First Republic Bancorp Inc.
Form 10-Q
March 31, 1996
Index
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet -
March 31, 1996 and December 31, 1995 3
Consolidated Statement of Income - Quarter
Ended March 31, 1996 and 1995 5
Consolidated Statement of Cash Flows -
Quarter Ended March 31, 1996 and 1995 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
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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.
FIRST REPUBLIC BANCORP INC.
CONSOLIDATED BALANCE SHEET
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March 31, December 31,
1996 1995
--------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 15,658,000 $ 15,918,000
Federal funds sold and short term investments 14,500,000 15,000,000
Interest bearing deposits at other financial institutions 193,000 200,000
Investment securities at cost 46,992,000 33,974,000
Investment securities at market 108,613,000 106,939,000
Federal Home Loan Bank Stock, at cost 30,714,000 30,321,000
----------- -----------
216,670,000 202,352,000
Loans
Single family (1-4 unit) mortgages 1,036,903,000 977,220,000
Multifamily (5+ units) mortgages 342,738,000 350,507,000
Commercial real estate mortgages 285,068,000 286,824,000
Commercial business loans 3,205,000 3,663,000
Single family construction 22,757,000 19,349,000
Multifamily/commercial construction 7,701,000 9,013,000
Equity lines of credit 26,871,000 26,572,000
Leases, contracts and other 770,000 933,000
Loans held for sale 5,179,000 8,182,000
------------- -------------
1,731,192,000 1,682,263,000
Less
Unearned loan fee income (3,738,000) (4,380,000)
Reserve for possible losses (18,878,000) (18,068,000)
------------- -------------
Net loans 1,708,576,000 1,659,815,000
Accrued interest receivable 13,229,000 12,582,000
Purchased servicing and premium on sale of loans 637,000 449,000
Prepaid expenses and other assets 13,970,000 14,677,000
Premises, equipment and leasehold improvements,
net of accumulated depreciation 4,021,000 4,180,000
Real estate owned (REO) 15,508,000 10,198,000
------------- -------------
$ 1,972,611,000 $ 1,904,253,000
============= =============
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3
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FIRST REPUBLIC BANCORP INC.
CONSOLIDATED BALANCE SHEET
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<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposits
Passbook and MMA accounts $ 217,336,000 $ 180,205,000
Certificates of deposit 977,670,000 960,236,000
------------- -------------
Total customer deposits 1,195,006,000 1,140,441,000
Interest payable 13,646,000 14,813,000
Other liabilities 6,930,000 6,156,000
Federal Home Loan Bank advances 581,530,000 570,530,000
Other borrowings -- --
------------- -------------
Total senior liabilities 1,797,112,000 1,731,940,000
Senior subordinated debentures 9,971,000 9,974,000
Subordinated debentures 19,566,000 19,579,000
Convertible subordinated debentures 34,500,000 34,500,000
------------- -------------
Total liabilities 1,861,149,000 1,795,993,000
------------- -------------
Stockholders' equity
Common stock 78,000 78,000
Capital in excess of par value 75,135,000 74,919,000
Retained earnings 43,378,000 40,608,000
Deferred compensation -- ESOP -- --
Treasury shares, at cost (5,763,000) (5,763,000)
Unrealized loss-available for sale securities (1,366,000) (1,582,000)
------------- -------------
Total stockholders' equity 111,462,000 108,260,000
------------- -------------
$1,972,611,000 $1,904,253,000
============= =============
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4
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FIRST REPUBLIC BANCORP INC.
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
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QUARTER ENDED
March 31,
-------------
1996 1995
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<S> <C> <C>
Interest income:
Interest on real estate and other loans $35,173,000 $28,898,000
Interest on investments 3,485,000 3,058,000
---------- ----------
Total interest income 38,658,000 31,956,000
---------- ----------
Interest expense:
Interest on customer deposits 17,160,000 13,369,000
Interest on FHLB advances and borrowings 8,800,000 8,928,000
Interest on debentures 1,442,000 1,443,000
---------- ----------
Total interest expense 27,402,000 23,740,000
---------- ----------
Net interest income 11,256,000 8,216,000
Provision for losses 1,773,000 1,465,000
---------- ----------
Net interest income after provision for losses 9,483,000 6,751,000
---------- ----------
Non-interest income:
Servicing fees, net 642,000 712,000
Loan and related fees 433,000 189,000
Gain on sale of loans 172,000 2,000
Other income 20,000 19,000
---------- ----------
Total non-interest income 1,267,000 922,000
---------- ----------
Non-interest expense:
Salaries and related benefits 2,214,000 2,027,000
Occupancy 705,000 659,000
Advertising 496,000 340,000
Professional fees 229,000 102,000
FDIC insurance premiums 78,000 530,000
REO costs and losses 726,000 413,000
Other general and administrative 1,562,000 1,267,000
---------- ----------
Total non-interest expense 6,010,000 5,338,000
---------- ----------
Income before income taxes 4,740,000 2,335,000
Provision for income taxes 1,970,000 951,000
---------- ----------
Net income $ 2,770,000 $ 1,384,000
========== ==========
Net income adjusted for effect of convertible
issue, used for fully diluted EPS $ 3,166,000 $ 1,783,000
========== ==========
Primary earnings per share $ 0.36 $ 0.18
========== ==========
Weighted average shares - primary 7,595,620 7,589,166
========== ==========
Fully diluted earnings per share $ 0.31 $ 0.18
========== ==========
Weighted average shares - fully diluted 10,119,887 10,129,792
========== ==========
</TABLE>
5
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FIRST REPUBLIC BANCORP INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
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Three Months ended
------------------
March 31,
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1996 1995
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<S> <C> <C>
Operating Activities
Net Income $ 2,770,000 $ 1,384,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses 1,773,000 1,465,000
Provision for depreciation and amortization 1,060,000 837,000
Amortization of loan fees (600,000) (1,003,000)
Amortization of loan servicing rights 105,000 91,000
Amortization of investment securities discounts (11,000) (8,000)
Amortization of investment securities premiums 54,000 66,000
Loans originated for sale (21,435,000) (9,103,000)
Loans sold into commitments 29,385,000 10,556,000
Increase in deferred taxes (416,000) --
Net gains on sale of loans (172,000) (2,000)
Increase in interest receivable (1,040,000) (1,081,000)
Decrease in interest payable (1,167,000) (208,000)
Decrease in other assets 951,000 991,000
Increase (decrease) in other liabilities 649,000 (797,000)
---------- ---------
Net Cash Provided By Operating Activities 11,906,000 3,188,000
Investment Activities
Loans originated (177,506,000) (98,166,000)
Other loans sold 12,989,000 --
Principal payments on loans 99,496,000 27,519,000
Purchases of investment securities (18,969,000) (2,980,000)
Repayments of investment securities 4,582,000 2,602,000
Additions to fixed assets (110,000) (389,000)
Net proceeds from sale of real estate owned 1,087,000 3,502,000
----------- ----------
Net Cash Used by Investing Activities (78,431,000) (67,912,000)
Financing Activities
Net increase (decrease) in passbook and MMA accounts 37,131,000 (6,449,000)
Issuance of certificates of deposit 93,655,000 139,266,000
Repayments of certificates of deposit (76,221,000) (82,283,000)
Increase (decrease) in long-term FHLB advances 15,000,000 (4,000,000)
Repayments of other long-term borrowings -- (162,000)
Net increase (decrease) in short-term borrowings (4,000,000) 10,000,000
Decrease in deferred compensation - ESOP -- 162,000
Repayments of subordinated debentures (16,000) (4,000)
Proceeds from employee stock purchase plan 85,000 37,000
Proceeds from common stock options exercised 131,000 36,000
Purchase of treasury stock -- (711,000)
---------- ----------
Net Cash Provided by Financing Activities 65,765,000 55,892,000
Decrease in Cash and Cash Equivalents (760,000) (8,832,000)
Cash and Cash Equivalents at Beginning of Period 30,918,000 32,420,000
---------- ----------
Cash and Cash Equivalents at End of Period $ 30,158,000 $ 23,588,000
========== ==========
</TABLE>
6
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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"), and First Republic Savings Bank. 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 1995 financial statements in order for
them to conform with the 1996 presentation.
