SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly Period Ended September 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-7436
REPUBLIC NEW YORK CORPORATION
(Exact name of registrant specified in its charter)
MARYLAND 13-2764867
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
452 FIFTH AVENUE, NEW YORK, NEW YORK 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 525-6100
NOT APPLICABLE
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No __
- ------------------------------------------------------------------------------
The number of shares outstanding of the registrant's common stock, was
107,275,142 at October 30, 1998.
<PAGE>
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
PAGE NO.
Item 1. Financial Statements:
Consolidated Statements of Condition - Unaudited
September 30, 1998 and December 31, 1997 2
Consolidated Statements of Income - Unaudited
Nine Months and Three Months Ended September 30,
1998 and 1997 3
Consolidated Statements of Cash Flows - Unaudited
Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Changes in Stockholders' Equity -
Unaudited Nine Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 7-22
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
The information contained in the financial statements furnished in
this report is unaudited. However, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of operations for the interim periods
presented, have been included.
-1-
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
UNAUDITED
(Dollars in thousands)
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 799,624 $ 901,783
Interest-bearing deposits with banks 2,943,079 4,756,804
Precious metals 974,875 1,241,956
Securities held to maturity (approximate market
value of $7,579,711 in 1998 and $9,392,289 in 1997) 7,398,835 9,237,151
Securities available for sale (at approximate market value) 16,423,528 16,276,667
------------ ------------
Total investment securities 23,822,363 25,513,818
Trading account assets (note 1) 3,568,791 4,510,955
Federal funds sold and securities purchased
under resale agreements 789,443 2,169,291
Loans (net of unearned income of $13,629
in 1998 and $16,563 in 1997) 13,552,915 12,359,741
Allowance for credit losses (note 1) (290,490) (326,481)
Customers' liability on acceptances 73,420 121,022
Accounts receivable and accrued interest 1,923,273 2,452,721
Investment in affiliate 809,468 864,178
Premises and equipment 460,830 469,103
Other assets 945,795 603,464
------------ ------------
Total assets $ 50,373,386 $ 55,638,355
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits:
In domestic offices $ 2,807,638 $ 2,699,819
In foreign offices 206,625 222,957
Interest-bearing deposits:
In domestic offices 11,028,492 12,214,760
In foreign offices 17,795,693 18,251,998
------------ ------------
Total deposits 31,838,448 33,389,534
Trading account liabilities 4,030,960 5,320,864
Short-term borrowings 4,491,399 5,613,834
Acceptances outstanding 73,599 121,371
Accounts payable and accrued expenses 1,244,181 2,191,840
Due to factored clients 696,283 593,815
Other liabilities (note 1) 254,634 154,682
Long-term debt 1,764,306 1,814,435
Subordinated long-term debt and perpetual capital notes 2,650,000 2,650,000
Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely junior subordinated debt securities 350,000 350,000
Stockholders' equity (notes 2 and 3):
Cumulative preferred stock, no par value
7,501,250 shares outstanding in 1998 and 1997 500,000 500,000
Common stock, $5 par value
150,000,000 shares authorized; 107,333,650 shares
outstanding in 1998 and 108,708,584 in 1997 536,668 543,543
Surplus 88,430 149,763
Retained earnings 2,302,168 2,259,172
Accumulated other comprehensive loss, net of taxes (444,050) (14,498)
Common stock in treasury, at cost 55,928 shares in 1998 (3,640) -
------------ ------------
Total stockholders' equity 2,979,576 3,437,980
------------ ------------
Total liabilities and stockholders' equity $ 50,373,386 $ 55,638,355
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-2-
<PAGE>
<TABLE>
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(In thousands except per share data)
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 835,989 $ 796,002 $ 287,095 $ 273,458
Interest on deposits with banks 221,776 225,912 75,466 72,355
Interest and dividends on investment securities:
Taxable 1,171,282 1,106,529 385,960 388,198
Exempt from federal income taxes 61,969 66,785 19,153 21,336
Interest on trading account assets 61,275 92,188 17,128 31,357
Interest on federal funds sold and securities
purchased under resale agreements 138,023 77,799 46,326 31,127
----------- ----------- ----------- -----------
Total interest income 2,490,314 2,365,215 831,128 817,831
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 1,132,543 1,070,340 383,285 370,890
Interest on short-term borrowings 342,260 328,196 113,520 117,690
Interest on long-term debt 230,456 205,154 77,904 72,501
----------- ----------- ----------- -----------
Total interest expense 1,705,259 1,603,690 574,709 561,081
----------- ----------- ----------- -----------
NET INTEREST INCOME 785,055 761,525 256,419 256,750
Provision for credit losses 8,000 12,000 - 4,000
----------- ----------- ----------- -----------
Net interest income after provision for
credit losses 777,055 749,525 256,419 252,750
----------- ----------- ----------- -----------
OTHER OPERATING INCOME (LOSS):
Trading revenue (note 4) 113,868 132,280 30,267 39,654
Provision for trading credit losses (4,000) - (4,000) -
Investment securities transactions, net (196,550) 11,093 (200,499) 9,730
Revenue from loans sold or held for sale 3,733 13,233 229 3,338
Commission income 73,268 63,204 25,100 21,947
Equity in earnings of affiliate 102,673 90,710 29,947 32,036
Other income 74,043 70,527 19,079 22,868
----------- ----------- ----------- -----------
Total other operating income (loss) 167,035 381,047 (99,877) 129,573
----------- ----------- ----------- -----------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 390,728 350,691 124,079 117,418
Occupancy, net 56,373 53,721 19,366 18,598
Other expenses 292,173 245,163 100,701 84,877
----------- ----------- ----------- -----------
Total other operating expenses 739,274 649,575 244,146 220,893
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 204,816 480,997 (87,604) 161,430
Income taxes 61,164 147,960 5,055 49,142
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 143,652 $ 333,037 $ (92,659) $ 112,288
=========== =========== =========== ===========
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK - DILUTED $ 122,848 $ 314,756 $ (99,424) $ 106,414
=========== =========== =========== ===========
Net income (loss) per common share (note 3):
Basic $1.16 $2.96 $(0.96) $1.00
Diluted 1.15 2.93 (0.96) 0.99
Average common shares outstanding (note 3):
Basic 104,522 105,793 103,985 105,559
Diluted 106,396 107,497 103,985 107,666
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-3-
<PAGE>
<TABLE>
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 143,652 $ 333,037
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization, net 82,591 66,138
Provision for trading and credit losses 12,000 12,000
Investment securities transactions, net 196,550 (11,093)
Revenue from loans sold or held for sale (3,733) (13,233)
Equity in earnings of affiliate (102,673) (90,710)
Net change in precious metals 267,081 224,633
Net change in trading accounts (123,956) (398,145)
Net change in accounts receivable and accrued interest 757,296 (1,338,780)
Net change in accounts payable and accrued expenses (579,474) 1,017,312
Other, net (223,825) (138,083)
----------- -----------
Net cash provided by (used in) operating activities 425,509 (336,924)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Interest-bearing deposits with banks 1,813,725 2,234,466
Federal funds sold and securities purchased under resale agreements 1,379,848 (1,724,307)
Short-term investments 34,858 (37,805)
Purchases of securities held to maturity (17,028) (1,001,775)
Proceeds from maturities of securities held to maturity 1,855,344 642,316
Purchases of securities available for sale (8,120,173) (6,015,934)
Proceeds from sales of securities available for sale 3,439,324 1,245,617
Proceeds from maturities of securities available for sale 4,330,037 2,459,896
Loans (2,496,613) (1,461,891)
Investment in affiliate 56,439 38,953
----------- -----------
