<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended Commission
June 30, 1994 File No. 0-15882
- - ----------------- ----------------
FIRST REPUBLIC BANCORP INC.
---------------------------
(Exact name of registrant as
specified in its charter)
Delaware 94-2964497
- - ------------------ ----------------
State or other jurisdiction (IRS Employer
of incorporation or organization Identification No.)
388 Market Street
San Francisco, California 94111
-------------------------------
(Address of principal executive offices) (Zip Code)
(415) 392-1400
--------------
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check 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
----- -----
Common Stock , par value $.01 per share, of First Republic Bancorp
Inc. outstanding at July 31, 1994, 7,699,085 shares.
<PAGE>
First Republic Bancorp Inc.
Form 10-Q
June 30, 1994
Index
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet -
June 30, 1994 and December 31, 1993 3
Consolidated Statement of Income - Six Months
and Quarters Ended June 30, 1994 and 1993 5
Consolidated Statement of Cash Flows -
Six Months ended June 30, 1994 and 1993 6
Notes to Consolidated Financial
Statements 7
Item 2 - Management's Discussion and
Analysis of Financial Condition
and Results of Operations 8
PART II - OTHER INFORMATION 27
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURES 28
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following interim consolidated financial statements are
unaudited. However, they reflect all adjustments (which included
only normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of financial
position, results of operations and cash flows for the interim
periods presented.
<TABLE>
<CAPTION>
FIRST REPUBLIC BANCORP INC.
CONSOLIDATED BALANCE SHEET
June 30, December 31,
1994 1993
-------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 12,820,000 $ 19,903,000
Federal funds sold and short term investments 27,999,000 18,883,000
Interest bearing deposits at other financial institutions 1,396,000 592,000
Investment securities (net) 107,699,000 84,208,000
Federal Home Loan Bank Stock, at cost 25,177,000 22,927,000
------------ ------------
175,091,000 146,513,000
Loans
Single family (1-4 unit) mortgages 654,612,000 546,232,000
Multifamily (5+ units) mortgages 378,042,000 387,757,000
Commercial real estate mortgages 246,687,000 229,914,000
Commercial business loans 7,030,000 8,346,000
Multifamily construction 17,209,000 5,707,000
Single family construction 16,405,000 14,512,000
Equity lines of credit 30,154,000 31,213,000
Leases, contracts and other 813,000 1,333,000
Loans held for sale 7,548,000 31,044,000
------------- -------------
1,358,500,000 1,256,058,000
Less
Unearned loan fee income (8,304,000) (9,406,000)
Reserve for possible losses (15,463,000) (12,657,000)
------------- -------------
Net loans 1,334,733,000 1,233,995,000
Accrued interest receivable 9,049,000 8,110,000
Purchased servicing and premium on sale of loans 953,000 1,154,000
Prepaid expenses and other assets 13,168,000 13,786,000
Premises, equipment and leasehold improvements,
net of accumulated depreciation 3,965,000 3,674,000
Real estate owned (REO) and in substance foreclosed REO 7,728,000 9,961,000
-------------- --------------
$1,544,687,000 $1,417,193,000
============== ==============
</TABLE>
3
<PAGE>
FIRST REPUBLIC BANCORP INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
---------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Thrift certificates
Passbook and MMA accounts $ 114,029,000 $ 117,161,000
Investment certificates 743,211,000 634,510,000
-------------- -------------
Total thrift certificates 857,240,000 751,671,000
Interest payable 7,466,000 8,105,000
Custodial receipts on loans serviced for others (462,000) 1,046,000
Other liabilities 14,791,000 8,358,000
Federal Home Loan Bank advances 493,530,000 468,530,000
Other borrowings 925,000 13,580,000
-------------- --------------
Total senior liabilities 1,373,490,000 1,251,290,000
Senior subordinated debentures 9,978,000 9,981,000
Subordinated debentures 18,449,000 16,476,000
Convertible subordinated debentures 34,500,000 34,500,000
-------------- --------------
Total liabilities 1,436,417,000 1,312,247,000
-------------- --------------
Stockholders' equity
Common stock 78,000 77,000
Capital in excess of par value 74,450,000 71,124,000
Retained earnings 35,324,000 35,296,000
Deferred compensation -- ESOP (925,000) (1,200,000)
Treasury Shares, at cost (642,000) (351,000)
Unrealized loss-available for sale securities (15,000) -
------------- --------------
Total stockholders' equity 108,270,000 104,946,000
------------- --------------
$1,544,687,000 $1,417,193,000
============== ==============
</TABLE>
4
<PAGE>
FIRST REPUBLIC BANCORP INC.
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
June 30, June 30,
----------------- -------------------
1994 1993 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Interest on real estate and other loans $ 24,308,000 $ 23,298,000 $ 47,667,000 $ 46,329,000
Interest on investments 1,860,000 1,066,000 3,434,000 2,244,000
------------ ------------ ------------ ------------
Total interest income 26,168,000 24,364,000 51,101,000 48,573,000
Interest expense:
Interest on thrift accounts 9,648,000 8,812,000 18,440,000 17,710,000
Interest on notes, debentures and other borrowings 6,870,000 5,247,000 12,961,000 10,515,000
------------ ------------ ------------ ------------
Total interest expense 16,518,000 14,059,000 31,401,000 28,225,000
Net interest income 9,650,000 10,305,000 19,700,000 20,348,000
Provision for losses 675,000 1,302,000 5,680,000 2,585,000
------------ ------------ ------------ ------------
Net interest income after provision for losses 8,975,000 9,003,000 14,020,000 17,763,000
Non-interest income:
Servicing fees, net 562,000 190,000 990,000 454,000
Loan and related fees 345,000 387,000 838,000 747,000
Gain (loss) on sale of loans (448,000) 668,000 126,000 1,032,000
Other income 228,000 1,000 243,000 3,000
----------- ------------ ----------- -----------
Total non-interest income 687,000 1,246,000 2,197,000 2,236,000
Non-interest expense:
Salaries and related benefits 1,717,000 1,327,000 3,646,000 2,816,000
Occupancy 607,000 410,000 1,216,000 835,000
Advertising 425,000 312,000 1,005,000 621,000
Professional fees 137,000 147,000 276,000 302,000
FDIC insurance premiums 428,000 452,000 856,000 905,000
REO costs and losses 434,000 827,000 547,000 1,720,000
Other general and administrative 1,517,000 1,135,000 3,133,000 2,168,000
Defeasance costs 0 1,132,000 0 1,132,000
----------- ----------- ----------- ----------
Total non-interest expense 5,265,000 5,742,000 10,679,000 10,499,000
Income before income taxes 4,397,000 4,507,000 5,538,000 9,500,000
Provision for income taxes 1,868,000 1,962,000 2,349,000 3,909,000
----------- ----------- ----------- -----------
Net income $2,529,000 $2,645,000 $3,189,000 $5,591,000
=========== =========== =========== ===========
Net income adjusted for effect of convertible
issue, used in fully diluted EPS $2,928,000 $3,047,000 $3,987,000 $6,395,000
=========== =========== ============ ===========
Primary earnings per share $ 0.32 $ 0.33 $ 0.40 $ 0.70
=========== =========== ============ ===========
Weighted average shares - primary 8,028,140 7,952,449 8,052,663 7,967,392
=========== =========== ============ ===========
Fully diluted earnings per share $ 0.28 $ 0.29 $ 0.38 $ 0.61
=========== =========== ============ ===========
Weighted average shares - fully diluted 10,571,484 10,504,704 10,586,445 10,505,648
=========== =========== ============ ===========
</TABLE>
5
<PAGE>
FIRST REPUBLIC BANCORP INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months ended
----------------
June 30,
----------------
1994 1993
----------- -----------
<S> <C> <C>
Operating Activities
Net Income $ 3,189,000 $ 5,591,000
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for losses 5,680,000 2,585,000
Provision for depreciation and amortization 1,173,000 906,000
Amortization of loa (2,198,000) (2,337,000)
Amortization of investment securities discounts (2,000) --
Amortization of investment securities premiums 99,000 68,000
Loans originated for sale (78,965,000) (183,509,000)
Loans sold into commitments 81,953,000 154,601,000
(Increase) decrease in deferred taxes 377,000 (320,000)
Net gains on sale of loans (126,000) (1,032,000)
(Increase) decrease in interest receivable (1,383,000) 67,000
Decrease in interest payable (639,000) (675,000)
(Increase) decrease in other assets 973,000 (431,000)
Increase in other liabilities 4,548,000 1,477,000
---------- -----------
Net Cash Provided (Used) By Operating Activities 14,679,000 (23,009,000)
Investment Activities
Loans originated (372,589,000) (204,711,000)
Other loans sold 109,171,000 22,510,000
Principal payments on loans 150,274,000 110,066,000
Purchases of investment securities (29,720,000) (12,119,000)
Repayments of investment securities 5,044,000 2,505,000
Net increase in short term investments (804,000) ---
Additions to fixed assets (680,000) (978,000)
Net proceeds from sale of real estate owned 6,622,000 1,586,000
------------ ------------
Net Cash (Used) by Investing Activities (132,682,000) (81,141,000)
Financing Activities
Net increase (decrease) in passbook and MMA accounts (3,132,000) 5,727,000
Issuance of investment certificates 219,002,000 144,000,000
Repayments of investment certificates (110,301,000) (135,100,000)
Increase in long-term FHLB advances 35,000,000 35,000,000
Repayments of other long-term borrowings (275,000) (237,000)
Net decrease in short-term borrowings (22,380,000) ---
Decrease in deferred compensation - ESOP 275,000 237,000
Repayment of subordinated debentures (9,000) (10,569,000)
Issuance of subordinated debentures 1,979,000 12,000,000
Proceeds from employee stock purchase plan 75,000 37,000
Proceeds from common stock options exercised 93,000 23,000
Purchase of Treasury Stock (291,000) ---
------------- ------------
Net Cash Provided by Financing Activities 120,036,000 51,118,000
Increase (Decrease) in Cash and Cash Equivalents 2,033,000 (53,032,000)
Cash and Cash Equivalents at Beginning of Period 38,786,000 98,301,000
------------- ------------
Cash and Cash Equivalents at End of Period $ 40,819,000 $ 45,269,000
============= ============
</TABLE>
6
<PAGE>
FIRST REPUBLIC BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of First Republic Bancorp
Inc. ("First Republic") include its subsidiaries, First Republic
Thrift & Loan ("First Thrift"), First Republic Mortgage Inc. and
First Republic Savings Bank. First Republic Savings Bank, an
FDIC-insured Nevada thrift and loan, was acquired in December 1993
for a cash purchase price of $1,414,000; at acquisition, its assets
totalled $2,105,000 and its deposit liabilities totalled $762,000.