These interim financial statements should be read in conjunction with the
Company's 1995 Annual Report to Stockholders and Consolidated Financial
Statements and Notes thereto. Results for the quarter ended March 31, 1996
should not be considered indicative of results to be expected for the full
year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In May 1995, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 122, "Accounting for Mortgage Servicing Rights, an Amendment of
FASB Statement No. 65." SFAS No. 122 requires that the rights to service
mortgage loans for others be recognized as a separate asset, however those
servicing rights are acquired. The total cost of originating or purchasing
mortgage loans should be allocated between the loan and the servicing rights
based on their relative fair values. The statement also requires the
assessment of all capitalized mortgage servicing rights for impairment to be
based on current fair value of those rights. The Company implemented SFAS
No. 122 effective January 1, 1996. The impact of SFAS No. 122 on the Company's
financial position is expected to be immaterial and the impact on the Company's
results will be to change the timing of reported earnings. SFAS No. 122
resulted in an increase in earnings before taxes of approximately $285,000 in
the quarter ended March 31, 1996.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 applies to all transactions in which an entity
acquires goods or services by issuing equity instruments such as common stock,
except for employee stock ownership plans. SFAS No. 123 establishes a new
method of accounting for stock-based compensation arrangements with employees
which is fair value based. The Statement encourages (but does not require)
employers to adopt the new method in place of the provisions of Accounting
Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees. Companies may continue to apply the accounting provisions of APB 25
in determining net income; however, they must apply the disclosure requirements
of SFAS No. 123. If the Company adopts the fair value based method of SFAS
No. 123, a higher compensation cost would result for fixed stock option plans
and a different compensation cost will result for the Company's contingent or
variable stock option plans. The recognition provisions and disclosure
requirements of SFAS No. 123 are effective January 1, 1996. The Company has
elected to continue to use its current practice under APB 25.
7
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
First Republic 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, and First Republic Savings Bank, a Nevada-chartered,
FDIC-insured thrift and loan subsidiary (collectively, the "Thrifts"). First
Thrift and First Republic Savings Bank are members of the FDIC's Bank Insurance
Fund ("BIF"), not the Savings Association Insurance Fund ("SAIF").
The Company is presently contemplating the merger of its two thrift and loan
subsidiaries, First Thrift and First Republic Savings Bank, in order to achieve
certain operational efficiencies. Additionally, the Company may in the future
pursue a change in the legal charter of its subsidiaries from a thrift and loan
charter to a commercial bank charter. Such a charter change would allow the
Company to provide additional services, including traditional checking
accounts, to its customers. The Company is also considering merging the holding
company into the merged operating subsidiary, if such subsidiary is converted
to a commercial bank. Each of these potential corporate reorganizations is
subject to regulatory approval and the Company's review of various business
considerations and federal and state laws; the holding company merger is also
subject to stockholder approval. There can be no assurance that any of the
foregoing contemplated reorganizations will be accomplished.
The Company is primarily engaged in originating residential real estate secured
loans on single family residences. The Company's loan portfolio also contains
loans secured by commercial properties and multifamily properties. Currently,
the Company's strategy in California is to emphasize the origination of single
family loans and to limit the origination of multifamily and commercial real
estate mortgage loans. Lending activities in Las Vegas are primarily focused on
single family and multifamily residential construction projects and permanent
mortgage loans on income properties. The Company emphasizes its real estate
lending activities in San Francisco, Los Angeles, Las Vegas, and San Diego
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 closing of new loans.
During the first quarter of 1996, the Company continued its focus on single
family lending, and the level of loan originations increased from the prior
year as a result of average interest rates being lower and improved secondary
market conditions allowing the amount of loans sold or originated for sale to
investors to be higher. Total loans of all types originated by the Company in
1995 were $584.4 million, and loan sales were $99.2 million in 1995. For the
quarter ended March 31, 1996, the Company originated $198.9 million of loans
and loan sales were $42.4 million, as compared to loan originations of $107.3
million and loan sales of $10.6 million for the quarter ended March 31, 1995.
8
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GENERAL (Continued)
- -------------------
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 sold in
the secondary market, thereby generating ongoing servicing fees. The Company's
mortgage servicing portfolio consisted of $788.2 million in loans at March 31,
1996.
The following table presents certain performance ratios and share data
information for the Company for the last three years and the first quarter of
the current and prior years.
<TABLE>
<CAPTION>
At or for the quarter At or for the Year
Ended March 31, Ended December 31,
--------------------- ----------------------------------
1996 1995 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets* 0.57% 0.32% 0.07% 0.47% 0.97%
Return on average equity* 10.06 5.11 1.08 6.77 12.65
Average equity to average assets 5.68 6.27 6.00 6.94 7.63
Leverage ratio 5.73 6.27 5.84 6.43 7.65
Total risk-based capital ratio 15.06 15.78 15.00 16.32 17.62
Net interest margin* 2.33 1.95 1.97 2.47 3.25
Non-interest expense to average assets* 1.09 1.14 1.07 1.28 1.33
Nonaccruing assets to total assets 2.41 2.02 2.46 2.41 1.55
Nonaccruing assets and performing restructured
loans to total assets 2.73 3.21 3.13 3.43 2.00
Net loan chargeoffs to average loans* 0.23 0.38 0.69 0.58 0.44
Reserve for possible losses to total loans 1.09 0.92 1.07 0.96 1.01
Reserve for possible losses to nonaccruing loans 59% 57% 49% 44% 109%
Share Data:
Common shares outstanding 7,348,974 7,385,818 7,330,400 7,444,703 7,718,791
Tangible book value per fully-diluted common share $15.16 $14.65 $14.76 $14.40 $13.58
</TABLE>
- --------------------------------
*Three 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, the retail
deposits of First Republic Savings Bank, 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 $748 million of FHLB advances at March 31,
1996. Such advances are collateralized by real estate mortgage loans and
$581.5 million has been advanced at March 31, 1996. Membership in the FHLB
provides First Thrift with an alternative funding source for its loans.
