<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR QUARTER ENDED COMMISSION
March 31, 1994 File No. 0-15882
-------------- -----------------
FIRST REPUBLIC BANCORP INC.
---------------------------
(Exact name of registrant as
specified in its charter)
DELAWARE 94-2964497
-------------------------------- -----------------------------
State or other jurisdiction (IRS Employer
of incorporation or organization Identification No.)
388 Market Street
San Francisco, California 94111
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(415) 392-1400
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Common Stock , par value $.01 per share, of First Republic Bancorp Inc.
outstanding at May 9, 1994, 7,809,032 shares.
<PAGE>
First Republic Bancorp Inc.
Form 10-Q
March 31, 1994
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet -
March 31, 1994 and December 31, 1993 3
Consolidated Statement of Income - Quarters
Ended March 31, 1994 and 1993 5
Consolidated Statement of Cash Flows -
Quarters ended March 31, 1994 and 1993 6
Notes to Consolidated Financial
Statements 7
Item 2 - Management's Discussion and
Analysis of Financial Condition
and Results of Operations 8
PART II - OTHER INFORMATION 26
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURES 28
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following interim consolidated financial statements are
unaudited. However, they reflect all adjustments (which included only normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of financial position, results of operations and cash flows
for the interim periods presented.
FIRST REPUBLIC BANCORP INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 12,686,000 $ 19,903,000
Federal funds sold and short term investments 19,381,000 18,883,000
Interest bearing deposits at other financial institutions 396,000 592,000
Investment securities (net) 81,944,000 84,208,000
Federal Home Loan Bank Stock, at cost 24,676,000 22,927,000
-------------- --------------
139,083,000 146,513,000
Loans
Single family (1-4 unit) mortgages 609,500,000 546,232,000
Multifamily (5+ units) mortgages 382,228,000 387,757,000
Commercial real estate mortgages 231,761,000 229,914,000
Commercial business loans 7,615,000 8,346,000
Multifamily construction 10,452,000 5,707,000
Single family construction 20,337,000 14,512,000
Equity lines of credit 29,168,000 31,213,000
Leases, contracts and other 893,000 1,333,000
Loans held for sale 40,771,000 31,044,000
-------------- --------------
1,332,725,000 1,256,058,000
Less
Unearned loan fee income (8,118,000) (9,406,000)
Reserve for possible losses (16,661,000) (12,657,000)
-------------- --------------
Net loans 1,307,946,000 1,233,995,000
Accrued interest receivable 9,210,000 8,110,000
Purchased servicing and premium on sale of loans 979,000 1,154,000
Prepaid expenses and other assets 12,671,000 13,786,000
Premises, equipment and leasehold improvements,
net of accumulated depreciation 3,937,000 3,674,000
Real estate owned (REO) and in substance foreclosed REO 10,162,000 9,961,000
-------------- --------------
$ 1,483,988,000 $1,417,193,000
=============== ==============
</TABLE>
3
<PAGE>
FIRST REPUBLIC BANCORP INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
------------- --------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Thrift certificates
Passbook and MMA accounts $ 117,793,000 $ 117,161,000
Investment certificates 691,374,000 634,510,000
-------------- --------------
Total thrift certificates 809,167,000 751,671,000
Interest payable 7,894,000 8,105,000
Custodial receipts on loans serviced for others 602,000 1,046,000
Other liabilities 3,874,000 8,358,000
Federal Home Loan Bank advances 493,530,000 468,530,000
Other borrowings 1,063,000 13,580,000
-------------- --------------
Total senior liabilities 1,316,130,000 1,251,290,000
Senior subordinated debentures 9,978,000 9,981,000
Subordinated debentures 17,585,000 16,476,000
Convertible subordinated debentures 34,500,000 34,500,000
-------------- --------------
Total liabilities 1,378,193,000 1,312,247,000
-------------- --------------
Stockholders' equity
Common stock 78,000 77,000
Capital in excess of par value 74,405,000 71,124,000
Retained earnings 32,795,000 35,296,000
Deferred compensation -- ESOP (1,063,000) (1,200,000)
Treasury Shares, at cost (420,000) (351,000)
-------------- --------------
Total stockholders' equity 105,795,000 104,946,000
-------------- --------------
$1,483,988,000 $1,417,193,000
============== ==============
</TABLE>
4
<PAGE>
FIRST REPUBLIC BANCORP INC.
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
March 31,
---------------------------
1994 1993
----------- -----------
<S> <C> <C>
Interest income:
Interest on real estate and other loans $23,359,000 $23,031,000
Interest on investments 1,574,000 1,178,000
----------- -----------
Total interest income 24,933,000 24,209,000
----------- -----------
Interest expense:
Interest on thrift accounts 8,792,000 8,898,000
Interest on notes, debentures and other borrowings 6,091,000 5,268,000
----------- -----------
Total interest expense 14,883,000 14,166,000
----------- -----------
Net interest income 10,050,000 10,043,000
Provision for losses 5,005,000 1,283,000
----------- -----------
Net interest income after provision for losses 5,045,000 8,760,000
----------- -----------
Non-interest income:
Servicing fees, net 428,000 264,000
Loan and related fees 493,000 360,000
Gain on sale of loans 574,000 364,000
Other income 15,000 2,000
----------- -----------
Total non-interest income 1,510,000 990,000
----------- -----------
Non-interest expense:
Salaries and related benefits 1,929,000 1,489,000
Occupancy 609,000 425,000
Advertising 580,000 309,000
Professional fees 139,000 155,000
FDIC insurance premiums 428,000 453,000
REO costs and losses 113,000 893,000
Other general and administrative 1,616,000 1,033,000
----------- -----------
Total non-interest expense 5,414,000 4,757,000
----------- -----------
Income before income taxes 1,141,000 4,993,000
Provision for income taxes 481,000 2,047,000
----------- -----------
Net income $ 660,000 $ 2,946,000
=========== ===========
Net income adjusted for effect of convertible
issue, used in fully diluted EPS - 1993 only -- $ 3,348,000
=========== ===========
Primary earnings per share $0.08 $0.37
=========== ===========
Weighted average shares - primary 8,077,221 7,982,326
=========== ===========
Fully diluted earnings per share $0.08 $0.32
=========== ===========
Weighted average shares - fully diluted 10,601,441 10,506,584
=========== ===========
</TABLE>
5
<PAGE>
FIRST REPUBLIC BANCORP INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Quarter ended
-----------------------------
March 31,
-----------------------------
1994 1993
------------- ------------
<S> <C> <C>
Operating Activities
Net Income $ 660,000 $ 2,946,000
Adjustments to reconcile net income to net
cash provided (used) by operating
activities:
Provision for losses 5,005,000 1,283,000
Provision for depreciation and
amortization 549,000 442,000
Amortization of loan fees (1,060,000) (1,143,000)
Amortization of investment securities
premiums 53,000 33,000
Loans originated for sale (62,999,000) (89,237,000)
Loans sold into commitments 53,272,000 61,003,000
Deferred taxes (645,000) (664,000)
Net gains on sale of loans (574,000) (364,000)
Increase in interest receivable (1,304,000) (461,000)
Decrease in interest payable (211,000) (503,000)
Decrease in other assets 1,146,000 1,105,000
Increase (decrease) in other liabilities (4,283,000) 769,000
------------- ------------
Net Cash (Used) By Operating Activities (10,391,000) (24,791,000)
Investment Activities
Loans originated (165,601,000) (62,379,000)
Other loans sold 18,288,000 ---
Principal payments on loans 80,494,000 36,273,000
Purchases of investment securities (5,254,000) (7,516,000)
Repayments of investment securities 2,213,000 1,262,000
Net decrease in short term investments 196,000 ---
Additions to fixed assets (446,000) (127,000)
Net proceeds from sale of real estate
owned 2,506,000 1,586,000
------------- ------------
Net Cash (Used) by Investing Activities (67,604,000) (30,901,000)
Financing Activities
Net increase in thrift passbooks 632,000 1,082,000
Issuance of investment certificates 115,402,000 57,992,000
Repayments of investment certificates ( 58,538,000) (64,925,000)
Increase in long-term FHLB advances 35,000,000 10,000,000
Repayments of other long-term borrowings (137,000) (119,000)
Net decrease in short-term borrowings (22,380,000) ---
Decrease in deferred compensation - ESOP 137,000 119,000
Repayment of subordinated debentures (7,000) (9,000)
Issuance of subordinated debentures 1,113,000 ---
Proceeds from employee stock purchase plan 51,000 ---
Proceeds from common stock options
exercised 72,000 19,000
Purchase of Treasury Stock (69,000) ---
------------- ------------
Net Cash Provided by Financing Activities 71,276,000 4,159,000
Decrease in Cash and Cash Equivalents (6,719,000) (51,533,000)
Cash and Cash Equivalents at Beginning of
Period 38,786,000 98,301,000
------------- ------------
Cash and Cash Equivalents at End of Period $ 32,067,000 $ 46,768,000
============= ============
</TABLE>
6
<PAGE>
FIRST REPUBLIC BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of First Republic Bancorp Inc. ("First
Republic") include its subsidiaries, First Republic Thrift & Loan ("First
Thrift"), First Republic Mortgage Inc. and First Republic Savings Bank. First
Republic Savings Bank, an FDIC-insured Nevada thrift and loan, was acquired in
December 1993 for a cash purchase price of $1,414,000; at acquisition, its
assets totalled $2,105,000 and its deposit liabilities totalled $762,000. First
Republic and its subsidiaries are collectively referred to as the "Company."