First Republic and its subsidiaries are collectively referred to as
the "Company." All material intercompany transactions and balances
are eliminated in consolidation. Certain reclassifications have
been made to the 1993 financial statements in order for them to
conform with the 1994 presentation.
These interim financial statements should be read in conjunction
with the Company's 1993 Annual Report to Stockholders and
Consolidated Financial Statements and Notes thereto. Results for
the quarter and six months ended June 30, 1994 should not be
considered indicative of results to be expected for the full year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In May 1993, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 115 "Accounting For Certain Investments in
Debt and Equity Securities" addressing the accounting and reporting
for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. Those
investments would be classified in three categories and accounted
for as follows: (i) debt securities that the entity has the
positive intent and ability to hold to maturity would be classified
as "held to maturity" and reported at amortized cost; (ii) debt
securities that are held for current resale would be classified as
trading securities and reported at fair value, with unrealized
gains and losses included in operations; and (iii) debt securities
not classified as either securities held to maturity or trading
securities would be classified as securities available for sale,
and reported at fair value, with unrealized gains and losses
excluded form operations and reported as a separate component of
stockholders' equity. The Company implemented SFAS No. 115 in the
first quarter of 1994, at which time substantially all of the
Company's investments were classified as held to maturity upon
adoption. The impact on the Company's results of operations and
financial position of implementing SFAS No. 115 was immaterial. At
June 30, 1994, the Company owned $3,231,000 of securities
classified as available for sale. These securities had a market
value of $3,216,000 at June 30, 1994 and, accordingly, the
Company's stockholders' equity has been reduced by $15,000.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." Under the provisions of SFAS No.114, a loan
is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect
all
7
<PAGE>
amounts due according to the contractual terms of the loan
agreement. SFAS No. 114 requires creditors to measure impairment
of a loan based on one of the following: (i) the present value of
expected future cash flows discounted at the loan's effective
interest rate, (ii) the fair value of the underlying collateral or
(iii) the fair value of the loan. If the measure of the impaired
loan is less than the recorded investment in the loan, a creditor
shall recognize an impairment by creating a valuation allowance
with a corresponding charge to the provision for losses. SFAS No.
114 applies to financial statements for fiscal years beginning
after December 15, 1994. Earlier implementation is permitted. The
Company plans to implement SFAS No. 114 for the year ended December
31, 1995. The impact of the statement on the Company's results of
operations and financial position is expected to be immaterial.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
- - -------
First Republic Bancorp Inc. ("First Republic" and with its
subsidiaries, the "Company") is a financial services company
operating in California and Nevada as a thrift and loan holding
company and as a mortgage banking company, originating, holding or
selling, and servicing mortgage loans. First Republic owns and operates
First Thrift, a California-chartered, FDIC-insured, thrift and loan
subsidiary, First Republic Savings Bank (collectively, "the
Thrifts").
The Company is primarily engaged in originating residential real
estate secured loans on single family residences and multifamily
properties. The Company's loan portfolio also contains loans
secured by commercial properties. Currently, the Company's
strategy is to emphasize the origination of single family and to
limit the origination of multifamily mortgage loans and
commercial real estate mortgage loans. Lending activities in Las
Vegas are primarily focused on single family and multifamily
residential construction projects. The Company emphasizes its real
estate lending activities in San Francisco, Los Angeles and Las
Vegas because of the proximity of its loan offices and the
experience of executive management with real estate in these areas.
In addition to the Company performing an underwriting analysis on
each borrower and obtaining independent property appraisals, an
officer of the Company generally visits each property or project
prior to the loan closing.
During the first half of 1994, the Company continued its focus on
single family lending and mortgage banking begun in 1992. Total
loans of all types originated by the Company in 1993 were $944.8
million, compared to loan originations of $826.2 million in 1992
and loan sales were $425.5 million in 1993 compared to loan sales
of $373.6 million in 1992. For the six months ended June 30, 1994,
the Company originated $451.6 million of loans and loan sales were
$191.1 million, as compared to loan originations of $388.2 million
and loan sales of $177.1 million for the six months ended June 30,
1993. The Company either retains the loans it originates in its
loan portfolio or sells the loans to institutional investors in the
secondary market. The Company has retained the servicing rights
for substantially all loans
8
<PAGE>
GENERAL (Continued)
- - -------------------
sold in the secondary market and has purchased mortgage loan servicing
rights from others, thereby generating ongoing servicing fees. The Company's
mortgage servicing portfolio consisted of $888.0 million in loans at June
30, 1994.
The following table presents certain performance ratios and share
data information for the Company for the last three years and the
first half of the two most recent years.
<TABLE>
<CAPTION>
At or for the six months At or for the Year
Ended June 30, Ended December 31,
------------------------ ----------------------------------
1994 1993 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets* 0.43% 0.90% 0.97% 1.06% 0.96%
Return on average equity* 5.99 11.77 12.65 14.10 17.22
Average equity to average assets 7.21 7.68 7.51 7.51 5.55
Leverage ratio 7.15 7.81 7.65 7.58 6.81
Total risk-based capital ratio 17.08 16.83 17.62 16.90 13.60
Net interest margin* 2.70 3.31 3.25 3.30 3.45
Non-interest expense to average assets* 1.37 1.33 1.33 1.30 1.44
Nonaccruing assets to total assets 3.13 2.15 1.55 1.54 1.50
Nonaccruing assets and restructured performing
loans to total assets 3.51 2.64 2.00 1.81 1.86
Net loan chargeoffs to average loans* 0.44 0.42 0.44 0.74 0.30
Reserve for possible losses to total loans 1.14 1.12 1.01 1.19 1.34
Reserve for possible losses to nonaccruing loans 38% 104% 109% 133% 88%
Share Data:
Common and equivalent shares outstanding 7,713,627 7,722,007 7,718,791 7,716,086 6,182,260
Tangible book value per fully-diluted common share $14.02 $12.69 $13.58 $11.94 $9.59
</TABLE>
- - ------------------------------
*Six months data is annualized
First Thrift's retail deposits and FHLB advances are the Company's
principal source of funds with loan principal repayments, sales of
loans, and the proceeds from debt and equity financings as
supplemental sources. The Company's deposit gathering activities
are conducted in the San Francisco Bay Area, Los Angeles, and San
Diego County, California and in Las Vegas, Nevada.
First Thrift is an approved voluntary member of the Federal Home
Loan Bank of San Francisco (FHLB). First Thrift is currently
approved for approximately 40% of its total assets or approximately
$599 million of FHLB advances at June 30, 1994. Such advances are
collateralized by real estate mortgage loans and $493.5 million has
been advanced at June 30, 1994. Membership in the FHLB provides
First Thrift with an alternative funding source for its loans and
creates opportunities for the Company to improve the matching of
assets with liabilities.
