-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T9hOKkI558LcOAUwE34GBNRHaf2C01S8jvFi1oQY3KN1CZsDNPp+x26d/1GilsI5 0LqV2HoO/ZXSF0RhyhPVGQ== 0000770975-96-000025.txt : 19961118 0000770975-96-000025.hdr.sgml : 19961118 ACCESSION NUMBER: 0000770975-96-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST REPUBLIC BANCORP INC CENTRAL INDEX KEY: 0000770975 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 942964497 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09837 FILM NUMBER: 96664279 BUSINESS ADDRESS: STREET 1: 388 MARKET ST STREET 2: SEOND FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4153921400 10-Q 1 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 September 30, 1996 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 November 6, 1996, 7,424,218 shares. First Republic Bancorp Inc. Form 10-Q September 30, 1996 Index PAGE ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheet - September 30, 1996 and December 31, 1995 3 Consolidated Statement of Income - Nine Months and Quarter Ended September 30, 1996 and 1995 5 Consolidated Statement of Cash Flows - Nine Months Ended September 30, 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 28 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 29 2 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
September 30, December 31, 1996 1995 ---- ---- (Unaudited) ASSETS Cash $ 20,437,000 $ 15,918,000 Federal funds sold and short term investments 3,800,000 15,000,000 Interest bearing deposits at other financial institutions 199,000 200,000 Investment securities at cost 54,625,000 33,974,000 Investment securities at market 103,050,000 106,939,000 Federal Home Loan Bank Stock, at cost 32,141,000 30,321,000 ----------- ----------- 214,252,000 202,352,000 Loans Single family (1-4 unit) mortgages 1,187,724,000 977,220,000 Multifamily (5+ units) mortgages 325,456,000 350,507,000 Commercial real estate mortgages 285,045,000 286,824,000 Commercial business loans 2,614,000 3,663,000 Single family construction 13,510,000 19,349,000 Multifamily/commercial construction 31,929,000 9,013,000 Equity lines of credit 29,760,000 26,572,000 Leases, contracts and other 1,706,000 933,000 Loans held for sale 7,258,000 8,182,000 --------------- ------------ 1,885,002,000 1,682,263,000 Less Unearned loan fee income (3,289,000) (4,380,000) Reserve for possible losses (18,265,000) (18,068,000) --------------- ----------- Net loans 1,863,448,000 1,659,815,000 Accrued interest receivable 13,553,000 12,582,000 Mortgage servicing rights 1,171,000 449,000 Prepaid expenses and other assets 12,828,000 14,677,000 Premises, equipment and leasehold improvements, net of accumulated depreciation 4,109,000 4,180,000 Real estate owned (REO) 12,807,000 10,198,000 --------------- ------------- $ 2,122,168,000 $ 1,904,253,000 =============== ===============
3 FIRST REPUBLIC BANCORP INC. CONSOLIDATED BALANCE SHEET
September 30, December 31, 1996 1995 ---- ---- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Customer deposits Passbook and MMA accounts $ 274,426,000 $ 180,205,000 Certificates of deposit 1,043,024,000 960,236,000 -------------- --------------- Total customer deposits 1,317,450,000 1,140,441,000 Interest payable 13,131,000 14,813,000 Other liabilities 8,012,000 6,156,000 Federal Home Loan Bank advances 601,530,000 570,530,000 Other borrowings -- -- -------------- -------------- Total senior liabilities 1,940,123,000 1,731,940,000 Senior subordinated debentures 9,966,000 9,974,000 Subordinated debentures 19,509,000 19,579,000 Convertible subordinated debentures 34,500,000 34,500,000 -------------- --------------- Total liabilities 2,004,098,000 1,795,993,000 -------------- --------------- Stockholders' equity Common stock 78,000 78,000 Capital in excess of par value 75,384,000 74,919,000 Retained earnings 49,654,000 40,608,000 Deferred compensation -- ESOP -- -- Treasury shares, at cost (5,763,000) (5,763,000) Unrealized loss-available for sale securities (1,283,000) (1,582,000) ------------- -------------- Total stockholders' equity 118,070,000 108,260,000 ------------- -------------- $2,122,168,000 $1,904,253,000 ============== ==============
4 FIRST REPUBLIC BANCORP INC. CONSOLIDATED STATEMENT OF INCOME (unaudited)
QUARTER ENDED NINE MONTHS ENDED September 30, September 30, ------------- ------------- 1996 1995 1996 1995 -------- -------- -------- ------ Interest income: Interest on real estate and other loans $ 36,742,000 $ 32,890,000 $107,717,000 $ 93,211,000 Interest on investments 3,681,000 3,200,000 10,688,000 9,095,000 ------------ ------------ ----------- ----------- Total interest income 40,423,000 36,090,000 118,405,000 102,306,000 ------------ ------------ ----------- ----------- Interest expense: Interest on customer deposits 18,336,000 16,424,000 52,887,000 45,052,000 Interest on FHLB advances and borrowings 8,957,000 9,347,000 26,449,000 28,185,000 Interest on debentures 1,433,000 1,438,000 4,324,000 4,322,000 ------------ ----------- ---------- ----------- Total interest expense 28,726,000 27,209,000 83,660,000 77,559,000 ------------ ----------- ----------- ----------- Net interest income 11,697,000 8,881,000 34,745,000 24,747,000 Provision for losses 1,500,000 2,500,000 5,088,000 12,715,000 ----------- ------------ ------------ ----------- Net interest income after provision for losses 10,197,000 6,381,000 29,657,000 12,032,000 ----------- ------------ ----------- ------------ Non-interest income: Servicing fees, net 516,000 646,000 1,616,000 2,027,000 Loan and related fees 161,000 345,000 962,000 890,000 Gain (loss) on sale of loans 709,000 9,000 957,000 (36,000) Gain on investment securities 28,000 -- 28,000 141,000 Other income 56,000 198,000 120,000 231,000 ---------- ----------- ----------- ----------- Total non-interest income 1,470,000 1,198,000 3,683,000 3,253,000 ---------- ----------- ----------- ----------- Non-interest expense: Salaries and related benefits 2,291,000 1,857,000 6,801,000 5,453,000 Occupancy 834,000 774,000 2,459,000 2,272,000 Advertising 610,000 345,000 1,650,000 1,128,000 Professional fees 216,000 177,000 850,000 430,000 FDIC insurance premiums 84,000 99,000 244,000 1,159,000 REO costs and losses 91,000 720,000 977,000 1,728,000 Other general and administrative 1,959,000 1,402,000 4,996,000 3,934,000 ---------- ---------- ---------- ----------- Total non-interest expense 6,085,000 5,374,000 17,977,000 16,104,000 ---------- ---------- ----------- ----------- Income (loss) before income taxes 5,582,000 2,205,000 15,363,000 (819,000) Provision for (benefit from) income taxes 2,307,000 884,000 6,317,000 (384,000) ----------- ----------- ----------- ---------- Net income (loss) $ 3,275,000 $ 1,321,000 $ 9,046,000 $ (435,000) =========== =========== =========== ========== Net income adjusted for effect of convertible issue, used for fully diluted EPS $ 3,671,000 $ 1,721,000 $10,234,000 $ -- =========== =========== =========== =========== Primary earnings per share $ 0.43 $ 0.17 $ 1.19 $ (0.06) =========== =========== =========== =========== Weighted average shares - primary 7,641,793 7,605,648 7,630,995 7,594,484 =========== =========== =========== =========== Fully diluted earnings per share $ 0.36 $ 0.17 $ 1.00 $ (0.06) =========== =========== =========== =========== Weighted average shares - fully diluted 10,263,213 10,129,927 10,207,226 10,127,290 =========== =========== =========== ===========