Net cash provided by (used in) investing activities 2,275,761 (3,620,464)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits (1,550,001) 1,712,302
Short-term borrowings (1,122,435) 1,997,426
Due to factored clients 102,468 120,910
Proceeds from issuance of long-term debt 675,248 797,218
Repayment of long-term debt (724,716) (603,722)
Proceeds from issuance of subordinated long-term debt - 250,000
Net proceeds from issuance of cumulative preferred stock - 146,900
Repurchase of cumulative preferred stock - (155,800)
Repurchase of common stock (95,332) (63,611)
Purchase of treasury stock at cost (3,640) -
Cash dividends paid (99,227) (90,359)
Other, net 15,793 7,620
----------- -----------
Net cash (used in) provided by financing activities (2,801,842) 4,118,884
----------- -----------
Effect of exchange rate changes on cash and due from banks (1,587) (8,839)
----------- -----------
Net (decrease) increase in cash and due from banks (102,159) 152,657
Cash and due from banks at beginning of period 901,783 710,183
----------- -----------
Cash and due from banks at end of period $ 799,624 $ 862,840
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,598,999 $ 1,494,970
Income taxes 58,336 87,133
Transfers from securities available for sale to trading account assets 227,784 -
Transfers from securities available for sale to securities held to maturity - 949,079
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-4-
<PAGE>
<TABLE>
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
UNAUDITED
(Dollars in thousands)
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CUMULATIVE PREFERRED STOCK:
Balance at beginning of period $ 500,000 $ 555,800
Issuance of 3,000,000 shares of $2.8575 cumulative preferred stock - 150,000
Redemption of 4,000,000 shares of $1.9375
cumulative preferred stock - (100,000)
Redemption of 558 shares of remarketed preferred stock - (55,800)
----------- -----------
Balance at end of period $ 500,000 $ 550,000
=========== ===========
COMMON STOCK:
Balance at beginning of period $ 543,543 $ 550,095
Net issuance under stock option, restricted stock
and restricted stock election plans of 263,680
shares in 1998 and 885,614 shares in 1997 1,318 4,428
Retirement of 1,638,614 shares in 1998 and 1,398,694 shares in 1997 (8,193) (6,993)
----------- -----------
Balance at end of period $ 536,668 $ 547,530
=========== ===========
SURPLUS:
Balance at beginning of period $ 149,763 $ 227,378
Net issuance of common stock under stock option,
restricted stock and restricted stock election plans of
263,680 shares in 1998 and 885,614 shares in 1997 23,005 16,160
Cost of issuing preferred stock - (3,100)
Treasury stock transactions of affiliate (839) (302)
Deferred compensation 3,640 -
Retirement of 1,638,614 common shares in 1998 and 1,398,694
common shares in 1997 (87,139) (56,618)
----------- -----------
Balance at end of period $ 88,430 $ 183,518
=========== ===========
RETAINED EARNINGS:
Balance at beginning of period $ 2,259,172 $ 1,934,824
Net income 143,652 333,037
Dividends declared on common stock (80,938) (75,536)
Dividends declared on issues of preferred stock (19,718) (17,132)
----------- -----------
Balance at end of period $ 2,302,168 $ 2,175,193
=========== ===========
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAXES:
Balance at beginning of period $ (14,498) $ 38,523
Net (depreciation) appreciation on securities available for sale (547,528) 103,064
Less: reclassification adjustment for gains (losses) included in net income (127,878) 6,663
----------- -----------
Net unrealized (depreciation) appreciation on securities available for sale (419,650) 96,401
Foreign currency translation (9,902) (10,357)
----------- -----------
Other comprehensive income (loss) (429,552) 86,044
----------- -----------
Balance at end of period $ (444,050) $ 124,567
=========== ===========
COMMON STOCK IN TREASURY, AT COST:
Balance at beginning of period $ - $ -
Purchases of treasury stock at cost, 55,928 shares (3,640) -
----------- -----------
Balance at end of period $ (3,640) $ -
=========== ===========
TOTAL STOCKHOLDERS' EQUITY:
Balance at beginning of period $ 3,437,980 $ 3,306,620
Net changes during the period (458,404) 274,188
----------- -----------
Balance at end of period $ 2,979,576 $ 3,580,808
=========== ===========
TOTAL COMPREHENSIVE INCOME (LOSS), NET OF TAXES:
Net income $ 143,652 $ 333,037
Other comprehensive income (loss) (429,552) 86,044
----------- -----------
Total comprehensive income (loss), net of taxes $ (285,900) $ 419,081
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-5-
<PAGE>
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COVERING THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1. The Corporation's aggregate allowance for credit losses at September 30,
1998 was $301.0 million, which consisted of $5.0 million applicable to
trading account assets which is a reduction of "trading account assets,"
$5.5 million included in "other liabilities" for off-balance-sheet
extensions of credit, such as standby letters of credit, guarantees and
commitments, and $290.5 million, which is available to absorb all other
credit losses.
The following table presents data related to the Corporation's
aggregate allowance for credit losses for the nine-month periods ended
September 30, 1998 and 1997.
1998 1997
--------- ---------
(In thousands)
Aggregate balance at beginning of period $ 353,481 $ 350,358
Charge-offs (70,526) (17,559)
Recoveries 5,963 9,412
--------- ---------
Net charge-offs (64,563) (8,147)
Provision for trading and credit losses 12,000 12,000
Translation adjustment 42 (1,120)
--------- ---------
Aggregate balance at end of period $ 300,960 $ 353,091
========= =========
Total net charge-offs for the nine-month period of 1998 include $50.7
million taken in the third quarter attributable to the Corporation's
Russian exposure.
2. Common stock in treasury consists of the cost of shares of common stock
of the Corporation which are held by a trust, established in connection
with the Corporation's 1998 Long Term Incentive Compensation Plan, for the
benefit of certain employees who have elected to invest a portion of their
deferred restricted cash compensation in common stock of the Corporation.
At the end of the deferral period, the common stock will be delivered by
the trust to the employee.
3. On June 1, 1998, a 100% stock dividend in the form of a two-for-one
common stock split was distributed to stockholders of record on May 1,
1998. All share and per share data have been adjusted to reflect the split.
4. The following table presents information related to trading revenue for
the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Precious metals $ 407 $ 12,761 $ (3,213) $ 918
Foreign exchange 114,987 86,309 42,765 26,572
Trading account profits and commissions (1,526) 33,210 (9,285) 12,164
--------- --------- --------- ---------
Total trading revenue $ 113,868 $ 132,280 $ 30,267 $ 39,654
========= ========= ========= =========
</TABLE>
-6-
<PAGE>
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COVERING THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
5. In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, and for hedging activities. This statement is effective for
periods commencing January 1, 2000. The Corporation is currently evaluating
the impact this statement will have on its results of operations and its
financial position.
6. Certain amounts from the prior year have been reclassified to conform
with 1998 classifications.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Management's discussion and analysis of the summary of operations should be
read in conjunction with the consolidated financial statements (unaudited)
and notes shown elsewhere in this Report. In the following discussion, the
interest income earned on tax exempt obligations has been adjusted
(increased) to a fully-taxable equivalent basis. The rate used for this
adjustment was approximately 43% in 1998 and 1997. This tax equivalent
adjustment permits all interest income and net interest income to be
analyzed on a comparable basis. The following table presents a comparative
summary of the increases (decreases) in income and expense for the third
quarter and nine months ended September 30, 1998 compared to the
corresponding periods of 1997.
<TABLE>
<CAPTION>
Increase (Decrease)
----------------------------------------------------------
3rd Qtr. 1998 vs. Nine Months 1998 vs.