First Thrift, whose thrift certificates are insured by the FDIC,
operates three branches in San Francisco, a branch in Los Angeles,
a branch in Beverly Hills, and three branches in San Diego County.
As of June 30, 1994, First Thrift had total assets of
$1,497,692,000, tangible shareholder's equity of $123,512,000 and
total capital, consisting of tangible shareholder's equity,
9
<PAGE>
GENERAL (Continued)
- - -------------------
subordinated capital notes and reserves of $153,684,000. At June
30, 1994, First Thrift's tangible shareholder's equity as a
percentage of total assets was 8.25% and its total capital as
a percentage of risk adjusted assets was 14.60%, compared to a risk
adjusted capital ratio requirement of 8.0%. Under FDIC
regulations, First Thrift calculates its Leverage Ratio at 8.39%,
using Tier 1 capital ( as defined under the FDIC's risk-based
capital definitions) and average total assets for the most recent
quarter.
In 1992, the Company implemented procedures requiring annual or
more frequent asset reviews of its multifamily and commercial real
estate loans. As part of these asset review procedures, recent
financial statements on the property and/or borrower are analyzed
to determine the current level of occupancy, revenues and expenses
as well as to investigate any deterioration in the value of the
real estate collateral or in the borrower's financial condition
since origination or the last review. Upon completion, an
evaluation or grade is assigned to each such loan. These asset
review procedures provide management with additional information
forassessing asset quality.
Since September 1992, the Company has maintained an insurance
policy to cover a portion of the risk of loss that might result
from earthquake damage to properties securing real estate mortgage
loans in its loan portfolio. Under a policy extending into
September, 1994, the Company is self-insuring for the first
$12,500,000 of any loss as a result of damage to underlying
collateral and the insurance policy covers up to an additional
$8,000,000 of loss. In obtaining this insurance coverage, the
Company was assisted by an engineering consulting firm which
analyzed the location and construction attributes of certain of the
properties that secure the Company's loans.
LIQUIDITY
- - ---------
Liquidity refers to the ability to maintain a cash flow adequate to
fund operations and to meet present and future obligations of the
Company either through the sale or maturity of existing assets or
by the acquisition of funds through liability management. The
Company maintains a portion of its assets in a diversified
portfolio of marketable investment securities, which includes U.S.
Government securities and mortgage backed securities. At June 30,
1994, the investment securities portfolio of $107,699,000, plus
cash and short term investments of $42,215,000, amounted to
$149,914,000, or 9.7% of total assets. At June 30, 1994,
substantially all of the Company's investments mature within twelve
months or are adjustable rate securities. At June 30, 1994, the
Company owned no investments of a trading nature.
Additional sources of liquidity at June 30, 1994 are provided by
borrowings collateralized by investment securities of approximately
$81,000,000, available unused FHLB advances of approximately
$105,000,000 and loans held for sale of $7,548,000. Management
believes that the sources of available liquidity are adequate to
meet the Company's reasonably foreseeable short-term and long-term
demands.
10
<PAGE>
ASSET AND LIABILITY MANAGEMENT
- - ------------------------------
Management seeks to manage its asset and liability portfolios to
earn a satisfactory level of net interest income while minimizing
the potential impact of fluctuating interest rates. To achieve
this objective, the Company's strategy is to manage the rate
sensitivity and maturity balance of its interest-earning assets and
interest-bearing liabilities by emphasizing the origination of
adjustable interest rate or short-term fixed rate loans and the
matching of adjustable rate asset repricings with short- and
intermediate-term investment certificates and adjustable rate
borrowings. The Company's profitability may be adversely affected
by rapid changes in interest rates. Institutions with long-term
assets (both loans and investments) can experience a decrease in
profitability and in the value of such assets if the general level
of interest rates rises. While substantially all of the Company's
assets are adjustable rate mortgage loans and investments, at June
30, 1994 approximately 54% of these assets which adjust within one
year were assets based on an interest rate index which generally
lags increases and decreases in market rates. Therefore,
management believes that interest rates on the Company's
liabilities will tend to rise more quickly in a rapidly rising
interest rate environment than rates on these assets, which could
cause a decrease in the Company's net interest margin. Conversely,
the Company could experience a decrease in its net interest income
if the general level of interest rates were to drop quickly because
the average maturity of its deposits may be longer than the average
maturity (or length of time before repricing of variable rate
assets) of its loan and investment portfolios, both evaluated on a
periodic basis.
The following table summarizes the differences between the
Company's maturing or rate adjusting assets and liabilities, or
"GAP" position, at June 30, 1994. Generally, an excess of maturing
or rate adjusting assets over maturing or rate adjusting
liabilities during a given period, will serve to enhance earnings
in a rising rate environment and inhibit earnings when rates
decline. Conversely, when maturing or rate adjusting liabilities
exceed maturing or rate adjusting assets during a given period, a
rising rate environment will inhibit earnings and declining rates
will serve to enhance earnings. As of June 30, 1994, approximately
66% of the Company's interest earning assets and 49% of interest
bearing liabilities will reprice within the next six months and the
Company's one-year cumulative GAP, or ratio of repricing assets to
repricing liabilities is positive 26.5%. Generally, this means its
assets would be expected to reprice more quickly than its
liabilities which could result in the Company's net interest spread
declining if interest rates decline rapidly or increasing if
interest rates rise rapidly. See "-Results of Operations" for a
discussion of the change in the Company's net interest spread for
the quarter ended June 30, 1994. During the generally declining
interest rate environment of 1992 and 1993, the Company maintained
a relatively stable net interest margin. Although the Company's
one-year cumulative gap was positive during this period, the
majority of its loans reprice based on an interest rate index which
lags market rates and a portion of the Company's loans carry
minimum interest rates, or floors, which became effective as rates
declined. The following table illustrates projected maturities or
interest rate adjustments based upon the contractual maturities or
adjustment dates at June 30, 1994:
11
<PAGE>
ASSET & LIABILITY REPRICING SENSITIVITY
FIRST REPUBLIC BANCORP CONSOLIDATED
June 30, 1994
(000's)
<TABLE>
<CAPTION>
3 Months 3 to 6 to 1 to 2 to Over Non Interest
Immediate or Less 6 Months 12 Months 2 Years 5 Years 5 Years Sensitive TOTAL
--------- -------- -------- --------- ------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans 0 389,554 468,525 401,853 44,091 27,568 26,909 0 1,358,500
Securities 0 80,094 39,380 13,387 0 0 15 0 132,876
Cash & short-term
investments 12,820 29,395 0 0 0 0 0 0 42,215
Non-interest bearing
assets, net 0 0 0 0 0 0 0 11,096 11,096
--------- -------- -------- --------- -------- -------- -------- ------- ---------
TOTAL 12,820 499,043 507,905 415,240 44,091 27,568 26,924 11,096 1,544,687
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Passbooks (1) 0 50,407 19,216 19,215 22,448 2,743 0 0 114,029
Investment Certificates:
100K or greater 0 6,385 7,635 6,768 9,486 8,886 419 0 39,579
< 100K 0 114,285 106,083 234,926 171,682 71,696 4,960 0 703,632
FHLB advances
- long term 0 186,170 130,000 79,360 50,000 8,000 40,000 0 493,530
ESOP debt 925 0 0 0 0 0 0 0 925
Other short-term
debt 0 0 0 0 0 0 0 0 0
Other
liabilities 0 0 0 0 0 0 0 21,795 21,795
Subord debt 0 0 0 0 0 0 62,927 0 62,927
Equity 0 0 0 0 0 0 0 108,270 108,270
------- ------- ------- ------- ------- ------ ------- ------- ---------
TOTAL 925 357,247 262,934 340,269 253,616 91,325 108,306 130,065 1,544,687
Repricing Assets
over (under)
liab 11,895 141,796 244,971 74,971 (209,525) (63,757) (81,382) (118,969) 0
Effect
of swaps 0 20,000 45,000 0 (40,000) 0 (25,000) 0 0
------ ------- ------- ------ -------- ------- ------- -------- ---------
Hedged gap 11,895 121,796 199,971 74,971 (169,525) (63,757) (56,382) (118,969) 0
====== ======= ======= ====== ======== ======== ======== ======== =========
Gap as % of
Total assets 0.77% 7.88% 12.95% 4.85% -10.97% -4.13% -3.65% -7.70% 0.00%
====== ======= ======= ====== ======== ======== ======== ======== =========
Cumulative
gap 11,895 133,691 333,662 408,633 239,108 175,351 118,969 0 0
====== ======= ======= ======= ======== ======== ======== ======== =========
Cumulative gap
as % of
assets 0.77% 8.65% 21.60% 26.45% 15.48% 11.35% 7.70% 0.00% 0.00%
======= ======= ======= ======= ======== ======== ======== ======== =========
</TABLE>
(1) Passbook amounts are allocated based on management's experience
of historical interest rate volatility and passbook erosion rates.