All material intercompany transactions and balances are eliminated in
consolidation. Certain reclassifications have been made to the 1993 financial
statements in order for them to conform with the 1994 presentation.
These interim financial statements should be read in conjunction with the
Company's 1993 Annual Report to Stockholders and Consolidated Financial
Statements and Notes thereto. Results for the quarter ended March 31, 1994
should not be considered indicative of results to be expected for the full year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In May 1993, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 115 "Accounting For Certain Investments in Debt and Equity
Securities" addressing the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. Those investments would be classified in three categories and
accounted for as follows: (i) debt securities that the entity has the positive
intent and ability to hold to maturity would be classified as "held to maturity"
and reported at amortized cost; (ii) debt securities that are held for current
resale would be classified as trading securities and reported at fair value,
with unrealized gains and losses included in operations; and (iii) debt
securities not classified as either securities held to maturity or trading
securities would be classified as securities available for sale, and reported at
fair value, with unrealized gains and losses excluded form operations and
reported as a separate component of stockholders' equity. The Company
implemented SFAS No. 115 in the first quarter of 1994, at which time
substantially all of the Company's investments were classified as held to
maturity. The impact on the Company's results of operations and financial
position of implementing SFAS No. 115 was immaterial.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." Under the provisions of SFAS No. 114, a loan is
considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. SFAS No. 114 requires creditors to
measure impairment of a loan based on one of the following: (i) the present
value of expected future cash flows discounted at the loan's effective interest
rate,
7
<PAGE>
(ii) the fair value of the underlying collateral or (iii) the fair value of the
loan. If the measure of the impaired loan is less than the recorded investment
in the loan, a creditor shall recognize an impairment by creating a valuation
allowance with a corresponding charge to the provision for losses. SFAS No. 114
applies to financial statements for fiscal years beginning after December 15,
1994. Earlier implementation is permitted. The Company plans to implement SFAS
No. 114 for the year ended December 31, 1995. The impact of the statement on
the Company's results of operations and financial position is expected to be
immaterial.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
First Republic Bancorp Inc. ("First Republic" and with its subsidiaries, the
"Company") is a financial services company operating in California and Nevada as
a thrift and loan holding company and as a mortgage banking company,
originating, holding or selling, and servicing mortgage loans. First Republic
owns First Thrift, a California-chartered, FDIC-insured, thrift and loan
subsidiary, First Republic Savings Bank and also a real estate loan origination
subsidiary in Las Vegas, Nevada.
The Company is primarily engaged in originating residential real estate secured
loans on single family residences and multifamily properties. The Company's loan
portfolio also contains loans secured by commercial properties. Currently, the
Company's strategy is to emphasize the origination of single family and
multifamily mortgage loans and to limit the origination of commercial real
estate mortgage loans. Lending activities in Las Vegas are primarily focused on
single family and multifamily residential construction projects. The Company
emphasizes its real estate lending activities in San Francisco, Los Angeles and
Las Vegas because of the proximity of its loan offices and the experience of
executive management with real estate in these areas. In addition to the Company
performing an underwriting analysis on each borrower and obtaining independent
property appraisals, an officer of the Company generally visits each property or
project prior to the loan closing.
During the first three months of 1994, the Company continued its focus on single
family lending and mortgage banking begun in 1992. Total loans of all types
originated by the Company in 1993 were $944.8 million, compared to loan
originations of $826.2 million in 1992 and loan sales were $425.5 million in
1993 compared to loan sales of $373.6 million in 1992. For the three months
ended March 31, 1994, the Company originated $228.6 million of loans and loan
sales were $71.6 million, as compared to loan originations of $151.6 million and
loan sales of $61.0 million for the three months ended March 31, 1993. The
Company either retains the loans it originates in its loan portfolio or sells
the loans to institutional investors in the secondary market. The Company has
retained the servicing rights for substantially all loans sold in the secondary
market and has purchased mortgage loan servicing rights from others, thereby
generating ongoing servicing fees. The Company's mortgage servicing portfolio
consisted of $822.4 million in loans at March 31, 1994.
8
<PAGE>
GENERAL (CONTINUED)
- -------------------
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 two most recent years.
<TABLE>
<CAPTION>
At or for the quarter At or for the Year
Ended March 31, Ended December 31,
----------------------- -------------------------------
1994 1993 1993 1992 1991
--------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets* 0.18% .96% 0.97% 1.06% 0.96%
Return on average equity* 2.49 12.60 12.65 14.10 17.22
Average equity to average assets 7.37 7.62 7.51 7.51 5.55
Leverage ratio 7.36 7.76 7.65 7.58 6.81
Total risk-based capital ratio 17.68 17.07 17.62 16.90 13.60
Net interest margin* 2.83 3.29 3.25 3.30 3.45
Non-interest expense to average assets* 1.47 1.26 1.33 1.30 1.44
Nonaccruing assets to total assets 1.95 1.81 1.55 1.54 1.50
Nonaccruing assets and restructured performing
loans to total assets 2.72 2.58 2.00 1.81 1.86
Net loan chargeoffs to average loans* 0.32 0.34 0.44 0.74 0.30
Reserve for possible losses to total loans 1.25 1.17 1.01 1.19 1.34
Reserve for possible losses to nonaccruing loans 89% 93% 109% 133% 88%
Share Data:
Common and equivalent shares outstanding 7,729,468 7,717,989 7,718,791 7,716,086 6,182,260
Tangible book value per fully-diluted common share $13.67 $12.34 $13.58 $11.94 $9.59
</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, 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 35%
of its total assets or approximately $507 million of FHLB advances at March 31,
1994. Such advances are collateralized by real estate mortgage loans and $493.5
million has been advanced at March 31, 1994. Membership in the FHLB provides
First Thrift with an alternative funding source for its loans and creates
opportunities for the Company to improve the matching of assets with
liabilities.
First Thrift, whose thrift certificates are insured by the FDIC, operates three
branches in San Francisco, a branch in Los Angeles, a branch in Beverly Hills,
and three branches in San Diego County. As of March 31, 1994, First Thrift had
total assets of $1,447,737,000, tangible shareholder's equity of $120,538,000
and total capital, consisting of tangible shareholder's equity, subordinated
capital notes and reserves of $148,283,000. At March 31, 1994, First Thrift's
tangible shareholder's equity as a percentage of total assets was 8.33% and its
total capital as a percentage of risk adjusted assets was 14.51%, compared to a
risk adjusted capital ratio requirement of 8.0%. Under FDIC regulations, First
Thrift calculates its Leverage Ratio at
9
<PAGE>
GENERAL (CONTINUED)
- -------------------
8.57%, using Tier 1 capital ( as defined under the FDIC's risk-based capital
definitions) and average total assets for the most recent quarter.
In 1992, the Company implemented procedures requiring annual or more frequent
asset reviews of its multifamily and commercial real estate loans. As part of
these asset review procedures, recent financial statements on the property
and/or borrower are analyzed to determine the current level of occupancy,
revenues and expenses as well as to investigate any deterioration in the value
of the real estate collateral or in the borrower's financial condition since
origination or the last review. Upon completion, an evaluation or grade is
assigned to each such loan. These asset review procedures provide management
with additional information for assessing asset quality.
