as amended in 1993,
provided that an aggregate of 4,150,000 shares, as adjusted for a stock split,
of Restricted Stock were available to be awarded, subject to further
adjustments, during the period ending on December 31, 1995, when the Plan will
terminate unless extended by the Board of Directors with stockholder approval.
During 1993, 1992 and 1991, the Corporation issued, net of cancellations,
470,783; 309,186, and 258,064 shares of Common Stock, respectively, with an
approximate market value as of the date of issue of $23,709,000, $13,540,000
and $16,477,000, respectively. Such market value is amortized as an expense
over the period for which such shares are restricted.
The Corporation's Restricted Stock Election Plan allows certain officers who
have earned deferred compensation to elect to receive payment in the form of
Restricted Stock of the Corporation. An aggregate of 375,000 shares of
Restricted Stock may be issued during the term of such plan which expires on
December 31, 1997, as amended. During 1993, 1992, and 1991, 568 shares, 672
shares and 642 shares, respectively, of the Corporation's Common Stock were
issued in lieu of cash dividends pursuant to such plan, with approximate market
values as of the dates of issue of $28,000, $28,000 and $35,000,
respectively.
The Corporation has an incentive stock option plan and a non-qualified stock
option plan for officers and other key employees of the Corporation and its
subsidiaries.
There remains reserved for issuance pursuant to the stock option plans 412,283
shares of Common Stock for the incentive stock option plan and 361,343 shares
of Common Stock for the non-qualified stock option plan. Both plans are
substantially identical, except that the incentive stock option plan has
certain limitations or requirements in order that the holders of such options
can receive certain beneficial tax treatment in the disposition of shares
acquired on the exercise of an option. Options may be granted under the plans
at any time prior to July, 1995, but they cannot exceed ten years in duration.
Exercise prices under the incentive stock option plan must be equal to the fair
market value of the common stock on the date of grant; exercise prices under
the non-qualified stock option plan are determined by a Committee of the Board
of Directors. Options become exercisable at the times and in the amounts
determined by such Committee in connection with awarding grants.
At the discretion of the Compensation and Benefits Committee of the Board of
Directors, option grants may be accompanied by stock appreciation rights
("SARs"). The SARs entitle the holder of the related option to surrender the
option and receive a payment equal to an amount by which the fair market value,
at the time of exercise, of the shares of Common Stock subject to the option
exceeds the exercise price. On the exercise of an option, an employee may
elect to make payment either in cash, by delivering previously owned shares of
the Corporation's Common Stock, or any combination thereof. SARs are
exercisable in lieu of acquiring shares of Common Stock. Compensation expense,
if any, resulting from the difference between the fair market value of the
Common Stock on the date of grant and the current market value of the Common
Stock will be accrued over the vesting period adjusted for subsequent
forfeitures and exercises.
The shares of the Plan and the stock option plans that may be awarded or issued
have been adjusted to reflect the three-for-two Common Stock split distributed
October 21, 1991.
68
42
The following is a summary of options transactions in each of the last three
years.
Option Price
Options Per Share
============================================================================================
Balance, December 31, 1990 796,498 $23.61 - $33.20
Granted 7,875 23.61 - 40.79
Exercised (151,537) 23.61 - 32.92
Cancelled (9,750)
- --------------------------------------------------------------------------------------------
Balance, December 31, 1991 643,086 $23.61 - $40.79
Granted 12,000 39.38
Exercised (42,599) 23.61 - 32.92
Cancelled (9,750)
- --------------------------------------------------------------------------------------------
Balance, December 31, 1992 602,737 $23.61 - $40.79
Granted 4,500 50.13
Exercised (43,100) 23.61 - 32.50
Cancelled --
- --------------------------------------------------------------------------------------------
Balance, December 31, 1993 564,137 $23.61 - $50.13
============================================================================================
At December 31, 1993, options for 468,887 shares were exercisable at prices of
$23.61 to $32.50 per share.
13. GEOGRAPHIC DISTRIBUTION OF REVENUE, EARNINGS AND ASSETS
The following geographic analysis of total assets, total operating revenue,
income (loss) before income taxes and net income (loss) is based on the
location of the customer. Charges and credits for funds employed or supplied
by domestic and international operations are based on the average internal cost
of funds. Inasmuch as the Corporation conducts a significant portion of its
international activities from its domestic offices, certain other items of
revenue and expense, including the provision for loan losses and applicable
income taxes, have been subjectively allocated, and, therefore, the data
presented may not be meaningful. Based on the above, the following table
summarizes the results of the Corporation's international and domestic
operations by geographic area for each of the years in the three-year period
ended December 31, 1993.
Total Total Operating Income (Loss) Before Net Income
(In millions) Assets Revenue Income Taxes (Loss)
=========================================================================================================
United Kingdom 1993 $ 1,271.6 $ 156.3 $ 40.8 $ 27.2
1992 1,861.8 153.5 27.2 20.3
1991 1,695.3 185.0 26.6 20.4
- ---------------------------------------------------------------------------------------------------------
Europe 1993 $ 3,407.5 $ 232.5 $ 15.8 $ 10.6
1992 4,674.9 260.4 1.7 1.3
1991 4,885.6 337.6 (10.9) (11.7)
- ---------------------------------------------------------------------------------------------------------
Canada 1993 $ 1,043.5 $ 64.0 $ 1.9 $ 1.3
1992 1,530.4 65.9 6.1 4.6
1991 1,114.4 87.7 1.4 .9
- ---------------------------------------------------------------------------------------------------------
Far East 1993 $ 3,555.4 $ 181.7 $ 23.0 $ 15.4
1992 3,830.0 221.0 24.8 18.5
1991 4,269.8 306.9 10.6 4.9
- ---------------------------------------------------------------------------------------------------------
Caribbean money center 1993 $ 3,104.0 $ 157.1 $ 38.7 $ 25.8
locations, Central 1992 3,078.9 163.8 46.1 34.3
and South America 1991 2,417.5 191.7 70.2 57.6
- ---------------------------------------------------------------------------------------------------------
Middle East and 1993 $ 204.2 $ 6.0 $ (.7) $ (.5)
Africa 1992 178.4 8.3 (.7) (.6)
1991 219.0 6.5 (5.5) (4.6)
- ---------------------------------------------------------------------------------------------------------
United States 1993 $26,907.3 $1,530.8 $331.9 $221.4
1992 21,992.0 1,467.9 242.1 180.5
1991 16,619.2 1,419.9 195.3 159.9
- ---------------------------------------------------------------------------------------------------------
Total 1993 $39,493.5 $2,328.4 $451.4 $301.2
1992 37,146.4 2,340.8 347.3 258.9
1991 31,220.8 2,535.3 287.7 227.4
=========================================================================================================
69
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of its business, the Corporation is a defendant in
various legal proceedings. Management, after reviewing with counsel all such
actions and proceedings pending against the Corporation, considers that the
aggregate liability or loss, if any, resulting from them would not have a
material adverse effect on the consolidated financial position of the
Corporation.