However, all passbook accounts are contractual subject to
immediate withdrawal and immediate repricing.
12
<PAGE>
ASSET AND LIABILITY MANAGEMENT (Continued)
- - -----------------------------------------
In evaluating the Company's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and
liabilities may have similar maturities or periods to repricing,
they may react differently to changes in market interest rates.
Additionally, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes
in market rates. Further, certain assets, such as adjustable rate
mortgages and mortgage related investments, have features which
restrict changes in interest rates on a short-term basis and over
the life of the asset. The Company considers the anticipated
effects of these various factors in implementing its interest rate
risk management activities, including the utilization of interest
rate caps.
The Company has entered into interest rate cap transactions in the
aggregate notional principal amount of $1,165,000,000 which
terminate in periods ranging from August 1994 through September
2000. Under the terms of these transactions, which have been
entered into with nine unrelated commercial or investment banking
institutions or their affiliates, the Company will be reimbursed
quarterly for increases in the three-month London Inter-Bank Offer
Rate ("LIBOR") for any quarter during the term of the applicable
transaction in which such rate exceeds a rate ranging from 9.0% to
13% as established for the applicable transaction. The interest
rate cap transactions are intended to act as hedges for the
interest rate risk created by restrictions on the maximum yield of
certain variable rate loans and investment securities held by the
Company which may, therefore, at times be exposed to the effect of
unrestricted increases in the rates paid on the liabilities which
fund these assets. Additionally, $37,400,000 of First Thrift's
advances with the FHLB contain interest caps of 12.0% as part of
the borrowing agreements. The cost of interest rate cap
transactions is amortized over their lives and totalled $529,000
and $393,000 for the six months ended June 30, 1994 and 1993,
respectively. Although these costs reduce current earnings, the
Company believes that the cost is justified by the protection these
interest rate cap transactions provide against significantly increased
interest rates. The effect of these interest rate cap transactions is not
factored into the determination of interest rate adjustments
provided in the table above.
At June 30, 1994, the Company had entered into interest rate swaps
with the FHLB for $45,000,000 and with an investment banking firm
for $20,000,000 to convert the fixed rate on long-term FHLB
advances to semi-annual adjustable liabilities. The availability
of long-term FHLB advances, with a weighted average maturity of
approximately 12 years at June 30, 1994, reduces the repricing
volatility in the Company's balance sheet and the Company's
dependence upon retail deposits, which generally have a shorter
maturity than the contractual life of mortgage loans. The Company
will continue to consider the alternative of FHLB advances as an
integral part of its asset and liability management program. The
Company is exposed to credit and market losses if the
counterparties to its interest rate cap and swap agreements fail to
perform; however, the Company is not aware of any reason which
should cause it to anticipate such nonperformance.
Since August 1990, the Company has utilized FHLB advances as a
supplement to deposit gathering to fund its assets. FHLB advances
must be collateralized by the pledging of mortgage loans which are
assets of First Thrift. At June 30, 1994, total FHLB advances
outstanding were $493,530,000. Of this amount, $426,330,000 had an
original maturity of 10 years or more and
13
<PAGE>
ASSET AND LIABILITY MANAGEMENT (Continued)
- - ------------------------------------------
$40,000,000 had an original maturity of five years. Also, $23,200,000 had an
original maturity of two years subsequently extended for a period of 8 years
to 10 years. The remaining $4,000,000 was due in three years. The
longer term advances provide the Company with an assured level of
funding for its term real estate assets with longer lives.
First Thrift is subject to the provisions of the California
Industrial Loan Law, which limits the amount of thrift balances
which may be raised to twenty times its shareholder's equity. At
June 30, 1994, based on the amount of thrift certificates
outstanding, First Thrift was required to maintain shareholder's
equity of approximately $41,800,000, compared with actual
shareholder's equity of $123,512,000.
CAPITAL RESOURCES
- - -----------------
The Company continues to maintain a strong capital base. At June
30, 1994 the Company's total capital, including total stockholders'
equity, senior subordinated debentures, convertible subordinated
debentures and reserves was $186,660,000. Total stockholders'
equity at June 30, 1994 has increased by $3,324,000 since December
31, 1993. This increase is the result of increases from net income
of $3,189,000, the repayment of $275,000 of the Company's ESOP
notes payable during the six month period, and an increase of
$168,000 from proceeds received upon the exercise of options on
common stock or sales of common stock under the Company's Employee
Stock Purchase Plan. The Company also purchased 21,900 treasury
shares at a cost of $291,000 and recorded an unrealized loss of
$15,000 on securities held for sale.
First Republic is not a bank holding company and unlike First
Thrift, is not directly regulated or supervised by the FDIC, the
Federal Reserve Board, or any other bank regulatory agency. Thus,
First Republic is not subject to the risk-based capital or leverage
requirements. If such regulations applied, the Company calculates
that at June 30, 1994 its leverage ratio would have been 7.15% and,
its total risk based capital ratio would have been 17.08%, as
calculated by management assuming, however, all of the Company's
subordinated debentures constitute Tier 2 capital, are not limited
to 50% of Tier 1 capital and the reserve for possible losses is not
limited to 1.25% of risk-adjusted assets.
During the second quarter of 1993, the Company's Board of Directors
approved a stock repurchase program under which the Company may
repurchase from time to time up to 206,000 shares of its common
stock, either in open market transactions or in block purchases.
As of June 30, 1994, 47,797 shares have been repurchased under this
program.
First Republic has used, and expects to continue to use, the
proceeds from the issuance of common stock, preferred stock and
subordinated debentures to, in part, provide capital to its thrift
and loan subsidiaries, First Thrift and First Republic Savings
Bank. For the first six months of 1994, First Republic contributed
$1,000,000 of additional capital to First Republic Savings Bank and
received from First Thrift dividends of $875,000 representing
approximately 17% of First Thrift's earnings plus interest payments
of $777,000. The ability of First Republic to receive future
dividends and other payments from the Thrifts depends upon the
operating results and capital levels of the Thrifts, restrictions
upon such payments imposed by creditors of the Thrifts, FDIC
regulations and other governmental regulations governing the
Thrifts.
14
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended June 30, 1994 Compared to Quarter Ended
- - --------------------- -----------------------------------------------------
June 30, 1993
-------------
The Company derives its income from three principal areas of
business: (1) net interest income which is the difference between
the interest income the Company receives on interest-earning
portfolio loans and investments and the interest expense it pays on
interest-bearing liabilities such as customer deposits and
borrowings; (2) mortgage banking operations involving the
origination and sale of real estate secured loans; and (3)
servicing fee income which results from the ongoing servicing of
such loans for investors and the servicing of other loans pursuant
to purchased servicing rights.
During the second quarter of 1994, First Republic's total assets
grew to $1,544,687,000 at June 30, 1994 from $1,483,988,000 at
March 31, 1994, primarily as a result of an increase in single
family mortgage loans. The Company's loan originations for the
second quarter of 1994 were $222,953,000, compared to loan
originations for the second quarter of 1993 of $237,904,000. The
level of loan originations for the second quarter of 1994 resulted
primarily from an increase in the number of loan officers employed
by the Company and included the closing of loans previously
committed to at the relatively lower rates of interest which have
been available to borrowers. For all of 1993 and through the first
six months of 1994, loan originations have been concentrated
primarily in single family lending due to the Company's reduced
emphasis on multifamily and commercial real estate loans. Single
family loans originated in the six months of 1994 were $342,400,000
compared to $328,800,000 in the first six months of 1993 and
$757,100,000 for all of 1993. For the first time, more than 50% of the
Company's loans were secured by single family mortgages at June 30, 1994.
Mortgage banking activity resulted in the sale of $119,563,000
ofsingle family loans to secondary market investors during the
second quarter of 1994, compared with $116,041,000 in the second
quarter of 1993. For the six months, loan sales were $451,554,000
in 1994, compared to $388,220,000 in 1993. The Company's portfolio
of real estate loans serviced for secondary market investors
increased to $888,048,000 at June 30, 1994 from $814,453,000 at
December 31, 1993, as loan sales exceed prepayments of existing
loans serviced. The level of future loan originations, loan sales
and loan repayments is dependent in part on overall credit
availability and the interest rate environment, the recovery in the
general economy and housing industry, and conditions in the
secondary loan sale markets.
Net income of $2,529,000 for the second quarter in 1994 decreased
$116,000 from net income of $2,645,000 in the same quarter of 1993.