Since September 1992, the Company has maintained an insurance policy to cover a
portion of the risk of loss that might result from earthquake damage to
properties securing real estate mortgage loans in its loan portfolio. Under a
policy extending until August 1994, the Company is self-insuring for the first
$12,500,000 of any loss as a result of damage to underlying collateral and the
insurance policy covers up to an additional $8,000,000 of loss. In obtaining
this insurance coverage, the Company was assisted by an engineering consulting
firm which analyzed the location and construction attributes of certain of the
properties that secure the Company's loans.
LIQUIDITY
- ---------
Liquidity refers to the ability to maintain a cash flow adequate to fund
operations and to meet present and future obligations of the Company either
through the sale or maturity of existing assets or by the acquisition of funds
through liability management. The Company maintains a portion of its assets in
a diversified portfolio of marketable investment securities, which includes U.S.
Government securities and mortgage backed securities. At March 31, 1994, the
investment securities portfolio of $81,944,000, plus cash and short term
investments of $32,659,000, amounted to $114,603,000, or 8% of total assets. At
March 31, 1994, substantially all of the Company's investments mature within
twelve months or are adjustable rate securities. At March 31, 1994, the Company
owned no investments of a trading nature.
Additional sources of liquidity at March 31, 1994 are provided by borrowings
collateralized by investment securities of approximately $75,000,000, available
unused FHLB advances of approximately $13,000,000 and loans held for sale of
$40,771,000. Management believes that the sources of available liquidity are
adequate to meet the Company's reasonably foreseeable short-term and long-term
demands.
10
<PAGE>
ASSET AND LIABILITY MANAGEMENT
- ------------------------------
Management seeks to manage its asset and liability portfolios to earn a
satisfactory level of net interest income while minimizing the potential impact
of fluctuating interest rates. To achieve this objective, the Company's
strategy is to manage the rate sensitivity and maturity balance of its interest-
earning assets and interest-bearing liabilities by emphasizing the origination
of adjustable interest rate or short-term fixed rate loans and the matching of
adjustable rate asset repricings with short- and intermediate-term investment
certificates and adjustable rate borrowings. The Company's profitability may be
adversely affected by rapid changes in interest rates. Institutions with long-
term assets (both loans and investments) can experience a decrease in
profitability and in the value of such assets if the general level of interest
rates rises. While substantially all of the Company's assets are adjustable
rate mortgage loans and investments, at March 31, 1994 approximately 48% of
these assets which adjust within one year were assets based on an interest rate
index which generally lags increases and decreases in market rates. Therefore,
management believes that interest rates on the Company's liabilities will tend
to rise more quickly in a rapidly rising interest rate environment than rates on
these assets, which could cause a decrease in the Company's net interest margin.
Conversely, the Company could experience a decrease in its net interest income
if the general level of interest rates were to drop quickly because the average
maturity of its deposits may be longer than the average maturity (or length of
time before repricing of variable rate assets) of its loan and investment
portfolios, both evaluated on a periodic basis.
The following table summarizes the differences between the Company's maturing or
rate adjusting assets and liabilities, or "GAP" position, at March 31, 1994.
Generally, an excess of maturing or rate adjusting assets over maturing or rate
adjusting liabilities during a given period, will serve to enhance earnings in a
rising rate environment and inhibit earnings when rates decline. Conversely,
when maturing or rate adjusting liabilities exceed maturing or rate adjusting
assets during a given period, a rising rate environment will inhibit earnings
and declining rates will serve to enhance earnings. As of March 31, 1994,
approximately 67% of the Company's interest earning assets and 52% of interest
bearing liabilities will reprice within the next six months and the Company's
one-year cumulative GAP, or ratio of repricing assets to repricing liabilities
is positive 26.4%. Generally, this means its assets would be expected to
reprice more quickly than its liabilities which could result in the Company's
net interest spread declining if interest rates decline rapidly or increasing if
interest rates rise rapidly. See "-Results of Operations" for a discussion of
the change in the Company's net interest spread for the quarter ended March 31,
1994. During the generally declining interest rate environment of 1992 and
1993, the Company maintained a relatively stable net interest margin. Although
the Company's one-year cumulative gap was positive during this period, the
majority of its loans reprice based on an interest rate index which lags market
rates and a portion of the Company's loans carry minimum interest rates, or
floors, which became effective as rates declined. The following table
illustrates projected maturities or interest rate adjustments based upon the
contractual maturities or adjustment dates at March 31, 1994:
11
<PAGE>
ASSET AND LIABILITY MANAGEMENT (CONTINUED)
- ------------------------------------------
ASSET & LIABILITY REPRICING SENSITIVITY
FIRST REPUBLIC BANCORP CONSOLIDATED
March 31, 1994
(000's)
<TABLE>
<CAPTION>
3 Months 3 to 6 to 1 to 2 to Over Non Interest
Immediate or Less 6 Months 12 Months 2 Years 5 Years 5 Years Sensitive TOTAL
--------- -------- -------- --------- -------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans 0 391,602 479,082 344,916 66,885 22,201 28,039 0 1,332,725
Securities 0 72,243 9,916 24,446 0 0 15 0 106,620
Cash & short-term
investments 12,686 18,776 1,001 0 0 0 0 0 32,463
Non-interest bearing
assets, net 0 0 0 0 0 0 0 12,181 12,181
------ ------- ------- ------- -------- ------- ------- -------- ---------
TOTAL 12,686 482,621 489,999 369,362 66,885 22,201 28,054 12,181 1,483,989
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Passbooks (1) 0 51,692 20,728 19,786 23,024 2,563 0 0 117,793
Investment Certificates:
100K or greater 0 7,778 4,923 10,524 7,907 9,481 413 0 41,026
Less than 100K 0 100,137 99,393 204,365 160,088 81,432 4,933 0 650,348
FHLB advances - long term 0 99,000 182,170 114,360 50,000 8,000 40,000 0 493,530
ESOP debt 1,063 0 0 0 0 0 0 0 1,063
Other short-term debt 0 0 0 0 0 0 0 0 0
Other liabilities 0 0 0 0 0 0 0 12,371 12,371
Subord debt 0 0 0 0 0 0 62,063 0 62,063
Equity 0 0 0 0 0 0 0 105,795 105,795
------ ------- ------- ------- -------- ------- ------- -------- ---------
TOTAL 1,063 258,607 307,214 349,035 241,019 101,476 107,409 118,166 1,483,989
Repricing Assets
over (under) liab 11,623 224,014 182,785 20,327 (174,134) (79,275) (79,355) (105,985) 0
Effect of swaps 0 45,000 20,000 0 (40,000) 0 (25,000) 0 0
------ ------- ------- ------- -------- ------- ------- -------- ---------
Hedged gap 11,623 179,014 162,785 20,327 (134,134) (79,275) (54,355) (105,985) 0
====== ======= ======= ======= ======== ======= ======= ======== =========
Gap as % of
Total assets 0.82% 12.63% 11.49% 1.43% -9.46% -5.59% -3.84% -7.48% 0.00%
====== ======= ======= ======= ======== ======= ======= ======== =========
Cumulative gap 11,623 190,637 353,422 373,749 239,615 160,340 105,985 0 0
====== ======= ======= ======= ======== ======= ======= ======== =========
Cumulative gap
as % of assets 0.82% 13.45% 24.94% 26.37% 16.91% 11.31% 7.48% 0.00% 0.00%
====== ======= ======= ======= ======== ======= ======= ======== =========
</TABLE>
(1) Passbook amounts are allocated based on management's experience of
historical interest rate volatility and passbook erosion rates. However,
all passbook accounts are contractual subject to immediate withdrawal and
immediate repricing.
12
<PAGE>
ASSET AND LIABILITY MANAGEMENT (CONTINUED)
- ------------------------------------------
In evaluating the Company's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react differently to
changes in market interest rates. Additionally, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Further, certain assets, such as adjustable rate mortgages and
mortgage related investments, have features which restrict changes in interest
rates on a short-term basis and over the life of the asset. The Company
considers the anticipated effects of these various factors in implementing its
interest rate risk management activities, including the utilization of interest
rate caps.