5 FIRST REPUBLIC BANCORP INC. CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
Nine Months ended ----------------- September 30, ------------- 1996 1995 ----------- ----------- Operating Activities Net Income (loss) $ 9,046,000 $ (435,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for losses 5,088,000 12,715,000 Provision for depreciation and amortization 2,989,000 3,002,000 Amortization of loan fees (1,454,000) (2,894,000) Amortization of loan servicing rights 397,000 257,000 Amortization of investment securities discounts (40,000) (33,000) Amortization of investment securities premiums 196,000 202,000 Loans originated for sale (44,936,000) (78,290,000) Loans sold into commitments 49,273,000 77,356,000 Increase in deferred taxes (307,000) -- Gain on sale of investment securities (28,000) -- Net (gains) losses on sale of loans (957,000) 36,000 Increase in interest receivable (2,271,000) (3,109,000) Increase (decrease) in interest payable (1,682,000) 966,000 Increase in other assets (366,000) (1,117,000) Increase (decrease) in other liabilities 1,963,000 (162,000) ------------- ----------- Net Cash Provided By Operating Activities 16,911,000 8,494,000 Investment Activities Loans originated (603,890,000) (354,833,000) Loans purchased -- (4,181,000) Other loans sold 81,124,000 -- Principal payments on loans 296,684,000 204,770,000 Purchases of investment securities (36,733,000) (17,412,000) Sale of investment securities 4,558,000 15,000 Repayments of investment securities 15,055,000 9,075,000 Net decrease in short term investments -- 198,000 Additions to fixed assets (748,000) (1,053,000) Net proceeds from sale of real estate owned 12,059,000 11,804,000 ----------- ------------ Net Cash Used by Investing Activities (231,891,000) (151,617,000) Financing Activities Net increase in passbook and MMA accounts 94,221,000 23,831,000 Issuance of certificates of deposit 321,981,000 328,402,000 Repayments of certificates of deposit (239,193,000) (203,134,000) Increase (decrease) in long-term FHLB advances 25,000,000 (44,000,000) Repayments of other long-term borrowings -- (488,000) Net increase in short-term borrowings 6,000,000 30,000,000 Decrease in deferred compensation - ESOP -- 488,000 Repayments of subordinated debentures (78,000) (109,000) Proceeds from employee stock purchase plan 136,000 65,000 Proceeds from common stock options exercised 232,000 84,000 Purchase of treasury stock -- (1,198,000) ------------ ------------ Net Cash Provided by Financing Activities 208,299,000 133,941,000 Decrease in Cash and Cash Equivalents (6,681,000) (9,182,000) Cash and Cash Equivalents at Beginning of Period 30,918,000 32,420,000 ------------ ------------ Cash and Cash Equivalents at End of Period $ 24,237,000 $ 23,238,000 ============ ============
6 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 and nine months ended September 30, 1996 should not be considered indicative of results to be expected for the full year. 2. RECENT ACCOUNTING PRONOUNCEMENTS In June 1996, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125 provides guidance for distinguishing transfers of financial assets that are "sales" from transfers that are "secured borrowings." This Statement, which supersedes or amends numerous existing guidelines, is effective January 1, 1997 and is to be applied prospectively. Earlier implementation of SFAS No. 125 is not permitted. Under SFAS No. 125, a transfer of financial assets in which control is surrendered over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in the exchange. Liabilities and derivatives incurred or obtained by the transfer of financial assets are required to be measured at fair value, if practicable. Also, any servicing assets and other retained interests in the transferred assets must be measured by allocating the previous carrying value between the asset sold and the interest retained, if any, based on their relative fair values at the date of transfer. For each servicing contract in existence before January 1, 1997, previously recognized servicing rights and excess servicing receivables that do not exceed contractually specified servicing are required to be combined, net of any previously recognized servicing obligations under that contract, as a servicing asset or liability. Previously recognized servicing receivables that exceed contractually specified servicing fees are required to be reclassified as interest-only strips receivable. The Statement also requires an assessment of interest-only strips, loans, other receivables or retained interests in securitizations. If these assets can be contractually prepaid or otherwise settled such that the holder would not recover substantially all of its recorded investment, the asset will be measured like available-for-sale securities or trading securities, under SFAS No. 115. This assessment is required for financial assets held on or acquired after January 1, 1997. 7 2. RECENT ACCOUNTING PRONOUNCEMENTS (Continued) In accordance with the above, the Company will apply the requirements of this Statement beginning January 1, 1997. The Company has not historically entered into transactions which meet the new definitions of transfers that are secured borrowings. However, the Company has not completed the complex analysis required to determine the future impact on its financial statements related to existing financial assets and servicing contracts. 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"). On October 31, 1996, the Company completed the merger of its two thrift and loan subsidiaries, First Thrift and First Republic Savings Bank, in order to achieve certain operational efficiencies. During the third quarter of 1996, the Company obtained all regulatory approvals to merge First Thrift into First Republic Savings Bank. Subsequent to the merger, First Republic Savings Bank will be the surviving legal entity and will continue to operate in both Nevada and California in substantially the same manner as each subsidiary has been operating. Additionally, the Company may in the future pursue a change in the legal charter of First Republic Savings Bank 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 parent company into the merged operating subsidiary, if such subsidiary is converted to a commercial bank. These remaining potential corporate reorganizations are 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 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 8 GENERAL (Continued) - ------------------- 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 nine months 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 nine months ended September 30, 1996, the Company originated $648.8 million of loans and loan sales were $130.4 million, as compared to loan originations of $433.1 million and loan sales of $77.4 million for the nine months ended September 30, 1995. 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 $806.8 million in loans at September 30, 1996. The following table presents certain performance ratios and share data information for the Company for the last periods indicated:
At or for the nine months At or for the Year Ended September 30, Ended December 31, ------------------- ------------------------------ 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- Performance Ratios: Return on average assets* 0.60% (0.03)% 0.07% 0.47% 0.97% Return on average equity* 10.66 (0.54) 1.08 6.77 12.65 Average equity to average assets 5.61 6.06 6.00 6.94 7.63 Leverage ratio 5.63 5.88 5.84 6.43 7.65 Total risk-based capital ratio 14.60 15.14 15.00 16.32 17.62 Net interest margin* 2.33 1.90 1.97 2.47 3.25 Non-interest expense to average assets* 1.12 1.08 1.07 1.28 1.33 Nonaccruing assets to total assets 2.05 2.73 2.46 2.41 1.55 Nonaccruing assets and performing restructured loans to total assets 2.39 3.60 3.13 3.43 2.00 Net loan chargeoffs to average loans* 0.36 0.82 0.69 0.58 0.44 Reserve for possible losses to total loans 0.97 1.07 1.07 0.96 1.01 Reserve for possible losses to nonaccruing loans 60% 46% 49% 44% 109% Share Data: Common shares outstanding 7,361,488 7,350,446 7,330,400 7,444,703 7,718,791 Tangible book value per common share $16.03 $14.56 $14.76 $14.40 $13.58 - ---------- *Nine months data is annualized
9 GENERAL (Continued) - ------------------- 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 $802 million of FHLB advances at September 30, 1996. Such advances are collateralized by real estate mortgage loans and $601.5 million has been advanced at September 30, 1996. First Republic Savings Bank became a member of the FHLB on July 26, 1996 upon the purchase of $540,000 of FHLB stock, and has been approved for approximately 25% of its total assets or approximately $25.1 million of FHLB advances at September 30, 1996. Membership in the FHLB provides the Thrifts 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 September 30, 1996, First Thrift had total assets of $2,005,478,000, tangible shareholder's equity of $136,570,000 and total capital (consisting of tangible shareholder's equity, subordinated capital notes and reserves) of $163,638,000. At September 30, 1996, First Thrift's tangible shareholder's equity as a percentage of total assets was 6.81% and its total capital as a percentage of risk adjusted assets was 12.64%, compared to a risk adjusted capital ratio requirement of 8.0%. Under FDIC regulations, First Thrift calculates its Leverage Ratio at 6.88%, using Tier 1 capital (as defined under the FDIC's risk-based capital definitions) and average total assets for the most recent quarter. First Republic Savings Bank, whose deposits are also insured by the FDIC BIF, operates one branch in Las Vegas, Nevada and is scheduled to open a second branch in the Las Vegas area during the fourth quarter of 1996. As of September 30, 1996, First Republic Savings Bank had total assets of $100,477,000, tangible shareholder's equity of $8,958,000 and total capital (consisting of tangible shareholder's equity and reserves) of $10,135,000. At September 30, 1996, First Republic Savings Bank's tangible shareholder's equity as a percentage of total assets was 8.92% and its total capital as a percentage of risk adjusted assets was 13.63%, compared to a risk adjusted capital ratio requirement of 8.0%. Under FDIC regulations, First Republic Savings Bank calculates its Leverage Ratio at 9.39%, 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 10 LIQUIDITY (Continued) - --------------------- diversified portfolio of marketable investment securities, which includes U.S. Government securities and mortgage backed securities. At September 30, 1996, the investment securities portfolio of $157,675,000, plus cash and short term investments of $24,436,000, amounted to $182,111,000, or 8.6% of total assets. At September 30, 1996, 89% of the Company's investments mature within twelve months or are adjustable rate in nature. At September 30, 1996, the Company owned no investments of a trading nature. Additional sources of liquidity at September 30, 1996 could be provided by approximately $125,000,000 of borrowings collateralized by investment securities and available unused FHLB advances of approximately $224,000,000. 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 September 30, 1996 approximately 73% 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 September 30, 1996, approximately 88% of the Company's interest-earning assets and 79% of interest-bearing liabilities will reprice within the next year and the Company's one-year cumulative GAP is positive 13.2%. 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 gradually from the second quarter of 1995 to the second quarter of 1996, as a result of lower and relatively more stable short term interest rates and increases in adjustable rate loan yields compared to liability costs. Important factors affecting the Company's net interest margin include competition and conditions in the home loan market which affect 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 September 30, 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 11 ASSET AND LIABILITY MANAGEMENT (Continued) - ------------------------------------------ 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 and nine months ended September 30, 1996. A portion of the Company's adjustable loans carry minimum interest rates, or floors, which became the effective loan yield as rates declined from the levels in prior periods and approximately $170,719,000 of such loans remain at these minimum interest rates as of September 30, 1996. The following table illustrates projected maturities or interest rate adjustments based upon the contractual maturities or adjustment dates at September 30, 1996: 12