3rd Qtr. 1997 Nine Months 1997
------------------------- ------------------------
Amount Percent Amount Percent
------------------------- ------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest income $ 12,244 1.5 $ 122,178 5.1
Interest expense 13,628 2.4 101,569 6.3
--------- ---------
Net interest income (1,384) (0.5) 20,609 2.6
Provision for credit losses (4,000) (100.0) (4,000) (33.3)
--------- ---------
Net interest income after
provision for credit losses 2,616 1.0 24,609 3.2
Other operating income (loss) (229,450) (177.1) (214,012) (56.2)
Other operating expenses 23,253 10.5 89,699 13.8
--------- ---------
Income (loss) before income taxes (250,087) (148.1) (279,102) (55.3)
--------- ---------
Applicable income taxes (44,087) (89.7) (86,796) (58.7)
Tax equivalent adjustment (1,053) (14.2) (2,921) (12.2)
--------- ---------
Total applicable income taxes (45,140) (79.8) (89,717) (52.2)
--------- ---------
Net income (loss) $(204,947) (182.5) $(189,385) (56.9)
========= ====== ========= =====
Net income (loss) applicable to
common stock - diluted $(205,838) (193.4) $(191,908) (61.0)
========= ====== ========= =====
</TABLE>
NET INTEREST INCOME - on a fully-taxable equivalent basis was $262.8
million in the third quarter of 1998, compared to $264.2 million in the
third quarter of 1997. Net interest income in the third quarter of 1998 was
reduced due to the loss of income from Russian GKO investment securities,
the generally lower level of interest rates, a reduction in cross-border
exposure to emerging markets, and by premium amortization attributable to
prepayments on mortgage-backed securities of $20.5 million, which was
partially offset by $6.9 million of mortgage prepayment interest income. As
shown in the table on page 9, average interest-earning assets were $47.4
billion in the third quarter of 1998, compared to $45.9 billion in the
third quarter of 1997. During the third quarter of 1998, the Corporation
decreased its short-term borrowings and reduced its holdings of
interest-bearing deposits with banks. The net interest rate differential
was 2.20% in the third quarter of 1998, compared to 2.28% in the third
quarter of 1997.
-8-
<PAGE>
<TABLE>
AVERAGE BALANCES, NET INTEREST DIFFERENTIAL,
AVERAGE RATES EARNED AND PAID
UNAUDITED
(Fully taxable equivalent basis)
(Dollars in thousands)
<CAPTION>
Quarter Ended September 30,
--------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid % Balance Expense Paid %
----------- -------- ------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits with banks $ 4,487,169 $ 75,466 6.67 $ 4,647,094 $ 72,355 6.18
Investment securities (1)<F1>:
Taxable 23,236,182 385,960 6.59 21,955,458 388,198 7.01
Exempt from federal income taxes 1,349,946 25,533 7.50 1,412,796 28,769 8.08
---------- -------- ----------- --------
Total investment securities 24,586,128 411,493 6.64 23,368,254 416,967 7.08
Trading account assets (2)<F2> 1,018,907 17,128 6.67 1,489,447 31,357 8.35
Federal funds sold and securities
purchased under resale agreements 3,275,722 46,326 5.61 2,315,180 31,127 5.33
Loans, net of unearned income:
Domestic offices 10,013,229 209,880 8.32 9,474,790 194,338 8.14
Foreign offices 3,995,738 77,215 7.67 4,628,691 79,120 6.78
---------- -------- ----------- --------
Total loans, net of unearned income 14,008,967 287,095 8.13 14,103,481 273,458 7.69
---------- -------- ----------- --------
Total interest-earning assets 47,376,893 $837,508 7.01 45,923,456 $825,264 7.13
======== ====== ======== ======
Cash and due from banks 872,644 897,655
Other assets 6,159,305 8,991,394
----------- -----------
Total assets $54,408,842 $55,812,505
=========== ===========
Interest-bearing funds:
Consumer and other time deposits $10,264,566 $ 97,879 3.78 $10,714,973 $ 109,702 4.06
Certificates of deposit 1,050,679 13,142 4.96 1,619,257 21,020 5.15
Deposits in foreign offices 18,067,907 272,264 5.98 16,905,634 240,168 5.64
----------- -------- ----------- ---------
Total interest-bearing deposits 29,383,152 383,285 5.18 29,239,864 370,890 5.03
Trading account liabilities (2)<F2> 449,127 1,999 1.77 138,751 2,442 6.98
Short-term borrowings 8,500,697 111,521 5.20 9,141,274 115,248 5.00
Total long-term debt 4,827,355 77,904 6.40 4,458,342 72,501 6.45
----------- -------- ----------- ---------
Total interest-bearing funds 43,160,331 $574,709 5.28 42,978,231 $ 561,081 5.18
======== ====== ========= ======
Noninterest-bearing deposits:
In domestic offices 2,696,884 2,318,170
In foreign offices 218,525 162,900
Other liabilities 5,050,954 6,982,172
Stockholders' equity:
Preferred stock 500,000 411,413
Common stockholders' equity 2,782,148 2,959,619
----------- -----------
Total stockholders' equity 3,282,148 3,371,032
----------- -----------
Total liabilities and stockholders' equity $54,408,842 $55,812,505
============ ============
Interest income/earning assets $837,508 7.01 $825,264 7.13
Interest expense/earning assets 574,709 4.81 561,081 4.85
-------- ------ -------- ------
Net interest differential $262,799 2.20 $264,183 2.28
======== ====== ======== ======
<FN>
<F1>(1) Based on amortized or historic cost with the mark-to-market
adjustment on securities available for sale included in other assets.
<F2>(2) Excludes noninterest-bearing balances, which are included in other
assets or other liabilities, respectively.
</FN>
</TABLE>
-9-
<PAGE>
<TABLE>
AVERAGE BALANCES, NET INTEREST DIFFERENTIAL,
AVERAGE RATES EARNED AND PAID
UNAUDITED
(Fully taxable equivalent basis)
(Dollars in thousands)
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid % Balance Expense Paid %
----------- -------- ------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits with banks $ 4,530,358 $ 221,776 6.55 $ 4,788,211 $ 225,912 6.31
Investment securities (1)<F1>:
Taxable 23,224,016 1,171,282 6.74 21,033,547 1,106,529 7.03
Exempt from federal income taxes 1,421,288 83,055 7.81 1,496,131 90,792 8.11
----------- ---------- ----------- ---------
Total investment securities 24,645,304 1,254,337 6.80 22,529,678 1,197,321 7.11
Trading account assets (2)<F2> 1,094,672 61,275 7.48 1,600,882 92,188 7.70
Federal funds sold and securities
purchased under resale agreements 3,310,576 138,023 5.57 1,943,328 77,799 5.35
Loans, net of unearned income:
Domestic offices 9,531,669 593,760 8.33 9,115,978 558,217 8.19
Foreign offices 3,982,318 242,229 8.13 4,699,467 237,785 6.76
----------- ---------- ----------- ---------
Total loans, net of unearned income 13,513,987 835,989 8.27 13,815,445 796,002 7.70
----------- ---------- ----------- ---------
Total interest-earning assets 47,094,897 $2,511,400 7.13 44,677,544 $2,389,222 7.15
========== ====== ========== ======
Cash and due from banks 856,123 820,446
Other assets 7,302,764 9,336,132
------------ -----------
Total assets $55,253,784 $54,834,122
============ ===========
Interest-bearing funds:
Consumer and other time deposits $10,442,183 $ 301,502 3.86 $10,834,753 $ 325,305 4.01
Certificates of deposit 1,289,526 49,068 5.09 1,607,161 61,305 5.10
Deposits in foreign offices 17,722,120 781,973 5.90 16,838,100 683,730 5.43
----------- ---------- ----------- ---------
Total interest-bearing deposits 29,453,829 1,132,543 5.14 29,280,014 1,070,340 4.89
Trading account liabilities (2)<F2> 413,049 10,849 3.51 188,568 9,584 6.80
Short-term borrowings 8,480,191 331,411 5.23 8,454,331 318,612 5.04
Total long-term debt 4,778,470 230,456 6.45 4,284,318 205,154 6.40
----------- ---------- ----------- ---------
Total interest-bearing funds 43,125,539 $1,705,259 5.29 42,207,231 $1,603,690 5.08
========== ====== ========== ======
Noninterest-bearing deposits:
In domestic offices 2,634,408 2,267,157
In foreign offices 244,468 178,856
Other liabilities 5,825,957 6,888,416
Stockholders' equity:
Preferred stock 500,000 430,240
Common stockholders' equity 2,923,412 2,862,222
------------ -----------
Total stockholders' equity 3,423,412 3,292,462
------------ -----------
Total liabilities and stockholders' equity $55,253,784 $54,834,122
============ ===========
Interest income/earning assets $2,511,400 7.13 $2,389,222 7.15
Interest expense/earning assets 1,705,259 4.84 1,603,690 4.80
---------- ------ ---------- ------
Net interest differential $ 806,141 2.29 $ 785,532 2.35
========== ====== ========== ======
<FN>
<F1>(1) Based on amortized or historic cost with the mark-to-market adjustment on securities available for sale
included in other assets.