The Corporation is obligated under noncancellable leases that expire at various
times through 2014. The minimum rental commitments on noncancellable leases
for premises are $19,369,000 in 1994, $16,944,000 in 1995, $15,891,000 in 1996,
$14,773,000 in 1997, $13,547,000 in 1998, and an aggregate of $75,023,000
thereafter until the expiration of the leases. The minimum rental commitments
have not been reduced by aggregate minimum sublease rentals of $11,946,000.
Actual net rental expense in 1993, 1992 and 1991, aggregated $23,613,000,
$20,491,000, and $19,743,000, respectively.
The subsidiary banks of the Corporation are required to maintain reserves with
the Federal Reserve Bank against certain balances. The average reserves
maintained totaled $92,000,000 during 1993.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires
the Corporation to disclose, in addition to the carrying value of certain
financial instruments, both assets and liabilities recorded on and off the
statement of condition for which it is practicable to estimate fair value. The
SFAS defines a financial instrument as cash, evidence of an ownership in an
entity, or a contract that conveys or imposes on an entity the contractual
right or obligation to either receive or deliver cash or another financial
instrument. Fair value is defined as the amount at which a financial
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation, and is best evidenced by a quoted
market price if one exists.
The SFAS requires deposit liabilities with no stated maturity to be reported at
their carrying value and does not allow for the recognition of the inherent
funding value of these instruments. Additionally, the values of franchises or
of other business units and entities of the Corporation, which are not
financial instruments as defined, are not disclosed. The Corporation believes
that significant value exists in this type of deposit and in its franchises and
individual business units.
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Corporation's financial instruments presented
below. The Corporation operates as a going concnern and, except for its
investment securities portfolio, trading account assets and its off-balance
sheet trading instruments, no active market exists for its financial
instruments. Much of the information used to determine fair value is highly
subjective and judgmental in nature and, therefore, the results may not be
precise. The subjective factors include, among other things, estimates of cash
flows, risk characteristics, credit quality and interest rates, all of which
are subject to change. Since the fair value is estimated as of the balance
sheet date, the amounts which will actually be realized or paid upon settlement
or maturity of the various financial instruments could be significantly
different.
The Corporation has a significant portion of its assets and liabilities in
financial instruments that have remaining maturities of under six months.
These short-term financial instruments, except for those financial instruments
for which an active market exists, are valued without regard to maturity and
are considered to have fair values equivalent to their carrying value.
70
44
FINANCIAL ASSETS
Interest-bearing deposits with banks amounting to $4.7 billion in 1993 and
$10.1 billion in 1992 mature within six months and are considered to have a
fair value equivalent to their carrying value. The fair value of
interest-bearing deposits with banks maturing in more than six months is
estimated using a discounted cash flow model based on current market rates for
comparable instruments with similar maturities.
The fair value of investment securities and trading account assets is based on
quoted market prices or dealer quotes.
Performing residential mortgages and consumer installment loans, which have
similar characteristics, have been valued on a pooled basis by using market
prices for securities backed by loans with similar terms. The fair value of
the Corporation's portfolio of loans to restructuring foreign governments are
based upon prices for similar securities quoted in the secondary market. The
fair value of all other loans, which are principally to commercial and
industrial entities and foreign governments, has been determined by discounting
the estimated future cash flows of such loans to their present value using an
assigned discount rate which may or may not be the contractual rate in effect
with the obligor. This discount rate is the rate at which a loan with similar
credit risk and remaining maturity would be entered into at the balance sheet
date and was determined based on the Corporation's internal credit quality and
pricing systems.
Cash and due from banks, federal funds sold and securities purchased under
resale agreements, accounts receivable and accrued interest, customers'
liability on acceptances and certain other assets, which meet the definintion of
financial instruments, have been valued at their respective carrying values due
to their short-term nature. These instruments are presented in the table below
as other financial assets.
FINANCIAL LIABILITIES
Deposits without a stated maturity include demand, savings, and money market
accounts. These deposits amounted to $6.1 billion in 1993 and $5.7 billion in
1992 and, in accordance with the SFAS, are reported at their carrying value.
No value has been assigned to the franchise value of these deposits.
Certificates of deposit maturing within six months aggregated $ 1.4 billion in
1993 and $2.1 billion in 1992 and their fair value is considered to equal
their carrying value. The fair value of deposits maturing in over six months
is based on rates currently offered for deposits with similar remaining
maturities.
Acceptances outstanding, accounts payable and accrued expenses, due to factored
clients and certain other liabilities, are considered to have fair values equal
to their carrying values due to their short-term nature. These instruments are
presented in the table below as other financial liabilities.
Short-term borrowings that mature within six months have fair values equal to
their carrying value. The fair value of long-term debt, subordinated long-term
debt and perpetual capital notes are based on market quotes obtained from
independent investment bankers.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit, standby letters of credit and foreign office
guarantees and commercial letters of credit aggregated $3.1 billion and $2.7
billion at year end 1993 and 1992, respectively. If ultimately funded, these
commitments are priced at current market rates.
Interest rate and foreign exchange contracts entered into for trading purposes
are carried at market value. The revaluation of such contracts resulted in
unrealized losses of $2 million at year end 1993 and 1992, respectively.
Interest rate and foreign exchange contracts entered into for hedging purposes
have fair values equivalent to the amount that would be received or paid to
terminate the contract at the reporting date. The fair value of foreign
exchange hedges are included in the valuation of the underlying
71
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
financial instrument hedged. The fair value of interest rate hedges, which are
primarily interest rate swaps, is disclosed separately below.
