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 March 31, 1999.
[ ] 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
105,190,672 at April 30, 1999.
<PAGE>
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Consolidated Statements of Condition - Unaudited
March 31, 1999 and December 31, 1998 2
Consolidated Statements of Income - Unaudited
Three Months Ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows - Unaudited
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Changes in Stockholders' Equity-
Unaudited-Three Months Ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis 10-24
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
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>
March 31, December 31,
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Cash and due from banks $ 867,561 $ 1,040,290
Interest-bearing deposits with banks 5,188,319 4,218,893
Precious metals 832,347 977,783
Securities held to maturity (approximate market
value of $6,231,375 in 1999 and $6,882,926 in 1998) 6,097,657 6,731,714
Securities available for sale (at approximate market value) 16,440,318 16,434,523
------------ ------------
Total investment securities 22,537,975 23,166,237
Trading account assets (note 1) 3,026,636 3,397,110
Federal funds sold and securities purchased
under resale agreements 816,913 689,335
Loans (net of unearned income of $ 8,460
in 1999 and $14,138 in 1998) 13,966,483 13,648,837
Allowance for credit losses (note 1) (292,125) (293,952)
Customers' liability on acceptances 61,528 36,287
Accounts receivable and accrued interest 1,216,009 1,352,619
Investment in affiliate 864,068 849,677
Premises and equipment 442,681 467,651
Other assets 924,639 873,387
------------ ------------
Total assets $ 50,453,034 $ 50,424,154
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits:
In domestic offices $ 2,795,738 $ 2,882,572
In foreign offices 245,779 179,709
Interest-bearing deposits:
In domestic offices 10,865,094 10,904,022
In foreign offices 18,825,111 19,253,456
------------ ------------
Total deposits 32,731,722 33,219,759
Trading account liabilities 3,145,353 3,350,456
Short-term borrowings 5,091,832 4,441,210
Acceptances outstanding 63,159 37,465
Accounts payable and accrued expenses 842,591 940,129
Due to factored clients 753,577 589,263
Other liabilities (note 1) 235,208 166,649
Long-term debt 1,415,345 1,542,773
Subordinated long-term debt and perpetual
capital notes 2,624,700 2,645,700
Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely junior subordinated debt securities 350,000 350,000
Stockholders' equity: (note 2)
Cumulative preferred stock, no par value
7,501,250 shares outstanding in 1999 and 1998 500,000 500,000
Common stock, $5 par value
150,000,000 shares authorized; 105,329,706
shares issued in 1999 and 107,322,157 in 1998 526,649 536,611
Surplus 113,766 96,487
Retained earnings 2,386,233 2,373,147
Accumulated other comprehensive loss,
net of taxes (274,031) (361,872)
Common stock in treasury, at cost 1,289,571 shares in 1999 and
55,905 shares in 1998 (53,070) (3,623)
------------ ------------
Total stockholders' equity 3,199,547 3,140,750
------------ ------------
Total liabilities and stockholders' equity $ 50,453,034 $ 50,424,154
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
-2-
<PAGE>
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(In thousands except per share data)
Three Months Ended
March 31,
----------------------
1999 1998
--------- ---------
INTEREST INCOME:
Interest and fees on loans $ 248,193 $ 259,540
Interest on deposits with banks 42,268 68,525
Interest and dividends on investment securities:
Taxable 345,990 399,112
Exempt from federal income taxes 18,515 22,786
Interest on trading account assets 16,923 18,767
Interest on federal funds sold and securities
purchased under resale agreements 21,872 39,317
--------- ---------
Total interest income 693,761 808,047
--------- ---------
INTEREST EXPENSE:
Interest on deposits 295,186 380,799
Interest on short-term borrowings 74,799 91,122
Interest on long-term debt 66,477 75,844
--------- ---------
Total interest expense 436,462 547,765
--------- ---------
NET INTEREST INCOME 257,299 260,282
Provision for credit losses 4,000 4,000
--------- ---------
Net interest income after provision for credit losses 253,299 256,282
--------- ---------
OTHER OPERATING INCOME:
Trading revenue (note 3) 72,303 40,138
Investment securities transactions, net 6,283 (8,481)
Revenue from loans sold or held for sale (157) 3,665
Commission income 25,785 23,958
Equity in earnings of affiliate 30,516 35,946
Other income 19,751 27,370
--------- ---------
Total other operating income 154,481 122,596
--------- ---------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 145,545 132,831
Occupancy, net 18,850 18,892
Restructuring charge (note 4) 97,000 --
Other expenses 91,454 100,019
--------- ---------
Total other operating expenses 352,849 251,742
--------- ---------
INCOME BEFORE INCOME TAXES 54,931 127,136
Income taxes 8,429 9,662
--------- ---------
NET INCOME $ 46,502 $ 117,474
========= =========
NET INCOME APPLICABLE TO COMMON STOCK - DILUTED $ 40,111 $ 110,420
========= =========
Net income per common share:
Basic $ 0.38 $ 1.05
Diluted 0.38 1.03
Average common shares outstanding:
Basic 103,335 104,901
Diluted 105,041 106,736
See accompanying notes to consolidated financial statements.