<F2>(2) Excludes noninterest-bearing balances, which are included in other assets or other liabilities,
respectively.
</FN>
</TABLE>
-10-
<PAGE>
As shown in the table on page 10, net interest income on a fully-taxable
equivalent basis was $806.1 million for the first nine months of 1998,
compared to $785.5 million in the comparable period of 1997. Average
interest-earning assets rose to $47.1 billion for the first nine months of
1998, compared to $44.7 billion for the corresponding period of 1997. The
increase in average interest-earning assets was primarily attributable to
taxable investment securities and federal funds sold. The net interest rate
differential was 2.29% for the first nine months of 1998, compared to 2.35%
in the respective period of 1997.
PROVISION FOR TRADING AND CREDIT LOSSES - was $4.0 million and $12.0
million for the third quarter and first nine months of 1998 and 1997,
respectively. In the third quarter of 1998, the Corporation recorded a $4.0
million provision for trading credit losses, which is included as a
component of other operating income (loss).
Aggregate net charge-offs were $55.2 million in the third quarter of 1998,
which included $50.7 million attributable to the Corporation's current and
anticipated Russian counterparty defaults. Net charge-offs were $3.3
million in the third quarter of 1997. For the first nine months of 1998
aggregate net charge-offs were $64.6 million, compared to $8.1 million for
the nine-month period of 1997. See Note 1 of notes to consolidated
financial statements for additional information related to the aggregate
allowance for credit losses and net charge-offs.
The following table presents summary data related to non-accrual loans and
other non-performing assets for the periods ended:
Sept 30, June 30, Dec. 31,
(in thousands) 1998 1998 1997
--------- -------- ---------
Non-accrual loans:
Domestic $ 69,490 $ 74,473 $ 84,094
Foreign 10,103 6,232 9,727
-------- -------- --------
Total non-accrual loans 79,593 80,705 93,821
Other assets and real estate owned 15,378 9,000 18,847
-------- -------- --------
Total non-performing assets $ 94,971 $ 89,705 $112,668
======== ======== ========
Non-accrual loans as a percentage of
loans outstanding at period end 0.59% 0.58% 0.76%
======== ======== ========
Total non-performing assets as a
percentage of period end total assets 0.19% 0.15% 0.20%
======== ======== ========
OTHER OPERATING INCOME (LOSS) - was $(99.9) million in the third quarter of
1998, compared to operating income of $129.6 million in the third quarter a
year earlier. The third quarter 1998 net other operating loss is a result
of $210.9 million, $190.7 million after tax, of losses on the Corporation's
Russian investment securities, which is discussed below. For the first nine
months of 1998, total other operating income was $167.0 million, compared
to $381.0 million in the corresponding period of 1997.
-11-
<PAGE>
Total trading revenue, including associated net interest income which is
reported as net interest income, was $52.0 million in the third quarter of
1998, compared to $60.2 million in the third quarter of 1997. For the
nine-month period ended September 30, 1998, trading revenue amounted to
$181.6 million, compared to $170.0 million in 1997. Trading net interest
income, which was primarily attributable to precious metals activities,
rose to $21.7 million and $67.7 million, in the third quarter and first
nine months of 1998, respectively, compared to $20.6 million and $37.8
million in the corresponding periods of 1997. Trading accounts profits and
commissions reflected lower results and a loss for the third quarter of
1998, due to aggressive reductions in trading positions, in a period of
high volatility and lack of liquidity. The items of net interest
income/(expense) in the following table represent the net interest earned
or paid on instruments held for trading, as well as an allocation by
management to reflect the funding benefit or cost associated with the
trading positions.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(In thousands)
Precious metals:
Trading revenue (loss) $ (3,213) $ 918 $ 407 $ 12,761
Net interest income 18,689 13,355 54,127 25,544
--------- --------- --------- ---------
Total 15,476 14,273 54,534 38,305
--------- --------- --------- ---------
Foreign exchange:
Trading revenue 42,765 26,572 114,987 86,309
Net interest expense (1,773) (2,339) (4,604) (7,918)
--------- --------- --------- ---------
Total 40,992 24,233 110,383 78,391
--------- --------- --------- ---------
Trading account profits and
commissions:
Trading revenue (loss) (9,285) 12,164 (1,526) 33,210
Net interest income 4,804 9,570 18,226 20,124
--------- --------- --------- ---------
Total (4,481) 21,734 16,700 53,334
--------- --------- --------- ---------
Total:
Trading revenue 30,267 39,654 113,868 132,280
Net interest income 21,720 20,586 67,749 37,750
--------- --------- --------- ---------
Total $ 51,987 $ 60,240 $ 181,617 $ 170,030
========= ========= ========= =========
Investment securities transactions resulted in net losses in the third
quarter of 1998 which aggregated $200.5 million and included losses of
$210.9 million ($190.7 million after tax effect), on the Corporation's
Russian investment securities. The investment securities losses stemmed
from management's decision to write down all of the Corporation's Russian
investment securities to net realizable value. The third quarter 1998
security losses included charges for the Corporation's Russian treasury
bill (GKO) investments and a mark-down of the Corporation's entire Russian
investments and related hedges, reflecting Russia's current market levels
or anticipated defaults.
-12-
<PAGE>
Additionally in the third quarter of 1998, the Corporation realized other
net investment securities gains of $10.4 million, compared to $9.7 million
in the third quarter of 1997. For the first nine months of 1998, investment
securities losses were $196.6 million, compared to gains of $11.1 million
last year.
Revenue on loans sold or held for sale was $0.2 million in the third
quarter of 1998, compared to $3.3 million in the third quarter of 1997. For
the nine month period of 1998 such revenue amounted to $3.7 million
compared to $13.2 million in the corresponding period of 1997, which was
primarily attributable to the sale of non-accrual commercial real estate
loans.
Commission income, consisting primarily of securities brokerage
commissions, fees for the issuance of banker acceptances and letters of
credit and retail services, was $25.1 million in the third quarter of 1998,
compared to $21.9 million in the third quarter of 1997. For the first nine
months of 1998, commission income amounted to $73.3 million, compared to
$63.2 million for the nine-month period of 1997.
Equity in the earnings of affiliate was $29.9 million in the third quarter
of 1998, compared to $32.0 million in the third quarter of 1997. This
income represents the Corporation's share of the earnings of Safra Republic
Holdings S.A. ("Safra Republic"), a European international private banking
group of which the Corporation owns approximately 49%. Safra Republic's
total client account assets, both on-and off-balance sheet, increased to
$31.7 billion at September 30, 1998 from $29.0 billion at September 30,
1997. This change was primarily due to an increase of $2.3 billion, or 19%,
in client deposits. For the nine-month period of 1998, equity in the
earnings of Safra Republic was $102.7 million, compared to $90.7 million
for the nine-month period of last year.