FIRST REPUBLIC BANCORP ASSET & LIABILITY REPRICING SENSITIVITY September 30, 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 --------- --------- -------- -------- ------- ------- ------- ---------- ---------- Loans (1) 0 931,901 619,918 105,481 21,946 166,404 39,352 0 1,885,002 Securities 0 142,391 9,145 14,081 0 0 24,199 0 189,816 Cash & short-term investments 20,436 4,000 0 0 0 0 0 0 24,436 Non-interest bearing assets, net 0 0 0 0 0 0 0 22,914 22,914 -------- --------- ------- -------- ------- ------- ------- ------ ----------- TOTAL 20,436 1,078,292 629,063 119,562 21,946 166,404 63,551 22,914 2,122,168 LIABILITIES AND STOCKHOLDERS' EQUITY: Passbooks & MMA's 0 234,642 23,699 11,291 4,794 0 0 0 274,426 Certificates of deposit: 100K or greater 0 19,432 13,541 17,615 13,884 4,133 100 0 68,705 < 100K 0 251,985 209,181 262,094 199,599 51,447 13 0 974,319 FHLB advances 0 175,000 288,530 35,000 8,000 72,500 22,500 0 601,530 ESOP debt 0 0 0 0 0 0 0 0 0 Other short-term debt 0 0 0 0 0 0 0 0 0 Other liabilities 0 0 0 0 0 0 0 21,143 21,143 Subord debt 0 0 0 0 0 1,482 62,493 0 63,975 Equity 0 0 0 0 0 0 0 118,070 118,070 ------- --------- ------- ------- -------- ------- ------- ------- --------- TOTAL 0 681,059 534,951 326,000 226,277 129,562 85,106 139,213 2,122,168 Repricing Assets over (under) liab 20,436 397,233 94,112 (206,438) (204,331) 36,842 (21,555) (116,299) 0 Effect of swaps 0 25,000 0 0 0 (25,000) 0 0 0 ------ ------- ------- -------- ------- ------- ------- ---------- -------- Hedged gap 20,436 372,233 94,112 (206,438) (204,331) 61,842 (21,555) (116,299) 0 ====== ======= ======= ======== ======== ======= ======= ======== ======== Gap as % of Total assets 0.96% 17.54% 4.43% -9.73% -9.63% 2.91% -1.02% -5.48% 0.00% ===== ======= ====== ======== ======= ======= ======= ====== ====== Cumulative gap 20,436 392,669 486,781 280,343 76,012 137,854 116,299 0 0 ====== ======= ======= ======= ======= ======= ======= ====== ====== Cumulative gap 0.96% 18.50% 22.94% 13.21% 3.58% 6.50% 5.48% 0.00% 0.00% as % of assets ====== ======= ====== ======= ======= ======= ======= ====== ======
(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 FHLB 11th District Cost of Funds Index (COFI), the One Year Treasury Constant Maturity Index, or the Prime rate, 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. 13 ASSET AND LIABILITY MANAGEMENT (Continued) - ------------------------------------------ In evaluating the Company's exposure to interest rate risk, certain limitations 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 $1,185,000,000 which terminate in periods ranging from March 1997 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, at September 30, 1996 $37,400,000 of First Thrift's advances with the FHLB contained interest caps of 12.0% as part of the borrowing agreements. At September 30, 1996, First Thrift also owned $50,000,000 of interest rate caps which 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 $1,252,000 and $1,278,000 for the nine months ended September 30, 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 September 30, 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 approximately 10 years at September 30, 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 September 30, 1996, total FHLB advances outstanding were $601,530,000. Of this 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 14 ASSET AND LIABILITY MANAGEMENT (Continued) - ------------------------------------------ lives. Prior to the thrift merger, First Thrift had been 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 September 30, 1996, based on the amount of deposits outstanding, First Thrift was required to maintain minimum shareholder's equity of approximately $61,396,000, compared with actual shareholder's equity of $136,570,000. First Republic Savings Bank is subject to the provisions of the Nevada Thrift Companies Act, which requires that the amount of customer deposits be in compliance with FDIC guidelines. CAPITAL RESOURCES - ----------------- The Company continues to maintain a strong capital base. At September 30, 1996, the Company's total capital, including total stockholders' equity, debentures and reserves was $200,310,000. Total stockholders' equity at September 30, 1996 has increased by $9,810,000 since December 31, 1995. This increase results primarily from the net income of $9,046,000 for the first nine months of 1996 and an increase of $299,000 in the market value of that portion of the Company's portfolio of securities which are classified as available for sale. First Republic is not a bank holding company, and unlike First Thrift prior to its merger 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 September 30, 1996 its leverage ratio would have been 5.63%, and its total risk based capital ratio would have been 14.6%, 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. There were repurchases of an aggregate additional 80,000 shares of common stock in March, April and November 1995, bringing total treasury shares repurchased to 486,000 at September 30, 1996. During the first nine months of 1996, First Republic received from First Thrift dividends of $2,824,000 representing approximately 25% of First Thrift's earnings. First Republic also received interest payments of $790,000 from First Thrift for the nine months ended September 30, 1996. Also, First Republic has received dividends of $250,000 from First Republic Savings Bank, related to that subsidiary's earnings for the fourth quarter of 1995, the first quarter of 1996 and the second quarter of 1996; dividends of $116,000, or approximately 25% of earnings for the third quarter of 1996, will be paid in November 1996. The ability of First Republic to receive future dividends and other payments from First Republic Savings Bank depends upon the operating results and capital level of First Republic Savings Bank, restrictions upon such payments imposed by creditors of First Republic Savings Bank, FDIC regulations and other governmental regulations governing First Republic Savings Bank. 15 RESULTS OF OPERATIONS - Quarter Ended September 30, 1996 Compared to Quarter - ------------------------ ---------------------------------------------------- Ended September 30, 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 third quarter of 1996, First Republic's total assets grew to $2,122,168,000 at September 30, 1996 from $2,064,209,000 at June 30, 1996, primarily as a result of an increase in single family mortgage loans. The Company's loan originations for the third quarter of 1996 were $229,106,000, compared to $220,779,000 for the second quarter of 1996 and $154,567,000 for the third quarter of 1995. The amounts of single family loans, construction loans and commercial real estate originated in the third quarter of 1996 were consistent with those originated in the second quarter of 1996, and there was a $9.0 million increase in multifamily lending from the prior quarter. Single family loans originated in the third quarter of 1996 were $175 million compared to $108 million in the third quarter of 1995 and $413 million for all of 1995. Mortgage banking activity resulted in the sale of $77,567,000 of single family loans to secondary market investors during the third quarter of 1996, compared with $41,979,000 in the third quarter of 1995. During the third quarter of 1996, $68 million of single family loans were sold to two specific investors. The Company's portfolio of real estate loans serviced for secondary market investors increased to $806,778,000 at September 30, 1996 from $804,856,000 at December 31, 1995. 