First Thrift, whose deposits are insured by the FDIC BIF, operates four
branches in San Francisco, a branch in San Rafael in Marin County north of San
Francisco, a branch in Los Angeles, a branch in Beverly Hills, and three
branches in San Diego County. As of March 31, 1996, First Thrift had total
assets of $1,871,433,000, tangible shareholder's equity of $130,675,000 and
total capital (consisting of tangible shareholder's equity, subordinated
capital notes and reserves) of $158,492,000. At March 31, 1996, First Thrift's
tangible shareholder's equity as a percentage of total assets was 6.98% and its
total
9
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GENERAL (Continued)
- ------------------
capital as a percentage of risk adjusted assets was 12.80%, compared to a risk
adjusted capital ratio requirement of 8.0%. Under FDIC regulations, First
Thrift calculates its Leverage Ratio at 7.07%, using Tier 1 capital (as
defined under the FDIC's risk-based capital definitions) and average
total assets for the most recent quarter.
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 March 31, 1996,
the investment securities portfolio of $155,605,000, plus cash and short term
investments of $30,351,000, amounted to $185,956,000, or 9.4% of total assets.
At March 31, 1996, 92% of the Company's investments mature within twelve
months or are adjustable rate in nature. At March 31, 1996, the Company
owned no investments of a trading nature.
Additional sources of liquidity at March 31, 1996 are provided by borrowings
collateralized by investment securities of approximately $123,000,000 and
available unused FHLB advances of approximately $167,000,000. Management
believes that the sources of available liquidity are adequate to meet the
Company's reasonably foreseeable short-term and long-term demands.
ASSET AND LIABILITY MANAGEMENT
- ------------------------------
The Company seeks to manage its asset and liability portfolios to help reduce
any adverse impact on its net interest income caused by fluctuating interest
rates. To achieve this objective, the Company emphasizes 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 March 31, 1996
approximately 68% 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 (the 11th District Cost of Funds Index or "COFI").
Additionally, the Company's loans contain interim rate increase caps or
limitations which can contribute to a further lagging of rates earned
on loans. At March 31, 1996, approximately 88% of the Company's
interest-earning assets and 83% of interest-bearing liabilities will reprice
within the next year and the Company's one-year cumulative GAP is
positive 10.1%. Despite the Company's positive repricing position,
the Company's net interest margin decreased in the first and second
quarters of 1995 as a result of the rapid rise in rates in 1994. The
Company's net interest margin has increased slightly in the third and
fourth quarters of 1995 and also in the first quarter of 1996. Important
factors affecting the Company's net interest margin include
competition and conditions in the home loan market which affect
10
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ASSET AND LIABILITY MANAGEMENT (Continued)
- -----------------------------------------
loan yields, the cost of the Company's FHLB advances, mortgage loan
repricings being subject to interim limitations on asset repricings, the
Company's strategy to increase its home loans which carry lower margins
and the lagging nature of COFI.
The following table summarizes the differences between the Company's maturing
or rate adjusting assets and liabilities, or "GAP" position, at March 31, 1996.
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. See
"-Results of Operations" for a discussion of the change in the Company's
net interest spread for the quarter ended March 31, 1996. A portion of the
Company's adjustable loans carry minimum interest rates, or floors,
which became the effective loan yield as rates declined and approximately
$174,268,000 of such loans remain at these minimum interest rates as of
March 31, 1996. The following table illustrates projected maturities or
interest rate adjustments based upon the contractual maturities or adjustment
dates at March 31, 1996:
11
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<TABLE>
<CAPTION>
FIRST REPUBLIC BANCORP
ASSET & LIABILITY REPRICING SENSITIVITY
March 31, 1996
(000's)
3 Months 3 to 6 to 1 to 2 to Over Non Interest
ASSETS: 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>
Loans (1) 0 863,015 551,629 103,045 15,060 138,772 59,671 0 1,731,192
Securities 0 146,808 4,749 20,366 0 0 14,396 0 186,319
Cash & short-term
investments 15,658 14,500 0 193 0 0 0 0 30,351
Non-interest bearing
assets, net 0 0 0 0 0 0 0 24,749 24,749
------ --------- ------- ------- ------ ------- ------ ------ ---------
TOTAL 15,658 1,024,323 556,378 123,604 15,060 138,772 74,067 24,749 1,972,611
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Passbooks & MMA's (2) 0 183,915 19,953 9,209 4,259 0 0 0 217,336
Certificates of deposit:
100K or greater 0 14,480 12,455 13,834 5,877 3,635 0 0 50,281
< 100K 0 240,776 210,146 302,108 126,895 47,408 56 0 927,389
FHLB advances - long term 0 190,000 244,170 54,360 8,000 37,500 47,500 0 581,530
FHLB advances - short-term 0 0 0 0 0 0 0 0 0
ESOP debt 0 0 0 0 0 0 0 0 0
Other liabilities 0 0 0 0 0 0 0 20,576 20,576
Subord debt 0 0 0 0 0 1,537 62,500 0 64,037
Equity 0 0 0 0 0 0 0 111,462 111,462
----- ------- ------- ------- ------- ------ ------- ------- ---------
TOTAL 0 629,171 486,724 379,511 145,031 90,080 110,056 132,038 1,972,611
Repricing Assets
over (under) liab 15,658 395,152 69,654 (255,907) (129,971) 48,692 (35,989) (107,289) 0
Effect of swaps 0 25,000 0 0 0 0 (25,000) 0 0
------ ------- ------ ------- ------- ------ ------ ------- ---------
Hedged gap 15,658 370,152 69,654 (255,907) (129,971) 48,692 (10,989) (107,289) 0
====== ======= ====== ======= ======= ====== ====== ======= =========
Gap as % of
Total assets 0.79% 18.76% 3.53% -12.97% -6.59% 2.47% -0.56% -5.44% 0.00%
====== ======= ====== ======= ======= ====== ====== ======= =========
Cumulative gap 15,658 385,810 455,464 199,557 69,586 118,278 107,289 0 0
====== ======= ======= ======= ======= ======= ======= ======= =========
Cumulative gap 0.79% 19.56% 23.09% 10.12% 3.53% 6.00% 5.44% 0.00% 0.00%
as % of assets ====== ======= ======= ======= ======= ======= ======= ======= =========
</TABLE>
(1) Adjustable rate loans consist principally of real estate
secured loans with a maximum term of 30 years.
Such loans are generally adjustable monthly,
semiannually, or annually based upon changes in the One
Year Treasury Constant Maturity Index, the Federal
Reserve's Six Month CD Index, or the FHLB 11th District
Cost of Funds Index (COFI), subject generally to a
maximum increase of 2% annually and 5% over the lifetime
of the loan.
(2) Passbook and MMA account maturities and rate adjustments
are allocated based upon management's experience
of historical interest rate volatility and erosion
rates. However, all passbook and MMA accounts are
contractually subject to immediate withdrawal.