The Company has entered into interest rate cap transactions in the aggregate
notional principal amount of $1,040,000,000 which terminate in periods ranging
from August 1994 through September 2000. Under the terms of these transactions,
which have been entered into with nine unrelated commercial or investment
banking institutions or their affiliates, the Company will be reimbursed
quarterly for increases in the three-month London Inter-Bank Offer Rate
("LIBOR") for any quarter during the term of the applicable transaction in which
such rate exceeds a rate ranging from 9.0% to 13% as established for the
applicable transaction. The interest rate cap transactions are intended to act
as hedges for the interest rate risk created by restrictions on the maximum
yield of certain variable rate loans and investment securities held by the
Company which may, therefore, at times be exposed to the effect of unrestricted
increases in the rates paid on the liabilities which fund these assets.
Additionally, $37,400,000 of First Thrift's advances with the FHLB contain
interest caps of 12.0% as part of the borrowing agreements. The cost of
interest rate cap transactions is amortized over their lives and totalled
$240,000 and $191,000 for the quarters ended March 31, 1994 and 1993,
respectively. Although these costs reduce current earnings, the Company
believes that the cost is justified by the protection these interest rate cap
transactions provide against 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, 1994, the Company had entered into interest rate swaps with the
FHLB for $45,000,000 and with an investment banking firm for $20,000,000 to
convert the fixed rate on long-term FHLB advances to semi-annual adjustable
liabilities. The availability of long-term FHLB advances, with a weighted
average maturity of approximately 12 years at March 31, 1994, reduces the
repricing volatility in the Company's balance sheet and the Company's dependence
upon retail deposits, which generally have a shorter maturity than the
contractual life of mortgage loans. The Company will continue to consider the
alternative of FHLB advances as an integral part of its asset and liability
management program. The Company is exposed to credit and market losses if the
counterparties to its interest rate cap and swap agreements fail to perform;
however, the Company is not aware of any reason which should cause it to
anticipate such nonperformance.
Since August 1990, the Company has utilized FHLB advances as a supplement to
deposit gathering to fund its assets. FHLB advances must be collateralized by
the pledging of mortgage loans which are assets of First Thrift. At March 31,
1994, total FHLB advances outstanding were $493,530,000. Of this amount,
$426,330,000 had an original maturity of 10 years or more
13
<PAGE>
ASSET AND LIABILITY MANAGEMENT (CONTINUED)
- ------------------------------------------
and $40,000,000 had an original maturity of five years. Also, $23,200,000 had an
original maturity of two years subsequently extended for a period of 8 years to
10 years. The remaining $4,000,000 was due in three years. The longer term
advances provide the Company with an assured level of funding for its term real
estate assets with longer lives.
First Thrift is subject to the provisions of the California Industrial Loan Law,
which limits the amount of thrift balances which may be raised to twenty times
its shareholder's equity. At March 31, 1994, based on the amount of thrift
certificates outstanding, First Thrift was required to maintain shareholder's
equity of approximately $40,000,000, compared with actual shareholder's equity
of $120,538,000.
CAPITAL RESOURCES
- -----------------
The Company continues to maintain a strong capital base. At March 31, 1994 the
Company's total capital, including total stockholders' equity, senior
subordinated debentures, convertible subordinated debentures and reserves was
$184,519,000. Total stockholders' equity at March 31, 1994 has increased by
$849,000 since December 31, 1993. This increase is the result of increases from
net income of $660,000, the repayment of $137,000 of the Company's ESOP notes
payable during the period, and an increase of $123,000 from proceeds received
upon the exercise of options on common stock or sales of common stock under the
Company's Employee Stock Purchase Plan. The Company also purchased 5,047
treasury shares at a cost of $69,000.
First Republic is not a bank holding company and unlike First Thrift, is not
directly regulated or supervised by the FDIC, the Federal Reserve Board, or any
other bank regulatory agency. Thus, First Republic is not subject to the risk-
based capital or leverage requirements. If such regulations applied, the
Company calculates that at March 31, 1994 its leverage ratio would have been
7.36% and, its total risk based capital ratio would have been 17.68%, as
calculated by management assuming, however, all of the Company's subordinated
debentures constitute Tier 2 capital, are not limited to 50% of Tier 1 capital
and the reserve for possible losses is not limited to 1.25% of risk-adjusted
assets.
During the second quarter of 1993, the Company's Board of Directors approved a
stock repurchase program under which the Company may repurchase from time to
time up to 206,000 shares of its common stock, either in open market
transactions or in block purchases. As of March 31, 1994, 30,797 shares have
been repurchased under this program.
First Republic has used, and expects to continue to use, the proceeds from the
issuance of common stock, preferred stock and subordinated debentures to, in
part, provide capital to its thrift and loan subsidiaries, First Thrift and
First Republic Savings Bank. For the first quarter of 1994, First Republic
received from First Thrift dividends of $500,000 representing approximately 30%
of First Thrift's earnings plus interest payments of $388,000. The ability of
First Republic to receive future dividends and other payments from First Thrift
depends upon the operating results and capital levels of First Thrift,
restrictions upon such payments imposed by creditors of First Thrift, FDIC
regulations and other governmental regulations governing First Thrift.
14
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended March 31, 1994 Compared to Quarter Ended
- ------------------------ ------------------------------------------------------
March 31, 1993
--------------
The Company derives its income from three principal areas of business: (1) net
interest income which is the difference between the interest income the Company
receives on interest-earning portfolio loans and investments and the interest
expense it pays on interest-bearing liabilities such as customer deposits and
borrowings; (2) mortgage banking operations involving the origination and sale
of real estate secured loans; and (3) servicing fee income which results from
the ongoing servicing of such loans for investors and the servicing of other
loans pursuant to purchased servicing rights.
During the first quarter of 1994, First Republic's total assets grew to
$1,483,988,000 at March 31, 1994 from $1,417,193,000 at December 31, 1993,
primarily as a result of an increase in single family mortgage loans. The
Company's loan originations for the first quarter of 1994 were $228,600,000,
compared to loan originations for the first quarter of 1993 of $151,616,000. The
increased level of loan originations for the first quarter of 1994 resulted
primarily from an increase in the number of loan officers employed by the
Company and the closing of loans previously committed to at the relatively lower
rates of interest which have been available to borrowers. For 1993 and the first
quarter of 1994, loan originations have been concentrated primarily in single
family lending due to the Company's reduced emphasis on multifamily and
commercial real estate loans. Single family loans originated in the first
quarter of 1994 increased to $196,800,000 compared to $133,100,000 in the first
quarter of 1993 and $757,100,000 for all of 1993.
Mortgage banking activity resulted in the sale of $71,560,000 of single family
loans to secondary market investors during the first quarter of 1994, compared
with $61,003,000 in the first quarter of 1993. The Company's portfolio of real
estate loans serviced for secondary market investors increased to $822,410,000
at March 31, 1994 from $814,453,000 at December 31, 1993, as loan sales exceed
prepayments of existing loans serviced. The level of future loan originations,
loan sales and loan repayments is dependent in part on overall credit
availability and the interest rate environment, the recovery in the general
economy and housing industry, and conditions in the secondary loan sale markets.
Net income of $660,000 for the first quarter in 1994 decreased $2,286,000 from
net income of $2,946,000 in the same quarter of 1993. This decline is primarily
due to a $4,000,000 special reserve provision relating to the effects of the
January 17, 1994 earthquake which struck Los Angeles, as more fully discussed
under the caption "Asset Quality and Provision for Possible Losses." Other
significant components effecting net income were a decrease of $278,000 in
provision for losses (excluding the special earthquake reserve), higher non-
interest income of $550,000, higher other non-interest expenses of $657,000, and
a lower provision for income taxes of $1,566,000. Fully diluted earnings per
share (EPS) were $0.08 for 1994, down from $0.32 for the similar period in 1993.
The special earthquake reserve, net of tax benefits, reduced fully diluted EPS
by approximately $0.24 in the first quarter of 1994.