Other income was $19.1 million in the third quarter of 1998, compared to
$22.9 million in the third quarter of 1997. The domestic consumer bank and
the domestic and international private banking divisions generate fee
income through service charges to clients for deposit accounts and trust
and securities activities. Other income includes revenues from these
activities of $15.6 million in the third quarter of 1998, compared to $14.5
million in the third quarter of 1997. Other income in the third quarter of
1997 included an affiliate service fee of $3.4 million as reimbursement for
prior-period shared representative office expense. Other income for the
nine-month periods ended September 30, 1998 and 1997 was $74.0 million and
$70.5 million, respectively. The nine-month periods included a gain of $4.4
million related to the sales of real estate in 1998 and in 1997 a gain of
$7.4 million on the unwinding of a real estate financing transaction,
approximately $3.6 million of annual investment management performance fees
and the above mentioned affiliate service fee of $3.4 million.
OTHER OPERATING EXPENSES - were $244.1 million in the third quarter of
1998, and $739.3 million for the first nine months of 1998, compared to
$220.9 million and $649.6 million in the corresponding periods of 1997.
Included in the third quarter of 1998, were $13.7 million of one-time
expenses related to certain unauthorized overseas securities transactions
and losses on banknote shipments and $4.3 million of Year 2000 Project
expenses. Year 2000 Project expenses were $31.8 million for the nine-month
period of 1998. In 1997, Year 2000 Project expenses were $4.5 million in
the third quarter and $4.8 million for the nine-month period of 1997,
respectively.
Salaries and employee benefits were $124.1 million in the third quarter of
1998, compared to $117.4 million in the third quarter of last year. The
increase in the third quarter of 1998, compared to the third quarter of
1997, was attributable to higher levels of staff and increases in salaries,
partially offset by reductions in incentive compensation. For the nine
months ended September 30, 1998, such expenses rose to $390.7 million from
$350.7 million in the year-earlier period.
-13-
<PAGE>
Occupancy expense was $19.4 million in the third quarter of 1998 and $56.4
million for the nine-month period of 1998, compared to $18.6 million and
$53.7 million in the comparable periods of 1997.
All other expenses were $100.7 million in the third quarter and $292.2
million in the first nine months of 1998, compared to $84.9 million and
$245.2 million in the corresponding periods of 1997. Included in the third
quarter of 1998, were $11.2 million for losses related to unauthorized
transactions in an offshore subsidiary and $2.5 million for losses on
banknote shipments. Amortization of goodwill and other intangible assets
was $6.9 million in the third quarter of 1998, compared to $7.0 million in
the third quarter of last year.
TOTAL APPLICABLE INCOME TAXES - have been adjusted (increased) to reflect
the inclusion of interest income on tax exempt obligations as if they were
subject to federal, state and local taxes, after giving effect to the
deductibility of state and local taxes for federal income tax purposes.
Total applicable income taxes declined $45.1 million and $89.7 million in
the third quarter and first nine months of 1998, when compared to the
corresponding periods of 1997. The Corporation recorded minimal tax
benefits relating to the Russian investment securities losses. The
effective tax rate, total applicable income taxes as a percentage of income
before income taxes, was not meaningful for the third quarter of 1998 due
to the loss reported for the period, compared to 34% for the third quarter
of 1997. The effective tax rate for the nine-month period of 1998 was 36%
compared to 34%, for the corresponding period of last year.
STATEMENT OF CONDITION
CAPITAL RATIOS
The Corporation's leverage ratio, Tier 1 capital to quarterly average
assets, and its risk-based capital ratios, Tier 1 and total qualifying
capital to risk-weighted assets, include the assets and capital of Safra
Republic on a consolidated basis in accordance with the requirements of the
Federal Reserve Board (the "FRB") specifically applied to the Corporation.
These ratios do not reflect the effect on stockholders' equity related to
the FASB 115 valuation of the Corporation's portfolio of securities
available for sale which is included in accumulated other comprehensive
loss, net of taxes.
The total risk-based capital ratio has been calculated under the FRB's new
market risk capital guidelines. The guidelines incorporate a measure of
specific issuer risk for debt and equity trading positions as well as the
market risk of all trading and nontrading foreign exchange and commodity
positions. The total risk-based capital ratio for December 31, 1997 has not
been restated to reflect these new guidelines.
The following table presents the Corporation's risk-based capital ratios:
Sept. 30, Dec. 31,
1998 1997
-------- -------
Risk-based capital ratios:
Tier 1 risk-based capital ratio 13.45% 12.97%
Total risk-based capital ratio 22.22% 21.58%
Leverage ratio 5.95% 5.60%
Common stockholders'
equity/total assets 4.92% 5.28%
-14-
<PAGE>
CROSS-BORDER EXPOSURE
The following table presents information on the Corporation's cross-border
exposure to Latin American countries at September 30, 1998:
Net
Cross-border
($ Millions) Outstandings (1)
-------------------
Brazil (2) $842
Mexico 261
Argentina 358
Venezuela 140
Chile 122
(1) Net cross-border outstandings include foreign office local country
claims on local residents less local country liabilities.
(2) Net outstandings exclude sovereign risk assets funded with U.S.
dollars where the providers of funds agree that, in the event that their
claims cannot be repaid in the designated currency due to sovereign
default or currency exchange restrictions in a given country, they will
wait to receive the non-local currency until such time as such default is
cured or the currency restrictions removed or such currency becomes
available in the local market; under limited circumstances, the providers
may receive either local currency or local market debt instruments. At
September 30, 1998, such excluded Brazilian sovereign assets, supported
by Brazilian sovereign risk liabilities, were $645 million. The
Corporation is managing further reductions in its Brazilian exposure.
The Corporation has no material exposure in Asian countries receiving
International Monetary Fund support.
At September 30, 1998, the Corporation's net cross-border outstandings to
Russia amounted to $63.4 million which has been further reduced by
collections.
At September 30, 1998, the Corporation's exposure to hedge funds consisted
of loans, commitments and the mark-to-market value of off-balance sheet
contracts, of which $101.8 million is collateralized and $64.5 million is
not collateralized.
At September 30, 1998, the estimated pre-tax, fair value, calculated in
accordance with FASB 107, of the Corporation's financial assets exceeded
the fair value of its liabilities, including Brazilian sovereign risk
liabilities, mentioned above, by the amount of $500 million (not reflected
in stockholders' equity). Additionally, the Corporation's unrecognized
market value pre-tax gain on its Safra Republic shares, excluded from FASB
115 and stockholders' equity, is approximately $650 million.
-15-
<PAGE>
At September 30, 1998, the Corporation's accumulated other comprehensive
loss reflected in stockholders' equity was $444 million, which consisted of
$402 million of mark-to-market reductions on the Corporation's available
for sale securities portfolio, in accordance with FASB 115, and $42 million
of foreign currency translation losses. This compares to an accumulated
comprehensive loss on December 31, 1997 of $14 million, which consisted of
$18 million of mark-to-market gains on that securities portfolio and $32
million of foreign currency translation losses.
RISK ELEMENTS
Year 2000 Risk
The ongoing efforts by the Corporation to address the risks arising from
the Year 2000 date change ("Year 2000 Risk") are being managed through its
Ready 2000 Program Management Office ("PMO"). The Ready 2000 PMO was
established during the first quarter of 1997 and is staffed by internal and
external experts who are directing and coordinating the efforts by the
Corporation to achieve Year 2000 readiness. "Year 2000 ready" means that
computer software and hardware recognizes all date-sensitive information,
whether before, on or after January 1, 2000, accurately and makes all
required calculations or performs other functions correctly. The PMO
reports its progress bi-weekly to a Steering Committee comprised of members
of the Board of Directors and senior management of the Corporation and its
principal subsidiary, Republic National Bank of New York (the "Bank").
Progress is reported directly to the Board of the Corporation on a
quarterly basis.
STATE OF READINESS
SCOPE OF PROGRAM - The Year 2000 Risk being addressed by the Corporation
can be divided into two broad categories: (1) information technology ("IT")
applications; and (2) non-information technology ("non-IT") applications.