Significant components effecting net income were a decrease in net
interest income of $655,000, a decrease of $627,000 in provision
for losses, lower non-interest income of $559,000 resulting from a loss
on sale of loans in 1994 and lower other non-interest expenses of $477,000.
Fully diluted earnings per share (EPS) were $0.28 for 1994, compared to $0.29
for the similar period in 1993.
Total interest income increased to $26,168,000 for the second
quarter of 1994 from $24,364,000 for the second quarter of 1993.
Interest income on real estate and other loans increased to
$24,308,000 for the second quarter of 1994, compared to $23,298,000
in 1993. The yield on average loans declined to 7.16% in the
second quarter of 1994, compared to 7.28% for the first quarter of
1994 and 8.20% for the same quarter of 1993, primarily due to lower
market interest rates, and the effect of an increased percentage of
single family loans earning relatively low
15
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended June 30, 1994 Compared to Quarter Ended
- - --------------------- -----------------------------------------------------
June 30, 1993 (Continued)
-------------------------
initial rates of interest and an increase in the average balance of
nonaccrual loans. The Company's net loans receivable outstanding increased
from $1,256,058,000 at December 31, 1993 to $1,358,500,000 at June
30, 1994. As a percentage of the Company's permanent loan
portfolio, single family loans increased to 51% at June 30, 1994
from 42% at June 30, 1993.
Interest income on cash, short-term investments and investment
securities increased as a result of a higher average portfolio for
the quarter earning a higher average rate. Such interest income
was $1,860,000 in the second quarter of 1994 compared to $1,066,000
in 1993. The average investment position was $144,308,000 during
the second quarter of 1994 and earned 5.17% compared to an average
position of $104,733,000 earning 4.10% during the second quarter of
1993. In 1994, the Company has decreased its short-term liquidity
position and increased its investment securities. To the extent
that the Company's investment portfolio increases as a proportion
of total assets, there could be an adverse effect on the Company's
net interest margin, since rates earned on investments tend to be
lower than rates earned on loans.
Total interest expense for the second quarter has increased to
$16,518,000 in 1994 from $14,059,000 in 1993. Total interest
expense consists of interest expense on deposits and interest
expense on FHLB advances, other borrowings and debentures.
Interest expense on deposits (comprised of passbook and money
market (MMA) accounts and investment certificates), increased to
$9,648,000 in the second quarter of 1994 from $8,812,000 in the
second quarter of 1993. Interest expense on other borrowings
increased to $6,870,000 in the second quarter of 1994 from
$5,247,000 in the second quarter of 1993, primarily due to a higher
average level of FHLB advances. The rate paid on average total
interest-bearing liabilities declined to 4.73% for 1994's second
quarter from 4.92% for 1993's second quarter.
In mid-1990, the Company implemented a funding strategy which
resulted in a lower average total cost of funds on a year-to-year
basis and reduced certain noninterest expenses such as advertising
costs. First Thrift became the first voluntary member of the San
Francisco FHLB in 1990 and began to utilize FHLB advances as an
alternative source of funds for asset growth. The Company's total
outstanding FHLB advances were $493,530,000 and $468,530,000 at
June 30, 1994 and December 31, 1993, respectively. The total cost
of FHLB advances has been lower than the total costs of deposits,
due in part to the fact that such advances require no deposit
insurance premiums and operational overhead costs are less than
those associated with deposits. In a rising interest rate
environment, the interest rates paid on First Thrift's FHLB
advances may tend to increase faster than rates paid on the
Company's deposits because the underlying indices in which these
adjustable rate advances reprice tends to be more sensitive to
conditions in the general interest rate environment. Advances from
the FHLB must be collateralized by the pledging of mortgage loans
which are assets of First Thrift and, although First Thrift may
substitute other loans for such pledged loans, First Thrift is
restricted in its ability to sell or otherwise pledge these loans
without substituting collateral or prepaying a portion of the FHLB
advances. Currently, First Thrift has an approved borrowing
capacity with the FHLB for $105,000,000 of additional borrowings or
equal to approximately 40% of the First Thrift's total assets at
June 30, 1994. Because the First Thrift's outstanding FHLB
advances represented approximately 33% of total assets at June 30,
1994, the Company expects that deposits will fund a greater
percentage of future asset growth and, as a result, the average
total cost of funds may increase as the costs of expanding the
Company's retail deposit base are
16
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended June 30, 1994 Compared to Quarter Ended
- - --------------------- -----------------------------------------------------
June 30, 1993 (Continued)
-------------------------
incurred.
The Company's net interest income was $9,650,000 for the second
quarter of 1994, compared to $10,305,000 for the second quarter of
1993, primarily as a result of earning a lower spread on a higher
average balance of assets. The net interest margin, calculated as
net interest income divided by total average interest earning
assets, was 2.57% for the second quarter of 1994, compared to 3.32%
for the same period of 1993. The change in net interest margin
resulted from the reduced yields on a larger volume of new single
family adjustable rate loans, an increase during the quarter in the
level of nonearning loans of approximately $20 million or 1.18% of
total assets and a continued emphasis on gathering deposits with
maturities of one year or more in the face of increasing interest
rates.
Non-interest income for the second quarter of 1994 decreased to
$687,000 from $1,246,000 in the second quarter of 1993, due to a
loss on sale of loans offset by higher net service fee revenue and
increased other income. Service fee revenue, net of amortized
costs on the Company's premium on sale of loans and purchased
mortgage servicing rights, was $562,000 for the second quarter of
1994 compared to $190,000 for the same period of 1993, primarily as
a result of lower amortization on the Company's purchased mortgage
servicing rights which have been almost fully amortized at June 30,
1994. The average balance of the servicing portfolio increased to
$833,376,000 for the six months of 1994 compared to $789,071,000
for all of 1993.
Total loans serviced were $888,048,000 at June 30, 1994 and
$814,453,000 at December 31, 1993. The percentage of servicing
fees received depends upon the terms of the loans as originated and
conditions in the secondary market when loans are sold. The
Company receives servicing fees ranging from 0.125% to 1.25% of the
outstanding loan balance which averaged approximately 0.35% for the
second quarter of 1994 compared to 0.38% for all of 1993.
For the second quarter, loan and related fee income was $345,000 in
1994 and $387,000 in 1993. This category includes documentation
and processing fees which vary with loan volume and market
conditions, late charge income which generally increases as the
loan and servicing portfolios grow, and prepayment penalty income
which generally varies with loan activity.
The Company sells whole loans and loan participations in the
secondary market under several specific programs. Loan sales were
$119,563,000 for the second quarter of 1994 and $116,041,000 for
the second quarter of 1993. During the period of low interest
rates and the popularity of fixed rate loan refinancings, the focus
of the Company's mortgage banking activities has been to enter into
formal commitments and informal agreements with institutional
investors to originate on a direct flow basis single family
mortgages which are priced and underwritten to conform to
previously agreed upon criteria prior to loan funding and are
delivered to the investor shortly after funding. Also, the Company
has identified, from time-to- time, secondary market sources which
have particular needs which can be filled primarily with adjustable
rate single family loans held in its portfolio.
The amount of loans sold is dependent upon conditions in both the
mortgage origination and
17
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended June 30, 1994 Compared to Quarter Ended
- - --------------------- -----------------------------------------------------
June 30, 1993 (Continued)
-------------------------
secondary loan sales markets, and the level of gains will fluctuate.
The Company computes a gain or loss on sale at the time of sale by comparing
sales price with carrying value and by calculating a capitalized premium,
if any. A premium results when the interest rate on the loan, adjusted for a
normal service fee, exceeds the pass-through yield to the buyer. In the
second quarter of 1994, the Company sold a $67 million pool of
adjustable rate mortgage loans which reset on an annual basis and
recorded a loss of approximately 0.70% on the loans sold. The sale
of these loans resulted in net losses of $448,000 for the second
quarter of 1994, compared to gains of $668,000 for the same period
of 1993. As a result of the increases during 1994 in mortgage
interest rates, the Company began to originate in the second
quarter of 1994, and expects to continue to originate in the
future, primarily adjustable rate mortgages originated for the
Company's balance sheet. Additionally, the mix of such lending is
expected to reflect reduced refinance activity by borrowers and
increased home loan purchase activity in the Company's markets.
Depending on market conditions and other factors, the Company
expects a decrease in the future level of loan sales, resulting in
minimal gains on the sale of loans and possible additional losses.
Non-interest expense totalled $5,265,000 for the second quarter of
1994, compared to $5,742,000 for the same period in 1993, which
included defeasance costs of $1,132,000 on the repayment of higher
cost debentures. The Company's non-interest expense for the second
quarter of 1994 included $434,000 related to results of operating
REO properties and losses on disposition or changes in value of REO
properties compared to $827,000 in the second quarter of 1993.