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 $3,275,000 for the third quarter of 1996 as compared to $1,321,000 in the same quarter of 1995. Fully diluted earnings per share was $0.36 for the third quarter of 1996, compared to $0.17 for the similar period in 1995. First Republic's pretax operating results for the quarter ended September 30, 1996 were higher than a year ago primarily because the Company's net interest income for the third quarter was $2,816,000 higher in 1996 than 1995, and the provision for loan losses was $1,000,000 lower. Total interest income increased to $40,423,000 for the third quarter of 1996 from $36,090,000 for the third quarter of 1995. Interest income on real estate and other loans increased to $36,742,000 for the third quarter of 1996, compared to $32,890,000 in 1995. The average yield on loans was 7.86% in the third quarter of 1996 compared to 8.04% for the second quarter of 1996 and was 8.16% for the third 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 total loans receivable outstanding increased from $1,834,407,000 at June 30, 1996 to $1,885,002,000 at September 30, 1996. As a percentage of the 16 RESULTS OF OPERATIONS - Quarter Ended September 30, 1996 Compared to Quarter - ------------------------ ---------------------------------------------------- Ended September 30, 1995 (Continued) ------------------------------------ Company's permanent loan portfolio, loans secured by single family residences increased to 65% at September 30, 1996 from 59% at September 30, 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 $3,681,000 in the third quarter of 1996 compared to $3,200,000 in the same period of 1995. The average investment position was $205,361,000 during the third quarter of 1996 and earned 7.30% compared to an average position of $188,242,000 earning 6.98% during the third 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 third quarter has increased to $28,726,000 in 1996 from $27,209,000 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 $18,336,000 in the third quarter of 1996 from $16,424,000 in the third quarter of 1995. The average rate paid on deposits was 5.67% for the third quarter of 1996, compared to 5.72% for the second quarter of 1996 and 6.05% for the third quarter of 1995. Interest expense on other borrowings decreased to $10,390,000 in the third quarter of 1996 from $10,785,000 in the third 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 5.84% for the third quarter of 1996, compared to 5.92% for the second quarter of 1996, and 6.64% for the third quarter of 1995; thus the average rate paid on these liabilities, primarily FHLB advances, decreased 8 basis points (.08%) from the second quarter of 1996 to the third quarter of 1996 and 80 basis points (.80%) from the third quarter of 1995 to the third quarter of 1996. The Company's net interest income was $11,697,000 for the third quarter of 1996, compared to $8,881,000 for the third 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 2.30% for the third quarter of 1996, compared to 2.04% for the third quarter of 1995 and 1.97% for all of 1995. The Company's net interest margin gradually increased each quarter from the second quarter of 1995 to 2.36% for the second quarter of 1996. From early 1994, through March 31, 1995, the cost of FHLB advances increased more rapidly than the yield on the Company's loans and 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 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 a general decline in market rates. The Company experienced increased yields on its ARM loans, as a result of loan repricings, and during the first six months of 17 RESULTS OF OPERATIONS - Quarter Ended September 30, 1996 Compared to Quarter - ------------------------ --------------------------------------------------- Ended September 30, 1995 (Continued) ------------------------------------ 1996, net interest margin has increased as liability costs moderated due to more stable interest rates. In the third quarter of 1996, the Company's net interest margin declined 6 basis points below the prior quarter as a result of a lagging COFI index and increased new single family loans added to the loan portfolio. Non-interest income for the third quarter of 1996 increased to $1,470,000 from $1,198,000 in the third quarter of 1995, primarily due to increased gains on sale of loans. Service fee revenue, net of amortized costs on the Company's mortgage servicing rights, was $516,000 for the third quarter of 1996 compared to $646,000 for the same period of 1995, primarily due to a lower average balance of mortgage servicing rights and higher amortization costs. The average balance of the servicing portfolio decreased to $790,813,000 for the third quarter of 1996 compared to $823,725,000 for the third quarter of 1995. Total loans serviced were $806,778,000 at September 30, 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 fees, on the outstanding loan balances serviced, which averaged approximately 0.34% for the nine months of 1996 compared to 0.37% for all of 1995. For the third quarter, loan and related fee income was $161,000 in 1996 and $345,000 in 1995. This income category includes miscellaneous fees which vary with 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. The amount of loans sold is dependent upon conditions in both the mortgage origination and secondary loan sales markets, and the level of gains on loan sales will fluctuate. Loan sales were $77,567,000 for the third quarter of 1996 and $41,979,000 for the third quarter of 1995. The Company computes a gain or loss on sale at the time of sale by comparing sales proceeds with the carrying value of the loans and by calculating the fair value of servicing rights retained. The gain on the sale of loans for 1996 includes the value attributed to mortgage loan servicing rights under SFAS No. 122, which was $743,000 for the third quarter of 1996. Most of the loans sold in the third quarter of 1996 were adjustable rate mortgages based on the COFI index. The sale of loans resulted in net gains of $709,000 for the third quarter of 1996, compared to $9,000 for the same period of 1995. 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. Non-interest expense totaled $6,085,000 for the third quarter of 1996, compared to $5,374,000 for the same period in 1995. In 1996, the Company reported higher personnel costs related to higher loan volume and higher corporate profitability, increased advertising and professional costs from operating a large company and higher other operating costs, including the accrual for a corporate 18 RESULTS OF OPERATIONS - Quarter Ended September 30, 1996 Compared to Quarter - ------------------------ ---------------------------------------------------- Ended September 30, 1995 (Continued) ------------------------------------ image and identity consulting project. The Company's non-interest expense for the third quarter of 1996 included $91,000 related to results of operating REO properties and losses on disposition or changes in value of REO properties, net of gains on sold REO, compared to $720,000 of REO related expenses in the third quarter of 1995. As a percentage of total assets, recurring general and administrative expenses, excluding REO related costs, was 1.14% for the second and third quarter of 1996, compared to 1.02% for the third quarter of 1995, and 1.07% for all of 1995. RESULTS OF OPERATIONS - Nine Months Ended September 30, 1996 Compared to Nine - ------------------------ ----------------------------------------------------- Months