DECEMBER 31, 1993 December 31, 1992
-------------------------- -------------------------
CARRYING ESTIMATED Carrying Estimated
(In millions) VALUE FAIR VALUE Value Fair Value
============================================================================================================
FINANCIAL ASSETS:
Interest-bearing deposits with banks $ 5,347 $ 5,354 $ 10,563 $ 10,568
Investment securities 14,950 15,046 12,331 12,685
Trading account assets 1,182 1,182 702 702
Loans (net) 9,197 9,642 7,766 8,024
Other financial assets 6,230 6,230 4,179 4,179
FINANCIAL LIABILITIES:
Deposits with no stated maturity and other
deposits maturing within six months $ 20,130 $ 20,130 $ 19,249 $ 19,249
Deposits maturing in over six months 2,671 2,696 1,853 1,888
Short-term borrowings 4,275 4,275 5,739 5,739
Long-term debt 2,583 2,620 2,502 2,516
Subordinated long-term debt and perpetual
capital notes 2,272 2,516 2,131 2,227
Other financial liabilities 3,721 3,721 3,097 3,097
Notional Estimated Notional Estimated
(In millions) Value Fair Value Value Fair Value
============================================================================================================
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Interest rate swap hedges:
Investment securities $ 4,912 $(88)
Loans 210 (5)
Interest-bearing deposits with banks 94 20
Premises and equipment 75 (4)
Long-term debt and subordinated
long-term debt 2,250 82
- ------------------------------------------------------------------------------------------------------------
Total $ 7,541 $ 5 $6,593 $(27)
Other interest rate hedges (principally
related to long-term debt) 1,150 (7) 2,570 3
============================================================================================================
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
CREDIT RELATED INSTRUMENTS
In the normal course of its business, there are various outstanding commitments
and contingent liabilities of the Corporation that are not reflected in the
consolidated financial statements.
The Corporation enters into various types of agreements with its customers
which enhance their credit standing, guarantee performance to third parties or
advance funds in the form of loans. These commitments usually have fixed
expiration dates and may require the payment of a fee. At December 31, 1993
and 1992, respectively, such obligations included commitments to extend credit
of $1,622 million and $1,209 million, standby letters of credit and foreign
office guarantees of $1,089 million and $1,086 million, and commercial letters
of credit of $432 million and $450 million. These amounts represent the
maximum principal which the Corporation may be required to disburse and the
maximum potential exposure if all such obligations were ultimately to become
worthless.
CREDIT RELATED RISK CONCENTRATIONS
In the normal course of its business, the Corporation's activities include
significant amounts of credit risk in its relationships with domestic and
international financial institutions. Such obligations aggregated
approximately 30% and 35% of the Corporation's on-balance sheet financial
instruments at December 31, 1993 and 1992, respectively. This exposure
included approximately 40% and 73% at year end 1993 and 1992, respectively, in
the form of interest-bearing deposits to foreign banks and branches and
agencies of foreign banks located in the United States. The Corporation's
credit exposure to the U.S. federal government and its agencies was
approximately 30% and 25% of respective year end on-balance sheet financial
instruments. The Corporation's real estate loan portfolio represented
approximately 10% of on-balance sheet financial instruments at year end 1993
and 1992, respectively. Credit exposure in the real estate loan portfolio is
concentrated in loans secured by multi-family and commercial real estate
properties and, to a lesser degree, residential properties in the New York
metropolitan area.
72
46
INTEREST RATE, FOREIGN EXCHANGE, PRECIOUS METALS AND OTHER FINANCIAL
INSTRUMENTS
The Corporation uses various off-balance sheet financial instruments to manage
its asset and liability exposure to interest rate and currency fluctuations and
to meet similar needs of its customers. Certain instruments commit the
Corporation to buy or sell, at a future date, a specified financial instrument,
currency or precious metals at an agreed to price. Other contracts involve
commitments to settle, in cash, differentials between specified indices which
are applied to a notional principal amount. Options contracts give the holder
the right, but not the obligation, to acquire or sell for a limited time period
a financial instrument, currency or precious metals at a designated price. The
writer of an option receives a premium at the outset of a contract as payment
for assuming the risk of unfavorable changes in the price of the underlying
instrument.
Each of these instruments involves exposure to fluctuations in price based on
the value of the underlying commodity, instrument or index. Such exposure may
be limited by offsetting asset or liability positions held by the Corporation.
Exposure to credit risk would occur if a counterparty to a transaction failed
to meet its obligation to settle a contract on a timely basis. This risk is
managed by limiting positions and using strict credit controls when considering
a counterparty.
The following table summarizes the notional or contractual amounts of the
Corporation's outstanding off-balance sheet instruments at respective year
ends.
(In millions) 1993 1992
=========================================================================================
Interest rate:
Futures and forward contracts $ 9,513 $17,905
Swaps 25,921 10,939
Written options 5,718 920
Foreign exchange:
Commitments to purchase foreign currencies and
U.S. dollar exchange 48,909 53,913
Swaps 30,812 21,802
Written options 9,591 8,910
Other - principally precious metals:
Futures and forward contracts 7,757 3,331
Swaps 165 95
Written options 946 385
=========================================================================================
An estimate of the amount at risk can be calculated using the replacement cost,
at current market rates, of all outstanding contracts in a gain position.
Based on this calculation, the Corporation estimates its risk of loss at year
end 1993 and 1992 to be $528 million and $107 million, respectively, on
interest rate contracts and $992 million and $1.896 billion, respectively, on
foreign exchange and precious metal contracts.
17. TRANSACTIONS WITH RELATED PARTIES
The following is a summary of significant balances, in the aggregate, of
transactions with related parties included in the Corporation's Consolidated
Statements of Condition at respective year ends.
(In thousands) 1993 1992
=========================================================================================
ASSETS:
Interest-bearing deposits with banks $129,862 $ 45,977
Securities available for sale 30,098 --
Loans 14,357 25,190
=========================================================================================
LIABILITIES:
Deposits $395,418 $326,442
Long-term debt 8,885 46,030
=========================================================================================
At December 31, 1993, Mr. Edmond J. Safra, through Saban S.A. and two other
entities, owned approximately 28.4% of the Corporation's outstanding Common
Stock and, through Saban S.A., owned approximately 20.7% of Safra Republic's
outstanding common shares.
73
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. STOCKHOLDER'S EQUITY OF REPUBLIC NATIONAL BANK OF NEW YORK
A summary of changes in the stockholder's equity accounts of the Bank was as
follows:
(In thousands) 1993 1992
==========================================================================================
COMMON STOCK:
Balance at beginning and end of year $ 355,000 $ 355,000
==========================================================================================
SURPLUS:
Balance at beginning of year $1,160,661 $ 960,220
Capital contribution by parent -- 200,000
Treasury stock transactions of affiliate (225) 441
- ------------------------------------------------------------------------------------------
Balance at end of year $1,160,436 $1,160,661
==========================================================================================
RETAINED EARNINGS:
Balance at beginning of year $ 390,918 $ 353,680
Net income 255,716 177,886
Dividends declared (126,502) (120,000)
Foreign currency translation, net of taxes (9,586) (21,014)
Allowance for unrealized loss on marketable equity
securities 1,305 366
- ------------------------------------------------------------------------------------------
Balance at end of year $ 511,851 $ 390,918
==========================================================================================
NET UNREALIZED GAIN ON SECURITIES
AVAILABLE FOR SALE, NET of TAXES:
Balance at beginning of year $ -- $ --
Unrealized gains 348,335 --
Income tax expense (136,751) --
- ------------------------------------------------------------------------------------------
Balance at end of year $ 211,584 $ --
==========================================================================================
TOTAL STOCKHOLDER'S EQUITY:
Balance at beginning of year $1,906,579 $1,668,900
Net changes during the year 332,292 237,679
- ------------------------------------------------------------------------------------------
Balance at end of year $2,238,871 $1,906,579
==========================================================================================
The Bank, as a national banking association, is subject to legal limitations on
the amount of dividends that may be paid to the Corporation, the Bank's sole
shareholder. The prior approval of the Comptroller of the Currency is required
to the extent the total of all dividends to be declared and paid by a national
bank in any calendar year exceeds net profits (as defined) for that year
combined with its retained net profits for the two preceding calendar years,
less any required transfers to surplus. Under this limitation, at December 31,
1993, the Bank may declare dividends without the prior approval of the
Comptroller of the Currency of up to $187 million plus an additional amount
equal the Bank's retained net profits for 1994 to the date of any dividend
declaration.