-3-
<TABLE>
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 46,502 $ 117,474
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization, net 31,958 27,781
Provision for trading and credit losses 8,000 4,000
Investment securities transactions, net (6,283) 8,481
Revenue from loans sold or held for sale 157 (3,665)
Equity in earnings of affiliate (30,516) (35,946)
Net change in precious metals 145,436 161,123
Net change in trading accounts 161,371 (629,551)
Net change in accounts receivable and accrued interest 144,689 (397,625)
Net change in accounts payable and accrued expenses (126,549) 250,179
Other, net 25,286 (179,141)
----------- -----------
Net cash provided by (used in) operating activities 400,051 (676,890)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Interest-bearing deposits with banks (969,426) 446,022
Federal funds sold and securities purchased under resale agreements (127,578) 783,872
Short-term investments 88,445 49,731
Purchases of securities held to maturity (1,150) (5,035)
Proceeds from maturities of securities held to maturity 635,207 547,193
Purchases of securities available for sale (1,942,999) (2,580,021)
Proceeds from sales of securities available for sale 823,333 726,424
Proceeds from maturities of securities available for sale 1,785,590 1,722,269
Loans (936,156) (1,135,396)
----------- -----------
Net cash provided by (used in) investing activities (644,734) 555,059
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits (487,907) 107,421
Short-term borrowings 650,622 (58,485)
Due to factored clients 164,314 187,816
Proceeds from issuance of long-term debt 95,762 85,275
Repayment of long-term debt (223,190) (211,398)
Repurchase of subordinated long-term debt and perpetual capital notes (21,000) -
Repurchase of common stock (27,032) (37,469)
Purchase of treasury stock (49,447) -
Cash dividends paid (33,445) (32,104)
Other, net 7,131 (1,922)
----------- -----------
Net cash provided by financing activities 75,808 39,134
----------- -----------
Effect of exchange rate changes on cash and due from banks (3,854) (9,634)
----------- -----------
Net decrease in cash and due from banks (172,729) (92,331)
Cash and due from banks at beginning of period 1,040,290 901,783
----------- -----------
Cash and due from banks at end of period $ 867,561 $ 809,452
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 406,204 $ 513,205
Income taxes 3,140 3,646
Transfers from securities available for sale to trading account assets- 222,890
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-4-
<TABLE>
<CAPTION>
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
UNAUDITED
(Dollars in thousands)
Three Months Ended
March 31,
--------------------------
1999 1998
----------- -----------
CUMULATIVE PREFERRED STOCK:
<S> <C> <C>
Balance at beginning and end of period $ 500,000 $ 500,000
=========== ===========
COMMON STOCK:
Balance at beginning of period $ 536,611 $ 543,543
Net issuance (cancellation) under stock option, restricted stock
and restricted stock election plans of (1,347,070) shares
in 1999 and 35,622 shares in 1998 (6,735) 178
Retirement of 645,381 shares in 1999 and 687,502 shares in 1998 (3,227) (3,437)
----------- -----------
Balance at end of period $ 526,649 $ 540,284
=========== ===========
SURPLUS:
Balance at beginning of period $ 96,487 $ 149,763
Net issuance (cancellation) of common stock under stock option,
restricted stock and restricted stock election plans of
(1,347,070) shares in 1999 and 35,622 shares in 1998 41,249 7,975
Treasury stock transactions of affiliate (406) (39)
Retirement of 645,381 common shares in 1999 and 687,502
common shares in 1998 (23,805) (34,032)
Deferred compensation 241 -
----------- -----------
Balance at end of period $ 113,766 $ 123,667
=========== ===========
RETAINED EARNINGS:
Balance at beginning of period $ 2,373,147 $ 2,259,172
Net income 46,502 117,474
Dividends declared on common stock (27,040) (27,052)
Dividends declared on issues of preferred stock (6,376) (6,602)
----------- -----------
Balance at end of period $ 2,386,233 $ 2,342,992
=========== ===========
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAXES:
Balance at beginning of period $ (361,872) $ (14,498)
Net appreciation on securities available for sale 119,078 43,990
Less: reclassification adjustment for gains (losses) included in net income 3,990 (5,550)
----------- -----------
Net unrealized appreciation on securities available for sale 115,088 49,540
Foreign currency translation (27,247) (8,486)
----------- -----------
Other comprehensive income 87,841 41,054
----------- -----------
Balance at end of period $ (274,031) $ 26,556
=========== ===========
COMMON STOCK IN TREASURY, AT COST:
Balance at beginning of period $ (3,623) $ -
Purchases of treasury stock at cost, 1,233,666 shares (49,447) -
----------- -----------
Balance at end of period $ (53,070) $ -
=========== ===========
TOTAL STOCKHOLDERS' EQUITY:
Balance at beginning of period $ 3,140,750 $ 3,437,980
Net changes during the period 58,797 95,519
----------- -----------
Balance at end of period $ 3,199,547 $ 3,533,499
=========== ===========
TOTAL COMPREHENSIVE INCOME, NET OF TAXES:
Net income $ 46,502 $ 117,474
Other comprehensive income 87,841 41,054
----------- -----------
Total comprehensive income, net of taxes $ 134,343 $ 158,528
=========== ===========
<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 THREE MONTHS ENDED MARCH 31, 1999 AND 1998
1. The following table sets forth the components of the aggregate allowance for
credit losses at the dates indicated.
March 31, December 31, March 31,
(In thousands) 1999 1998 1998
-------- -------- --------
Credit losses $292,125 $293,952 $326,811
Trading accounts 17,516 13,516 14,857
Off balance-sheet credit commitments 6,718 5,818 10,000
-------- -------- --------
Aggregate allowance for credit losses $316,359 $313,286 $351,668
======== ======== ========
The following table presents data related to the Corporation's aggregate
allowance for credit losses for the three-month periods ended March 31, 1999 and
1998.
(In thousands) 1999 1998
--------- ---------
Aggregate balance at beginning of period $ 313,286 $ 353,481
Charge-offs (6,271) (7,737)
Recoveries 2,195 2,311
--------- ---------
Net charge-offs (4,076) (5,426)
Provision for trading and credit losses 8,000 4,000
Translation adjustment (851) (387)
--------- ---------
Balance at end of period $ 316,359 $ 351,668
========= =========
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 (the "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.
Pursuant to the current Plan, at the end of the deferral period, the common
stock will be delivered by the trust to the employee. See Footnote 7 "Subsequent
Events" for a discussion of the transaction described therein as to its affect
on common stock held by the Plan. During the first quarter of 1999, the
Corporation purchased approximately 1.2 million shares of common stock for the
trust
3. The following table presents information related to trading revenue
for the three-month periods ended March 31, 1999 and 1998.
1999 1998
-------- --------
(In thousands)
Precious metals $ 4,293 $ 3,366
Foreign exchange 62,682 30,243
Trading account profits and commissions 9,328 6,529
Provision for trading credit losses (4,000) --
-------- --------
Total trading revenue $ 72,303 $ 40,138
======== ========
-6-
<PAGE>
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COVERING THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
4. In the first quarter of 1999, the Corporation recorded a $97 million pre-tax
restructuring charge, resulting from the Corporation's lines-of-business review
and its plan to grow its core private banking and special niche businesses. The
restructuring charge is related to workforce reductions, branch consolidations,
outsourcing certain data processing functions and related network and
communication operations and the decision to exit certain activities. The
components of this charge are as follows:
(In thousands)
Salaries and employee benefits $53,800
Occupancy, net 7,900
Other expenses 35,300
-------
Total restructuring charge $97,000
=======
Occupancy, net and other expenses in the table above include an aggregate of
approximately $32 million related to outsourcing certain data processing
functions and related network and communication operations.