Ended September 30, 1995 ------------------------------- The following comments are made regarding the results of operations for the nine months ended September 30, 1996 compared to the nine months ended September 30, 1995. The trend in income and expense items is generally consistent with the comparison of the third quarter of 1996 with the same quarter of 1995, including a decrease in the provision for losses and an increase in net interest income. Total interest income and interest expense have increased on a year-to-date basis, primarily as a result of an increased average balance sheet, as presented in the following table. Net interest income has increased due to the increased level of assets earning a higher interest rate spread, as the rates paid on liabilities has decreased 0.33% while yields earned on loans has increased 0.13%. Non-interest income was $3,683,000 for the first nine months of 1996 as compared to $3,253,000 for the same period in 1995. Gain on sale of loans was higher by $993,000, offset in part by a decrease of $411,000 in net servicing fees. Non-interest expense increased 11.6% from $16,104,000 in 1995 to $17,977,000 in 1996. A decrease in REO related costs to $977,000 for the nine months ended September 30, 1996 from $1,728,000 in the same period 1995 was offset by an increase in general and administrative expenses. As a percentage of average assets, noninterest expenses increased to 1.12% for the first nine months of 1996 from 1.08% for the first nine months of 1995. The following table presents for the first nine months 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 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%. 19 RESULTS OF OPERATIONS - Nine Months Ended September 30, 1996 Compared to Nine - ------------------------ ----------------------------------------------------- Months Ended September 30, 1995 -------------------------------
Nine months Ended September 30, ------------------------------------------------------------------ 1996 1995 ---------------------------- ---------------------------- Average Yields/ Average Yields/ Balance Interest Rates Balance Interest Rates ------- -------- ----- ------- -------- ----- (In thousands) Assets: Interest-bearing deposits with other institutions $ 1,938 $ 64 4.41% $ 1,311 $ 51 5.20% Short-term investments 20,452 876 5.63 20,211 960 6.26 Investment securities 185,327 9,962 7.17 164,106 8,379 6.81 Loans 1,787,592 107,718 8.03 1,573,032 93,211 7.90 --------- ------- --------- ------ Total earning assets 1,995,309 118,620 7.93 1,758,660 102,601 7.78 ------- ------- Non interest-earning assets 20,002 18,639 ------- ------- Total average assets $2,015,311 $1,777,299 ========= ========= Liabilities and Stockholders' Equity: Passbooks & MMA's $229,667 $ 8,288 4.82% $141,065 $ 5,210 4.94% Certificates of deposit 996,852 44,599 5.98 883,360 39,842 6.03 ------- ------ ------- ------ Total customer deposits 1,226,519 52,887 5.76 1,024,425 45,052 5.88 Other borrowings 592,711 26,449 5.96 566,431 28,185 6.65 Subordinated debentures 64,002 4,324 9.01 64,136 4,322 8.99 ------- ------ ------- ------ Total interest-bearing liabilities 1,883,232 83,660 5.93 1,654,992 77,559 6.26 ------ ------ Non interest-bearing liabilities 18,934 14,564 Stockholders' equity 113,145 107,743 ------- ------- Total average liabilities and stockholders' equity $2,015,311 $1,777,299 ========= ========= Net interest spread 1.99% 1.51% Net interest income and net interest margin $ 34,960 2.33% $25,042 1.88% ======= ======
The Company's balance sheet at September 30, 1996 is generally comparable to that at December 31, 1995. Total assets have increased $217,915,000 to $2,122,168,000, while there was a net increase in the Company's loan portfolio of $203,663,000, including an increase of $210,504,000 in single family mortgages. Funds were raised primarily by retail deposits which increased $177,009,000 and by an increase of $31,000,000 in FHLB advances. The Company's reserve for possible losses was $18,265,000 at September 30, 1996, and there were thirteen foreclosed real estate properties resulting in other real estate owned with a net book value of $12,807,000. 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 1995 and the first nine months of 1996. All of the Company's net loan growth since December 31, 1994 is represented by growth in single family home loans. 20 ASSET QUALITY AND PROVISION FOR POSSIBLE LOSSES (Continued) - -----------------------------------------------------------
September 30, December 31, ---------------------- 1996 1995 1994 ------------- ------------- ------------- Loans: Single family (1-4 units) $1,193,223,000 $983,331,000 $820,078,000 Multifamily (5+ units) 325,456,000 350,507,000 367,750,000 Commercial real estate 285,045,000 286,824,000 249,119,000 Multifamily/commercial construction 13,510,000 9,013,000 10,658,000 Single family construction 31,929,000 19,349,000 14,227,000 Home equity credit lines 29,760,000 26,572,000 28,137,000 ------------- ------------- ------------- Real estate mortgages subtotal 1,878,923,000 1,675,596,000 1,489,969,000 ------------- ------------- ------------- Commercial business and other 6,079,000 6,667,000 8,694,000 ------------- ------------- ------------- Total loans 1,885,002,000 1,682,263,000 1,498,663,000 Unearned fee income (3,289,000) (4,380,000) (6,816,000) Reserve for possible losses (18,265,000) (18,068,000) (14,355,000) ------------- -------------- ------------ Loans, net $1,863,448,000 $1,659,815,000 $1,477,492,000 ============= ============= =============
The following table presents an analysis of the Company's loan portfolio at September 30, 1996 by property type and geographic location:
San Francisco Los Angeles San Diego Other CA Las Vegas, Percent $ in thousands Bay Area County County Areas Nevada Other Total By Type -------------- --------- --------- --------- ---------- ------- --------- -------- Property Type: Single family (1-4 units)(1) $774,057 $255,772 $39,703 $100,155 $11,096 $42,200 $1,222,983 64.9% Multifamily (5+ units) 141,611 67,771 441 17,434 98,199 --- 325,456 17.3% Commercial real estate 195,343 30,308 1,063 13,480 42,454 2,396 285,044 15.1% Construction loans 10,326 10,009 --- 1,650 23,455 --- 45,440 2.4% Business loans --- 2,317 1,770 286 --- --- 4,373 0.2% CD backed loans/other 498 366 19 300 107 416 1,706 0.1% --------- -------- -------- -------- -------- ------ --------- ----- Total $1,121,835 $366,543 $42,996 $133,305 $175,311 $45,012 $1,885,002 100.0% ========= ======= ====== ======= ======= ====== ========= ===== Percent by location 59.5% 19.4% 2.3% 7.1% 9.3% 2.4% 100.0%
(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 earlier if 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). 21 ASSET QUALITY AND PROVISION FOR POSSIBLE LOSSES (Continued) - ----------------------------------------------------------- The following table presents nonaccruing loans, REO, performing restructured loans and accruing single family loans over 90 days past due at the dates indicated.