The Federal Reserve Act limits extensions of credit to, or guarantees,
acceptances or letters of credit issued on behalf of, affiliates by member
banks and also requires that such transactions be secured by specific
obligations. Such transactions, aggregated with certain other transactions
with affiliates, are limited to 10% of the Bank's capital and surplus, as
defined, to any one affiliate and to 20% of such amount to all such affiliates
in the aggregate. Based upon these requirements, the Bank could have advanced,
assuming adequate qualifying collateral was available, up to $247 million to
the Corporation.
74
48
19. REPUBLIC NEW YORK CORPORATION (PARENT COMPANY ONLY)
Condensed Balance Sheets
December 31,
-------------------------
(In thousands) 1993 1992
==========================================================================================
ASSETS
Deposits with subsidiary bank, principally interest-bearing $ 979,579 $1,624,955
Investment in bank subsidiaries 2,737,702 2,346,916
Investment in non-bank subsidiaries 656,624 67,525
Securities held to maturity 60,315 410,144
Securities available for sale 634,706 --
Investment in subordinated debt of subsidiary bank 575,000 575,000
Advances to non-bank subsidiaries 369,275 264,055
Loans, net of unearned income 7,448 5,675
Dividends receivable from subsidiaries 65,000 38,000
Other assets 82,639 103,302
- ------------------------------------------------------------------------------------------
Total assets $6,168,288 $5,435,572
==========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper $ 881,741 $ 720,308
Other liabilities 73,325 77,085
Long-term debt (note 9) 200,000 250,000
Subordinated long-term debt and perpetual capital
notes (note 9) 2,266,000 2,124,750
Stockholders' equity (notes 10 and 12):
Cumulative preferred stock, no par value 556,425 556,425
Common stock, $5 par value 263,516 260,951
Surplus 459,713 447,691
Retained earnings 1,204,818 998,362
Net unrealized gain on securities available
for sale, net of taxes 262,750 --
- ------------------------------------------------------------------------------------------
Total stockholders' equity 2,747,222 2,263,429
- ------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $6,168,288 $5,435,572
==========================================================================================
CONDENSED STATEMENTS OF INCOME
(In thousands) 1993 1992 1991
=========================================================================================================
INCOME:
Dividends from bank subsidiaries $ 189,502 $ 328,000 $ 253,500
Dividends from non-bank subsidiaries 15,650 13,500 --
Interest from subsidiaries 64,588 41,608 81,806
Interest and dividend income 49,511 59,212 16,735
Investment securities gains (losses), net (3,853) 9,399 (5,131)
Other income (expense) (5,347) 160 (168)
- ---------------------------------------------------------------------------------------------------------
Total income 310,051 451,879 346,742
- ---------------------------------------------------------------------------------------------------------
EXPENSES:
Salaries and employee benefits 20,352 13,938 11,643
Interest on long-term debt and commercial paper 176,857 170,510 172,471
Other expenses 17,594 12,139 8,967
- ---------------------------------------------------------------------------------------------------------
Total expenses 214,803 196,587 193,081
- ---------------------------------------------------------------------------------------------------------
Income before income tax benefit and equity in
undistributed net income of subsidiaries 95,248 255,292 153,661
Applicable income tax benefit - current 62,327 47,344 35,616
- ---------------------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME
OF SUBSIDIARIES 157,575 302,636 189,277
Equity in undistributed net income of subsidiaries* 143,630 (43,753) 38,083
- ---------------------------------------------------------------------------------------------------------
NET INCOME $ 301,205 $ 258,883 $ 227,360
=========================================================================================================
*Represents excess of dividends over net income in 1992.
75
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands) 1993 1992 1991
===================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $301,205 $258,883 $227,360
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries* (143,630) 43,753 (38,083)
Net (increase) decrease in dividends receivable from
subsidiaries (27,000) 40,500 (16,500)
Other, net 16,902 (55,903) 33,101
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 147,477 287,233 205,878
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits with banks -- 385 2,188
Net (increase) decrease in deposits with subsidiary bank 645,376 (156,997) (921,758)
Cash contributions to bank and non-bank subsidiaries (591,800) (200,100) --
Net (increase) decrease in short-term investments (281,659) (169,760) 212,196
Purchases of securities held to maturity -- -- (137,533)
Proceeds from maturities and sales of securities held to maturity -- -- 124,535
Net (increase) decrease in advances to subsidiaries (105,220) (100,415) 102,799
Net (increase) decrease in loans (1,773) (589) 913
Investment in subordinated debt of subsidiary bank -- (525,000) (50,000)
Other, net 15,078 (18,615) (6,363)
- -------------------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (319,998) (1,171,091) (673,023)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in commercial paper 161,433 196,261 (67,384)
Proceeds from issuance of subordinated long-term debt 250,000 750,000 550,000
Repayment of subordinated long-term debt (108,750) (20,000) (15,000)
Repayment of long-term debt (50,000) (49,354) (87,756)
Net proceeds from issuance of cumulative preferred stock -- 96,660 168,675
Repurchase of cumulative preferred stock -- (500) (25,000)
Cash dividends paid (83,945) (78,952) (68,236)
Other, net 3,783 (10,257) 11,846
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 172,521 883,858 467,145
- -------------------------------------------------------------------------------------------------------------------
Cash at beginning and end of year $ -- $ -- $ --
===================================================================================================================
*Represents excess of dividends over net income in 1992.