The following table summarizes the activity in the restructuring charge accrual
during the first quarter of 1999:
(In thousands)
Restructuring charge $ 97,000
Payments (15,600)
Non-cash writedowns (6,000)
--------
Ending accrual at March 31, 1999 $ 75,400
========
5. The Corporation has strategically aligned its operations into five major
segments of business based on the needs of its clients and trading partners. The
five major segments of business are Private Banking, Consumer Financial
Services, Lending, Global Treasury and Global Markets. The Corporation manages
these segments of business using an internal profitability reporting system to
measure each of the major segments independently on a net income basis. The
information generated is not necessarily comparable with similar information for
any other financial institution.
The following table presents the summary results for the three-month periods
ended March 31, 1999 and 1998, respectively.
-7-
<TABLE>
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COVERING THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
5. Continued
<CAPTION>
Three Months Ended March 31, 1999
-----------------------------------------------------------------------------
Consumer
Private Financial Global Global
(In millions) Banking Services Lending Treasury Markets Other Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 19.3 $ 90.9$ 63.4 $ 69.1 $ 25.5 $ (10.9) $ 257.3
Other income 47.3 14.3 13.0 6.0 72.5 1.4 154.5
Revenue sharing 3.4 3.9 - (4.4) (2.8) (0.1) -
Restructuring charge - - - - - 97.0 97.0
Income taxes 9.1 7.6 6.1 7.4 10.4 (32.2) 8.4
Net income (loss) 24.3 22.9 11.5 30.0 17.6 (59.8) 46.5
Average assets $ 2,757 $ 929$ 9,865 $ 23,214 $ 8,715 $ 2,426 $ 47,906
=============================================================================
Three Months Ended March 31, 1998
-----------------------------------------------------------------------------
Consumer
Private Financial Global Global
(In millions) Banking Services Lending Treasury Markets Other Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 13.1 $ 81.9$ 57.9 $ 70.8 $ 25.9 $ 10.7 $ 260.3
Other income 60.2 12.3 16.6 3.6 31.8 (1.9) 122.6
Revenue sharing 2.4 1.8 - (1.7) (2.5) - -
Income taxes 11.5 6.5 7.5 (14.6) 2.8 (4.0) 9.7
Net income (loss) 30.1 16.4 13.9 59.4 5.1 (7.4) 117.5
Average assets $ 2,849 $ 824$ 10,159 $ 28,439 $ 12,126 $ 531 $ 54,928
=============================================================================
</TABLE>
6.Certain amounts from the prior year have been reclassified to conform with
1999 classifications.
7. Subsequent Events
On May 10, 1999, the Corporation and Safra Republic Holdings S.A. ("SRH
") entered into a definitive agreement providing for (1) the merger of the
Corporation with a wholly-owned subsidiary of HSBC Holdings plc ("HSBC") in
which each outstanding share of the Corporation's common stock would be
converted into the right to receive $72.00 in cash and (2) a tender offer for
the outstanding common shares of SRH (other than those owned by the Corporation)
at $72.00 per share. Saban S.A., the principal stockholder of the Corporation,
which is controlled by the Corporation's founder, Edmond J. Safra, has
irrevocably undertaken to vote its 29% stockholding in the Corporation in favor
of the merger and, in addition, to accept the tender offer in respect of its
20.8% stockholding in SRH. All outstanding preferred shares of each company will
remain outstanding after these transactions.
-8-
<PAGE>
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COVERING THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
7. Continued
The consummation of the transactions are subject to a number of
conditions, including approval by the Corporation's stockholders and regulatory
approvals in various jurisdictions. The merger and tender offer are to close at
the same time, which is expected to be no later than in the last quarter of
1999.
In connection with the merger, the Corporation has issued an option to
HSBC, which would allow HSBC to purchase up to 19.9% of the outstanding shares
of the Corporation at $72.00 per share in limited circumstances.
In the second quarter of 1999, the Corporation recorded a gain of
approximately $70 million, pre-tax, relating to its investment in the Canary
Wharf Group and the completion of its initial public offering in April 1999. The
incremental impact of this transaction may be reduced by further decreases in
emerging markets exposures and other actions.
-9-
<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 1999 and 1998. 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 results of operations
for the first quarter of 1999 and the first quarter of 1998 and the increases
(decreases) in income and expense between such periods.
<TABLE>
<CAPTION>
Increase (Decrease)
----------------------------
Quarter Ended 1st Qtr. 1999 vs.
March 31, 1st Qtr. 1998
------------------------ ----------------------------
1999 1998 Amount Percent
--------- --------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest income $ 700,083 $ 815,992 $(115,909) (14.2)
Interest expense 436,462 547,765 (111,303) (20.3)
--------- --------- ---------
Net interest income 263,621 268,227 (4,606) (1.7)
Provision for credit losses 4,000 4,000 --
--------- --------- --------
Net interest income after
provision for credit losses 259,621 264,227 (4,606) (1.7)
Other operating income 154,481 122,596 31,885 26.0
Other operating expenses 352,849 251,742 101,107 40.2
--------- --------- --------
Income before income taxes 61,253 135,081 (73,828) (54.7)
--------- --------- --------
Applicable income taxes 8,429 9,662 (1,233) (12.8)
Tax equivalent adjustment 6,322 7,945 (1,623) (20.4)
--------- --------- --------
Total applicable income taxes 14,751 17,607 (2,856) (16.2)
--------- --------- --------
Net income $ 46,502 $ 117,474 $ (70,972) (60.4)
========= ========= ========= ====
Net income applicable to
common stock - diluted $ 40,111 $ 110,420 $ (70,309) (63.7)
========= ========= ========= ====
</TABLE>
Net Interest Income - on a fully-taxable equivalent basis, was $263.6 million in
the first quarter of 1999, compared to $268.2 million in the first quarter of
1998. The change in net interest income between the first quarter of 1999 and
the first quarter of 1998, reflected a reduction in the level of
interest-earning assets, which was partially offset by improved interest rate
spreads. In the first quarter of 1999, $3.1 million of past due interest was
received on previously written down Russian securities. Premium amortization
attributable to prepayments on mortgage-backed securities was $22.6 million in
the first quarter of 1999, compared to $19.2 million in the first quarter of
1998. As shown in the table on page 11, average interest-earning assets were
$42.5 billion in the first quarter of 1999, down from $45.9 billion in the first
quarter of 1998, as the Corporation reduced its holdings of taxable investment
securities, interest-bearing deposits with banks and federal funds sold.