Total interest income increased to $24,933,000 for the first quarter of 1994
from $24,209,000 for the first quarter of 1993. Interest income on real estate
and other loans increased to $23,359,000 for the first quarter of 1994, compared
to $23,031,000 in 1993. The yield on
15
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended March 31, 1994 Compared to Quarter Ended
- ------------------------------------------------------------------------------
March 31, 1993 (Continued)
--------------------------
average loans declined to 7.28% in the first quarter of 1994, from 8.39% for the
same quarter of 1993, primarily due to lower market interest rates, and the
effect of an increased percentage of single family loans earning relatively low
initial rates of interest. The Company's net loans receivable outstanding
increased from $1,256,058,000 at December 31, 1993 to $1,332,725,000 at March
31, 1994. As a percentage of the Company's permanent loan portfolio, single
family loans increased to 49% at March 31, 1994 from 39% at March 31, 1993.
Interest income on cash, short-term investments and investment securities
increased as a result of a higher average portfolio for the quarter earning a
higher average rate. Such interest income was $1,574,000 in 1994 compared to
$1,178,000 in 1993. The average investment position was $138,651,000 during the
first quarter of 1994 and earned 4.55% compared to an average position of
$123,925,000 earning 3.85% during the first quarter of 1993. In 1994, the
Company has decreased its short-term liquidity position and increased its
investment securities. To the extent that the Company's investment portfolio
increases as a proportion of total assets, there could be an adverse effect on
the Company's net interest margin, since rates earned on investments tend to be
lower than rates earned on loans.
Total interest expense for the first quarter has increased to $14,883,000 in
1994 from $14,166,000 in 1993. Total interest expense consists of interest
expense on deposits and interest expense on FHLB advances, other borrowings and
debentures. Interest expense on deposits (comprised of passbook and money
market (MMA) accounts and investment certificates), decreased to $8,792,000 in
the first quarter of 1994 from $8,898,000 in the first quarter of 1993 because
of lower average rates paid on such deposit accounts. Interest expense on other
borrowings increased to $6,091,000 in the first quarter of 1994 from $5,268,000
in the first quarter of 1993, primarily due to a higher average level of FHLB
advances. The rate paid on average total interest-bearing liabilities declined
to 4.51% for 1994's first quarter from 5.04% for 1993's first quarter.
In mid-1990, the Company implemented a funding strategy which resulted in a
lower average total cost of funds on a year-to-year basis and reduced certain
noninterest expenses such as advertising costs. First Thrift became the first
voluntary member of the San Francisco FHLB in 1990 and began to utilize FHLB
advances as an alternative source of funds for asset growth. The Company's
total outstanding FHLB advances were $493,530,000 and $468,530,000 at March 31,
1994 and December 31, 1993, respectively. The total cost of FHLB advances has
been lower than the total costs of deposits, due in part to the fact that such
advances require no deposit insurance premiums and operational overhead costs
are less than those associated with deposits. In a rising interest rate
environment, the interest rates paid on First Thrift's FHLB advances may tend to
increase faster than rates paid on the Company's deposits because the underlying
indices in which these adjustable rate advances reprice tends to be more
sensitive to conditions in the general interest rate environment. Advances from
the FHLB must be collateralized by the pledging of mortgage loans which are
assets of First Thrift and, although First Thrift may substitute other loans for
such pledged loans, First Thrift is restricted in its ability to sell or
otherwise pledge these loans without substituting collateral or prepaying a
portion of the FHLB advances. At March 31, 1994, First Thrift had an approved
borrowing capacity with the FHLB for $13,000,000 of additional borrowings or
equal to approximately 35% of the First Thrift's total assets. Because the
First Thrift's outstanding FHLB advances represented approximately 34% of total
assets at March 31, 1994, the Company expects that deposits will fund a greater
percentage of future asset growth and, as a result, the average total
16
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended March 31, 1994 Compared to Quarter Ended
- ------------------------------------------------------------------------------
March 31, 1993 (Continued)
--------------------------
cost of funds may increase as the costs of expanding the Company's retail
deposit base are incurred.
The Company's net interest income was $10,050,000 for the first quarter of 1994,
compared to $10,043,000 for the first quarter of 1993, primarily as a result of
earning a lower spread on a higher average balance of assets. The net interest
margin, calculated as net interest income divided by total average interest
earning assets, was 2.83% for the first quarter of 1994, compared to 3.29% for
the same period of 1993. The change in net interest margin resulted from the
reduced yields on a larger volume of new single family adjustable rate loans, an
increase during the quarter in the level of nonearning loans of approximately
0.40% of total assets and a continued emphasis on gathering deposits with
maturities of one year or more in the face of increasing interest rates.
Non-interest income for the first quarter of 1994 increased to $1,510,000 from
$990,000 in the first quarter of 1993, due to a higher level of gains on sale of
loans. Service fee revenue, net of amortized costs on the Company's premium on
sale of loans and purchased mortgage servicing rights, was $428,000 for the
first quarter of 1994 compared to $264,000 for the same period of 1993,
primarily as a result of lower amortization on the Company's purchased mortgage
servicing rights which have been almost fully amortized at March 31, 1994. The
average balance of the servicing portfolio increased to $821,597,000 for the
first quarter of 1994 compared to $789,071,000 for all of 1993.
Total loans serviced were $822,410,000 at March 31, 1994 and $814,453,000 at
December 31, 1993. The percentage of servicing fees received depends upon the
terms of the loans as originated and conditions in the secondary market when
loans are sold. The Company receives servicing fees ranging from 0.125% to
1.25% of the outstanding loan balance which averaged approximately 0.33% for the
first quarter of 1994 compared to 0.38% for all of 1993.
For the first quarter, loan and related fee income was $493,000 in 1994 and
$360,000 in 1993. This category includes documentation and processing fees
which vary with loan volume and market conditions, late charge income which
generally increases as the loan and servicing portfolios grow, and prepayment
penalty income which generally varies with loan activity.
The Company sells whole loans and loan participations in the secondary market
under several specific programs. Loan sales were $71,560,000 for the first
quarter of 1994 and $61,003,000 for the first quarter of 1993. A focus of the
Company's mortgage banking activities has been to enter into formal commitments
and informal agreements with institutional investors to originate on a direct
flow basis single family mortgages which are priced and underwritten to conform
to previously agreed upon criteria prior to loan funding and are delivered to
the investor shortly after funding. Also, the Company has identified, from
time-to-time, secondary market sources which have particular needs which can be
filled primarily with adjustable rate single family loans held in its portfolio.
The amount of loans sold is dependent upon conditions in both the mortgage
origination and secondary loan sales markets, and the level of gains will
fluctuate. The Company computes a
17
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended March 31, 1994 Compared to Quarter Ended
- ------------------------------------------------------------------------------
March 31, 1993 (Continued)
--------------------------
gain 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 gains of $574,000 for
the first quarter of 1994, compared to $364,000 for the same period of 1993. As
a result of the recent increases in mortgage interest rates beginning in early
1994, the Company expects that future loan origination activity will shift from
fixed rate loans sold into the secondary market to adjustable rate mortgages
originated for the Company's balance sheet. Additionally, the mix of such
lending is expected to reflect reduced refinance activity by borrowers and
increased home loan purchase activity in the Company's markets. Depending on
market conditions and other factors, the Company expects a decrease in the
future level of loan sales, resulting in lower levels of gain on sale of loans.
Non-interest expense totalled $5,414,000 for the first quarter of 1994, compared
to $4,757,000 for the same period in 1993. The Company's non-interest expense
for the first quarter of 1994 included $113,000 related to results of operating
REO properties and losses on disposition or changes in value of REO properties
compared to $893,000 in the first quarter of 1993. Since January 1, 1993, the
Company has followed the AICPA's Statement of Position ("SOP") 92-3 which
requires chargeoffs to the reserve for possible losses to be recorded upon
foreclosure and for expenses or losses on REO, including subsequent decreases in
estimated fair values, to be expensed as incurred.
The Company incurred increased costs to manage its larger balance sheet and
expanded operations, in the first quarter of 1994 compared to the first quarter
of 1993. In 1994, the Company's expenses include the occupancy, personnel and
advertising costs of three new deposit branches, higher payroll taxes and other
employee benefit costs, and increased expenses resulting from the origination of
single family loans on which processing fees or points were not collected from
the borrowers. As a percentage of total assets, recurring general and
administrative expenses, excluding REO related costs, were 1.47% for the first
quarter of 1994, compared to 1.26% for the first quarter of 1993 and 1.33% for
all of 1993.