12
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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 $1,065,000,000 which
terminate in periods ranging from June 1996 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 12.5% 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. At March 31, 1996, First Thrift also
owned certain shorter-term interest rate cap contracts purchased in
1994 as protection against further increases in interest rates
during 1995 and 1996. Monthly repricing caps in the notional
principal amount of $150,000,000 carry a strike rate which
increases from 6.75% to 8.92% over the period from April 1995 to
maturity in July 1996 and $50,000,000 of interest rate caps carry
a strike rate of 8% until maturity in December 1996. The cost of
interest rate cap transactions is amortized over their lives and
totaled $399,000 and $430,000 for the quarter ended March 31, 1996
and 1995, 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 March 31, 1996, the Company had entered into interest rate swaps
with the FHLB in the notional principal amount of $25,000,000 to
convert the fixed rate on certain long-term FHLB advances to semi-annual
adjustable liabilities. The availability of long-term FHLB
advances, with a weighted average maturity of over 10 years at
March 31, 1996, has reduced 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 market loss if the counterparties to its interest rate cap and
swap agreements fail to perform; however, the Company does not
anticipate such nonperformance.
Since 1990, the Company has utilized FHLB advances as a supplement
to deposit gathering to fund its assets. FHLB advances require no
deposit insurance premiums and operational overhead costs are less
than for deposits. FHLB advances must be collateralized by the
pledging of mortgage loans which are assets of First Thrift. At
March 31, 1996, total FHLB advances outstanding were $581,530,000. Of this
13
<PAGE>
ASSET AND LIABILITY MANAGEMENT (Continued)
- ------------------------------------------
amount, $503,330,000 had an original maturity of 10 years
or more and $23,200,000 had an original maturity of two years
subsequently extended for a period of 8 years to 10 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 customer deposit
balances which may be raised to twenty times its shareholder's
equity. At March 31, 1996, based on the amount of deposits
outstanding, First Thrift was required to maintain minimum
shareholder's equity of approximately $56,100,000, compared with
actual shareholder's equity of $130,675,000.
CAPITAL RESOURCES
- -----------------
The Company continues to maintain a strong capital base. At March
31, 1996 the Company's total capital, including total stockholders'
equity, debentures and reserves was $194,377,000. Total stockholders'
equity at March 31, 1996 has increased by $3,202,000 since
December 31, 1995. This increase results primarily from the net
income of $2,770,000 for the first quarter of 1996 and an increase
of $216,000 in the market value of the Company's portfolio of
adjustable rate perpetual preferred stocks, which are classified as
securities available for sale because they carry no stated
maturity.
First Republic is not a bank holding company, and unlike First
Thrift and First Republic Savings Bank, is not directly regulated
or supervised by the FDIC, nor is it regulated by 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 March 31, 1996 its leverage ratio would have been 5.73%,
and its total risk based capital ratio would have been 15.1%, as
calculated by management assuming, however, all of the Company's
subordinated debentures constitute Tier 2 capital and are not
limited to 50% of Tier 1 capital.
During the first quarter of 1995, the Company acquired 53,603
treasury shares which completed the repurchase of 406,000 shares of
common stock previously approved for repurchase by the Board of
Directors. In March 1995, the Company's Board of Directors
authorized for repurchase from time to time up to an additional
250,000 shares of common stock. Repurchases of an additional
80,000 shares of common stock in March, April and November 1995
brought total treasury shares repurchased to 486,000 at March 31,
1996.
During the first quarter of 1996, First Republic received from
First Thrift dividends of $974,000 representing approximately 24%
of First Thrift's earnings for the first quarter. First Republic
also received interest payments of $263,000 from First Thrift for
the quarter ended March 31, 1996. Also, First Republic has
received dividends of $76,000 from First Republic Savings Bank,
representing 20% of that subsidiary's earnings for the fourth
quarter of 1995; dividends of $74,000 for the first quarter of 1996
will be paid in May 1996. 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 March 31, 1996 Compared to
- ----------------------- ----------------------------------------
Quarter Ended March 31, 1995
----------------------------
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 first quarter of 1996, First Republic's total assets grew
to $1,972,611,000 at March 31, 1996 from $1,904,253,000 at December
31, 1995, primarily as a result of an increase in single family
mortgage loans. The Company's loan originations for the first quarter
of 1996 were $198,941,000, compared to $151,341,000 for the fourth
quarter of 1995 and $107,269,000 for the first quarter of 1995. The
amount of single family loans originated in the first quarter of 1996
was $36 million higher than those originated in the fourth quarter of
1995, while there was a slight increase in multifamily and construction
lending from the prior quarter. Single family loans originated
in the first quarter of 1996 were $161 million compared to $72 million
in the first quarter of 1995 and $413 million for all of 1995.
Mortgage banking activity resulted in the sale of $42,374,000 of
single family loans to secondary market investors during the first
quarter of 1996, compared with $10,556,000 in the first quarter of
1995. The Company's portfolio of real estate loans serviced for
secondary market investors decreased to $788,199,000 at March 31, 1996
from $804,856,000 at December 31, 1995, as prepayments of existing
loans serviced exceeded loan sales. 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.
The Company reported net income of $2,770,000 for the first quarter
of 1996 as compared to net income of $1,384,000 in the same quarter
of 1995. Fully diluted earnings per share was $0.31 for the first
quarter of 1996, compared to $0.18 for the similar period in 1995.
First Republic's operating results for the quarter ended March 31,
1996 were higher than earnings a year ago primarily because of higher
net interest income.
Total interest income increased to $38,658,000 for the first quarter
of 1996 from $31,956,000 for the first quarter of 1995. Interest
income on real estate and other loans increased to $35,173,000 for the
first quarter of 1996, compared to $28,898,000 in 1995. The average
yield on loans decreased to 8.22% in the first quarter of 1996 from
8.29% for the fourth quarter of 1995 and was 7.60% for the first
quarter of 1995. The Company's yield on loans is affected by market
rates, the level of adjustable rate loan indexes, the effect of new
single family loans earning lower initial rates of interest and the
level of nonaccrual loans. The Company's net loans receivable
outstanding increased from $1,682,263,000 at December 31, 1995 to
$1,731,192,000 at March 31, 1996. As a percentage of the Company's
permanent loan portfolio, loans secured by single family residences
increased to 62% at March 31, 1996 from 57% at March 31, 1995.
Interest income on cash, short-term investments and investment
securities increased as a result of a higher average portfolio for the
quarter earning a slightly higher average rate. Such interest income
was $3,485,000 in the first quarter of 1996 compared to $3,058,000 in
the same period of 1995. The average
15
<PAGE>
RESULTS OF OPERATIONS- Quarter Ended March 31, 1996 Compared to Quarter
- ---------------------- ------------------------------------------------
Ended March 31, 1995 (Continued)
--------------------------------
investment position was $210,117,000 during the first quarter of 1996
and earned 6.86% compared to an average position of $187,960,000 earning
6.71% during the first quarter of 1995. 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 first quarter has increased to
$27,402,000 in 1996 from $23,740,000 in 1995. Total interest expense
consists of two components - 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 certificates of deposit), increased to $17,160,000 in the
first quarter of 1996 from 13,369,000 in the first quarter of 1995.