-10-
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, NET INTEREST DIFFERENTIAL,
AVERAGE RATES EARNED AND PAID
UNAUDITED
(Fully taxable equivalent basis)
(Dollars in thousands)
Quarter Ended March 31,
------------------------------------------------------------------------------
1999 1998
--------------------------------------- -----------------------------------
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 $ 2,975,242 $ 42,268 5.76 $ 4,200,687 $ 68,525 6.62
Investment securities (1):
Taxable 21,515,126 345,990 6.52 23,375,774 399,112 6.92
Exempt from federal income taxes 1,333,174 24,837 7.56 1,556,875 30,731 8.01
---------- ----------- ----------- -----------
Total investment securities 22,848,300 370,827 6.58 24,932,649 429,843 6.99
Trading account assets (2) 1,236,677 16,923 5.55 1,008,555 18,767 7.55
Federal funds sold and securities
purchased under resale agreements 1,840,354 21,872 4.82 2,861,972 39,317 5.57
Loans, net of unearned income:
Domestic offices 10,043,053 184,404 7.45 8,885,831 183,390 8.37
Foreign offices 3,548,183 63,789 7.29 3,961,220 76,150 7.80
---------- ----------- ---------- -----------
Total loans, net of unearned income 13,591,236 248,193 7.41 12,847,051 259,540 8.19
---------- ----------- ---------- -----------
Total interest-earning assets 42,491,809 $ 700,083 6.68 45,850,914 $ 815,992 7.22
=========== ======= =========== ====
Cash and due from banks 945,447 798,668
Other assets 4,468,688 8,278,668
----------- -----------
Total assets $47,905,944 $54,928,250
=========== ===========
Interest-bearing funds:
Consumer and other time deposits $10,100,760 $ 82,282 3.30 $10,557,424 $ 103,696 3.98
Certificates of deposit 768,005 8,297 4.38 1,541,360 19,633 5.17
Deposits in foreign offices 15,905,021 204,607 5.22 17,885,145 257,470 5.84
----------- ----------- ----------- -----------
Total interest-bearing deposits 26,773,786 295,186 4.47 29,983,929 380,799 5.15
Trading account liabilities (2) 383,313 895 0.95 380,897 2,932 3.12
Short-term borrowings 6,405,131 73,904 4.68 6,807,115 88,190 5.25
Total long-term debt 4,463,837 66,477 6.04 4,742,391 75,844 6.49
----------- ----------- ----------- -----------
Total interest-bearing funds 38,026,067 $ 436,462 4.65 41,914,332 $ 547,765 5.30
=========== ====== =========== ====
Noninterest-bearing deposits:
In domestic offices 2,843,470 2,591,733
In foreign offices 229,898 269,375
Other liabilities 3,732,909 6,699,783
Stockholders' equity:
Preferred stock 500,000 500,000
Common stockholders' equity 2,573,600 2,953,027
----------- ---------
Total stockholders' equity 3,073,600 3,453,027
----------- ---------
Total liabilities and stockholders' equity $47,905,944 $54,928,250
=========== ===========
Interest income/earning assets $ 700,083 6.68 $ 815,992 7.22
Interest expense/earning assets 436,462 4.16 547,765 4.85
----------- ------ ----------- ----
Net interest differential $ 263,621 2.52 $ 268,227 2.37
=========== ====== =========== ====
<FN>
(1) Based on amortized or historic cost with the mark-to-market adjustment on
securities available for sale included in other assets.
</FN>
<FN>
(2) Excludes noninterest-bearing balances, which are included in other assets or
other liabilities, respectively.
</FN>
</TABLE>
-11-
<PAGE>
The net interest rate differential rose to 2.52% in the first quarter of 1999
from 2.37% in the first quarter of 1998, which reflected a reduction in higher
cost liabilities and a corresponding reduction in lower spread assets.
Provision for trading and credit losses - The aggregate provision for the first
quarter of 1999 consisted of $4.0 million related to credit losses and $4.0
million related to trading credit losses. The $4.0 million provision for trading
credit losses, which is reflected in trading revenue, was attributable to
increased trading activity in the first quarter of 1999. The provision for
credit losses was $4.0 million in the first quarter of 1998.
Net charge-offs of $4.1 million in the first quarter of 1999 reflected
recoveries of $1.0 million related to the Corporation's prior Russian
charge-offs, of which $0.9 million were for off-balance-sheet credit
commitments. Net charge-offs were $5.4 million in the first quarter of 1998. 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 at periods ended:
<TABLE>
<CAPTION>
March 31, Dec. 31, March 31,
(in thousands) 1999 1998 1998
------------ ------------- -------------
<S> <C> <C> <C>
Non-accrual loans:
Domestic $78,378 $73,257 $76,397
Foreign 8,211 7,597 8,140
------- ------- -------
Total non-accrual loans 86,589 80,854 84,537
Other assets and real estate owned 7,374 12,297 14,432
------- ------- -------
Total non-performing assets $93,963 $93,151 $98,969
======= ======= =======
Non-accrual loans as a percentage of
loans outstanding at period end 0.62% 0.59% 0.64%
======= ======= =======
Total non-performing assets as a
percentage of period end total assets 0.19% 0.18% 0.18%
======= ======= =======
</TABLE>
Other Operating Income - was $154.5 million in the first quarter of 1999,
compared to $122.6 million in the first quarter last year, representing an
increase of approximately 25%.
Total trading revenue, including associated net interest income which is
reported as net interest income and net of the provision for trading credit
losses, rose to $90.0 million in the first quarter of 1999, from $66.0 million
in the first quarter of 1998. The 36% increase in the first quarter of 1999 is a
result of recovering global markets and strong client activity. Trading net
interest income, which was primarily attributable to precious metals activities,
declined to $17.7 million in the first quarter of 1999 from $25.8 million in the
first quarter of 1998. 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.
-12-
<PAGE>
Three Months Ended
March 31,
------------------------------------
1999 1998
---------------- ----------------
(In thousands)
Precious metals:
Trading revenue $ 4,293 $ 3,366
Net interest income 15,456 18,922
---------------- ----------------
Total 19,749 22,288
---------------- ----------------
Foreign exchange:
Trading revenue 62,682 30,243
Net interest expense (1,239) (618)
---------------- ----------------
Total 61,443 29,625
---------------- ----------------
Trading account profits and commissions:
Trading revenue 9,328 6,529
Net interest income 3,485 7,519
---------------- ----------------
Total 12,813 14,048
---------------- ----------------
Provision for trading credit losses (4,000) -
---------------- ----------------
Total:
Trading revenue 72,303 40,138
Net interest income 17,702 25,823
---------------- ----------------
Total $ 90,005 $ 65,961
================ ================
Investment securities transactions resulted in net gains of $6.3 million in the
first quarter of 1999, compared to net losses of $8.5 million in the first
quarter of 1998. The net gains in the first quarter of 1999 were primarily from
sales of Brazilian securities and restructured Russian securities.
