Funds Come Cheap to Republic National

Taking advantage of an eager market, Republic National Bank closed out 1991 with a $1.5 billion debt issue.

The bank, a unit of Republic New York Corp., sold the one-year notes last Thursday with a paper-thin fixed spread, 11 basis points over comparable U.S. Treasury securities.

Republic also won bragging rights to the biggest debt issue of the year among banks, brushing past J.P. Morgan, which sold $1 billion in similar securities only a day earlier.

A Bullish Sign

Analysts view the success of two such large issues as a bullish sign for banks in general. But besides having a willing market, both banks were also top-notch credit risks.

"Republic's credit is viewed as being as close to J.P. Morgan as any large institution in the country," said Stephen J. Paluszek, an analyst with M.A. Shapiro in New York. Morgan is the only U.S. bank with a triple-A credit rating.

Analysts usually refer to Republic New York's balance sheet as "rock solid," pointing to risk-adjusted capital ratio of 14% and a conservative ratio of deposits to loans. The lead bank is seen as equally strong.

The price of Republic's debt reflects that strength. The yield is only 4.55%.

"That is cheaper than what they would pay for the same money in certificates of deposit, given the deposit insurance premium they would pay," said Mark Alpert, an analyst with Bear, Stearns & Co.

Still, Republic may already regret its timing. The day after the bank issued the fixed-rate notes, the Federal Reserve Board cut the discount rate by a full percentage point.

Analysts noted that the debt issue also marks a change in funding strategy, in this case replacing overnight federal funds with somewhat longer-term debt.

Although Republic has said it plans to acquire New York banks or thrifts, a one-year note is not the best funding strategy for a purchase. And according to the prospectus accompanying the offer, the proceeds are earmarked for general corporate purposes.

"I don't think they will book $1.5 billion in assets with this debt," said Mr. Alpert.

Fed Funds Shunned

Republic has been replacing fed funds throughout the year. In the third quarter, for example, the banking company extended maturities on $610 million.

Moving further out on the yield curve raises Republic's cost of funds just as it is falling at many other banks, causing their interest margins to balloon. Republic has not yet enjoyed that benefit from the latest rate cut.

Indeed, the margin dropped slightly in the third quarter. But the bank locked in low-cost funds through its latest deal.

Republic is bucking another trend in funding as well. Over the past 12 months, other banks have been adding fed funds, using them to purchase government bonds.

As interest rates have fallen, those banks have recorded sizable earnings through securities trading, particularly in the third quarter.

Modest Gain Posted

On the other hand, Republic, true to its conservative roots, has recorded a relatively paltry gain of $3.3 million in the first nine months of 1991.

Republic remains interested in acquisitions. The company has already said that it is seeking an acquisition in the New York market and that Crossland Savings, a troubled thrift, is the most likely target.

But the additional $1.5 billion opens other options for the bank to expand through acquisition, some analysts say.

"The note sale puts them in a position to be a buyer of thrift institutions that the government is trying to place," said Mr. Paluszek. "I wouldn't be surprised to see them buying in the next year or two."

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