IT applications include both hardware and software systems which perform
mathematical calculations and other data processing, such as the system
used by the Bank to maintain its customers' deposits. Non-IT applications
rely upon hardware or software components to perform their functions,
however, data processing is not their primary activity. An example of a
non-IT application is the heating, ventilation and air-conditioning systems
that regulate the environment in the main office of the Corporation. The
Corporation's Ready 2000 program encompasses both IT and non-IT
applications.
The Corporation has identified and evaluated approximately 2,300
applications for Year 2000 readiness. Each application will be made Year
2000 ready by one of three strategies: repair, retire or replace. Although
the vast majority of applications will be repaired, certain applications
will be retired or replaced where doing so is the more cost effective means
to achieve Year 2000 readiness. In this regard, each new and replacement
application is certified by the Corporation, even if the vendor or service
provider states that such application is already Year 2000 ready.
PROGRAM DESCRIPTION - The Corporation has prioritized each application as
high, or "mission critical," medium or low, depending on its importance to
the Corporation's operations. By categorizing an application as "mission
critical," the Corporation has identified it as one which is vital to the
successful continuance of one of the Corporation's core business activities
or interfaces with a designated mission-critical application.
-16-
<PAGE>
The Corporation's Ready 2000 PMO has developed ten steps or "milestones"
which each application must satisfy in order to be deemed Year 2000 ready.
These milestones are: (1) baseline testing - a series of tests that
identify and document all functions performed by an application; (2)
pre-assessment- identifies and documents all the components of an
application (e.g., program modules, hardware components, operating systems
and interfaces); (3) code assessment - a detailed examination of an
application to identify its date-sensitive elements; (4) code conversion
plan - describes the process by which the application will be made Year
2000 ready; (5) conversion - the process of remediating an application to
make it Year 2000 ready; (6) regression testing - re-execution of the
baseline testing to confirm that the application's functionality was not
adversely affected as a result of conversion; (7) Year 2000 compliance
testing - testing a converted application in a simulated Year 2000
environment; (8) Year 2000 integration testing - testing an application's
interfaces in a simulated Year 2000 environment; (9) Year 2000
certification - approval by senior management that an application has
successfully satisfied milestones 1 through 8; and (10) move to production.
In addition, the Corporation has implemented quality-control procedures
designed to assure that each application is subjected to and satisfies
consistent and rigorous milestone requirements. These procedures include
the independent review of the test plans for all mission-critical
applications; the review of the documentation evidencing satisfaction of
all milestone requirements for each application by a quality assurance
review team following the conclusion of testing and before the application
is considered for certification; and the strict adherence to "clean
management" procedures for certified applications. Clean management applies
to any application once it is certified to be Year 2000 ready. If a
certified application is modified subsequently for any reason, the modified
application may not be returned to production without first being
thoroughly re-tested in order to confirm that the modified application
remains Year 2000 ready.
PROGRAM STATUS - As explained above, each IT and non-IT application must
complete ten milestones required by the Ready 2000 program. Therefore, by
multiplying the total number of applications by ten, the number of "total
milestones" for the program can be determined. The Corporation expects to
complete 100% of the total milestones for the project by June 30, 1999. The
table below illustrates the Corporation's progress in meeting this goal as
reflected in the percentages of total milestones completed as of the end of
the third quarter of 1998 and forecasted percentages for year end 1998.
Percentages of Total Milestones Completed
-----------------------------------------
Sept. 30, 1998 Dec. 31, 1998*
--------------- ---------------
IT Non-IT IT Non-IT
---- ------ ---- ------
Mission critical 69% 7% 94% 93%
Medium 42 32 92 94
Low 65 16 85 87
*forcasted
While the foregoing demonstrates the significant overall progress made by
the Corporation toward making its applications Year 2000 ready, in
accordance with guidance issued by federal banking regulators, the
Corporation has been focusing its program resources on its mission critical
applications. The impact of giving priority to certifying mission-critical
applications is reflected in the following table.
-17-
<PAGE>
Percentages of Applications Certified
-----------------------------------------
Sept. 30, 1998 Dec. 31, 1998*
--------------- ---------------
IT Non-IT IT Non-IT
---- ------ ---- ------
Mission critical 52% 7% 90% 93%
Medium 24 32 84 94
Low 56 16 80 75
*forcasted
All the Corporation's applications are scheduled to be certified by June
30, 1999. However, the certification of an application and its move into
production does not end the Year 2000 readiness process. The Corporation
will continue testing certified applications throughout 1999 to re-affirm
that they will function properly on and after January 1, 2000. For certain
applications, this additional testing will include the Corporation's
participation in so-called "street-wide" testing with other banks and
industry participants.
COSTS
The Corporation estimates that total incremental costs associated with its
Year 2000 readiness efforts through the end of 1999, which are being funded
through general operating funds, will be approximately $60 million.
Commencing in the second half of 1997 and through September 30, 1998, $47.3
million of these costs have been recorded, including expenses for the third
quarter of 1998 of $4.3 million. At the inception of the Ready 2000
program, the Corporation did not institute a formal tracking system of
internal IT resource costs, which costs would consist principally of the
time of IT personnel and some personnel from other business units. However,
management believes that the portion of these internal resources is not
significant to the overall IT budget.
The following table presents the expenses incurred by the Corporation to
date, as well as its forecast of the additional incremental expenses
required to complete its Ready 2000 program.
<TABLE>
<CAPTION>
Year Ended 1998 1999 2000
---------------------------------------- -------------------------------------- -------
Dec 31, 1997 1st Qtr. 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr. 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr Total
-------------- -------- ------- ------- ------- -------- ------- ------- ------- -----
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$15.5 $18.9 $8.6 $4.3 $3.4* $3.4* $2.2* $1.4* $1.3* $1.0* $60.0*
<FN>
*forecasted
</FN>
</TABLE>
The incremental expenses incurred by the Corporation in connection with its
Ready 2000 program as described above are not expected to include a
material amount of expenses pertaining to the accelerated replacement of
any software or hardware systems. In addition, the Corporation's Year 2000
readiness program has not caused the deferral or cancellation of any
material IT projects.
YEAR 2000 RISK
The Corporation is addressing Year 2000 Risk with respect to business
activities conducted through its own applications and systems and those
which require reliance upon or interaction with a third party. In either
case, a partial malfunction or total failure could cause the Corporation to
suffer a business slowdown or interruption, resulting in financial loss,
legal liability or action by its regulators that may be material to the
Corporation's financial condition and operations.
-18-
<PAGE>
Business activities conducted using applications that the Corporation owns
or whose use is licensed from a vendor include trading with counterparties,
buying and selling securities in public exchanges and over-the-counter
markets, managing customer deposits and transactions and maintaining
accurate accounting records. The malfunction or failure of its own systems
could result in a financial loss to the Corporation and legal liability to
customers and counterparties for whom transactions cannot be initiated or
completed.
The Corporation also faces Year 2000 Risk arising from the numerous third
parties whose services or relationship are significant to its operations.
Even if the Corporation completes its Ready 2000 program successfully,
failures by significant third parties to address their Year 2000 Risk may
disrupt the Corporation's operations and cause it to incur financial
losses. These third parties include major trading counterparties,
securities exchanges, clearing organizations, service bureaus, vendors,
utilities, telecommunication companies and significant borrowers.
Accordingly, the Corporation is assessing the readiness of significant
third parties in order to confirm that they are evaluating their own Year
2000 Risk and, as necessary, remediating or replacing their hardware and
software systems, as well as developing contingency plans addressing
unexpected disruptions caused by the Year 2000 date change.
Because of the nature and scope of Year 2000 Risk, there are many
uncertainties associated with it that will not be resolved completely prior
to January 1, 2000. In light of this uncertainty, as explained more
thoroughly below, the Corporation is in the process of reviewing its
contingency plans and revising them, as appropriate, in order to address
Year 2000 Risk.