The average rate paid on deposits was 5.90% for the first quarter of
1996, compared to 6.10% for the fourth quarter of 1995 and 5.50% for
the first quarter of 1995. Interest expense on other borrowings
decreased to $10,242,000 in the first quarter of 1996 from $10,371,000
in the first quarter of 1995, as a result of a lower average rate paid
on a higher average level of FHLB advances. The average rate paid on the
Company's other borrowings and FHLB advances, excluding longer term
debentures, was 6.13% for the first quarter of 1996, compared to 6.50%
for the fourth quarter of 1995, and 6.28% for the first quarter of
1995; thus the average rate paid on these liabilities, primarily FHLB
advances, decreased 37 basis points (.37%) from the fourth quarter of
1995 to the first quarter of 1996.
The Company's net interest income was $11,256,000 for the first
quarter of 1996, compared to $8,216,000 for the first quarter of 1995,
as a result of earning a higher 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 1.96% for the
first quarter of 1996, compared to 1.81% for the fourth quarter of
1995, 1.60% for all of 1995 and 1.59% for the first quarter of 1995.
The Company's net interest spread has gradually increased each quarter
since the second quarter of 1995.
From early 1994, through March 31, 1995, the cost of FHLB advances
increased more rapidly than the cost of the Company's deposits, due
to rapidly rising short term interest rates. The Company's advances
have interest rates which generally adjust semiannually and to a
lesser extent annually, with repricing points spread throughout the
year. There are no limitations or interim caps on the amount that the
interest rate on FHLB advances may increase. Thus, at each repricing
point, the cost of an FHLB advance fully reflects market rates. Most
of the Company's adjustable mortgage loans have interim rate increase
limitations. This adverse trend began a reversal in the third quarter
of 1995, as the weighted average cost of the Company's FHLB advances
decreased as a result of the decline in market rates.
Non-interest income for the first quarter of 1996 increased to
$1,267,000 from $922,000 in the first quarter of 1995, primarily due
to higher loan related fee income and higher gain on sale of loans.
Service fee revenue, net of amortized costs on the Company's premium
on sale of loans and mortgage servicing rights, was $642,000 for the
first quarter of 1996 compared to $712,000 for the same period of
1995, primarily due to a lower average balance of mortgage servicing
rights. The average balance of the servicing portfolio decreased to
$799,999,000 for the first quarter of 1996 compared to $823,965,000
for all of 1995. Total loans serviced were $788,199,000 at March 31,
1996 and $804,856,000 at December 31, 1995. 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
16
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended March 31, 1996 Compared to Quarter
- ----------------------- ------------------------------------------------
Ended March 31, 1995 (Continued)
--------------------------------
fees, on the outstanding loan balances serviced, which averaged
approximately 0.37% for the first quarter of 1996 compared to 0.37%
for all of 1995.
For the first quarter, loan and related fee income increased $244,000
to $433,000 in 1996 from $189,000 in 1995. This income category
includes documentation and processing fees which vary with loan volume
and market conditions, late charge income which generally varies with
the size of the loan and servicing portfolios and economic conditions,
and prepayment penalty income which generally varies with loan
activity and market conditions.
The Company sells whole loans and loan participations in the secondary
market under several specific programs. Loan sales were $42,374,000
for the first quarter of 1996 and $10,556,000 for the first quarter
of 1995. Included in the gain on the sale of these loans is the value
attributed to mortgage loan servicing rights under SFAS No. 122, which
was $293,000 for the first quarter of 1996. Many of the loans sold
in the first quarter of 1996 carried fixed rates for initial periods
of 3 to 7 years before becoming adjustable. The Company's mortgage banking
activities have been focused on entering 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 historically 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 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. The sale of loans
resulted in net gains of $172,000 for the first quarter of 1996,
compared to net gains of $2,000 for the same period of 1995.
Non-interest expense totaled $6,010,000 for the first quarter of 1996,
compared to $5,338,000 for the same period in 1995. Because the
Company's subsidiaries are insured by the FDIC's Bank Insurance Fund
("BIF"), the premiums charged for the first quarter of 1996 were
reduced from $530,000 in the first quarter of 1995 to $78,000 in the
first quarter of 1996. The Company's non-interest expense for the
first quarter of 1996 included $726,000 related to results of
operating REO properties and losses on disposition or changes in value
of REO properties, net, compared to $413,000 in the first quarter of
1995.
As a percentage of total assets, recurring general and administrative
expenses, excluding REO related costs, was 1.09% for the first quarter
of 1996, compared to 1.04% for the fourth quarter of 1995, 1.14% for
the first quarter of 1995, and 1.07% for all of 1995.
The following table presents for the first quarter of 1996 and 1995,
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
on nonaccrual loans is included only to the extent recognized on
17
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended March 31, 1996 Compared to Quarter
- ----------------------- ------------------------------------------------
Ended March 31, 1995 (Continued)
--------------------------------
a cash basis. 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%.
<TABLE>
<CAPTION>
Quarter Ended March 31,
---------------------------------------------
1996 1995
-------------------------- -------------------------
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 $2,185 $ 23 4.23% $ 198 $ 3 6.06%
Short-term investments 35,245 497 5.58 27,720 429 6.19
Investment securities 172,687 3,036 7.09 160,042 2,720 6.80
Loans 1,711,556 35,173 8.22 1,520,872 28,898 7.60
--------- ------ --------- ------
Total earning assets 1,921,673 38,729 8.10 1,708,832 32,050 7.50
------ ------
Non interest-earning assets 18,078 18,766
--------- ---------
Total average assets $1,939,751 $1,727,598
========= =========
Liabilities and Stockholders' Equity:
Passbooks & MMA's $199,342 $ 2,378 4.80% $135,587 $ 1,633 4.82%
Certificates of deposit 970,634 14,782 6.13 836,966 11,736 5.61
--------- ------ ------- ------
Total customer deposits 1,169,976 17,160 5.90 972,553 13,369 5.50
Other borrowings 576,911 8,800 6.13 568,928 8,928 6.28
Subordinated debentures 64,045 1,442 9.01 64,176 1,443 8.99
--------- ------ --------- ------
Total interest-bearing liabilities 1,810,932 27,402 6.14 1,605,657 23,740 5.91
------ ------
Non interest-bearing liabilities 18,727 13,575
Stockholders' equity 110,092 108,366
--------- ---------
Total average liabilities and stockholders' equity $1,939,751 $1,727,598
========= =========
Net interest spread 1.96% 1.59%
Net interest income and net interest margin $ 11,327 2.33% $ 8,310 1.95%
======= ======
</TABLE>
The Company's balance sheet at March 31, 1996 is generally comparable
to that at December 31, 1995. Total assets have increased $68,358,000
to $1,972,611,000. Loans held for sale decreased $3,003,000 and other
loans in the Company's portfolio increased $51,932,000, including an
increase of $59,683,000 in single family mortgages. Funds were raised
primarily by retail deposits which increased $54,565,000 and
$11,000,000 in FHLB advances. The Company's reserve for possible
losses was $18,878,000 at March 31, 1996, and there were fifteen
foreclosed real estate properties resulting in other real estate owned
with a net book value of $15,508,000.
ASSET QUALITY AND PROVISION FOR POSSIBLE LOSSES
- -----------------------------------------------
The levels of the Company's provision for losses and reserve for
losses are related to the size and composition of the loan portfolio,
general economic conditions, 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 primarily the dollar amount and proportion of its loans
secured by single family residences in
18
<PAGE>
ASSET QUALITY AND PROVISION FOR POSSIBLE LOSSES (Continued)
- -----------------------------------------------------------
1995 and the first quarter of 1996. An amount equal to 95% of all net
loan growth since December 31, 1994 is represented by growth in
single family home loans.