September 30, December 31, --------------------------- 1996 1995 1994 ---- ---- ---- Nonaccruing loans: Single family $ 231,000 $ --- $ --- Multifamily 24,851,000 23,664,000 29,049,000 Commercial real estate 5,461,000 12,555,000 3,400,000 Other 86,000 331,000 174,000 ----------- ------------ ----------- Total nonaccruing loans 30,629,000 36,550,000 32,623,000 Real estate owned ("REO") 12,807,000 10,198,000 8,500,000 ----------- ------------ ----------- Total nonaccruing assets 43,436,000 46,748,000 41,123,000 Performing restructured loans 7,377,000 12,795,000 17,489,000 ----------- ----------- ------------ Total nonaccruing assets and performing restructured loans $50,813,000 $59,543,000 $58,612,000 =========== =========== =========== Accruing single family loans more than 90 days past due $ 3,638,000 $3,747,000 $ 2,587,000 Percent of Total Assets: Nonaccruing assets 2.05% 2.46% 2.41% Nonaccruing assets and performing restructured loans 2.39% 3.13% 3.43% Ratio of reserve for possible losses to nonaccruing loans 60% 49% 44%
At September 30, 1996, the dollar amount of the Company's nonaccruing loans and REO after chargeoffs was $43,436,000 compared to $42,879,000, at June 30, 1996 and $46,748,000 at December 31, 1995. The Northridge earthquake had a previous adverse impact on 49% of the Company's nonaccruing assets at September 30, 1996, or approximately $17,467,000 of loans and $3,623,000 of REO. 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 twelve 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 have been placed on nonaccrual status because of changes in the borrower's condition, the property's status or the loan's terms. 22 ASSET QUALITY AND PROVISION FOR POSSIBLE LOSSES (Continued) - ----------------------------------------------------------- The following table summarizes the changes in the Company's nonaccrual loans during the third quarter of 1996. Nonaccrual loans are segmented by major geographical region and activity.
CHANGE IN NONACCRUAL LOANS BY REGION Los Angeles Northern County California Nevada Total ------ ---------- ------ ----- Balance June 30, 1996 $ 18,572,000 $10,006,000 $ --- $ 28,578,000 Additions to nonaccrual loans: New nonaccrual loans 3,260,000 5,820,000 --- 9,080,000 Deductions from nonaccrual loans: Chargeoffs to reserves (1,867,000) (300,000) --- (2,167,000) Transfer to foreclosed assets (1,625,000) (2,600,000) --- (4,225,000) Cash proceeds received (556,000) (81,000) --- (637,000) ------------ ----------- ---------- ------------ Balance September 30, 1996 $ 17,784,000 $12,845,000 $ --- $ 30,629,000 ============ =========== ========== ============
Additions to nonaccrual loans during the third quarter of 1996 were related to five apartment loans ($3,029,000) in Los Angeles County which had been impacted by the earthquake and one single family loan ($231,000). Also, there were three apartment loans ($5,820,000) secured by properties in Northern California placed on nonaccrual as a result of increased delinquency or deteriorating performance. Deductions from nonaccrual loans during the third quarter of 1996 resulted from chargeoffs to the Company's reserve for possible losses and foreclosures upon properties. Also, cash proceeds of $637,000 received during the third quarter of 1996 were used to reduce the carrying basis of nonaccrual loans. Chargeoffs on nonaccrual loans occur when the Company determines that the collateral value is reduced to other than temporary levels. Chargeoffs recorded in the third quarter of 1996 related both to loans which were on nonaccrual status at June 30, 1996 and to loans which were placed on nonaccrual status or transferred to REO during the third 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"). As of September 30, 1996, the amounts reported for REO, nonaccruing loans, and performing restructured loans have been reduced by previous chargeoffs of $6,972,000, $8,058,000 and $328,000, respectively. The Company's nonaccrual loans included $16,830,000 of loans on which interest payments were received during the quarter at an average payment rate of 8.4% on their recorded investment. As a result of the terms of these restructurings, such loans will be reported as nonaccrual loans until a satisfactory payment history is achieved and the Company believes its recorded investment in the loans is secure. As of September 30, 1996, $7,377,000 of modified loans are reported as performing restructured loans. Additional loan modifications, including loan restructurings, have been completed in 1996 and additional modifications may be entered into with the Company's borrowers in future quarters. 23 ASSET QUALITY AND PROVISION FOR POSSIBLE LOSSES (Continued) - ----------------------------------------------------------- During the third quarter of 1996, four loans totaling $4,225,000 were transferred to REO. Six REO properties and one loan (prior to foreclosure) with a remaining June 30, 1996 book value totaling $4,532,000 were sold and the Company recovered proceeds in excess of the written down basis of these properties by $1,093,000. At September 30, 1996, the Company held as REO properties seven apartment buildings, two 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 September 30, 1996, the Company is actively marketing or preparing its REO properties for sale and expects to sell certain REO properties and to foreclose upon additional loans in the fourth 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. 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 September 30, 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. For the most recent eleven quarters from January 1, 1994 to September 30, 1996, net chargeoffs on single family loans as a percentage of average single family loans was 0.02%. As of September 30, 1996, the Company has not experienced any losses on its permanent loan portfolio secured by real estate located in the Las Vegas market. Collectively, the single family loan and Las Vegas permanent loan categories represented 74% of the Company's total loans at September 30, 1996. As a percentage of nonaccruing loans, the reserve for possible losses was 49% at December 31, 1995 and 60% at September 30, 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. 24 ASSET QUALITY AND PROVISION FOR POSSIBLE LOSSES (Continued) - ----------------------------------------------------------- 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 September 30, 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. 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.