CONTINGENCY PLANNING
Even if the Corporation's Ready 2000 program is completely successful with
respect to all its own applications, the possibility remains that the
Corporation may experience Year 2000-related disruptions caused by the
inadequate preparations by third parties. The Corporation is evaluating
this type of Year 2000 Risk and developing contingency plans to address it.
This planning takes two forms: remediation contingency plans and business
resumption contingency plans.
REMEDIATION CONTINGENCY PLANNING - Remediation contingency plans address
the actions to be taken if the Corporation's original plan to make a system
Year 2000 ready is determined to be ineffective or cannot be completed in a
timely manner. This type of contingency planning involves hiring additional
staff in order to expedite remediation and testing activities and
transferring the processing done by certain applications to an alternative
vendor or service provider. The Corporation has developed remediation
contingency plans for all mission-critical business applications which were
not certified to be Year 2000 ready as of September 30, 1998.
BUSINESS RESUMPTION CONTINGENCY PLANNING - In addition to remediation
contingency planning, the Corporation is currently evaluating the risks of
a failure by each core business process as a result of the Year 2000 date
change and how our business resumption contingency plan may need to be
revised to address this risk. This evaluation includes the impact of
potential failures by the Corporation's internal systems, as well as the
failure of systems maintained by third parties, including service bureaus,
electric and gas utilities, telecommunication companies and the providers
of institutional clearing services. The Corporation has established a
sub-committee of the Year 2000 Steering Committee that is overseeing this
planning process. The sub-committee has, in turn, designated business
resumption planning coordinators on divisional and departmental levels.
-19-
<PAGE>
Year 2000 Risk constitutes a unique type of risk that must be incorporated
into the Corporation's existing contingency planning. To do so, the
Corporation has adopted a four-phase process: (1) Organizational Planning
Guidelines - establishes the strategy for developing each plan; (2)
Business Impact Analysis - assesses the economic impact on each business
unit of the Corporation caused by the interruption or failure of its
critical systems; (3) Contingency Plan Development - clarifies the
circumstances and timing and procedures to be followed in the event a plan
must be activated; and (4) Methodology for Validation - requires the design
of a method to validate each plan. The first two phases of this process are
substantially complete as of September 30, 1998. The third and fourth
phases are scheduled to be well underway by December 31, 1998.
European Monetary Union
Commencing January 1, 1999, eleven of the fifteen participating member
countries of the European Monetary Union ("EMU") are scheduled to adopt a
single currency, to be known as the "Euro", as their common legal currency.
On this date each participating country will also establish a fixed
conversion rate between its existing sovereign currency and the Euro.
The efforts undertaken by the Corporation to address the issues arising
from the adoption of the Euro are being managed by an EMU Steering
Committee, which is comprised of members of senior management. The EMU
Steering Committee oversees the activities of the EMU Management Office
("EMO") and several working groups of managers representing business units
that will be affected by introduction of the Euro. The working groups
identify issues that are expected to impact system processing and products
in the Corporation's business units worldwide. Once identified, the working
groups work with the internal and external experts from the EMO in order to
develop, test and implement an appropriate remediation strategy for the
affected applications in each business unit. The EMO provides reports on
its progress to the EMU Steering Committee on a monthly basis. The EMU
Steering Committee reports to the Board of Directors of the Corporation on
a quarterly basis
The remediation strategies adopted in order to prepare the Corporation for
the introduction of the Euro are based on a comprehensive evaluation of
systems and applications by geographical location, including
vendor-provided and in-house systems. In this regard, each working group
participated in an analysis of the impact of the Euro introduction on the
operations of each of the Corporation's business units. Generally, the
Corporation's remediation strategy is two-fold: (1) remediating the
information technology applications whose transaction processing will be
affected by this event; and (2) developing, testing and implementing new
operational procedures to support Euro-denominated transactions.
Because the introduction of the Euro will affect only a small portion of
its overall customers and operations directly, the Corporation does not
expect its impact to be significant. However, to the extent applicable, the
introduction of the Euro creates risk to the Corporation. For example, if
its own systems are not adequately prepared for the introduction of the
Euro, the Corporation could experience failed trade settlements, the
inability to reconcile trading positions and balances with third parties,
and funding disruptions. In addition to the foregoing, the Corporation
faces risk related to its dependence on the successful conversion
preparations by its market counterparties, such as exchanges, clearing
agents and information providers. If these third parties do not prepare for
the introduction of the Euro adequately, the Corporation's clearance,
settlement and related activities could be adversely impacted. If any of
these risks are realized, it could cause the Corporation loss of income,
legal liability, additional litigation expenses, damage to reputation and
disciplinary action by its regulators.
-20-
<PAGE>
As of September 30, 1998, the Corporation has completed the remediation of
its affected applications and the completion of testing is on schedule. The
Corporation has communicated with its clients and counterparties regarding
the introduction of the Euro and the effect this will have on these
business relationships. In addition, the Corporation has evaluated the
impact of the introduction of the Euro upon its operations and developed
appropriate contingency plans addressing Euro-related disruptions to
significant business units beginning on January 1, 1999.
The Corporation is on schedule to be prepared for the introduction of the
Euro. The Corporation estimates that the incremental costs associated with
reviewing and remediating affected applications and preparing its
operations for the introduction of the Euro will be approximately $1
million.
RISK MANAGEMENT
ON- AND OFF-BALANCE-SHEET MARKET RISK SENSITIVITY
One of the Corporation's most significant risks is to U.S. interest rate
fluctuations in its investing, lending and borrowing activities. The extent
of this risk will fluctuate when the level and interest sensitivity
characteristics of its interest-earning assets differ from its
interest-bearing liabilities. Based on the Corporation's asset and
liability positions, including associated off-balance-sheet interest rate
hedges, primarily swaps and caps, the Corporation has simulated the effect
of an immediate 10% parallel upward shift in the yield curve and the impact
of this shift on the fair value of its financial assets and liabilities and
on net interest income at September 30, 1998 and December 31, 1997.
Based on the results of this simulation, the Corporation estimated that
this change in interest rates would reduce the value of net financial
assets by approximately $150 million and $258 million at September 30, 1998
and December 31, 1997, respectively. Net interest income would be reduced
by approximately $12 million and $17 million over the next twelve months
from the respective simulation dates.
TRADING-MARKET RISK SENSITIVITY
The Corporation uses Value at Risk ("VaR") analysis which attempts to
determine the potential U.S. dollar loss resulting from unfavorable market
developments within a given time horizon (typically one day) and given a
certain confidence level (99%) across all global trading positions.
The following tables present the calculated VaR amounts for the trading
portfolio for the periods indicated and the VaR components by risk category
at September 30, 1998, after considering correlation.
9 Mos. Ended Sept. 30, 1998
- ------------------------------------ 1-day VaR at
Average Minimum Maximum Risk Asset Class Sept. 30, 1998
- --------- --------- -------- ------------------- ---------------
(In millions) (In millions)
$12.0 $6.2 $17.4 Foreign exchange $1.3
3rd Qtr 1998 Interest rate 9.1
- ------------------------------------
Average Minimum Maximum Commodity 2.4
- --------- --------- --------
$13.9 $11.4 $16.0 Equity 0.4
2nd Qtr 1998 Optionality 0.8
- ------------------------------------
Average Minimum Maximum Correlation effects (1.8)
- --------- --------- -------- --------------
$11.6 $9.8 $17.4 $12.2
==============
-21-
<PAGE>
FORWARD-LOOKING INFORMATION
IN CONNECTION WITH THE INFORMATION RELATING TO NET INTEREST INCOME, THE
VALUE AT RISK ANALYSIS, THE YEAR 2000 AND EMU, THIS REPORT CONTAINS
STATEMENTS THAT CONSTITUTE FORWARD-LOOKING STATEMENTS AND ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE THE ACTUAL FACTS TO DIFFER
MATERIALLY FROM THOSE CONTAINED IN THIS REPORT. NET INTEREST INCOME AND THE
VALUE AT RISK ANALYSIS MIGHT BE AFFECTED BY SUCH UNCERTAINTIES AS DEFAULTS
IN CERTAIN EMERGING MARKET COUNTRIES AND CHANGES IN CONDITIONS IN THOSE
MARKETS, CHANGES IN INTEREST RATES, CHANGES IN THE GLOBAL SECURITIES
MARKETS AND THE GENERAL ECONOMIC ENVIRONMENT AND THE ACTIONS THAT THE
CORPORATION MIGHT TAKE IN LIGHT OF SUCH CHANGES.