<TABLE>
<CAPTION>
March 31, December 31,
------------------------------
1996 1995 1994
-------------- ------------ ------------
<S> <C> <C> <C>
Loans:
Single family (1-4 units) $1,040,287,000 $983,331,000 $820,078,000
Multifamily (5+ units) 342,738,000 350,507,000 367,750,000
Commercial real estate 285,068,000 286,824,000 249,119,000
Multifamily/commercial construction 7,701,000 9,013,000 10,658,000
Single family construction 22,757,000 19,349,000 14,227,000
Home equity credit lines 26,871,000 26,572,000 28,137,000
------------- ------------- -------------
Real estate mortgages subtotal 1,725,422,000 1,675,596,000 1,489,969,000
------------- ------------- -------------
Commercial business and other 5,770,000 6,667,000 8,694,000
------------- ------------- -------------
Total loans 1,731,192,000 1,682,263,000 1,498,663,000
Unearned fee income (3,738,000) (4,380,000) (6,816,000)
Reserve for possible losses (18,878,000) (18,068,000) (14,355,000)
------------- ------------- -------------
Loans, net $1,708,576,000 $1,659,815,000 $1,477,492,000
============= ============= =============
</TABLE>
The following table presents an analysis of the Company's loan
portfolio at March 31, 1996 by property type and geographic location:
<TABLE>
<CAPTION>
San Francisco Los Angeles San Diego Other CA Las Vegas Percent
$ in thousands Bay Area County County Areas Nevada Other Total By Type
-------- --------- ------- -------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property Type:
Single family (1-4 units)(1) $685,534 $238,253 $32,129 $ 74,822 $ 9,897 $28,318 $1,068,953 61.7%
Multifamily (5+ units) 146,272 70,515 444 18,208 107,299 --- 342,738 19.8%
Commercial real estate 201,709 30,213 1,070 9,573 40,057 2,446 285,068 16.5%
Construction loans 8,592 2,778 --- 24 19,064 --- 30,458 1.8%
Business loans --- 2,570 22 611 --- --- 3,203 0.2%
CD backed loans/other 277 123 94 155 104 69 772 0.0%
---------- -------- ------- -------- -------- ------- ---------- ------
Total $1,042,334 $344,452 $33,759 $103,393 $176,421 $30,833 $1,731,192 100.0%
========== ======== ======= ======== ======== ======= ========== ======
Percent by location 60.2% 19.9% 1.9% 6.0% 10.2% 1.8% 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 any installment
of principal or interest is 90 days or more past due (except for loans
which are judged by management to be well secured and in the process
of collection, generally applicable to single family loans), or when
management determines the ultimate collection of all contractually due
principal or interest to be unlikely. Additionally, loans
restructured to defer or waive amounts due are placed on nonaccrual
status and generally will continue in this status until a satisfactory
payment history is achieved (generally at least six payments).
19
<PAGE>
ASSET QUALITY AND PROVISION FOR POSSIBLE LOSSES (Continued)
- -----------------------------------------------------------
The following table presents nonaccruing loans and investments,
REO, performing restructured loans and accruing single family loans
over 90 days past due at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
------------------
1996 1995 1994
--------- ---------- ----------
<S> <C> <C> <C>
Nonaccruing Loans:
Single family $ --- $ --- $ ---
Multifamily 22,357,000 23,664,000 29,049,000
Commercial real estate 9,384,000 12,555,000 3,400,000
Other 325,000 331,000 174,000
----------- ----------- -----------
Total nonaccruing loans 32,066,000 36,550,000 32,623,000
Real estate owned ("REO") 15,508,000 10,198,000 8,500,000
----------- ----------- -----------
Total nonaccruing assets 47,574,000 46,748,000 41,123,000
Performing restructured loans 6,349,000 12,795,000 17,489,000
----------- ----------- -----------
Total nonaccruing assets and performing restructured loans $53,923,000 $59,543,000 $58,612,000
=========== =========== ===========
Accruing single family loans more than 90 days past due $ 4,461,000 $ 3,747,000 $ 2,587,000
Percent of Total Assets:
Nonaccruing assets 2.41% 2.46% 2.41%
Nonaccruing assets and performing restructured loans 2.73% 3.13% 3.43%
Ratio of reserve for possible losses to nonaccruing loans 59% 49% 44%
</TABLE>
At March 31, 1996, the dollar amount of the Company's nonaccruing
loans and REO after chargeoffs was $47,574,000, compared to
$46,748,000 at December 31, 1995. At March 31, 1996, 58% of
nonaccruing assets, or approximately $21,438,000 of loans and
$6,340,000 of REO, were adversely impacted by the Northridge
earthquake.
On January 17, 1994, the Northridge earthquake struck the Los
Angeles area, causing significant damage to the freeway system and
real estate values throughout the area. The Company's loans
secured by low to moderate income multifamily properties were
primarily affected by this event, either by direct property damage,
loss of tenants, or economic difficulties resulting from lower
rental revenues and higher vacancies. Certain earthquake affected
loans remain on nonaccrual status because of uncertainty about
their ultimate collectability, even though the loans may have been
paying for as much as 12 months. In 1994, 1995 and continuing
into 1996, the Company has experienced increased delinquencies,
additional loan loss provisions and higher partial loan chargeoffs
as a result of this substantial natural disaster. Additionally,
certain loans in Northern California which have been placed on
nonaccrual status because of changes in the borrower's condition,
the property's status or the loan's terms.
20
<PAGE>
ASSET QUALITY AND PROVISION FOR POSSIBLE LOSSES (Continued)
- -----------------------------------------------------------
The following table summarizes the changes in the Company's
nonaccrual loans during the first quarter of 1996. Nonaccrual
loans are segmented by major geographical region and activity.
<TABLE>
<CAPTION>
CHANGE IN NONACCRUAL
LOANS BY REGION
Los Angeles Northern
County California Nevada Total
------ ---------- ------ -----
<S> <C> <C> <C> <C>
Balance December 31, 1995 $ 20,762,000 $12,433,000 $ 3,355,000 $ 36,550,000
Additions to nonaccrual loans:
New nonaccrual loans 2,570,000 295,000 --- 2,865,000
Performing restructured loans
returned to nonaccrual status 6,200,000 --- --- 6,200,000
Deductions from nonaccrual loans:
Chargeoffs to reserves (1,269,000) (427,000) --- (1,696,000)
Transfer to foreclosed assets (5,876,000) (698,000) --- (6,574,000)
Transfer to performing status --- --- (3,355,000) (3,355,000)
Cash proceeds received (316,000) (1,608,000) --- (1,924,000)
------------ ----------- ---------- ------------
Balance March 31, 1996 $ 22,071,000 $ 9,995,000 $ --- $ 32,066,000
============ =========== ========== ============
</TABLE>
Additions to nonaccrual loans during the first quarter of 1996 were
primarily related to six apartment loans ($7,617,000) in Los
Angeles County which were impacted by the earthquake, plus one
commercial real estate loan ($669,000) and one single family home
loan ($484,000) in that area.