76
50
Republic New York Corporation
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS
[KPMG PEAT MARWICK LETTERHEAD]
The Board of Directors and Stockholders
Republic New York Corporation:
We have audited the accompanying consolidated statements of condition of
Republic New York Corporation as of December 31, 1993 and 1992, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1993,
and the consolidated statements of condition of Republic National Bank of New
York as of December 31, 1993 and 1992. These consolidated financial statements
are the responsibility of the Corporation's management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Republic New York
Corporation at December 31, 1993 and 1992, and the results of their operations,
and their cash flows for each of the years in the three year period ended
December 31, 1993, and the consolidated financial position of Republic National
Bank of New York at December 31, 1993 and 1992 in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 3 to the consolidated financial statements, the
Corporation changed its method of accounting for investments to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities at December 31, 1993. As discussed in Notes 1 and 11,
the Corporation changed its method of accounting for income taxes in 1993 to
adopt the provisions of the Financial Accounting Standards Board's SFAS No.
109, Accounting for Income Taxes.
/s/ KPMG PEAT MARWICK
---------------------
January 18, 1994
77
51
Republic New York Corporation
REPORT OF MANAGEMENT
FINANCIAL STATEMENTS
The accompanying consolidated financial statements and the related notes
thereto have been prepared by the management of Republic New York Corporation
(the "Corporation") in accordance with generally accepted accounting principles
and, as such, include amounts, some of which are based on judgments and
estimates by management. Management's Discussion and Analysis appearing
elsewhere in this Annual Report is consistent with the content of the financial
statements.
KPMG Peat Marwick have audited the accompanying consolidated financial
statements of the Corporation and their report thereon is presented herein.
Such report represents that all of the Corporation's consolidated financial
statements, provided in the Annual Report, present fairly, in all material
respects, its financial position and results of operations in conformity with
generally accepted accounting principles.
INTERNAL CONTROL SYSTEM OVER FINANCIAL REPORTING
Management of the Corporation is responsible for establishing and maintaining
an effective internal control system over financial reporting presented in
conformity with generally accepted accounting principles. The system contains
monitoring mechanisms, and actions are taken to correct deficiencies
identified.
The Audit Committee of the Board of Directors is composed of directors who are
not officers or employees of the Corporation. The Audit Committee of the Board
of Directors is responsible for ascertaining that the accounting policies
employed by management are reasonable and that internal control systems are
adequate. The Director of Internal Audit of the Corporation conducts audits
and reviews of the Corporation's worldwide operations and reports directly to
the Audit Committee of the Board of Directors. In addition, KPMG Peat Marwick,
the Corporation's independent auditors, have direct, private access to the
Audit Committee of the Board of Directors to discuss the results of their
audits as well as other auditing and financial reporting matters they deem
necessary.
There are inherent limitations in the effectiveness of any Internal control
system, including the possibility of human error and the possible circumvention
or overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control system may vary over time.
Management assessed the Corporation's internal control system over financial
reporting presented in conformity with generally accepted accounting principles
as of December 31, 1993. This assessment was based on criteria for effective
Internal control over financial reporting described in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management believes that, as of
December 31, 1993, the Corporation maintained an effective internal control
system over financial reporting presented in conformity with generally accepted
accounting principles.
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for maintaining an effective system of internal
control over compliance with federal and state laws and regulations concerning
dividend restrictions and federal laws and regulations concerning loans to
insiders.
Management has assessed its compliance with the aforementioned laws and
regulations. Based on this assessment, management believes that the insured
depository subsidiaries, Republic National Bank of New York and Republic Bank
for Savings, of Republic New York Corporation, complied, in all material
respects, with such laws and regulations during the year ended December 31,
1993.
/s/ WALTER H. WEINER /s/ JOHN D. KABERLE, JR.
- -------------------- ------------------------
Walter H. Weiner John D. Kaberle, Jr.
Chairman of the Board Executive Vice President and Comptroller
New York, New York
January 18, 1994
78
52
Republic New York Corporation
INDEPENDENT AUDITORS' REPORT ON MANAGEMENT'S
ASSERTIONS RELATED TO INTERNAL CONTROL
[KPMG PEAT MARWICK LETTERHEAD]
The Board of Directors
Republic New York Corporation
We have examined management's assertion, included in the accompanying Report of
Management, that as of December 31, 1993, Republic New York Corporation
maintained an effective system of internal control over financial reporting
presented in conformity with generally accepted accounting principles.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of the internal control system over financial
reporting, testing, and evaluating the design and operating effectiveness of
the internal control system, and such other procedures as we considered
necessary in the circumstances. We believe that our examination provides a
reasonable basis for our opinion.
Because of inherent limitations in any internal control system, errors or
irregularities may occur and not be detected. Also, projections of any
evaluation of the internal control system to future periods are subject to the
risk that the internal control system may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
In our opinion, management's assertion referred to above is fairly stated, in
all material respects, based on the criteria described in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
/s/ KPMG PEAT MARWICK
---------------------
March 15, 1994
79
53
Republic New York Corporation
SELECTED FINANCIAL DATA - SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
1993 1992
--------------------------------------- -------------------------------------------
(In thousands except per share data) FOURTH THIRD SECOND FIRST Fourth Third Second First
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income $487,921 $481,572 $471,954 $491,479 $501,007 $507,816 $506,088 $523,681
Interest expense 294,854 288,549 273,678 299,994 314,438 322,032 327,530 354,228
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 193,067 193,023 198,276 191,485 186,569 185,784 178,558 169,453
Provision for loan losses 15,000 20,000 25,000 25,000 35,000 35,000 30,000 20,000
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 178,067 173,023 173,276 166,485 151,569 150,784 148,558 149,453