Since January 1, 1993, the Company has followed the AICPA's
Statement of Position ("SOP") 92-3 which requires chargeoffs to the
reserve for possible losses to be recorded upon foreclosure and for
expenses or losses on REO, including subsequent decreases in
estimated fair values, to be expensed as incurred.
Although the Company implemented a number of cost control measures
in the second quarter of 1994, it incurred increased costs to
manage its larger balance sheet and expanded operations, in the
second quarter of 1994 compared to the second quarter of 1993. In
1994, the Company's expenses include the occupancy, personnel and
advertising costs of three new deposit branches, higher payroll
taxes and other employee benefit costs, and increased expenses
resulting from the origination of single family loans on which
processing fees or points were not collected from the borrowers.
As a percentage of total assets, recurring general and
administrative expenses, excluding REO related costs, were 1.28%
for the second quarter of 1994, compared to 1.47% for the first
quarter of 1994, 1.30% for the second quarter of 1993 and 1.33% for
all of 1993.
18
<PAGE>
RESULTS OF OPERATIONS - Six Months Ended June 30, 1994 Compared to Six Months
- - --------------------- -----------------------------------------------------
Ended June 30, 1993
-------------------
The following comments are made regarding the results of operations
for the six months ended June 30, 1994 compared to the six months
ended June 30, 1994. The trend in income and expense items is
generally consistent with the comparison of the second quarter of
1994 with the same quarter of 1993. Total interest income and
interest expense have increased on a year- to-date basis, primarily
as a result of an increased average balance sheet offset in part by
a decline in yields earned on assets and rates paid on liabilities,
as more fully described below and presented in the table on the
following page. Net interest income has decreased due to the
increased level of assets earning a lower interest rate spread.
Non-interest income has decreased from $2,236,000 for the first six
months of 1993 to $2,197,000 for 1994. This decrease results from
a decrease in gain on sale of loans offset in part by increases in
net servicing fees, loan and related fees and a $177,000 refund
from the Thrift Guaranty Corporation received in the second quarter
in 1994. Non-interest expense increased to $10,679,000 in 1994
from $10,499,000 in 1993, primarily due to increases in occupancy
costs related to expanded facilities, advertising expense for loans
and deposits, and other general and administrative expenses related
to operating a larger company in 1994. This category also includes
defeasance costs of $1,132,000 which were recorded in June 1993
upon the early redemption of the Company's 11% senior subordinated
debentures. As a percentage of average assets, noninterest
expenses were 1.37% for the first six months of 1994 compared to
1.33% for the first six months of 1993.
The following table presents for the six months of 1994 and 1993,
the distribution of consolidated average assets, liabilities, and
stockholders' equity as well as the total dollar amounts of
interest income, average interest-earning assets and the resultant
yields, and the dollar amounts of interest expense, average
interest-bearing liabilities, and rates paid. Nonaccrual loans are
included in the calculation of the average balances of loans and
interest not accrued is excluded. The yield on short-term
investments has been adjusted upward to reflect the effects of
certain income thereon which is exempt from federal income tax,
assuming an effective rate of 35% for 1993 and for 1994.
19
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended June 30, 1994 Compared to Six Months
- - --------------------- --------------------------------------------------
Ended June 30, 1993 (Continued)
-------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------------------------
1994 1993
----------------------------- ----------------------------
Average Yields/ Average Yields/
Balance Interest Rates Balance Interest Rates
------- -------- ------ ------- -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits with other institutions $ 551 $ 14 5.08% $ 690 $ 21 6.09%
Short-term investments 28,299 545 3.85 47,908 767 3.20
Investment securities 112,644 2,883 5.12 65,678 1,478 4.50
Loans 1,320,904 47,667 7.22 1,117,562 46,329 8.29
--------- ------- --------- -------
Total earning assets 1,462,398 51,109 6.99 1,231,838 48,595 7.89
------- -------
Non interest-earning assets 14,161 5,647
--------- ---------
Total average assets $1,476,559 $1,237,485
========== ==========
Liabilities and Stockholders' Equity:
Passbooks $116,340 $1,798 3.09% $114,114 $ 1,945 3.41%
Investment certificates 692,484 16,642 4.81 582,819 15,765 5.41
--------- ------ -------- -------
Total thrift certificates 808,824 18,440 4.56 696,933 17,710 5.08
Other borrowings 488,170 10,172 4.17 380,857 7,908 4.15
Subordinated debentures 62,142 2,789 8.98 55,294 2,608 9.43
--------- ------ ------- -------
Total interest-bearing liabilities 1,359,136 31,401 4.62 1,133,084 28,226 4.98
------ -------
Non interest-bearing liabilities 10,979 9,396
Stockholders' equity 106,444 95,005
---------- ----------
Total average liabilities and stockholders' equity $1,476,559 $1,237,485
========== ==========
Net interest spread 2.37% 2.91%
Net interest income and net interest margin $ 19,708 2.70% $20,369 3.31%
======== =======
</TABLE>
The Company's balance sheet at June 30, 1994 is generally
comparable to that at December 31, 1993. Total assets have
increased $127,494,000 to $1,544,687,000. Loans held for sale
decreased $23,496,000 and other loans in the Company's portfolio
increased $125,938,000, including an increase of $108,380,000 in
single family mortgages. Funds were raised primarily by higher
deposits of $105,569,000. The Company's reserve for possible
losses was $15,463,000 at June 30, 1994, and there were six
foreclosed real estate properties resulting in other real estate
owned with a value of $7,728,000.
20
<PAGE>
RESULTS OF OPERATIONS - Six Months Ended June 30, 1994 Compared to Six Months
- - --------------------- -----------------------------------------------------
Ended June 30, 1993 (Continued)
-------------------------------
ASSET QUALITY AND PROVISION FOR POSSIBLE LOSSES
- - -----------------------------------------------
The level of the Company's provision for losses and reserve for
losses are related to the size and composition of the loan
portfolio and conditions affecting the real estate markets in which
the Company conducts lending activities. The following table sets
forth by category the total loan portfolio of the Company at the
dates indicated. As indicated below, the Company has increased
the dollar amount and relative percentage of its loans secured by
single family residences.
<TABLE>
<CAPTION>
June 30, December 31,
----------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Loans:
Single family (1-4 units) $656,307,000 $577,276,000 $375,757,000
Multifamily (5+ units) 378,042,000 387,757,000 405,399,000
Commercial real estate 246,687,000 229,914,000 204,611,000
Multifamily construction 17,209,000 5,707,000 19,574,000
Single family construction 16,405,000 14,512,000 14,703,000
Home equity credit lines 30,154,000 31,213,000 35,255,000
------------- ------------- -------------
Real estate mortgages subtotal 1,344,804,000 1,246,379,000 1,055,299,000
Commercial business and other 13,696,000 9,679,000 12,486,000
------------- ------------- -------------
Total loans 1,358,500,000 1,256,058,000 1,067,785,000
Unearned fee income (8,304,000) (9,406,000) (12,621,000)
Reserve for possible losses (15,463,000) (12,657,000) (12,686,000)
------------- ------------- --------------
Loans, net $1,334,733,000 $1,233,995,000 $1,042,478,000
============== =============== ==============
</TABLE>
The following table presents an analysis of the Company's loan
portfolio at June 30, 1994 by property type and geographic
location:
<TABLE>
<CAPTION>
San Francisco Los Angeles Other CA Las Vegas Percent
Bay Area County Areas Nevada Other Total By Type
------------ ------------ ----------- ------------ ----------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Property Type:
Single family (1-4 units)(1) $477,416,000 $163,852,000 $37,102,000 $ 5,414,000 $ 8,530,000 $ 692,314,000 50.9%
Multifamily (5+ units) 160,178,000 98,709,000 21,949,000 97,206,000 --- 378,042,000 27.8%
Commercial real estate 172,016,000 29,089,000 10,606,000 31,260,000 3,716,000 246,687,000 18.2%
Construction loans 265,000 --- --- 33,349,000 --- 33,614,000 2.5%
Commercial Business and other 128,000 6,331,000 1,000,000 358,000 26,000 7,843,000 0.6%
------------ ------------ ----------- ------------ ----------- -------------- -------
Total $810,003,000 $297,981,000 $70,657,000 $167,587,000 $12,272,000 $1,358,500,000 100.0%
============ ============ =========== ============ =========== ============== =======
Percent by location 59.6% 21.9% 5.2% 12.4% 0.9% 100.0%
</TABLE>
(1) Includes equity lines of credit secured by single family
residences and single family loans held for sale.