Revenue on loans sold or held for sale resulted in a loss of $0.2 million in the
first quarter of 1999, compared to gains of $3.7 million in the first quarter of
1998.
Commission income consists primarily of securities brokerage commissions, fees
for the issuance of banker acceptances and letters of credit and retail
services. Such income was $25.8 million in the first quarter of 1999, compared
to $24.0 million in the first quarter of 1998.
-13-
<PAGE>
Equity in the earnings of affiliate was $30.5 million in the first quarter of
1999, compared to $35.9 million in the first quarter of 1998. This income
represents the Corporation's share of the earnings of Safra Republic Holdings
S.A., ("SRH"), a European international private banking group of which the
Corporation owns approximately 49%. The decrease in the first quarter of 1999,
compared to the first quarter of 1998, was due to lower levels of other income,
which resulted from lower performance fees in funds management. SRH's total
client accounts both on-and off-balance sheet were $32.7 billion at March 31,
1999, compared to $30.6 billion at March 31, 1998. This change consisted of
increases of $0.9 billion in client portfolio assets and $1.2 billion in client
deposits.
Other income was $19.8 million in the first quarter of 1999, compared to $27.4
million in the first quarter of 1998. The consumer financial services group and
the private banking group generated fee income through service charges to
clients for deposit accounts and trust and securities activities. Other income
included revenues of $16.4 million from these activities in the first quarter of
1999, compared to $15.6 million in the first quarter of 1998. Included in other
income in the first quarter of 1998 was $7.8 million related to incentive
management fees from Safra Republic Investments Limited, a subsidiary whose
ownership is shared equally with Safra Republic.
Other Operating Expenses - were $248.8 million in the first quarter of 1999,
excluding the special restructuring and one-time charges of $104 million,
pre-tax, discussed further below, compared to $251.7 million in the first
quarter of 1998. Included in the first quarters of 1999 and 1998 were $4.7
million and $18.9 million, respectively, of Year 2000 expenses.
Salaries and employee benefits were $139.7 million in the first quarter of 1999,
excluding $5.8 million related to the one-time charge, compared to $132.8
million in the first quarter of 1998. After excluding the one-time charge,
salaries and benefits rose in the first quarter of 1999 due to increased
incentive compensation related to higher levels of trading revenue.
Occupancy expense was $18.9 million in the first quarters of 1999 and 1998.
Included in occupancy expense in the first quarter of 1999 was $0.6 million
related to the one-time charge.
The restructuring and one-time special charges of $104 million in the first
quarter of 1999 consisted of a previously announced $97 million pre-tax
restructuring charge resulting from the Corporation's lines-of-business review,
its plan to grow its core private banking and special niche businesses and a $7
million one-time charge primarily related to the termination of selected
employee benefits. The $97 million restructuring charge is related to workforce
reductions, branch consolidations, outsourcing certain data processing functions
and related network and communication operations and the decision to exit
certain activities. The Corporation expects to achieve pre-tax cost savings of
at least $67 million per year as the restructuring is fully implemented over the
next 18 months. This amount is net of an expected $5 million expense for hiring
new employees in its core and special niche businesses. In the first quarter of
1999, cost savings of approximately $2 million were realized. The timing and
expected future benefits from this restructuring are uncertain because of the
pending transaction discussed in Footnote 7 of notes to consolidated financial
statements "Subsequent Events."
-14-
<PAGE>
All other expenses were $90.9 million in the first quarter of 1999, excluding
$0.6 million related to the one-time charge, compared to $100.0 million in the
first quarter of 1998. Excluding the impact of Year 2000 expenses, all other
expenses were $86.2 million in the first quarter of 1999, compared to $82.1
million in the first quarter of 1998. Amortization of goodwill and other
intangible assets was $6.8 million in the first quarters of 1999 and 1998.
As previously reported, the Corporation estimates that total incremental
expenses for the Year 2000 project will be approximately $60 million. Since 1997
when the project commenced, cumulative Year 2000 expenses of $55.2 million have
been recorded. The Corporation is on target for the timely completion of all its
Year 2000 Project efforts.
Lines-of-Business
The Corporation's businesses are organized into five major segments: Private
Banking, Consumer Financial Services, Lending, Global Treasury and Global
Markets. The following tables present the actual results for the first quarters
of 1999 and 1998 and proforma results for the first quarter of 1999. The
proforma results for the first quarter of 1999 assume the elimination of the
restructuring charge ($97 million) and the one-time charge ($7 million) after
income tax effect.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
----------------------------------------------------------------------------------------
Consumer
Private Financial Global Global
Banking Services Lending Teasury Markets Other Total
------------- ------------ ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
Net income (loss) $ 24.3 $ 22.9 $ 11.5 $ 30.0 $ 17.6 $ (59.8) $ 46.5
Average assets 2,757 929 9,865 23,214 8,715 2,426 47,906
Average liabilities and
preferred stock 8,691 11,355 8,169 6,469 9,715 933 45,332
Average risk-adjusted equity 549 413 350 1,022 240 - 2,574
Efficiency ratio 51% 70% 66% 44% 70% - 86%
Return on average risk-
adjusted equity 18.0% 22.5% 13.4% 9.4% 29.7% - 6.3%
</TABLE>
<TABLE>
<CAPTION>
Proforma Three Months Ended March 31, 1999
----------------------------------------------------------------------------------------
Consumer
Private Financial Global Global
Banking Services Lending Teasury Markets Other Total
------------- ------------ ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
Net income $ 25.0 $ 23.5 $ 13.5 $ 30.7 $ 18.2 $ 3.2 $ 114.1
Average assets 2,757 929 9,865 23,214 8,715 2,426 47,906
Average liabilities and
preferred stock 8,691 11,355 8,169 6,469 9,715 933 45,332
Average risk-adjusted equity 549 413 350 1,022 240 - 2,574
Efficiency ratio 50% 70% 62% 42% 69% - 60%
Return on average risk-
adjusted equity 18.4% 23.1% 15.6% 9.6% 30.8% - 17.0%
</TABLE>
-15-
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
----------------------------------------------------------------------------------------
Consumer
Private Financial Global Global
Banking Services Lending Teasury Markets Other Total
------------- ------------ ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions)
Net income (loss) $ 30.1 $ 16.4 $ 13.9 $ 59.4 $ 5.1 $ (7.4) $ 117.5
Average assets 2,849 824 10,159 28,439 12,126 531 54,928
Average liabilities and
preferred stock 10,970 11,636 8,460 5,668 14,923 318 51,975
Average risk-adjusted equity 551 419 383 1,325 275 - 2,953
Efficiency ratio 44% 76% 60% 37% 85% - 66%
Return on average risk-
adjusted equity 22.2% 15.8% 14.7% 16.0% 7.5% - 15.2%
</TABLE>
The description below of the variances in net income are a comparison of the
proforma 1999 and the actual 1998 first quarter results.