Other operating income 111,338 108,200 94,958 80,976 87,569 85,241 67,200 62,237
Other operating expenses 174,409 156,969 156,722 146,865 148,019 141,932 130,779 134,612
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 114,996 124,254 111,512 100,596 91,119 94,093 84,979 77,078
Income taxes 35,069 46,649 36,584 31,851 24,291 26,341 21,080 16,674
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 79,927 $ 77,605 $ 74,928 $ 68,745 $ 66,828 $ 67,752 $ 63,899 $ 60,404
=================================================================================================================================
Net income applicable to common
stock $ 72,792 $ 70,545 $ 67,873 $ 61,580 $ 59,616 $ 60,515 $ 56,376 $ 53,990
=================================================================================================================================
Net income per common share:
Primary $1.38 $1.34 $1.30 $1.18 $1.14 $1.16 $1.08 $1.04
Fully diluted 1.34 1.30 1.26 1.15 1.11 1.13 1.06 1.02
Average common shares outstanding:
Primary 52,690 52,634 52,336 52,196 52,346 52,329 52,118 52,020
Fully diluted 56,525 56,506 56,201 56,052 56,181 56,145 55,924 55,828
=================================================================================================================================
80
54
Republic Bank for Savings
CONSOLIDATED STATEMENTS OF CONDITION
December 31,
-----------------------------
(Dollars in thousands) 1993 1992
==================================================================================================
ASSETS
Cash and due from banks $ 33,562 $ 62,969
Interest-bearing deposits with banks 256,377 461,817
Securities held to maturity (approximate market value
of $947,972 in 1993 and $2,156,763 in 1992) 921,741 2,051,415
Securities available for sale (approximate market value
of $1,896,063 in 1993) 1,896,063 --
- --------------------------------------------------------------------------------------------------
Total investment securities 2,817,804 2,051,415
Federal funds sold -- 150,000
Loans, net of unearned income 2,895,555 3,331,897
Allowance for possible loan losses (57,362) (47,539)
- --------------------------------------------------------------------------------------------------
Loans (net) 2,838,193 3,284,358
Premises and equipment 33,465 29,314
Accounts receivable and accrued interest 68,580 83,535
Other assets 101,482 70,559
- --------------------------------------------------------------------------------------------------
Total assets $6,149,463 $6,193,967
==================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Noninterest-bearing deposits $ 345,807 $ 311,222
Interest-bearing deposits 4,392,980 4,892,058
Mortgage escrow deposits 37,676 38,029
- --------------------------------------------------------------------------------------------------
Total deposits 4,776,463 5,241,309
Securities sold under repurchase agreements 579,376 362,616
Accounts payable and accrued expenses 303,797 151,099
Other liabilities 12,154 12,051
Stockholder's equity:
Common stock, $100 par value, 750,000 shares authorized
and outstanding 75,000 75,000
Surplus 255,423 255,423
Retained earnings 106,812 96,469
Net unrealized gain on securities available for sale,
net of taxes 40,438 --
- --------------------------------------------------------------------------------------------------
Total stockholder's equity 477,673 426,892
- --------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $6,149,463 $6,193,967
==================================================================================================
81
55
Republic New York Corporation
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data) 1993 1992 1991 1990(1) 1989
==============================================================================================================================
INTEREST INCOME:
Interest and fees on loans $ 635,484 $ 721,909 $ 919,342 $1,115,943 $ 895,994
Interest on deposits with banks 295,871 385,299 591,046 686,526 886,114
Interest and dividends on investment securities:
Taxable 847,022 807,611 637,919 511,769 342,382
Exempt from federal income taxes 65,759 63,385 60,261 79,297 71,239
Interest on trading account assets 54,467 22,928 6,280 7,372 8,149
Interest on federal funds sold and securities purchased under
resale agreements 34,323 37,460 49,059 100,644 143,600
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income 1,932,926 2,038,592 2,263,907 2,501,551 2,347,478
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 689,234 804,906 1,205,989 1,457,600 1,535,593
Interest on short-term borrowings 197,769 234,249 258,010 366,748 202,434
Interest on long-term debt 270,072 279,073 218,662 219,879 252,585
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,157,075 1,318,228 1,682,661 2,044,227 1,990,612
- ------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 775,851 720,364 581,246 457,324 356,866
Provision for loan losses 85,000 120,000 62,000 40,000 209,000
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 690,851 600,364 519,246 417,324 147,866
- ------------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME:
Income from precious metals 37,910 22,637 39,449 45,456 41,046
Foreign exchange trading income 111,572 102,571 81,351 77,347 55,076
Trading account profits and commissions 78,742 12,319 22,444 16,481 15,294
Investment securities gains, net 1,295 11,232 4,264 6,613 2,778
Net gain (loss) on loans sold or held for sale (843) 17,089 3,031 12,457 10,390
Commission income 50,956 37,592 34,628 35,388 32,695
Equity in earnings of affiliate 59,463 45,220 41,083 34,703 30,558
Gain on sale of building ownership option -- -- -- -- 51,157
Other income 56,377 53,587 45,183 42,139 39,189
- ------------------------------------------------------------------------------------------------------------------------------
Total other operating income 395,472 302,247 271,433 270,584 278,183
- ------------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSES:
Salaries 203,759 180,318 166,107 158,605 136,588
Employee benefits 143,748 113,813 97,568 87,476 60,669
Occupancy, net 48,161 45,301 38,048 44,937 28,316
Other expenses 239,297 215,910 201,210 173,565 144,426
- ------------------------------------------------------------------------------------------------------------------------------
Total other operating expenses 634,965 555,342 502,933 464,583 369,999
- ------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 451,358 347,269 287,746 223,325 56,050
Income taxes 150,153 88,386 60,386 22,105 32,053
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME $301,205 $258,883 $227,360 $201,220 $23,997
==============================================================================================================================
NET INCOME APPLICABLE TO COMMON STOCK $272,790 $230,497 $204,627 $180,177 $1,223
==============================================================================================================================
Net income per common share:
Primary $5.20 $4.42 $3.95 $3.62 $.03
Fully diluted 5.05 4.32 3.90 3.62 .03
Cash dividends declared per common share 1.08 1.00 .95 .88 .85
Average common shares outstanding
Primary 52,466 52,204 51,852 49,726 45,223
Fully diluted 56,321 56,020 54,292 49,726 45,223
==============================================================================================================================
(1) Includes the results of operations of Republic Bank for Savings, which was
accounted for as a purchase, from May 2, 1990 the date of acquisition.