The following table presents for the first quarter of 1994 and 1993, the
distribution of consolidated average assets, liabilities, and stockholders'
equity as well as the total dollar amounts of interest income, average interest-
earning assets and the resultant yields, and the dollar amounts of interest
expense, average interest-bearing liabilities, and rates paid. Nonaccrual loans
are included in the calculation of the average balances of loans and interest
not accrued is excluded. The yield on short-term investments has been adjusted
upward to reflect the effects of certain income thereon which is exempt from
federal income tax, assuming an effective rate of 35% for 1993 and for 1994.
18
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended March 31, 1994 Compared to Quarter Ended
- ------------------------------------------------------------------------------
March 31, 1993 (Continued)
--------------------------
<TABLE>
<CAPTION>
Quarter Ended March 31,
-------------------------------------------------------------------
1994 1993
-------------------------------- --------------------------------
Average Yields/ Average Yields/
Balance Interest Rates Balance Interest Rates
---------- -------- -------- ---------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-bearing deposits with other institutions $ 442 $ 5 4.52% $ 690 $ 10 5.80%
Short-term investments 30,718 252 3.28 62,637 502 3.21
Investment securities 107,491 1,320 4.91 60,598 681 4.50
Loans 1,283,636 23,359 7.28 1,098,203 23,031 8.39
---------- ------- ---------- -------
Total earning assets 1,422,287 24,936 7.01 1,222,128 24,224 7.93
------- -------
Non interest-earning assets 15,556 4,611
---------- ----------
Total average assets $1,437,843 $1,226,739
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Passbooks $ 116,169 $ 838 2.89% $ 112,893 $ 965 3.42%
Investment certificates 663,390 7,954 4.80 580,097 7,933 5.47
---------- ------- ---------- -------
Total thrift certificates 779,559 8,792 4.51 692,990 8,898 5.14
Other borrowings 478,831 4,706 3.93 375,752 3,962 4.22
Subordinated debentures 61,710 1,385 8.98 55,045 1,307 9.50
---------- ------- ---------- -------
Total interest-bearing liabilities 1,320,100 14,883 4.51 1,123,787 14,167 5.04
------- -------
Non interest-bearing liabilities 11,736 9,449
Stockholders' equity 106,007 93,503
---------- ----------
Total average liabilities and stockholders' equity $1,437,843 $1,226,739
========== ==========
Net interest spread 2.50% 2.89%
Net interest income and net interest margin $10,053 2.83% $10,057 3.29%
======= =======
</TABLE>
The Company's balance sheet at March 31, 1994 is generally comparable to that at
December 31, 1993. Total assets have increased $66,795,000 to $1,483,988,000.
Loans held for sale increased $9,727,000 and other loans in the Company's
portfolio increased $66,940,000, including an increase of $63,268,000 in single
family mortgages. Funds were raised primarily by increased FHLB advances of
$25,000,000 and higher deposits of $57,496,000. The Company's reserve for
possible losses was $16,661,000 at March 31, 1994, and there were nine
foreclosed real estate properties and one loan treated as foreclosed in
substance resulting in other real estate owned with a value of $10,162,000.
19
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended March 31, 1994 Compared to Quarter Ended
- ------------------------------------------------------------------------------
March 31, 1993 (Continued)
--------------------------
ASSET QUALITY AND PROVISION FOR POSSIBLE LOSSES
- -----------------------------------------------
The level of the Company's provision for losses and reserve for losses are
related to the size and composition of the loan portfolio and conditions
affecting the real estate markets in which the Company conducts lending
activities. The following table sets forth by category the total loan portfolio
of the Company at the dates indicated. As indicated below, the Company has
increased the dollar amount and relative percentage of its loans secured by
single family residences.
<TABLE>
<CAPTION>
December 31,
March 31, ---------------------------------
1994 1993 1992
--------------- --------------- ---------------
<S> <C> <C> <C>
LOANS:
Single family (1-4 units) $ 644,773,000 $ 577,276,000 $ 375,757,000
Multifamily (5+ units) 382,228,000 387,757,000 405,399,000
Commercial real estate 231,761,000 229,914,000 204,611,000
Multifamily construction 10,452,000 5,707,000 19,574,000
Single family construction 20,337,000 14,512,000 14,703,000
Home equity credit lines 29,168,000 31,213,000 35,255,000
-------------- -------------- --------------
Real estate mortgages subtotal 1,318,719,000 1,246,379,000 1,055,299,000
Commercial business and other 14,006,000 9,679,000 12,486,000
-------------- -------------- --------------
Total loans 1,332,725,000 1,256,058,000 1,067,785,000
Unearned fee income (8,118,000) (9,406,000) (12,621,000)
Reserve for possible losses (16,661,000) (12,657,000) (12,686,000)
-------------- -------------- --------------
Loans, net $1,307,946,000 $1,233,995,000 $1,042,478,000
============== ============== ==============
</TABLE>
The following table presents an analysis of the Company's loan portfolio at
March 31, 1994 by property type and geographic location:
<TABLE>
<CAPTION>
San Francisco Los Angeles Other CA Las Vegas Percent
Bay Area County Areas Nevada Other Total By Type
------------- ------------ ------------ ------------ ----------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Property Type:
Single family (1-4 units)(1) $488,340,000 $153,145,000 $19,435,000 $ 5,994,000 $12,525,000 $ 679,439,000 51.0%
Multifamily (5+ units) 152,302,000 96,510,000 22,358,000 111,057,000 --- 382,227,000 28.7%
Commercial real estate 176,122,000 28,933,000 4,573,000 18,400,000 3,733,000 231,761,000 17.4%
Construction loans 265,000 --- --- 30,524,000 --- 30,789,000 2.3%
Commercial Business and other 153,000 5,825,000 1,956,000 466,000 109,000 8,509,000 0.6%
------------ ------------ ----------- ------------ ----------- -------------- -----
Total $817,182,000 $284,413,000 $48,322,000 $166,441,000 $16,367,000 $1,332,725,000 100.0%
============ ============ =========== ============ =========== ============== =====
Percent by location 61.4% 21.3% 3.6% 12.5% 1.2% 100.0%
</TABLE>
(1) Includes equity lines of credit secured by single family residences and
single family loans held for sale.
The Company places an asset on nonaccrual status when one of the following
events occurs: any installment of principal or interest is over 90 days past due
(except for single family loans which are judged by management to be well
secured and in the process of collection), management determines the ultimate
collection of principal or interest to be unlikely, management deems a loan to
be an in-substance foreclosure, or the Company takes possession of the
collateral. Real estate collateral obtained by the Company or deemed to be
foreclosed in substance is collectively referred to as REO.
20
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended March 31, 1994 Compared to Quarter Ended
- ------------------------------------------------------------------------------
March 31, 1993 (Continued)
--------------------------
The following table presents nonaccruing loans and investments, REO,
restructured performing loans and accruing single family loans over 90 days past
due at the dates indicated.
NONACCRUING ASSETS AND OTHER LOANS
<TABLE>
<CAPTION>
December 31,
March 31, --------------------------
1994 1993 1992
----------- ----------- ----------
<S> <C> <C> <C>
Nonaccruing Loans
Single family $ --- $ --- $ ---
Multifamily 13,153,000 6,740,000 3,894,000
Commercial real estate 5,447,000 4,862,000 5,524,000
Other 167,000 16,000 140,000
----------- ----------- -----------
Nonaccruing loans 18,767,000 11,618,000 9,558,000
Real estate owned ("REO") 10,162,000 9,961,000 8,937,000
Nonaccruing investments --- 361,000 469,000
----------- ----------- -----------
Total nonaccruing assets 28,929,000 21,940,000 18,964,000
Restructured performing loans 11,386,000 6,342,000 3,366,000
----------- ----------- -----------
Total nonaccruing assets and restructured performing loans $40,315,000 $28,282,000 $22,330,000
=========== =========== ===========
Accruing single family loans more than 90 days past due $ 4,396,000 $ 1,390,000 $ 3,541,000
Percent of Total Assets:
Nonaccruing assets 1.95% 1.55% 1.54%
Nonaccruing assets and restructured performing loans 2.72% 2.00% 1.81%
Ratio of reserve for possible losses to nonaccruing loans 89% 109% 133%
</TABLE>
Commencing in late 1990 and continuing to date in 1994, the California economy
has been affected by an economic recession. The recession has affected both the
San Francisco Bay Area and Southern California, although management believes
that at present the effects of the recession are more severe on the Company's
loans in the Los Angeles area. The recession has reduced the ability of some of
the Company's borrowers to perform under the terms of their loan agreements and
the value of some of the properties securing the Company's loans. The recession
has primarily impacted the Company's multifamily and commercial real estate loan
portfolios, resulting in an increase in the level of nonaccruing assets and
restructured loans and in chargeoffs against the reserve for possible losses.