Deductions from nonaccrual loans during the first quarter of 1996
resulted from chargeoffs to the Company's allowance for possible
losses, actual foreclosures upon properties and the transfer of one
loan from nonaccrual to performing status as the result of the
borrower attaining a satisfactory payment history. Also, cash
proceeds of $1,924,000 received during the first quarter of 1996
were used to reduce the carrying basis of nonaccrual loans,
including $1,500,000 to fully pay off one nonaccrual loan.
Chargeoffs on nonaccrual loans occur when the Company determines
that the collateral value is reduced to other than temporary
levels. Chargeoffs recorded in the first quarter of 1996 related
both to loans which were on nonaccrual status at December 31, 1995
and to loans which were placed on nonaccrual status or transfered
to REO during the first quarter. While the future collateral value
of these properties may change, the Company recorded chargeoffs to
reduce the carrying basis of its nonaccrual loans to the estimated
current collateral value, net of selling costs (See "Impaired
Loans"). Chargeoffs were $1,269,000 for loans secured by
properties in Los Angeles County and $427,000 for loans secured by
properties in Northern California.
As of March 31, 1996, the amounts reported for REO, nonaccruing
loans, and performing restructured loans have been reduced by
previous chargeoffs of $6,327,000, $7,431,000 and $328,000,
respectively.
The Company's nonaccrual loans included $21,313,000 of loans on
which interest payments were received during the quarter at an
average annualized yield of 6.4% on their recorded investment. As
a result of the terms of these restructurings, such loans will be
reported as nonaccrual loans until a
21
<PAGE>
ASSET QUALITY AND PROVISION FOR POSSIBLE LOSSES (Continued)
- -----------------------------------------------------------
satisfactory payment history is achieved and the Company believes
its recorded investment in the loans is secure.
As of March 31, 1996, $6,349,000 of modified loans are reported as
performing restructured loans. Additional loan modifications,
including loan restructurings, were completed in the first quarter
of 1996 and additional modifications may be entered into with the
Company's borrowers in future quarters.
During the first quarter of 1996, ten loans totaling $6,574,000
after partial chargeoff were transferred to REO. Two REO
properties with a remaining December 31, 1995 book value totaling
$1,106,000 were sold and the Company recovered proceeds
approximately equal to the written down basis of these properties.
At March 31, 1996, the Company held as REO properties seven
apartment buildings, four commercial real estate properties, two
single family homes, one partially completed single family
construction project and one parcel of land. The Company's policy
is to attempt to resolve problem assets reasonably quickly,
including the aggressive pursuit of foreclosure or other workout
procedures. It has been the Company's general policy to sell such
problem assets when acquired as promptly as possible at prices
available in the prevailing market. For certain properties,
including those acquired as a result of the Northridge earthquake,
the Company has made repairs and engaged management companies to
reach stabilized levels of occupancy prior to asset disposition.
At March 31, 1996, the Company is actively preparing its REO
properties for sale and expects to sell certain properties and to
foreclose upon additional loans in the second quarter of 1996.
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 any 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.
The Company's reserve for possible losses is maintained at a level
estimated by management to be adequate to provide for losses that
can be reasonably anticipated based upon specific conditions at the
time as determined by management, including past 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, current and expected economic conditions
and other factors.
Since inception through March 31, 1996, the Company has experienced
a relatively low level of losses on its single family loans in each
of its geographic market areas. The Company's cumulative single
family loan loss experience is 0.06% on all loans originated. As
of March 31, 1996, the Company has not experienced any losses on
its permanent loan portfolio secured by real estate located in the
Las Vegas market. Collectively, these two categories represented
71% of the Company's total loans at March 31, 1996.
As a percentage of nonaccruing loans, the reserve for possible
losses was 49% at December 31, 1995 and
22
<PAGE>
ASSET QUALITY AND PROVISION FOR POSSIBLE LOSSES (Continued)
- -----------------------------------------------------------
59% at March 31, 1996. 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 and restructured
loans in assessing the adequacy of its total reserves. In addition,
the Company follows procedures for reviewing and grading all of the
larger income property loans in its portfolio on a periodic basis.
Based predominately upon that continuous review and grading process,
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 will provide additional reserves when
the results of its problem loan assessment methodology or overall reserve
adequacy test indicate additional reserves are required. The review of
problem loans is an ongoing process, during which management may determine
that additional chargeoffs are required or additional loans should be
placed on nonaccrual status.
Although substantially all nonaccrual loans and loans that were
adversely affected by the earthquake have been reduced to their
currently estimated collateral fair value (net of selling costs) at
March 31, 1996, there can be no assurance that additional reserves
or chargeoffs will not be required in the event that the properties
securing the Company's existing problem loans fail to maintain
their values or that new problem loans arise.
23
<PAGE>
ASSET QUALITY AND PROVISION FOR POSSIBLE LOSSES (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>
Quarter Ended Year Ended
March 31, March 31,
-----------------------
1996 1995 1994
---- ----- ----
<S> <C> <C> <C>
Reserve for Possible Losses:
Balance beginning of period $ 18,068,000 $ 14,355,000 $ 12,657,000
Provision charged to expense 1,773,000 14,765,000 9,720,000
Reserve from purchased loans --- --- 34,000
Chargeoffs on originated loans:
Single family (127,000) (14,000) (210,000)
Multifamily (1,283,000) (9,314,000) (7,177,000)
Commercial real estate ( 385,000) (2,163,000) (695,000)
Commercial business and other loans --- (48,000) (79,000)
Construction loans --- (353,000) ---
Recoveries on originated loans:
Single family --- 3,000 11,000
Multifamily 79,000 765,000 119,000
Commercial real estate 752,000 30,000 ---
Commercial business and other loans --- 54,000 15,000
Acquired loans:
Chargeoffs --- (22,000) (47,000)
Recoveries 1,000 10,000 7,000
-------------- --------------- --------------
Total chargeoffs, net of recoveries (963,000) (11,052,000) (8,056,000)
-------------- -------------- --------------
Balance end of period $ 18,878,000 $ 18,068,000 $ 14,355,000
============== ============== ==============
Average loans for the period $1,711,556,000 $1,591,827,000 $1,379,640,000
Total loans at period end 1,731,192,000 1,682,263,000 1,498,663,000
Ratios of reserve for possible losses to:
Total loans 1.09% 1.07% 0.96%
Nonaccruing loans 59% 49% 44%
Nonaccruing loans and performing restructured loans 49% 37% 29%
Net chargeoffs to average loans 0.23%* 0.69% 0.58%
</TABLE>
- ----------------------
*Annualized
IMPAIRED LOANS
- --------------
Effective January 1, 1995, the Company adopted SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by
SFAS No. 118 (collectively referred to as SFAS No. 114). These
statements address the accounting treatment of certain impaired
loans and amend SFAS No. 5 and SFAS No. 15. However, these
statements do not address the overall adequacy of the allowance for
losses.