82
56
Republic New York Corporation
CONSOLIDATED STATEMENTS OF CONDITION
December 31,
------------------------------------------------------------------
(In thousands) 1993 1992 1991 1990 1989
===================================================================================================================================
ASSETS
Cash and due from banks $ 636,633 $ 490,711 $ 412,026 $ 424,899 $ 397,897
Interest-bearing deposits with banks 5,346,647 10,562,885 8,776,578 7,129,174 8,175,016
Precious metals 1,110,434 412,105 278,309 458,896 412,128
Securities held to maturity 1,992,847 12,011,358 9,666,692 7,642,680 5,638,065
Securities available for sale 12,956,946 320,113 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 14,949,793 12,331,471 9,666,692 7,642,680 5,638,065
Trading account assets 1,182,093 702,479 268,950 98,148 323,448
Federal funds sold and securities purchased under resale
agreements 2,322,465 1,505,274 10,546 1,081,719 404,410
Loans, net of unearned income 9,508,558 8,007,457 8,568,958 9,004,859 6,580,389
Allowance for possible loan losses (311,855) (241,020) (227,454) (236,634) (287,501)
- -----------------------------------------------------------------------------------------------------------------------------------
Loans (net) 9,196,703 7,766,437 8,341,504 8,768,225 6,292,888
Customers' liability on acceptances 1,134,294 1,611,531 1,699,667 2,378,658 2,162,547
Premises and equipment 399,626 385,557 383,460 391,837 377,653
Accounts receivable and accrued interest 2,117,879 571,648 607,520 568,210 638,038
Investment in affiliate 625,333 553,315 534,744 505,918 484,716
Other assets 471,572 252,975 240,809 148,637 160,187
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $39,493,472 $37,146,388 $31,220,805 $29,597,001 $25,466,993
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits:
In domestic offices $ 1,427,518 $ 1,236,451 $ 953,321 $ 959,906 $ 890,473
In foreign offices 135,251 79,262 95,446 151,409 100,575
Interest-bearing deposits:
In domestic offices 8,724,797 9,164,704 8,971,780 9,572,343 7,400,930
In foreign offices 12,513,684 10,621,770 10,362,355 9,303,156 8,132,824
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 22,801,250 21,102,187 20,382,902 19,986,814 16,524,802
Short-term borrowings 4,275,439 5,738,822 1,802,744 1,963,018 1,510,420
Acceptances outstanding 1,137,636 1,616,964 1,718,266 2,390,400 2,174,693
Accounts payable and accrued expenses 2,873,903 1,096,163 1,546,412 601,303 859,773
Due to factored clients 614,549 559,211 493,644 499,454 403,760
Other liabilities 188,658 136,191 158,817 56,849 100,296
Long-term debt 2,582,875 2,502,497 1,718,882 1,551,687 1,831,498
Subordinated long-term debt and perpetual capital notes 2,271,940 2,130,924 1,401,543 864,526 689,782
Stockholders' equity:
Preferred stock, no par value 556,425 556,425 456,925 309,425 309,425
Common stock, $5 par value 263,516 260,951 260,227 172,027 151,107
Surplus 459,713 447,691 448,303 531,156 380,701
Retained earnings 1,204,818 998,362 832,140 670,342 530,736
Net unrealized gain on securities available for sale, net
of taxes 262,750 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,747,222 2,263,429 1,997,595 1,682,950 1,371,969
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $39,493,472 $37,146,388 $31,220,805 $29,597,001 $25,466,993
===================================================================================================================================
83
57
Republic New York Corporation
AVERAGE BALANCES, NET INTEREST DIFFERENTIAL, AVERAGE RATES EARNED AND PAID
YEAR ENDED DECEMBER 31, 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
AVERAGE Average
INTEREST RATES Interest Rates
AVERAGE INCOME/ EARNED/ Average Income/ Earned/
(Dollars in thousands) BALANCE EXPENSE PAID Balance Expense Paid
===============================================================================================================================
INTEREST-EARNING ASSETS:
Interest-bearing deposits with banks $ 7,452,339 $ 295,871 3.97% $ 7,792,737 $ 385,299 4.94%
Investment securities:
Taxable 13,190,788 847,022 6.42 11,147,315 807,611 7.24
Exempt from federal income taxes(1) 987,139 96,892 9.82 780,597 95,473 12.23
---------------------- ----------------------
Total investment securities 14,177,927 943,914 6.66 11,927,912 903,084 7.57
Trading account assets 969,986 54,467 5.62 489,312 22,928 4.69
Federal funds sold and securities purchased
under resale agreements 1,069,247 34,323 3.21 1,020,232 37,460 3.67
Loans, net of unearned income(2):
Domestic offices(1) 6,422,421 483,474 7.53 6,307,949 529,570 8.40
Foreign offices 2,468,138 152,357 6.17 2,424,483 192,694 7.95
---------------------- ----------------------
Total loans, net of unearned income 8,890,559 635,831 7.15 8,732,432 722,264 8.27
---------------------- ----------------------
TOTAL INTEREST-EARNING ASSETS 32,560,058 $1,964,406 6.03% 29,962,625 $2,071,035 6.91%
=================== ====================
Cash and due from banks 587,551 393,992
Other assets(3) 4,223,717 3,310,653
---------- ----------
TOTAL ASSETS $37,371,326 $33,667,270
========== ==========
INTEREST-BEARING FUNDS:
Consumer and other time deposits $ 8,274,344 $ 253,012 3.06% $ 8,147,281 $ 329,904 4.05%
Certificates of deposit 705,536 22,823 3.23 905,423 35,552 3.93
Deposits in foreign offices 10,680,094 413,399 3.87 8,530,175 439,450 5.15
---------------------- ----------------------
Total interest-bearing deposits 19,659,974 689,234 3.51 17,582,879 804,906 4.58
Short-term borrowings 5,380,459 197,769 3.68 5,522,013 234,249 4.24
Total long-term debt 4,637,595 270,072 5.82 4,148,477 279,073 6.73
---------------------- ----------------------
TOTAL INTEREST-BEARING FUNDS 29,678,028 $1,157,075 3.90% 27,253,369 $1,318,228 4.84%
=================== ====================
Noninterest-bearing deposits:
In domestic offices 1,189,192 962,183
In foreign offices 101,908 88,974
Other liabilities 4,036,916 3,196,603
STOCKHOLDERS' EQUITY:
Preferred stock 556,425 540,984
Common stockholders' equity 1,808,857 1,625,157
---------- ----------
Total stockholders' equity 2,365,282 2,166,141
---------- ----------
Total liabilities and stockholders' equity $37,371,326 $33,667,270
========== ==========
Interest income/earning assets $1,964,406 6.03% $2,071,035 6.91%
Interest expense/earning assets 1,157,075 3.55 1,318,228 4.40
------------------- --------------------
NET INTEREST DIFFERENTIAL $ 807,331 2.48% $ 752,807 2.51%
=================== ====================
(1) Income has been adjusted to a fully-taxable equivalent basis. The rate
used for this adjustment was approximately 44% in 1993 and 42% in all other
years.
(2) Including non-accrual loans.
(3) Including allowance for possible loan losses.