The Company places an asset on nonaccrual status when one of the
following events occurs: any installment of principal or interest
is over 90 days past due (except for single family loans which are
judged by management to be well secured and in the process of
collection), management determines the ultimate collection of
principal or interest to be unlikely, management deems a loan to be
an in-substance foreclosure, or the Company takes possession of the
collateral. Additionally, loans modified to defer or waive
interest equal to more than four payments are
21
<PAGE>
RESULTS OF OPERATIONS - Six Months Ended June 30, 1994 Compared to Six Months
- - --------------------- -----------------------------------------------------
Ended June 30, 1993 (Continued)
-------------------------------
placed on nonaccrual status and generally will continue in this status until at
least six payments have been received. Real estate collateral obtained
by the Company or deemed to be foreclosed in substance is
collectively referred to as REO.
The following table presents nonaccruing loans and investments,
REO, restructured performing loans and accruing single family loans
over 90 days past due at the dates indicated.
NONACCRUING ASSETS AND OTHER LOANS
<TABLE>
<CAPTION>
June 30, December 31,
----------------------------------
1994 1993 1992
----------- ----------------------------------
<S> <C> <C> <C>
Nonaccruing Loans
Single family $ 1,683,000 $ --- $ ---
Multifamily 33,617,000 6,740,000 3,894,000
Commercial real estate 5,134,000 4,862,000 5,524,000
Other 232,000 16,000 140,000
----------- --------------- --------------
Nonaccruing loans 40,666,000 11,618,000 9,558,000
Real estate owned ("REO") 7,728,000 9,961,000 8,937,000
Nonaccruing investments --- 361,000 469,000
----------- --------------- --------------
Total nonaccruing assets 48,394,000 21,940,000 18,964,000
Restructured performing loans 5,889,000 6,342,000 3,366,000
----------- --------------- --------------
Total nonaccruing assets and restructured performing loans $54,283,000 $28,282,000 $22,330,000
=========== =============== ==============
Accruing single family loans more than 90 days past due $ 2,057,000 $ 1,390,000 $ 3,541,000
Percent of Total Assets:
Nonaccruing assets 3.13% 1.55% 1.54%
Nonaccruing assets and restructured performing loans 3.51% 2.00% 1.81%
Ratio of reserve for possible losses to nonaccruing loans 38% 109% 133%
</TABLE>
Commencing in late 1990 and continuing to date in 1994, the
California economy has been affected by an economic recession. The
recession has affected both the San Francisco Bay Area and Southern
California, although management believes that at present the
effects of the recession are more severe on the Company's loans in
the Los Angeles area. The recession has reduced the ability of
some of the Company's borrowers to perform under the terms of their
loan agreements and the value of some of the properties securing
the Company's loans. The recession has primarily impacted the
Company's multifamily and commercial real estate loan portfolios,
resulting in an increase in the level of nonaccruing assets and
restructured loans and in chargeoffs against the reserve for
possible losses.
On January 17, 1994, the greater Los Angeles area experienced an
earthquake which caused significant damage to the freeway system
and real estate throughout the area. As a result of this
earthquake, some of the Company's borrowers are experiencing
problems primarily among the 37+ unit multifamily loan portfolio in
Los Angeles County, which represented approximately 5% of the
Company's total assets at June 30, 1994. A special earthquake
reserve of $4,000,000 was provided in the first quarter of 1994.
Such reserve represented the Company's best estimate, at the time,
of the loss potential resulting from damage or related economic
impact, after contacting the potentially affected borrowers
and making inspections of such properties. The ultimate adequacy of
this reserve amount depends in part on the outcome
22
<PAGE>
RESULTS OF OPERATIONS - Six Months Ended June 30, 1994 Compared to Six Months
- - --------------------- -----------------------------------------------------
Ended June 30, 1993 (Continued)
-------------------------------
of additional negotiations with borrowers, the nature and timing of local
disaster relief funding, and the general economic climate affecting multifamily
occupancy and rental rates in the Los Angeles area. As of June 30,
1994, $1,446,000 has been charged off against this reserve
including $408,000 of interest which was recorded as a receivable
at March 31, 1994 and was subsequently determined to be in
doubt as to its collection.
At June 30, 1994, the dollar amount of the Company's nonaccruing
assets increased to $48,394,000 from $21,940,000 at December 31,
1993, primarily due to the affects of the January 17, 1994, Los
Angeles earthquake. At June 30, 1994, nonaccruing assets included
approximately $33,000,000 of loans adversely impacted by the
earthquake and REO properties included $1,473,000 of multifamily
properties acquired as a result of the earthquake. At June 30,
1994, all $5,889,000 of restructured loans were restructured as a
result of the earthquake. Nonaccruing assets at June 30, 1994 have
been reduced by chargeoffs of $1,139,000 during the first six
months of 1994 and $1,488,000 prior to 1994. At June 30, 1994, the
Company's nonaccrual loans included $14,400,000 of loans which had
been restructured by the forgiveness of interest or the
capitalization of interest equivalent to more than four months.
Additionally, there were $6,700,000 of modified loans placed on
nonaccrual at June 30, 1994 because the borrowers have been
unable to perform under the terms of forebearance agreements.
As a result of the terms of these restructurings, although the Company
has received or expects to receive monthly payments, the loans will
continue to be reported as nonaccrual loans until at least six
payments have been received.
Because of this earthquake, management of the Company expects that
the level of loan delinquencies and REO may increase further during
1994. Some borrowers have experienced direct property damage or
loss of tenants, or could be affected in the future as a result of
lower rental revenues or further economic difficulties. First
Republic has been and is continuing to work with those borrowers to
assist them with obtaining available disaster relief funding and
has assisted some of them by modifying the terms of loans. Such
loan modifications have included the deferral or capitalization of
interest payments, the reduction in the rate of interest collected
and the waiver of principal and interest in some cases. The
Company has also assisted many of its borrowers in the application
for federal, state, and local disaster relief funds; although the
receipt of such funds has been delayed, the Company expects that
some of its borrowers will ulitmately receive such assistance and
has deferred the modification of certain nonaccruing loans until
the disaster relief process is concluded.
As of June 30, 1994, the Company has granted forbearance as to
principal and interest payments, generally amounting to two to four
months of payments, on $16,300,000 of loans; as a result of these
forbearance agreements, the Company has recorded as a receivable at
June 30, 1994, $ 275,000 of interest, $155,000 of which relates to the
first quarter of 1994 and $120,000 of which relates to the second
quarter of 1994. Such interest was not collected but is expected to be
collected over the next one to four years, as part of regular payments
scheduled to begin in the third quarter of 1994. These loans will be
placed on nonaccrual status if the borrowers become unable to
perform under the terms of these forbearance agreements. If losses
result from the inability of borrowers to comply with these
agreements, such losses of
23
<PAGE>
RESULTS OF OPERATIONS - Six Months Ended June 30, 1994 Compared to Six Months
- - --------------------- -----------------------------------------------------
Ended June 30, 1993 (Continued)
-------------------------------
principal or forbearance interest will be charged to the Company's special
earthquake reserve.
Additionally, the Company has modified the terms of $8,500,000 of
primarily multifamily loans as a result of this natural disaster.
Under these modifications, the Company has agreed to capitalize
interest payments, extend loan maturity, reduce the contractual
interest rate or waive amounts due. If the terms of the loans,
after such modifications, are below those generally available in
the current market or if any principal or contractually due
interest is forgiven, then such loan modifications are classified
as restructured loans. As of June 30, 1994, $5,889,000 of these loans
are reported as restructured performing loans. In the event that the
Company's borrowers are unable to meet their obligations under
modified or restructured loans and a loss is incurred, the Company
will charge the special earthquake reserve. Additional forbearance
agreements or loan modifications, including loan restructurings,
are expected to be entered into with the Company's borrowers in the
third quarter of 1994 and, possibly, future quarters.
During the second quarter of 1994, two loans totaling $2,598,000 were
transferred to REO and five REO properties with a book value
totaling $4,246,000 were sold. At June 30, 1994, the Company held
as REO properties two apartment buildings, which were foreclosed
upon as a result of the earthquake, one commercial property, two
parcels of land and one single family residential property. One of
the REO parcels of land is an 800 acre parcel which was appraised
in January 1993 at a value in excess of its recorded value of
$5,054,000; this property is owned by First Republic, the holding
company.
At the time each loan is originated, the Company establishes a
reserve for the inherent risk of potential future losses, based on
established criteria, including the type of loan and loan-to- value
or cash flow-to-debt service ratios. Management believes that such
policy enables the Company's reserves to increase commensurate with
growth in the size of the Company's loan portfolio. In the
underwriting of purchased loans, management considers the inherent
risk of loss in determining the price to be paid. When loans are
purchased, a portion of the discount is designated as a reserve for
possible losses to reflect the inherent credit losses which could
be reasonably expected to occur in the future and is thereafter
unavailable to be amortized as an increase in interest income.