Nine Months Ended Year Ended September 30, December 31, -------------------------------- 1996 1995 1994 ------------ ------------ ----------- Reserve for Possible Losses: Balance beginning of period $ 18,068,000 $ 14,355,000 $ 12,657,000 Provision charged to expense 5,088,000 14,765,000 9,720,000 Reserve from purchased loans --- --- 34,000 Chargeoffs on originated loans: Single family (277,000) (14,000) (210,000) Multifamily (5,265,000) (9,314,000) (7,177,000) Commercial real estate (406,000) (2,163,000) (695,000) Commercial business and other loans (21,000) (48,000) (79,000) Construction loans --- (353,000) --- Recoveries on originated loans: Single family --- 3,000 11,000 Multifamily 206,000 765,000 119,000 Commercial real estate 824,000 30,000 --- Commercial business and other loans 46,000 54,000 15,000 Acquired loans: Chargeoffs --- (22,000) (47,000) Recoveries 2,000 10,000 7,000 ------------ ------------ ----------- Total chargeoffs, net of recoveries (4,891,000) (11,052,000) (8,056,000) ------------ ------------ ------------ Balance end of period $ 18,265,000 $ 18,068,000 $ 14,355,000 ============= ============= =========== Average loans for the period $1,787,592,000 $1,591,827,000 $1,379,640,000 Total loans at period end 1,885,002,000 1,682,263,000 1,498,663,000 Ratios of reserve for possible losses to: Total loans 0.97% 1.07% 0.96% Nonaccruing loans 60% 49% 44% Nonaccruing loans and performing restructured loans 48% 37% 29% Net chargeoffs to average loans 0.36%* 0.69% 0.58%
- ---------- *Annualized 25 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 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 September 30, 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. 26 IMPAIRED LOANS (Continued) - --------------------------
Related Recorded SFAS No. 114 Investment in Allowance for Impaired Loans Losses -------------- ------------- Impaired loans requiring a SFAS No. 114 allowance: Single Family $ 231,000 $ 23,000 Multifamily 6,644,000 359,000 Commercial Real Estate 1,149,000 258,000 Other 103,000 17,000 ----------- ----------- $ 8,127,000 $ 657,000 ----------- =========== Impaired loans not requiring a SFAS No. 114 allowance: Multifamily 21,819,000 Commercial Real Estate 8,060,000 Other --- ----------- 29,879,000 ---------- Total $38,006,000 ===========
The $29,879,000 of loans reported as impaired loans not requiring a SFAS No. 114 allowance are classified in this manner because, as of September 30, 1996, the recorded investments in these loans have been reduced to their collateral fair value, net of selling costs, by $8,386,000 of specific chargeoffs to the Company's reserves. At September 30, 1996, the Company has designated $57,000 of its reserves to protect against contingent liabilities on certain of these impaired loans, while the ultimate amount of payment, if any, is being contested. Total interest income recognized on loans designated as impaired for the third quarter and nine months ended September 30, 1996 was $266,000 and $878,000 respectively, all of which was recorded using the cash received method. The average recorded investment in impaired loans during the third quarter of 1996 was approximately $37,000,000. 27 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 October 18, 1996, the Company filed a Form 8-K relating to Item 5 therein, covering the registrant's release on October 17, 1996 to the business community of its earnings for the quarter and nine months ended September 30, 1996. C. On November 4, 1996, the Company filed a form 8-K relating to Item 5 therein, covering the completion, as planned, on October 31, 1996 of the merger of First Republic Thrift & Loan, a wholly owned subsidiary, into First Republic Savings Bank, also a wholly owned subsidiary. 28 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: November 13, 1996 /s/KATHERINE AUGUST-DEWILDE --------------------------- KATHERINE AUGUST-DEWILDE Executive Vice President Date: November 13, 1996 /s/WILLIS H. NEWTON, JR. ------------------------ WILLIS H. NEWTON, JR. Sr. Vice President and Chief Financial Officer (Principal Financial Officer) 29 EX-11 2 EXHIBIT 11 FIRST REPUBLIC BANCORP INC. STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
Quarter Ended Nine Months Ended September 30, September 30, ------------- ------------- 1996 1995 1996 1995 ---- ---- ---- ---- Primary: Net income (loss) available to common stock $ 3,275,000 $ 1,321,000 $9,046,000 $(435,000) =========== =========== ========== ========= Weighted average shares outstanding, beginning of period including treasury shares 7,838,988 7,807,662 7,816,400 7,797,100 Effect of stock options exercised during period 3,817 910 12,932 4,464 Weighted average shares of stock purchased by employees 1,597 468 7,515 4,343 Weighted average shares of dilutive stock options under treasury stock method 283,391 260,008 280,148 223,326 Weighted average shares of treasury stock (486,000) (463,400) (486,000) (434,749) ---------- ---------- ---------- ----------- Adjusted shares outstanding - primary 7,641,793 7,605,648 7,630,995 7,594,484 ========== ========== ========== =========== Net income (loss) per common share - primary $ 0.43 $ 0.17 $ 1.19 $ (0.06)(2) ========== ========== ========== =========== Fully Diluted: Net income (loss) available to common stock $ 3,275,000 $ 1,321,000 $ 9,046,000 $ (435,000) Effect of convertible subordinated debentures, net of taxes (1) 396,000 400,000 1,188,000 1,198,000 ----------- ---------- ----------- ----------- Adjusted net income (loss) for fully diluted calculation(1) $ 3,671,000 $ 1,721,000 $10,234,000 $ 763,000(2) =========== =========== =========== =========== Adjusted shares - primary, from above 7,641,793 7,605,648 7,630,995 7,594,484 Weighted average shares issuable upon conversion of convertible subordinated debentures 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 97,210 69 52,021 8,596 ----------- ----------- ---------- ----------- Adjusted shares outstanding - fully diluted 10,263,213 10,129,927 10,207,226 10,127,290 =========== ========== ========== ========== Net income (loss) per share - fully diluted $ 0.36 $ 0.17 $ 1.00 $ (0.06)(2) ========== ========== ========== ==========
- --------------------------------- (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) For the first nine months of 1995, consideration of the conversion of the Company's convertible subordinated debentures in the fully diluted calculation would result in lower loss per share amounts than the primary calculations (the convertible subordinated debentures are antidilutive). Therefore, the primary loss per share is reported as the fully diluted loss per share for this period. 30 EX-27 3
9 Registrant is not a Bank or Savings and Loan Holding Company. 0000770975 FIRST REPUBLIC BANCORP INC. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 20,437 199 3,800 0 103,050 86,766 86,639 1,885,002 18,265 2,122,168 1,317,450 10,000 19,180 655,505 75,462 0 0 42,608 2,122,168 107,717 10,688 0 118,405 52,887 83,660 34,745 5,088 28 10,242 15,363 15,363 0 0 9,046 1.19 1.00 2.33 30,629 3,638 7,377 3,000 18,068 5,969 1,078 18,265 18,265 0 17,608
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