A loan within the scope of SFAS No. 114 is considered impaired
when, based on current information and events, it is probable that
the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement, including scheduled
interest payments. For a loan that has been restructured
subsequent to the January 1, 1995 adoption of SFAS No. 114 by the
Company, the relevant
24
<PAGE>
IMPAIRED LOANS (Continued)
- --------------------------
contractual terms refer to the contractual terms specified by the
original loan agreement, not the contractual terms specified by the
restructuring agreement. Subsequent to the adoption of SFAS No. 114,
a restructured loan may be excluded from the impairment assessment and
may cease to be reported as an impaired loan in the calendar years
subsequent to the restructuring if the loan is not impaired based on the
modified terms.
For loans that are impaired within the meaning of SFAS No. 114, the
Company makes an assessment of impairment when and while such loans
are on nonaccrual or the loans have been restructured. The
measurement of impairment may be based on (i) the present value of
the expected future cash flows of the impaired loan discounted at
the loan's original effective interest rate, (ii) the observable
market price of the impaired loan, or (iii) the fair value of the
collateral of a collateral dependent loan. The Company's loans are
primarily real estate secured; therefore the Company primarily
bases the measurement of impaired loans on the fair value of the
collateral, reduced by costs to sell.
If the measurement of the impaired loan is less than the recorded
investment in the loan, impairment is recognized by creating or
adjusting an existing allocation of the allowance for losses. Cash
receipts on impaired loans not performing according to contractual
terms are generally used to reduce the carrying value of the loan
unless the Company believes it will recover the remaining principal
balance of the loan.
In accordance with the disclosures guidelines of SFAS No. 114, the
following table shows the recorded investment in impaired loans and
any related SFAS No. 114 allowance for losses at March 31, 1996.
An impaired loan has a specific amount of the Company's reserves
(allowance for losses) assigned to it whenever the collateral's
fair value, net of selling costs, is less than the Company's
recorded investment in the loan, after amounts charged off to
reserves are deducted. Generally, impaired loans not requiring a
special allowance under SFAS No. 114 have already been written down
or have a net collateral fair value which exceeds the loan balance.
25
<PAGE>
IMPAIRED LOANS (Continued)
- --------------------------
<TABLE>
<CAPTION>
Related
Recorded SFAS No. 114
Investment in Allowance for
Impaired Loans Losses
-------------- -------------
<S> <C> <C>
Impaired loans requiring a SFAS No. 114 allowance:
Single Family $ --- $ ---
Multifamily 6,709,000 1,533,000
Commercial Real Estate 1,159,000 270,000
Other 350,000 47,000
----------- ------------
8,218,000 $ 1,850,000
----------- ============
Impaired loans not requiring a SFAS No. 114 allowance:
Single Family ---
Multifamily 18,342,000
Commercial Real Estate 11,855,000
Other ---
30,197,000
-----------
Total $38,415,000
===========
</TABLE>
The $30,197,000 of loans reported as impaired loans not requiring a
SFAS No. 114 allowance are classified in this manner because, as of
March 31, 1996, the recorded investment in these loans have been
reduced to their collateral fair value, net of selling costs, by
$6,063,000 of specific chargeoffs to the Company's reserves. At
March 31, 1996, the Company has designated $88,000 of its reserves
to protect against contingent liabilities on certain of these
loans, while the ultimate amount of payment, if any, is being
contested.
Total interest income recognized on loans designated as impaired
for the first quarter ended March 31, 1996 was $300,000, all of
which was recorded using the cash received method. The average
recorded investment in impaired loans during the first quarter of
1996 was approximately $45,000,000.
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 April 19, 1996, the Company filed a Form 8-K
relating to Item 5 therein, covering the
registrant's release on April 18, 1996 to the
business community of its earnings for the quarter
ended March 31, 1996.
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: May 14, 1996 /s/JAMES H. HERBERT, II
-----------------------------
JAMES H. HERBERT, II
President and Chief Executive Officer
Date: May 14, 1996 /s/WILLIS H. NEWTON, JR.
-------------------------------
WILLIS H. NEWTON, JR.
Sr. Vice President and
Chief Financial Officer
(Principal Financial Officer)
28
EXHIBIT 11
FIRST REPUBLIC BANCORP INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Quarter Ended
March 31,
--------------------------
1996 1995
---- ---
<S> <C> <C>
Primary:
Net income available to common stock $ 2,770,000 $ 1,384,000
=========== ===========
Weighted average shares outstanding,
beginning of period including treasury shares 7,816,400 7,797,100
Effect of stock options exercised during period 8,142 1,827
Weighted average shares of stock purchased by employees 4,745 2,713
Weighted average shares of dilutive stock
options under treasury stock method 252,333 174,677
Weighted average shares of treasury stock (486,000) (387,151)
----------- -----------
Adjusted shares outstanding - primary 7,595,620 7,589,166
=========== ===========
Net income per common share - primary $ 0.36 $ 0.18
=========== ===========
Fully Diluted:
Net income available to common stock $ 2,770,000 $ 1,384,000
Effect of convertible subordinated debentures,
net of taxes (1) 396,000 399,000
----------- -----------
Adjusted net income for fully diluted calculation (1) $ 3,166,000 $ 1,783,000
=========== ===========
Adjusted shares - primary, from above 7,595,620 7,589,166
Weighted average shares issuable upon conversion
of convertible subordinated debentures 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 57 16,416
----------- -----------
Adjusted shares outstanding - fully diluted 10,119,887 10,129,792
=========== ===========
Net income per share - fully diluted $ 0.31 $ 0.18
=========== ===========
</TABLE>
- -------------
(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.
29
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
Registrant is not a Bank or Savings and Loan Holding Company.
</LEGEND>
<CIK> 0000770975
<NAME> FIRST REPUBLIC BANCORP INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 15,658
<INT-BEARING-DEPOSITS> 193
<FED-FUNDS-SOLD> 14,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 108,613
<INVESTMENTS-CARRYING> 77,706
<INVESTMENTS-MARKET> 77,213
<LOANS> 1,731,192
<ALLOWANCE> 18,878
<TOTAL-ASSETS> 1,972,611
<DEPOSITS> 1,195,006
<SHORT-TERM> 0
<LIABILITIES-OTHER> 20,950
<LONG-TERM> 645,567
0
0
<COMMON> 75,213
<OTHER-SE> 36,249
<TOTAL-LIABILITIES-AND-EQUITY> 1,972,611
<INTEREST-LOAN> 35,173
<INTEREST-INVEST> 3,485
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 38,658
<INTEREST-DEPOSIT> 17,160
<INTEREST-EXPENSE> 27,402
<INTEREST-INCOME-NET> 11,256
<LOAN-LOSSES> 1,773
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,647
<INCOME-PRETAX> 4,740
<INCOME-PRE-EXTRAORDINARY> 4,740
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,770
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.31
<YIELD-ACTUAL> 2.33
<LOANS-NON> 32,066
<LOANS-PAST> 4,461
<LOANS-TROUBLED> 6,349
<LOANS-PROBLEM> 3,000
<ALLOWANCE-OPEN> 18,068
<CHARGE-OFFS> 1,795
<RECOVERIES> 832
<ALLOWANCE-CLOSE> 18,878
<ALLOWANCE-DOMESTIC> 18,878
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 17,028
</TABLE>