THE CORPORATION'S EXPECTATIONS ABOUT FUTURE COSTS AND THE TIMELY COMPLETION
OF ITS YEAR 2000 AND EMU MODIFICATIONS ARE SUBJECT TO UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM WHAT HAS BEEN
DISCUSSED ABOVE. FACTORS THAT COULD INFLUENCE THE AMOUNT OF FUTURE COSTS
AND THE EFFECTIVE TIMING OF REMEDIATION EFFORTS INCLUDE THE SUCCESS OF THE
CORPORATION IN IDENTIFYING COMPUTER PROGRAMS AND NON-INFORMATION TECHNOLOGY
SYSTEMS THAT CONTAIN TWO-DIGIT YEAR CODES, THE NATURE AND AMOUNT OF
PROGRAMMING AND TESTING REQUIRED TO UPGRADE OR REPLACE EACH OF THE AFFECTED
PROGRAMS AND SYSTEMS, THE NATURE AND AMOUNT OF TESTING, VERIFICATION AND
REPORTING REQUIRED BY THE CORPORATION'S REGULATORS AROUND THE WORLD,
INCLUDING SECURITIES EXCHANGES, CENTRAL BANKS AND VARIOUS GOVERNMENTAL
REGULATORY BODIES, THE RATE AND MAGNITUDE OF RELATED LABOR AND CONSULTING
COSTS, AND THE SUCCESS OF THE CORPORATION'S EXTERNAL COUNTERPARTIES AND
SUPPLIERS, AS WELL AS WORLDWIDE EXCHANGES, CLEARING ORGANIZATIONS AND
DEPOSITORIES, IN ADDRESSING THE YEAR 2000 AND EMU ISSUES.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS WHICH SPEAK ONLY TO THE DATE OF THIS REPORT.
-22-
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information
Stockholder Proposals
As set forth in the Corporation's Proxy Statement dated March 26, 1998, for
the 1998 Annual Meeting of Stockholders held on May 27, 1998, any
stockholder proposal intended to be presented at the 1999 Annual Meeting of
Stockholders and included in the Corporation's 1999 Proxy Statement must be
received by the Corporate Secretary of the Corporation not later than
November 26, 1998. Upon receipt of any such proposal, the Corporation will
determine whether or not to include such proposal in the 1999 Proxy
Statement and proxy in accordance with regulations governing the
solicitation of proxies.
Also, pursuant to recently adopted provisions of the Corporation's By-Laws,
in order for a stockholder to nominate a candidate for director or raise
other business from the floor of the 1999 Annual Meeting, written notice of
such nomination or other business proposal must be given to the Corporate
Secretary of the Corporation not later than January 27, 1999 and not
earlier than December 28, 1998. The notice must include the information
required by the Corporation's By-Laws. These advance notice requirements
are separate from and in addition to the requirements a stockholder must
meet to have a proposal included in the Corporation's Proxy Statement.
Notice must be given to the Corporate Secretary of the Corporation at its
principal executive offices, 452 Fifth Avenue, New York, New York 10018.
Copies of the Corporation's By-Laws will be furnished without charge to any
stockholder upon written request to the Corporate Secretary.
6. Exhibits and Reports on Form 8-K
(a) Exhibits
11. Computation of Earnings Per Common Share
27. Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
September 30, 1998.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REPUBLIC NEW YORK CORPORATION
Dated: November 13, 1998 BY /S/WALTER H. WEINER
Walter H. Weiner
Chairman of the Board
Dated: November 13, 1998 BY /S/STAN MARTIN
Stan Martin
Executive Vice President and
Chief Financial Officer -
Financial Reporting and Control
-24-
<PAGE>
FORM 10-Q
QUARTERLY REPORT
For the fiscal quarter ended September 30, 1998
REPUBLIC NEW YORK CORPORATION
EXHIBIT INDEX
NO. EXHIBIT DESCRIPTION
11 Computation of Earnings Per Common Share
27 Financial Data Schedule
<TABLE>
EX-11
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
UNAUDITED
(In thousands except per share data)
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic earnings (loss):
Net income (loss) $ 143,652 $ 333,037 $ (92,659) $ 112,288
Less preferred stock dividends (19,701) (17,132) (6,529) (5,421)
Less dividends on restricted stock plan shares (2,424) (2,451) (674) (922)
--------- --------- --------- ---------
Net income (loss) applicable to common stock - basic $ 121,527 $ 313,454 $ (99,862) $ 105,945
========= ========= ========= =========
Average common shares outstanding - excluding restricted
stock plan shares 104,522 105,793 103,985 105,559
========= ========= ========= =========
Basic earnings (loss) per common share $ 1.16 $ 2.96 $ (0.96) $ 1.00
========= ========= ========= =========
Diluted earnings (loss):
Net income (loss) applicable to common stock - basic $ 121,527 $ 313,454 $ (99,862) $ 105,945
Dividend adjustment on restricted stock plan
shares to reflect shares assumed issued 1,321 1,302 438 469
--------- --------- --------- ---------
Net income (loss) applicable to common stock - diluted $ 122,848 $ 314,756 $ (99,424) $ 106,414
========= ========= ========= =========
Diluted shares:
Average common shares outstanding - excluding
restricted stock plan shares 104,522 105,793 103,985 105,559
Net shares assumed issued under restricted stock plan 1,797 1,597 - 2,001
Shares assumed issued on exercise of stock options 77 107 - 106
--------- --------- --------- ---------
Average diluted common shares outstanding 106,396 107,497 103,985 107,666
========= ========= ========= =========
Diluted earnings (loss) per common share $ 1.15 $ 2.93 $ (0.96) $ 0.99
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 799,624
<INT-BEARING-DEPOSITS> 2,943,079
<FED-FUNDS-SOLD> 789,443
<TRADING-ASSETS> 3,568,791
<INVESTMENTS-HELD-FOR-SALE> 16,423,528
<INVESTMENTS-CARRYING> 7,398,835
<INVESTMENTS-MARKET> 7,579,711
<LOANS> 13,552,915
<ALLOWANCE> 290,490
<TOTAL-ASSETS> 50,373,386
<DEPOSITS> 31,838,448
<SHORT-TERM> 4,491,399
<LIABILITIES-OTHER> 254,634
<LONG-TERM> 4,414,306
<COMMON> 536,668
0
500,000
<OTHER-SE> 1,942,908
<TOTAL-LIABILITIES-AND-EQUITY> 50,373,386
<INTEREST-LOAN> 835,989
<INTEREST-INVEST> 1,233,251
<INTEREST-OTHER> 421,074
<INTEREST-TOTAL> 2,490,314
<INTEREST-DEPOSIT> 1,132,543
<INTEREST-EXPENSE> 1,705,259
<INTEREST-INCOME-NET> 785,055
<LOAN-LOSSES> 8,000
<SECURITIES-GAINS> (196,550)
<EXPENSE-OTHER> 739,274
<INCOME-PRETAX> 204,816
<INCOME-PRE-EXTRAORDINARY> 143,652
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143,652
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.15
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
