-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SrUp1oe8sBNcJfubWirJLOqeXSiueQIwVQq7RlSy2pvKzLBi4/4hHVn87BRznx96 KnKLrU9nUjYt9/tE/HvjbA== 0000083246-98-000012.txt : 19981116 0000083246-98-000012.hdr.sgml : 19981116 ACCESSION NUMBER: 0000083246-98-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REPUBLIC NEW YORK CORP CENTRAL INDEX KEY: 0000083246 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 132764867 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07436 FILM NUMBER: 98748923 BUSINESS ADDRESS: STREET 1: 452 FIFTH AVE CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2125256100 10-Q 1 QUARTERLY REPORT ON FORM 10-Q: 9-30-98 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. 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- ITEM 1. FINANCIAL STATEMENTS REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION UNAUDITED (Dollars in thousands)
September 30, December 31, 1998 1997 ------------ ------------ 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 ============ ============ See accompanying notes to consolidated financial statements.
-2- REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME UNAUDITED (In thousands except per share data)
Nine Months Ended Three Months Ended September 30, September 30, -------------------------- -------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- 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 See accompanying notes to consolidated financial statements.
-3- REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands)
Nine Months Ended September 30, -------------------------- 1998 1997 ----------- ----------- 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 See accompanying notes to consolidated financial statements.
-4- REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY UNAUDITED (Dollars in thousands)
Nine Months Ended September 30, -------------------------- 1998 1997 ----------- ----------- 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 =========== =========== See accompanying notes to consolidated financial statements.
-5- 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.
Nine Months Ended Three Months Ended September 30, September 30, ---------------------- ---------------------- 1998 1997 1998 1997 --------- --------- --------- --------- (In thousands) 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 ========= ========= ========= =========
-6- 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- 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.
Increase (Decrease) ---------------------------------------------------------- 3rd Qtr. 1998 vs. Nine Months 1998 vs. 3rd Qtr. 1997 Nine Months 1997 ------------------------- ------------------------ Amount Percent Amount Percent ------------------------- ------------------------ (Dollars in thousands) 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) ========= ====== ========= =====
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- AVERAGE BALANCES, NET INTEREST DIFFERENTIAL, AVERAGE RATES EARNED AND PAID UNAUDITED (Fully taxable equivalent basis) (Dollars in thousands)
Quarter Ended September 30, -------------------------------------------------------------------------- 1998 1997 ---------------------------------- ---------------------------------- Average Average Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid % Balance Expense Paid % ----------- -------- ------- ----------- -------- ------- 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): 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) 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) 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 ======== ====== ======== ====== (1) Based on amortized or historic cost with the mark-to-market adjustment on securities available for sale included in other assets. (2) Excludes noninterest-bearing balances, which are included in other assets or other liabilities, respectively.
-9- AVERAGE BALANCES, NET INTEREST DIFFERENTIAL, AVERAGE RATES EARNED AND PAID UNAUDITED (Fully taxable equivalent basis) (Dollars in thousands)
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 % ----------- -------- ------- ----------- -------- ------- 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): 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) 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) 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 ========== ====== ========== ====== (1) Based on amortized or historic cost with the mark-to-market adjustment on securities available for sale included in other assets. (2) Excludes noninterest-bearing balances, which are included in other assets or other liabilities, respectively.
-10- 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- 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- 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- 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- 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- 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- 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- 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.
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) $15.5 $18.9 $8.6 $4.3 $3.4* $3.4* $2.2* $1.4* $1.3* $1.0* $60.0* *forecasted
The incremental expenses incurred by the Corporation in connection with its Ready 2000 program as described above are not expected to include a material amount of expenses pertaining to the accelerated replacement of any software or hardware systems. In addition, the Corporation's Year 2000 readiness program has not caused the deferral or cancellation of any material IT projects. YEAR 2000 RISK The Corporation is addressing Year 2000 Risk with respect to business activities conducted through its own applications and systems and those which require reliance upon or interaction with a third party. In either case, a partial malfunction or total failure could cause the Corporation to suffer a business slowdown or interruption, resulting in financial loss, legal liability or action by its regulators that may be material to the Corporation's financial condition and operations. -18- 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- 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- 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- 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- 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- 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- 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 EX-11 2 COMPUTATION OF PER SHARE EARNINGS EX-11 REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE UNAUDITED (In thousands except per share data)
Nine Months Ended Three Months Ended September 30, September 30, ---------------------- ---------------------- 1998 1997 1998 1997 ---------- --------- --------- --------- 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 ========= ========= ========= =========
EX-27 3 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1998 SEP-30-1998 799,624 2,943,079 789,443 3,568,791 16,423,528 7,398,835 7,579,711 13,552,915 290,490 50,373,386 31,838,448 4,491,399 254,634 4,414,306 536,668 0 500,000 1,942,908 50,373,386 835,989 1,233,251 421,074 2,490,314 1,132,543 1,705,259 785,055 8,000 (196,550) 739,274 204,816 143,652 0 0 143,652 1.16 1.15 0 0 0 0 0 0 0 0 0 0 0 0
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