Anticipating a possible recession, the Company began to provide
additional reserves in July 1990 by establishing a newly created
recession reserve category. The provisions for the recession
reserve were not required or recommended by any regulatory
authority. These provisions reduced earnings by $1,000,000 for the
first and second quarters of 1993 and $750,000 for the first and
second quarters of 1994. Management views the recession reserve as
part of its total unallocated reserves available to absorb losses
on the Company's loans that may result from general economic
conditions. If specific loans become delinquent or property values
decline, this reserve is available to absorb losses.
Since January 1, 1993, the Company adopted the AICPA's SOP 92-3
which requires chargeoffs to the reserve for possible losses to be
recorded upon foreclosure and for expenses or losses on REO to be
expensed as incurred. The Company's reserve for possible losses is
maintained at
24
<PAGE>
RESULTS OF OPERATIONS - Six Months Ended June 30, 1994 Compared to Six Months
- - --------------------- -----------------------------------------------------
Ended June 30, 1993 (Continued)
-------------------------------
a level estimated by management to be adequate to
provide for losses that can be reasonably anticipated based upon
specific conditions as determined by management, historical loan
loss experience, the results of the Company's ongoing loan grading
process, the amount of past due and nonperforming loans,
observations of auditors, legal requirements, recommendations or
requirements of regulatory authorities, prevailing economic
conditions and other factors. These factors are essentially
judgmental and may not be reduced to a mathematical formula.
Since inception through June 30, 1994, the Company has experienced
a relatively low level of losses on its single family loans in each
of its geographic market areas. As of June 30, 1994, the Company
has not experienced any losses on its portfolio of real estate
secured loans, including construction loans, located in the Las
Vegas market. Collectively, these two categories represented 63%
of the Company's total loans at June 30, 1994.
As a percentage of nonaccruing loans, the reserve for possible
losses was 109% at December 31, 1993 and 38% at June 30, 1994.
Management's continuing evaluation of the loan portfolio and
assessment of economic conditions will dictate future reserve
levels.
The adequacy of the Company's total reserves is reviewed quarterly.
Management closely monitors all past due loans, in assessing the
adequacy of its total reserves. In addition, the Company has
instituted procedures for reviewing and grading of all the larger
income property loans in its portfolio on at least an annual basis.
Based upon that continuing review and grading process, among other
factors, the Company will determine appropriate levels of total
reserves in response to its assessment of the potential risk of
loss inherent in its loan portfolio. Management currently
anticipates that it will continue to provide additional recession
or earthquake related reserves so long as, in its judgement, the adverse
effects of these events on its assets continue. Management expects
that additional reserve provisions in the range of $750,000 to
$1,000,000 per quarter may be necessary for the remainder of 1994.
When management determines that the effects of the recessionary conditions
have diminished, management currently anticipates that it would reduce
or eliminate such future provisions to the recession reserve,
although the Company may continue to maintain total reserves at a
level higher than existed prior to this recession. Management does
not intend to increase earnings in future periods by reversing
amounts in the recession reserve.
25
<PAGE>
RESULTS OF OPERATIONS - Six Months Ended June 30, 1994 Compared to Six Months
- - --------------------- -----------------------------------------------------
Ended June 30, 1993 (Continued)
-------------------------------
The following table provides certain information with respect to
the Company's reserve position and provisions for losses as well as
chargeoff and recovery activity for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
---------------------------
1994 1993 1992
---------------- ------------- --------------
<S> <C> <C> <C>
Reserve for Possible Losses:
Balance beginning of period $ 12,657,000 $ 12,686,000 $ 11,663,000
Provision charged to expense:
Regular reserve 172,000 806,000 1,649,000
Recession reserve 1,500,000 4,000,000 6,413,000
Earthquake reserve 4,000,000 --- ---
Reserve from purchased loans 33,000 200,000 466,000
Reserve of First Republic Savings Bank at acquisition --- 24,000 ---
Chargeoffs on originated loans:
Single family (100,000) (209,000) (328,000)
Multifamily (2,723,000) (3,367,000) (3,961,000)
Commercial real estate (52,000) (1,547,000) (3,750,000)
Commercial business loans --- (76,000) (213,000)
Recoveries on originated loans:
Single family --- --- 50,000
Multifamily --- --- 5,000
Commercial real estate --- 92,000 654,000
Commercial business loans --- 43,000 12,000
Acquired loans:
Chargeoffs (24,000) --- ---
Recoveries --- 5,000 26,000
---------- ----------- ----------
Total chargeoffs, net of recoveries (2,899,000) (5,059,000) (7,505,000)
---------- ----------- ----------
Balance end of period $ 15,463,000 $ 12,657,000 $ 12,686,000
========== =========== ==========
Average loans for the period $1,320,904,000 $1,154,680,000 $1,008,783,000
Total loans at period end 1,358,500,000 1,233,995,000 1,067,785,000
Ratios of reserve for possible losses to:
Total loans 1.14% 1.01% 1.19%
Nonaccruing loans 38% 109% 133%
Nonaccruing assets and restructured performing loans 28% 45% 57%
Net chargeoffs to average loans 0.44%* 0.44% 0.74%
</TABLE>
- - ------------
*Annualized
26
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not Applicable
Item 2. Changes in Securities
---------------------
Not Applicable
Item 3. Defaults Upon Senior Securities
-------------------------------
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not Applicable
Item 5. Other Information
-----------------
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibit 11 Statement of Computation of
Earnings Per Share.
B. On June 6, 1994 the Company filed a Form
8-K concerning its response to
an inquiry from the New York Stock
Exchange on the trading acitivity of its
common stock.
C. On July 21, 1994, the Company filed a
Form 8-K relating to Item 5 therein,
covering the registrant's release to the
business community of its earnings
for the quarter and six months ended
June 30, 1994.
27
<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.
FIRST REPUBLIC BANCORP INC.
Date: August 11, 1994 /s/JAMES H. HERBERT, II
------------------------
JAMES H. HERBERT, II
President and Chief Executive Officer
Date: August 11,1994 /s/WILLIS H. NEWTON, JR.
--------------------------
WILLIS H. NEWTON, JR.
Sr. Vice President and
Chief Financial Officer
(Principal Financial Officer)
28
<PAGE>
EXHIBIT 11
FIRST REPUBLIC BANCORP INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1994 1993 1994 1993
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Primary:
Net income available to common stock $2,529,000 $2,645,000 $3,189,000 $5,591,000
Effect of convertible subordinated debentures,
net of taxes (1) 399,000 402,000 798,000 804,000
---------- ---------- ---------- ----------
Adjusted net income for fully diluted calculation (1) $2,928,000 $3,047,000 $3,987,000 $6,395,000
========== ========== ========== ==========
Weighted average shares outstanding,
beginning of period excluding treasury shares 7,754,957 7,718,050 7,743,965 7,716,086
Effect of stock options exercised during period 992 519 5,646 1,933
Weighted average shares of stock purchased by employees 932 1,032 3,340 519
Weighted average shares of dilutive stock
options under treasury stock method 314,082 232,848 335,301 248,854
Weighted average shares of treasury stock (42,823) -- (35,589) --
---------- ---------- ----------- ----------
Adjusted shares outstanding - primary 8,028,140 7,952,449 8,052,663 7,967,392
========== ========== =========== ==========
Net income per common share - primary $ 0.32 $ 0.33 $ 0.40 $ 0.70
=========== ========== =========== ===========
Fully Diluted:
Adjusted shares - primary, from above 8,028,140 7,952,449 8,052,663 7,967,392
Weighted average shares issuable upon conversion
of convertible subordinated debentures (1) 2,524.210 2,524,210 2,524,210 2,524,210
Additional weighted average shares of dilutive
stock options converted at period-end
stock price under the treasury stock method 19,134 28,045 9,572 14,046
---------- ---------- ---------- ----------
Adjusted shares outstanding - fully diluted 10,571,484 10,504,704 10,586,445 10,505,648
========== ========== ========== ==========
Net income per share - fully diluted (1) $ 0.28 $ 0.29 $ 0.38(2) $ 0.61
========== ========== ========== ==========
</TABLE>
- - --------------------
Per share amounts and numbers of shares have been adjusted to
reflect the effect of the 3% mstock dividend paid to stockholders
of record on February 18, 1994.
(1) Due to the existence of convertible subordinated debentures,
the fully-diluted calculation includes the number of shares which
would be outstanding if all such debentures were converted and
adjusts reported net income for the effect of interest expense on
the debentures, net of taxes.
(2) As a result of these debentures being antidilutive in the
first quarter of 1994, the calculated fully diluted EPS for the
first six months of 1994 exceeds the total of the calculated fully
diluted EPS for each quarter of 1994 by $0.02.
29