On January 17, 1994, the greater Los Angeles area experienced an earthquake
which caused significant damage to the freeway system and real estate throughout
the area. As a result of this earthquake, some of the Company's borrowers are
experiencing problems primarily among the 37+ unit multifamily loan portfolio in
Los Angeles County, which was $75.3 million, or 5.1% of the Company's total
assets at March 31, 1994. Within this portfolio, approximately $35,000,000 of
loans appear to have been adversely impacted and a special earthquake reserve of
$4,000,000 was provided in the first quarter of 1994. Such reserve represents
the Company's best estimate as of April 21, 1994 of the loss potential resulting
from damage or related economic impact, after contacting all of the potentially
affected borrowers and making inspections of all such properties. Because of
this earthquake, management of the Company expects that the level of loan
delinquencies and REO may increase further during 1994. Some borrowers have
experienced direct property damage or loss of tenants, or could be affected in
the future as a result of lower rental revenues or further economic
difficulties. First Republic has been and is continuing to work with those
borrowers to assist them with obtaining available
21
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended March 31, 1994 Compared to Quarter Ended
- ------------------------------------------------------------------------------
March 31, 1993 (Continued)
--------------------------
disaster relief funding or to assist them by modifying the terms of loans. Such
loan modifications may defer the timing of payments, reduce the rate of interest
collected or possibly lower the principal balance.
As of March 31, 1994, the Company has granted forbearance as to principal and
interest payments, generally amounting to two to four months of payments, on
$22,500,000 of loans; as a result of these forbearance agreements, the Company
recognized $234,000 of interest income in the quarter ended March 31, 1994 which
was not collected but is expected to be collected over the next one to four
years, as part of regular payments scheduled to begin in the third quarter of
1994. At March 31, 1994, none of these loans would have been on nonaccrual
status if the forbearance agreements had not been granted. Although the Company
expects its borrowers to be able to perform under the terms of these forbearance
agreements, if losses result from the inability of borrowers to comply with
these agreements, such losses of principal or forbearance interest would be
charged to the Company's special earthquake reserve which totalled $4.0 million
at March 31, 1994.
Additionally, the Company has modified the terms of $7,700,000 of primarily
multifamily loans as a result of this natural disaster. Under these
modifications, the Company has agreed to capitalize interest payments, extend
loan maturity, reduce the contractual interest rate or waive amounts due. If
the terms of the loans, after such modifications, are below those generally
available in the current market or if any principal or contractually due
interest is forgiven, then such loan modifications are classified as
restructured loans. As of March 31, 1994, the Company's restructured loans
include $5,045,000 of loans which have been restructured as a result of this
earthquake. In the event that the Company's borrowers are unable to meet their
obligations under modified or restructured loans and a loss is incurred, the
Company would charge the special earthquake reserve. Additional forbearance
agreements or loan modifications, including loan restructurings, are expected
to be entered into with the Company's borrowers in the second quarter and,
possibly, future quarters of 1994.
Included in restructured performing loans at March 31, 1994 and December 31,
1993 is a $6,342,000 first trust deed loan secured by a low-income 208-unit
multifamily complex in Los Angeles which was restructured in February 1993. This
loan was made by the Company in connection with the REO sale of the property by
the Company to the borrower in March 1992 for $7,000,000. The property was
reappraised in February 1993 for $7,150,000. The appraisal reflected improve-
ments to the property completed by the borrower since acquisition. In order to
facilitate stabilization of the occupancy level at monthly rents appropriate for
long-term tenants, the Company agreed to reduce the interest rate on its
adjustable rate loan for a two-year period, and capitalized three monthly
payments by extending the loan term to allow the borrower to bring all trade
payables current. In April 1994, the Company entered into a further loan
restructuring whereby the borrower agreed to pay an interest rate of 3% for one
year, and 4% for the second year, followed by a two year period of increasing
payments. If the borrower performs without default and meets certain other
conditions, approximately $33,000 of interest will be forgiven when the loan is
repaid in full. As a result of this agreement, this loan will be classified as a
restructured loan for at least the next two years.
22
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended March 31, 1994 Compared to Quarter Ended
- ------------------------------------------------------------------------------
March 31, 1993 (Continued)
--------------------------
At March 31, 1994, the dollar amount of the Company's nonaccruing assets and
restructured loans increased to $28,929,000 from $21,940,000 at December 31,
1993. Nonaccruing assets and restructured loans increased from December 31, 1993
to March 31, 1994, primarily due to the affects of the January 17, 1994, Los
Angeles earthquake. At March 31, 1994, nonaccruing assets included approximately
$10,804,000 of loans adversely impacted by the earthquake, REO properties
included $2,736,000 of multifamily properties acquired as a result of the
earthquake and restructured loans included $5,044,000 of loans restructured as a
result of the earthquake. Nonaccruing Assets and restructured loans at March 31,
1994 were reduced by chargeoffs totalling $1,025,000 during the first quarter of
1994 and $2,298,000 prior to 1994.
The Company's general policy is to attempt to resolve problem assets quickly and
to sell such problem assets when acquired as rapidly as possible at prices
available in the prevailing market. The Company resolves problem assets by
restructuring a loan when it determines the benefits of such a workout exceed
the value of any concessions granted, it believes the borrower is committed to
the terms of the new loan and it believes a successful outcome is likely.
During the first quarter of 1994, loans totaling $3,297,000 were transferred to
REO and three REO properties with a book value totalling $2,226,000 were sold.
At March 31, 1994, the Company held as REO properties five apartment buildings,
four of which were foreclosed upon as a result of the earthquake, one commercial
property, two parcels of land and two single family residential properties. One
of the REO parcels of land is an 800 acre parcel which was appraised in January
1993 at a value in excess of its recorded value of $4,960,000; this property was
owned by First Republic, the holding company.
At the time each loan is originated, the Company establishes a reserve for the
inherent risk of potential future losses, based on established criteria,
including the type of loan and loan-to-value or cash flow-to-debt service
ratios. Management believes that such policy enables the Company's reserves to
increase commensurate with growth in the size of the Company's loan portfolio.
In the underwriting of purchased loans, management considers the inherent risk
of loss in determining the price to be paid. When loans are purchased, a
portion of the discount is designated as a reserve for possible losses to
reflect the inherent credit losses which could be reasonably expected to occur
in the future and is thereafter unavailable to be amortized as an increase in
interest income.
Anticipating a possible recession, the Company began to provide additional
reserves in July 1990 by establishing a newly created recession reserve
category. The provisions for the recession reserve were not required or
recommended by any regulatory authority. These provisions reduced earnings by
$1,000,000 for the first quarter of 1993 and $750,000 for the first quarter of
1994. Management views the recession reserve as part of its total unallocated
reserves available to absorb losses on the Company's loans that may result from
general economic conditions. If specific loans become delinquent or property
values decline, this reserve is available to absorb losses.
Since January 1, 1993, the Company adopted the AICPA's SOP 92-3 which requires
chargeoffs to the reserve for possible losses to be recorded upon foreclosure
and for expenses or losses on REO to be expensed as incurred. The Company's
reserve for possible losses is maintained at a level estimated by management to
be adequate to provide for losses that can be reasonably anticipated based upon
specific conditions as determined by management, historical loan loss
experience, the results of the Company's ongoing loan grading process, the
amount of past due and nonperforming loans, observations of auditors, legal
requirements, recommendations or
23
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended March 31, 1994 Compared to Quarter Ended
- ------------------------------------------------------------------------------
March 31, 1993 (Continued)
--------------------------
requirements of regulatory authorities, prevailing economic conditions and other
factors. These factors are essentially judgmental and may not be reduced to a
mathematical formula.
Since inception through March 31, 1994, the Company has experienced a relatively
low level of losses on its single family loans in each of its geographic market
areas. As of March 31, 1994, the Company has not experienced any losses on its
portfolio of real estate secured loans, including construction loans, located in
the Las Vegas market. Collectively, these two categories represented 63% of the
Company's total loans at March 31, 1994.