Private Banking had net income of $25.0 million for the first quarter of 1999,
compared to $30.1 million for the first quarter of 1998. A decline of
approximately $7.8 million, before tax effect, relates to incentive management
fees received from Safra Republic Investments Limited which were included in the
first quarter of 1998. The Private Banking segment had an increase in total
private client account assets, both on-and off-balance sheet, to $23.8 billion
at March 31, 1999, from $22.7 billion at March 31, 1998.
Consumer Financial Services net income increased $7.1 million between the first
quarters of 1998 and 1999. This increase resulted from higher fees and
commissions, particularly from Republic Financial Services, earnings on fund
balances and improvement in consumer lending. The Republic Internet Banking
product was launched during the first quarter of 1999.
Lending had net income of $13.5 million in the first quarter of 1999, compared
to $13.9 million in the first quarter of l998. The markets where the
Corporation's lending units compete continue to be highly competitive with
respect to transactions that meet our credit risk requirements with the proper
returns.
Global Treasury net income was $30.7 million for the first quarter of 1999, a
decline from $59.4 million in the first quarter of 1998. This decline resulted
from a lower average balance sheet, reduced exposures in emerging markets, and
competitive market conditions. The Corporation has made a concerted effort to
reduce its Latin American net cross-border outstandings. At the same time, the
Corporation has seen an improvement in the net interest rate differential and a
reduction in foreign funding costs.
Global Markets net income increased $13.1 million in the first quarter of 1999,
compared to the first quarter of 1998. This increase reflects the excellent
returns in foreign exchange trading which were offset partially by increased
incentive compensation for higher levels of trading revenue.
Other primarily reflects the Year 2000 expenses of $4.7 million in the first
quarter of 1999 and $18.9 million in the first quarter of 1998.
-16-
<PAGE>
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 $2.9 million between the first quarters of 1999 and 1998. The
effective tax rates, total applicable income taxes as a percentage of income
before income taxes, for the first quarters of 1999 and 1998 were 24% and 13%,
respectively. The effective tax rate for the first quarter of 1998 included the
reversal of certain tax liabilities accrued in prior years.
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 market
valuation of the Corporation's portfolio of securities available for sale which
is included in accumulated other comprehensive loss, net of taxes.
The following table presents the Corporation's capital ratios at periods ending:
March 31, Dec. 31,
1999 1998
------------- --------------
Risk-based capital ratios:
Tier 1 risk-based capital ratio 13.55% 13.95%
Total risk-based capital ratio 22.26% 22.99%
Leverage ratio 6.56% 6.51%
Common stockholders'
equity/total assets 5.35% 5.24%
-17-
<PAGE>
Cross-border Exposure
The following table presents information on the Corporation's cross-border
exposure to Latin American countries at the dates indicated:
Net Cross-border Outstandings at (1)
--------------------------------------------
(In millions) March 31, 1999 Dec. 31, 1998
-------------------- -------------------
Brazil $484(2) $720(2)
Mexico 256 350
Argentina 262 279
Venezuela 111 153
Chile 71 65
(1) Net cross-border outstandings include foreign office local country claims on
local residents less local country liabilities.
(2) Net outstandings exclude $490 million at March 31, 1999 and $653 million at
December 31, 1998 of sovereign risk assets, before the FASB 115 depreciation
adjustment of $13 million and $17 million respectively, funded with U.S. dollars
where the providers of funds agree that, in the event 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. Also excluded is net exposure of approximately $147 million in
both periods, which represented the Corporation's share of Safra Republic's net
exposure.
The Corporation's Latin American exposure consists primarily of sovereign
securities. The mark-to-market value of these securities is fully reflected,
after tax benefit, as an adjustment to stockholders' equity through accumulated
other comprehensive loss.
During the first quarter of 1999, the Corporation reduced its Latin American net
cross-border outstandings by $383 million, including $236 million in Brazil,
through repayment at scheduled maturities and the sale of securities at a net
gain. The Corporation continually reviews its available-for-sale investment
portfolio and is managing further reductions of emerging market exposures.
RISK ELEMENTS
Year 2000 Risk
State of Readiness
Scope of Program - The Corporation continues to manage the risks arising from
the Year 2000 date change ("Year 2000 Risk") through its Ready 2000 Program
Management Office ("PMO"). The Ready 2000 Program covers both information
technology ("IT") applications and non-information technology ("non-IT")
applications which, as of March 31, 1999, involved approximately 2,500
applications.
-18-
<PAGE>
On March 1, 1999, the Corporation announced it plans to outsource its data
centers and related network and communication operations. The Corporation
subsequently entered into a definitive agreement with a third party service
provider (the "third party provider"), for the provision of these services,
which is effective. The Corporation has carefully evaluated and determined that
the services being provided by the third party provider can be integrated into
the Corporation's Year 2000 readiness effort. In addition, the Corporation has
obtained appropriate assurances and protections that all aspects of the
equipment and services to be provided by the third party provider will be Year
2000 ready. See "Year 2000 Risk" below.
Program Description - Although the vast majority of the approximately 2,500
products and services identified and included in the Corporation's application
inventory are or will be certified, a portion of this inventory is not eligible
for certification. This group includes the applications that are being retired
or replaced, as well as certain types of services provided by third parties,
like generating utilities and telecommunications carriers ("utility
applications"), the remediation of which is completely outside the control of
the Corporation. The Corporation is, however, monitoring the progress of the
Year 2000 readiness efforts of the vendors of these utility applications.