84
58
Republic New York Corporation
AVERAGE BALANCES, NET INTEREST DIFFERENTIAL, AVERAGE RATES EARNED AND PAID
YEAR ENDED DECEMBER 31, 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 8,558,149 $ 591,046 6.91% $ 8,030,285 $ 686,526 8.55%
Investment securities:
Taxable 7,178,784 637,919 8.89 5,435,151 511,769 9.42
Exempt from federal income taxes(1) 713,579 91,904 12.88 959,569 119,782 12.48
------------------------ -----------------------
Total investment securities 7,892,363 729,823 9.25 6,394,720 631,551 9.88
Trading account assets 132,122 6,280 4.75 94,978 7,372 7.76
Federal funds sold and securities purchased
under resale agreements 819,697 49,059 5.99 1,246,926 100,644 8.07
Loans, net of unearned income(2):
Domestic offices(1) 6,906,899 653,183 9.46 7,782,696 790,271 10.15
Foreign offices 2,716,498 266,564 9.81 2,820,683 326,116 11.56
------------------------ -----------------------
Total loans, net of unearned income 9,623,397 919,747 9.56 10,603,379 1,116,387 10.53
------------------------ -----------------------
TOTAL INTEREST-EARNING ASSETS 27,025,728 $2,295,955 8.50% 26,370,288 $2,542,480 9.64%
=================== =======================
Cash and due from banks 339,478 349,304
Other assets(3) 3,749,075 4,138,431
---------- ----------
TOTAL ASSETS $31,114,281 $30,858,023
========== ==========
INTEREST-BEARING FUNDS:
Consumer and other time deposits $ 7,883,143 $ 481,274 6.11% $ 6,905,784 $ 498,923 7.22%
Certificates of deposit 1,443,330 88,589 6.14 1,991,784 153,980 7.73
Deposits in foreign offices 9,095,280 636,126 6.99 9,583,018 804,697 8.40
------------------------ -----------------------
Total interest-bearing deposits 18,421,753 1,205,989 6.55 18,480,586 1,457,600 7.89
Short-term borrowings 4,080,232 258,010 6.32 4,084,885 366,748 8.98
Total long-term debt 2,562,166 218,662 8.53 2,389,401 219,879 9.20
------------------------ -----------------------
TOTAL INTEREST-BEARING FUNDS 25,064,151 $1,682,661 6.71% 24,954,872 $2,044,227 8.19%
=================== =======================
Noninterest-bearing deposits:
In domestic offices 867,493 834,812
In foreign offices 124,640 94,559
Other liabilities 3,213,840 3,421,980
STOCKHOLDERS' EQUITY:
Preferred stock 403,260 309,425
Common stockholders' equity 1,440,897 1,242,375
---------- ----------
Total stockholders' equity 1,844,157 1,551,800
---------- ----------
Total liabilities and stockholders' equity $31,114,281 $30,858,023
========== ==========
Interest income/earning assets $2,295,955 8.50% $2,542,480 9.64%
Interest expense/earning assets 1,682,661 6.23 2,044,227 7.75
------------------- -----------------------
NET INTEREST DIFFERENTIAL $ 613,294 2.27% $ 498,253 1.89%
=================== =======================
YEAR ENDED DECEMBER 31, 1989
- -----------------------------------------------------------------------------------------------
Average
Interest Rates
Average Income/ Earned/
(Dollars in thousands) Balance Expense Paid
===============================================================================================
INTEREST-EARNING ASSETS:
Interest-bearing deposits with banks $ 9,141,358 $ 886,114 9.69%
Investment securities:
Taxable 3,633,231 342,382 9.42
Exempt from federal income taxes(1) 834,157 107,316 12.87
-------------------------
Total investment securities 4,467,388 449,698 10.07
Trading account assets 177,675 8,149 4.59
Federal funds sold and securities purchased
under resale agreements 1,542,265 143,600 9.31
Loans, net of unearned income(2):
Domestic offices(1) 6,130,598 650,157 10.61
Foreign offices 2,235,963 246,324 11.02
-------------------------
Total loans, net of unearned income 8,366,561 896,481 10.72
-------------------------
TOTAL INTEREST-EARNING ASSETS 23,695,247 $2,384,042 10.06%
====================
Cash and due from banks 351,901
Other assets(3) 3,867,461
----------
TOTAL ASSETS $27,914,609
==========
INTEREST-BEARING FUNDS:
Consumer and other time deposits $ 5,360,446 $ 421,917 7.87%
Certificates of deposit 2,266,775 191,184 8.43
Deposits in foreign offices 9,789,883 922,492 9.42
-------------------------
Total interest-bearing deposits 17,417,104 1,535,593 8.82
Short-term borrowings 2,270,187 202,434 8.92
Total long-term debt 2,641,185 252,585 9.56
-------------------------
TOTAL INTEREST-BEARING FUNDS 22,328,476 $1,990,612 8.92%
====================
Noninterest-bearing deposits:
In domestic offices 753,897
In foreign offices 94,586
Other liabilities 3,323,189
STOCKHOLDERS' EQUITY:
Preferred stock 309,425
Common stockholders' equity 1,105,036
----------
Total stockholders' equity 1,414,461
----------
Total liabilities and stockholders' equity $27,914,609
==========
Interest income/earning assets $2,384,042 10.06%
Interest expense/earning assets 1,990,612 8.40
--------------------
NET INTEREST DIFFERENTIAL $ 393,430 1.66%
====================
85
59
Appendix A
REPUBLIC NEW YORK CORPORATION
1993 Annual Report to Stockholders
Graphic and Image Material Cross-Reference Index
Information Conveyed by
Omitted Graphic Image Omitted Graphic Image
- --------------------- -----------------------
Graphs:
- ------
Net Interest Income See "Average Balances, Net
(Interest Income; Interest Interest Rate Differential,
Expense; Net Interest Income). Average Rates Earned and Paid"
Omitted from page 29. on pages 84 and 85.
Net Interest Rate Differential See "Average Balances, Net
(Rate on Interest-Earning Interest Rate Differential,
Assets; Rate on Interest- Average Rates Earned and Paid"
Bearing Funds; Net Interest on pages 84 and 85.
Differential). Omitted
from page 30.
Loan Loss Recoveries. See "Allowances for Possible
Omitted from page 30. Loan Losses" on page 42.
Net Income Applicable to See "Consolidated Statements of
Common Stock. Omitted Income" on page 82.
from page 34.
Average Deposits See "Average Balances, Net Interest
(Consumer and Other Time Rate Differential, Average Rates
Deposits; Certificates of Earned and Paid" on pages 84 and
Deposit; Interest-Bearing 85.
Deposits in Foreign Offices;
Noninterest-Bearing Deposits).
Omitted from page 35.
Average Interest-Earning See "Average Balances, Net Interest
Assets. Omitted from Rate Differential, Average Rates
page 38. Earned and Paid" on pages 84 and
85.
Average Interest-Earning See "Average Balances, Net Interest
Assets (Loans, Net of Rate Differential, Average Rates
Unearned Income; Federal Earned and Paid" on pages 84 and
Funds Sold; Investment 85.
Securities/Trading Account
Assets; Interest-Bearing
Deposits with Banks).
Omitted from page 40.
Allowance for Possible Loan See "Allowance for Possible Loan
Losses (Allowance for Losses" on pages 42 and 43.
Possible Loan Losses as a
Percentage of Year End Loans,
Net of Unearned Income; Year
End Allowance for Possible
Loan Losses). Omitted from
page 42.
Earnings and Dividends Per See "Consolidated Statements of
Common Share (Net Income Income" on page 82.
Per Common Share Fully
Diluted; Cash Dividends
Declared Per Common Share).
Omitted from page 47.
Book Value Per Common Share The book value per common share at
at Year End. Omitted from year end was $23.44 for 1989,
page 49. $26.61 for 1990, $29.60 for 1991,
$32.71 for 1992 and $41.57 for
1993.