As a percentage of nonaccruing loans, the reserve for possible losses was 109%
at December 31, 1993 and 89% at March 31, 1994. While this ratio declined since
December 31, 1993, management currently considers the $16,661,000 reserve, at
March 31, 1994, to be adequate as an allowance against foreseeable losses.
Management's continuing evaluation of the loan portfolio and assessment of
economic conditions will dictate future reserve levels.
The adequacy of the Company's total reserves is reviewed quarterly. Management
closely monitors all past due loans, in assessing the adequacy of its total
reserves. In addition, the Company has instituted procedures for reviewing and
grading of all the larger income property loans in its portfolio on at least an
annual basis. Based upon that continuing review and grading process, among
other factors, the Company will determine appropriate levels of total reserves
in response to its assessment of the potential risk of loss inherent in its loan
portfolio. Management currently anticipates that it will continue to provide
additional recession reserves so long as, in its judgement, the effects of the
recessionary condition on its assets continue. When management determines that
the effects of the recessionary conditions have diminished, management currently
anticipates that it would reduce or eliminate such future provisions to the
recession reserve, although the Company may continue to maintain total reserves
at a level higher than existed prior to this recession. Management does not
intend to increase earnings in future periods by reversing amounts in the
recession reserve.
24
<PAGE>
RESULTS OF OPERATIONS - Quarter Ended March 31, 1994 Compared to Quarter Ended
- ------------------------------------------------------------------------------
March 31, 1993 (Continued)
--------------------------
The following table provides certain information with respect to the Company's
reserve position and provisions for losses as well as chargeoff and recovery
activity for the periods indicated.
<TABLE>
<CAPTION>
Year Ended
Quarter Ended December 31,
March 31, ---------------------------------
1994 1993 1992
--------------- --------------- ---------------
<S> <C> <C> <C>
RESERVE FOR POSSIBLE LOSSES:
Balance beginning of period $ 12,657,000 $ 12,686,000 $ 11,663,000
Provision charged to expense:
Regular reserve 255,000 806,000 1,649,000
Recession reserve 750,000 4,000,000 6,413,000
Earthquake reserve 4,000,000 --- ---
Reserve from purchased loans 33,000 200,000 466,000
Reserve of First Republic Savings Bank at acquisition --- 24,000 ---
Chargeoffs on originated loans:
Single family (100,000) (209,000) (328,000)
Multifamily (925,000) (3,367,000) (3,961,000)
Commercial real estate --- (1,547,000) (3,750,000)
Commercial business loans --- (76,000) (213,000)
Recoveries on originated loans:
Single family --- --- 50,000
Multifamily --- --- 5,000
Commercial real estate --- 92,000 654,000
Commercial business loans --- 43,000 12,000
Acquired loans:
Chargeoffs (9,000) --- ---
Recoveries --- 5,000 26,000
-------------- -------------- --------------
Total chargeoffs, net of recoveries (1,034,000) (5,059,000) (7,505,000)
-------------- -------------- --------------
Balance end of period $ 16,661,000 $ 12,657,000 $ 12,686,000
============== ============== ==============
Average loans for the period $1,283,636,000 $1,154,680,000 $1,008,783,000
Total loans at period end 1,307,946,000 1,233,995,000 1,067,785,000
RATIOS OF RESERVE FOR POSSIBLE LOSSES TO:
Total loans 1.25% 1.01% 1.19%
Nonaccruing loans 89% 109% 133%
Nonaccruing assets and restructured performing loans 41% 45% 57%
Net chargeoffs to average loans 0.32%* 0.44% 0.74%
</TABLE>
- ---------------
*Annualized
25
<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
---------------------------------------------------
The Company's annual meeting of stockholders was held on May 4, 1994.
At the annual meeting, the stockholders approved the following
actions:
(i) Mr. James H. Herbert, II, Mr. James F. Joy, Mr. Barrant Merrill
and Mr. Roger O. Walther were elected as directors of the Company
with terms expiring in 1997. For each of the four nominees, the vote
was 5,346,967 shares for; 109 shares against and 629,047 shares
withheld. The remaining directors of the Company and the years in
which their respective terms expire are as follows: Ms. Katherine
August - 1995; Mr. L. Martin Gibbs - 1995; Mr. John F. Mangan -1995;
Mr. Richard Cox Johnson - 1996; Mr. Kenneth W. Dougherty - 1996; Mr.
Frank J. Fahrenkopf, Jr. - 1996.
(ii) A proposal to approve the grant of stock options for an
aggregate of 82,400 shares of the Company's Common Stock to the
Company's eight non-employee directors was approved. The vote was:
5,047,359 shares for; 732,091 shares against; 22,325 shares abstain.
(iii) The selection of the firm of KPMG Peat Marwick as independent
auditors to examine the financial statements of the Company for the
1994 fiscal year was ratified. The vote was: 5,782,392 shares for;
24,049 shares against; 13,002 shares abstain.
ITEM 5. OTHER INFORMATION
-----------------
On May 6, 1994, the Company was approved under a post-effective
amendment to its Registration Statement on Form S-3 to offer an
additional series of the Company's Subordinated Debentures Due
January 15, 2009, such series to be called "Series 8% Reset". The
Series 8% Reset Debentures are offered in an aggregate amount of up
to $9,836,000, together with an option granted to the underwriter to
purchase up to an additional $2,000,000 of Debentures.
26
<PAGE>
PART II - OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
A. Exhibit 11 Statement of Computation of Earnings Per Share.
B. On February 7, 1994, the Company filed a report on Form 8-K
reporting the Company's earnings for the quarter and year ended
December 31, 1993, and the declaration of a 3% stock dividend to
stockholders of record on February 18, 1994.
C. On March 18, 1994, the Company filed a report on Form 8-K
reporting the impact on the Company's earnings from the January
17, 1994 earthquake in the Los Angeles, California area.
D. On April 21, 1994, the Company filed a Form 8-K relating to Item
5 therein, covering the registrant's release to the business
community of its earnings for the quarter ended March 31, 1994.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST REPUBLIC BANCORP INC.
Date: May 13, 1994 /s/JAMES H. HERBERT, II
--------------------------------
JAMES H. HERBERT, II
President and Chief Executive Officer
Date: May 13, 1994 /s/WILLIS H. NEWTON, JR.
--------------------------------
WILLIS H. NEWTON, JR.
Sr. Vice President and
Chief Financial Officer
(Principal Financial Officer)
28
<PAGE>
EXHIBIT 11
FIRST REPUBLIC BANCORP INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Quarter Ended
March 31,
--------------------------
1994 1993
----------- -----------
<S> <C> <C>
Primary:
Net income available to common stock $ 660,000 $ 2,946,000
Effect of convertible subordinated debentures,
net of taxes (1) 399,000 402,000
----------- -----------
Adjusted net income for fully diluted calculation (1)
(1994 Proforma only) $ 1,059,000 $ 3,348,000
=========== ===========
Weighted average shares outstanding,
beginning of period excluding treasury shares 7,743,965 7,716,087
Effect of stock options exercised during period 3,114 1,379
Weighted average shares of stock purchased by employees 1,896 ---
Weighted average shares of dilutive stock
options under treasury stock method 356,519 264,860
Weighted average shares of treasury stock (28,273) ---
----------- -----------
Adjusted shares outstanding - primary 8,077,221 7,982,326
=========== ===========
Net income per common share - primary $0.08 $ 0.37
=========== ===========
Fully Diluted:
Adjusted shares - primary, from above 8,077,221 7,982,326
Weighted average shares issuable upon conversion
of convertible subordinated debentures (1) 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 10 48
----------- -----------
Adjusted shares outstanding - fully diluted 10,601,441 10,506,584
=========== ===========
Net income per share - fully diluted (1) $0.08 $ 0.32
=========== ===========
</TABLE>
- -----------------
Per share amounts and numbers of shares have been adjusted to reflect the effect
of the 3% stock dividend paid to stockholders of record on February 18, 1994.
(1) Due to the existence of convertible subordinated debentures, the fully-
diluted calculation for 1993 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.
For the first quarter of 1994, the convertible subordinated debentures are
anti-dilutive.