When the PMO certifies an application, it has been subjected to such standards
as are appropriate for that type of application and a reasonable belief was
reached that an application will perform in a Year 2000 ready manner. The
Corporation's internal certification of an application does not mean that it is
warranting or guaranteeing to any customer or other third party that the
application will perform in a Year 2000 ready manner. The Corporation is,
however, confident that its certification process will be effective.
The Corporation has implemented quality control procedures which include the
independent review of the test plans for all mission-critical business
applications, and the review of the documentation evidencing satisfaction of a
set of milestone requirements for each application by a quality assurance review
team. In addition, "clean management" procedures are applied to each application
once it is certified to be Year 2000 ready. Clean management means that if a
certified application is modified subsequently for any reason, the modified
application may not be returned to production without first being thoroughly
re-tested in order to confirm that the modified application remains Year 2000
ready. Clean management procedures will also be applied to each software and
hardware application transferred to the third party provider.
Program Status - As of March 31, 1999, the Corporation certified 89 percent of
all its IT and non-IT applications, including 94 percent of its mission-critical
applications. The table below illustrates the overall progress of the
Corporation's Ready 2000 effort as of this date as reflected in the percentages
of total milestones completed and applications certified.
<TABLE>
<CAPTION>
% of Total Milestones % of Total Applications
Completed at March 31, 1999 Certified at March 31, 1999
----------------------------------- ----------------------------------
IT Non-IT IT Non-IT
------------- ------------------ ------------- -----------------
<S> <C> <C> <C> <C>
Mission critical 96 95 94 93
Medium 87 91 76 89
Low 93 96 91 96
</TABLE>
-19-
<PAGE>
The Corporation expects to achieve its goal of completing all certifications by
June 30, 1999. In addition to conducting its own Ready 2000 program, the
Corporation is reviewing the results of the progress of Safra Republic's Year
2000 readiness program. Safra Republic is managing the remediation of
approximately 400 applications and presently expects to complete certifying its
applications and complete revising its business resumption contingency planning
with respect to Year 2000 Risk by June 30, 1999.
Costs
The Corporation estimates that total incremental costs associated with its Year
2000 readiness efforts through the end of the first quarter of 2000, which are
being funded through general operating funds, will be approximately $60 million.
From the second half of 1997 through March 31, 1999, $55.2 million of these
costs had been recorded, including expenses for the first quarter of 1999 of
$4.7 million. At the inception of the Ready 2000 program, the Corporation did
not institute a formal system for tracking all internal IT resource costs, which
would consist principally of the time of IT personnel and certain personnel from
other business units spent on Year 2000 activities. However, management believes
that these internal resources devoted to Year 2000 readiness are not a
significant portion of 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:
1997 1998 1999 2000
---------- --------- --------------------------------------- ----------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr Total
(In millions)
$15.5 $35.0 $4.7 $1.7* $1.1* $1.0* $1.0* $60.0*
*forecasted
The incremental expenses incurred by the Corporation in connection with its
Ready 2000 program as described above are not expected to include a material
amount of expenses pertaining to the accelerated replacement of any software or
hardware systems. In addition, the Corporation's Year 2000 readiness program has
not resulted in 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 that require
reliance upon or interaction with a third party. In either case, a partial
malfunction or total failure could cause the Corporation to suffer a business
slowdown or interruption, resulting in financial loss, legal liability or action
by its regulators that could have a material adverse affect on the Corporation's
financial condition and operations.
-20-
<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 on public exchanges and in over-the-counter markets,
managing customer deposits and transactions and maintaining accurate accounting
records. The malfunction or failure of its own systems could result in a
financial loss to the Corporation and legal liability to customers and
counterparties for whom transactions could not be initiated or completed.
The Corporation also faces Year 2000 Risk arising from numerous third parties
whose services or relationships are significant to its operations. Even if the
Corporation completes its Ready 2000 program successfully, failures by such
third parties to address their Year 2000 Risk may disrupt the Corporation's
operations and cause it to incur financial losses. These third parties include
major trading counterparties, securities exchanges, clearing organizations,
service bureaus, vendors, generating utilities, telecommunication companies and
borrowers. Accordingly, the Corporation is assessing the readiness of such third
parties in order to confirm that they are evaluating their own Year 2000 Risk
and, as necessary, remediating or replacing their hardware and software systems,
as well as developing contingency plans addressing unexpected disruptions caused
by the Year 2000 date change.
The third party provider has assumed responsibility for the operations of the
Corporation's data centers and related network and communication operations. In
order to mitigate the Year 2000 Risk that may arise from such event, the
definitive agreement for these services requires the third party provider to
adopt and assume responsibility for the Corporation's existing disaster recovery
plans for all the applications and systems being migrated to it. These plans
require redundant data processing and back-up capabilities to be available at
all times in the event services are interrupted for any reason. The definitive
agreement also requires the third party provider to deliver its own
comprehensive disaster recovery plans with respect to the processing being done
for the Corporation which are acceptable in all respects to the Corporation.
Notwithstanding the foregoing precautions, if the disaster recovery plans
utilized by the third party provider or any other service provider do not work
as planned, the Corporation is preparing contingency plans addressing Year 2000
Risk, as more fully described below.
Contingency Planning
Even if the Corporation's Ready 2000 program is completely successful with
respect to all its own applications, the possibility remains that the
Corporation may experience Year 2000-related disruptions caused by inadequate
preparations by third parties. The Corporation is evaluating this type of Year
2000 Risk and developing contingency plans to address it. This planning takes
two forms: remediation contingency planning and business resumption contingency
planning. Remediation contingency 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.
-21-
<PAGE>
Business resumption contingency planning addresses the risks of a failure by
each core business process as a result of the Year 2000 date change, including
the failure of systems maintained by third parties, like service bureaus,
electric and gas utilities, telecommunication companies and the providers of
institutional clearing services. The Corporation is in the process of revising
its business resumption contingency plans in order to address these risks.
Because the business resumption contingency planning process presumes that
ordinary data processing support is unavailable, the outsourcing of its data
centers and related network and communication operations to the third party
provider is not expected to affect these planning activities significantly. The
Corporation will, however, in all appropriate cases, consider the impact of the
migration on its business resumption contingency plans.
Year 2000 Risk constitutes a unique type of risk that must be incorporated into
the Corporation's existing contingency planning. To do so, the Corporation has
adopted a four-phase process: (1) Organizational Planning Guidelines -
establishes the strategy for developing each plan; (2) Business Impact Analysis
- - assesses the economic impact on each business unit of the Corporation caused
by the interruption or failure of its critical systems; (3) Contingency Plan
Development -- clarifies the circumstances and timing and procedures to be
followed in the event a plan must be activated; and (4) Methodology for
Validation - requires the design of a method to validate each plan. The first
two phases of this process were completed as of December 31, 1998. The final
phases of this effort are expected to be substantially completed by June 30,
1999.
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 differs 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 base yield curve and the impact of this shift on the fair value of its
financial assets and liabilities and on net interest income at March 31, 1999
and December 31, 1998.
Based on the results of this simulation, the Corporation estimates that this
change in interest rates would reduce the value of net financial assets by
approximately $288 million and $131 million at March 31, 1999 and December 31,
1998, respectively. The change in value in financial assets was primarily due to
a lengthening of the average maturities in the Corporation's mortgage-backed
securities portfolio during the three-month period. Net interest income would
increase by approximately $15 million and $20 million over the 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.
-22-
<PAGE>
The following tables present the calculated VaR amounts based on stress
projections given a 99% confidence level across all global trading positions,
for the periods indicated in 1999 and 1998 and the VaR components by risk
category at March 31, 1999 and December 31, 1998, after considering correlation.
1st Qtr 1999
- ----------------------------------------
Average Minimum Maximum
- ----------- ------------- ------------
(In millions)
$4.3 $3.0 $5.3
1st Qtr 1998
- ----------------------------------------
Average Minimum Maximum
- ----------- ------------- ------------
$10.6 $6.2 $16.0
1-day VaR at
------------------------
March 31, Dec. 31,
Risk Asset Class 1999 1998
------------------ ----------- -----------
(In millions)
Foreign exchange $1.1 $0.5
Interest rate 3.7 3.8
Commodity 1.3 1.5
Equity 0.1 -
Optionality 1.7 1.3
Correlation effects (2.8) (2.9)
----------- -----------
$5.1 $4.2
=========== ===========
-23-
<PAGE>
Forward-looking Information
In connection with the information relating to net interest income, the Value at
Risk analysis, the Year 2000, the anticipated savings from the line-of-business
review and the further reductions in emerging market exposures and other actions
to optimize the balance sheet, this report contains statements that constitute
forward-looking statements and are subject to certain risks and uncertainties
that could cause the actual results to differ materially from those contained in
this report.
With respect to net interest income and the Value at Risk analysis, results
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. With
respect to the Year 2000, uncertainties could include unanticipated events
relating to work on the developments or modifications to computer systems and to
software, including work performed by suppliers or vendors to the Corporation,
and the satisfactory resolution of such events may be beyond the Corporation's
control in responding to such events. With respect to the contemplated savings
in operating expenses, the actual results may differ due to, among other things,
the fact that the expected cost savings may not be fully realized or realized
within the expected time frame, competitive pressures among depository or other
financial institutions may increase significantly, regulatory changes not
presently proposed may be enacted and technological changes may be more
difficult or expensive than anticipated. With respect to the reduction in
emerging market exposures and the other actions to optimize the balance sheet,
the actual results will depend on future developments in emerging markets and
global securities markets generally and whether opportunities for investment
consistent with the Corporation's business strategy are available.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only to the date of this report.
-24-
<PAGE>
PART II - OTHER INFORMATION
Item 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
March 31, 1999.
-25-
<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: May 14, 1999 By /s/Dov C. Schlein
----------------------
Dov C. Schlein
Chairman of the Board
Dated: May 14, 1999 By /s/Stan Martin
--------------
Stan Martin
Executive Vice President and
Chief Financial Officer
-26-
<PAGE>
FORM 10-Q
QUARTERLY REPORT
For the fiscal quarter ended March 31, 1999
REPUBLIC NEW YORK CORPORATION
EXHIBIT INDEX
No. Exhibit Description
11 Computation of Earnings Per Common Share
27 Financial Data Schedule
<TABLE>
<CAPTION>
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
UNAUDITED
(In thousands except per share data)
Three Months Ended
March 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Basic earnings:
Net income $ 46,502 $ 117,474
Less preferred stock dividends (6,376) (6,602)
Less dividends on restricted stock plan shares (349) (865)
------------- -------------
Net income applicable to common stock- basic $ 39,777 $ 110,007
============= =============
Average common shares outstanding - excluding restricted
stock plan shares 103,335 104,901
============= =============
Basic earnings per common share $ 0.38 $ 1.05
============= =============
Diluted earnings:
Net income applicable to common stock - basic $ 39,777 $ 110,007
Dividend adjustment on restricted stock plan
shares to reflect shares assumed issued 334 413
------------- -------------
Net income applicable to common stock - diluted $ 40,111 $ 110,420
============= =============
Shares:
Average common shares outstanding - excluding restricted
stock plan shares 103,335 104,901
Net shares assumed issued under compensation stock plans 1,640 1,748
Shares assumed issued on exercise of stock options 66 87
------------- -------------
Average common shares outstanding 105,041 106,736
============= =============
Diluted earnings per common share $ 0.38 $ 1.03
============= =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 867,561
<INT-BEARING-DEPOSITS> 5,188,319
<FED-FUNDS-SOLD> 816,913
<TRADING-ASSETS> 3,026,636
<INVESTMENTS-HELD-FOR-SALE> 16,440,318
<INVESTMENTS-CARRYING> 6,097,657
<INVESTMENTS-MARKET> 6,231,375
<LOANS> 13,966,483
<ALLOWANCE> 292,125
<TOTAL-ASSETS> 50,453,034
<DEPOSITS> 32,731,722
<SHORT-TERM> 5,091,832
<LIABILITIES-OTHER> 235,208
<LONG-TERM> 4,040,045
<COMMON> 526,649
0
500,000
<OTHER-SE> 2,172,898
<TOTAL-LIABILITIES-AND-EQUITY> 50,453,034
<INTEREST-LOAN> 248,193
<INTEREST-INVEST> 364,505
<INTEREST-OTHER> 81,063
<INTEREST-TOTAL> 693,761
<INTEREST-DEPOSIT> 295,186
<INTEREST-EXPENSE> 436,462
<INTEREST-INCOME-NET> 257,299
<LOAN-LOSSES> 4,000
<SECURITIES-GAINS> 6,283
<EXPENSE-OTHER> 352,849
<INCOME-PRETAX> 54,931
<INCOME-PRE-EXTRAORDINARY> 46,502
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,502
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
<YIELD-ACTUAL> 0
<LOANS-NON> 0
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