10-K405
1
FORM 10-K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 COMMISSION FILE NUMBER: 0-15882
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FIRST REPUBLIC BANCORP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2964497
(State or other jurisdiction of (I.R.S., Employer
incorporation or organization) Identification No.)
388 MARKET STREET, 2ND FLOOR, 94111
SAN FRANCISCO, CA (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (415) 392-1400
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Name of each exchange on which registered:
Securities registered pursuant to Section 12(b) of the Act:
New York Stock Exchange
Common Stock, $.01 par value
and
7 1/4% Convertible Subordinated Debentures Due 2002 Pacific Stock Exchange
8 1/2% Subordinated Debentures Due 2008
Securities registered pursuant to Section 12(g) of the Act:
None
INDICATE BY CHECK MARK 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 [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [ X ]
The aggregate market value of the voting stock held by non affiliates of the
registrant, based on the closing price of $10.875 for such stock on March 28,
1995 was $76,538,000.
The number of shares outstanding of the registrant's common stock, par value
$.01 per share, as of March 28, 1995 was 7,385,578.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of registrant's Annual Report to Stockholders for the year ended
December 31, 1994 are incorporated in Parts II and IV of the Form 10-K.
Portions of the Registrant's definitive proxy statement for its annual
meeting of stockholders to be held on May 4, 1995 (which will be filed with the
Commission within 120 days of the registrant's last fiscal year end) are
incorporated in Part III of this Form 10-K.
The index to Exhibits appears on page 32.
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PART I
ITEM 1. BUSINESS
GENERAL
First Republic Bancorp Inc. ("First Republic" and with its subsidiaries, the
"Company") is a financial services holding company operating in California and
Nevada. First Republic conducts its business primarily through a California-
chartered, FDIC-insured, thrift and loan subsidiary, First Republic Thrift &
Loan ("First Thrift"), and also a Nevada-chartered, FDIC-insured thrift and
loan subsidiary, First Republic Savings Bank (together the "Thrifts") operating
in Las Vegas, Nevada. The Company operates both as an originator of loans for
its balance sheet and as a mortgage company, originating, holding or selling,
and servicing mortgage loans.
The Company is engaged in originating real estate secured loans for retention
in the portfolios of the Thrifts. In addition, the Company operates as a
mortgage banking company originating mortgage loans for sale to institutional
investors in the secondary market. The Company also generates fee income by
servicing mortgage loans for such institutional investors and other third
parties. First Thrift's depository activities and advances from the Federal
Home Loan Bank of San Francisco (the "FHLB") are its principal source of funds
with loan principal repayments, sales of loans and capital contributions and
advances from First Republic as supplemental sources. The Company's deposit
gathering activities are conducted in the San Francisco Bay Area, Los Angeles
Area, and San Diego County, California and in Las Vegas, and its lending
activities are concentrated in the San Francisco, Los Angeles and Las Vegas
areas. The San Francisco Bay Area, Los Angeles Area and San Diego County are
among the wealthiest areas in California as measured by average housing costs
and income per family. Las Vegas has been growing rapidly and has experienced
significant inward migration as well as internal business growth.
On December 10, 1993, First Republic acquired First Republic Savings Bank,
when all of its outstanding common stock was acquired for a total purchase
price of $1,414,000 in cash. As a result of this acquisition, accounted for as
a purchase transaction, the Company has recorded goodwill of $93,000 net of
amortization at December 31, 1994. At the date of acquisition, First Republic
Savings Bank's assets consisted primarily of cash of $684,000 and loans of
$1,416,000 and its deposits were $762,000. On January 18, 1994, this entity
relocated to Las Vegas, Nevada and was renamed First Republic Savings Bank.
LENDING ACTIVITIES
The Company's loan portfolio primarily consists of loans secured by single
family residences, multifamily buildings and seasoned commercial real estate
properties. Currently, the Company's strategy is to focus on the origination of
single family and multifamily mortgage loans and to limit the origination of
commercial mortgage loans. A substantial portion of single family loans have
been originated for sale in the secondary market, whereas historically a small
percentage of apartment and commercial loans has been sold. From its inception
in 1985 through December 31, 1994, the Company originated approximately $4.4
billion of loans, of which approximately $1.7 billion were sold to investors.
The Company has emphasized the retention of adjustable rate mortgages
("ARMs") in its loan portfolio. At December 31, 1994, over 96% of the Company's
loans were adjustable rate or were due within one year. If interest rates rise,
payments on ARMs increase, which may be financially burdensome to some
borrowers. Subject to market conditions, however, the Company's ARMs generally
provide for a life cap that is 5% to 6% above the initial interest rate as well
as periodic caps on the rates to which an ARM can increase from its initial
interest rate, thereby protecting borrowers from unlimited interest rate
increases. Also, the ARMs offered by the Company often carry fixed rates of
interest during the initial period of from one to twelve months which are below
the rate determined by the index at the time of origination plus the
contractual margin. Certain ARMs contain provisions for the negative
amortization of principal in the event that the
1
amount of interest and principal due is greater than the required monthly
payment. The amount of any shortfall is added to the principal balance of the
loan to be repaid through future monthly payments, which could cause increases
in the amount of principal owed by the borrower over that which was originally
advanced. At December 31, 1994, the amount of loans with the potential for
negative amortization held by the Company was approximately 9.5% of total loans
and the amount of loans which had actually experienced increases in principal
balance since origination was approximately 0.6% of total loans.
The Company focuses on originating loans secured by a limited number of
property types, located in specific geographic areas. The Company's loans are
of sufficient average size to justify executive management's involvement in
most transactions. The Company's executive loan committee reviews all loan
applications and approves all lending decisions. Substantially all properties
are visited by the originating loan officer, and generally, an additional visit
is made by one of the members of the Executive Loan Committee, either the
President, the Executive Vice President, or another Vice President who is an
underwriting officer prior to loan closing. Approximately 80% of the Company's
loans are secured by properties located within 20 miles of one of the Company's
offices.
The Company utilizes third-party appraisers for appraising the properties on
which it makes loans. These appraisers are chosen from a small group of
appraisers approved by the Company for specific types of properties and
geographic areas. In the case of single family home loans in excess of
$1,100,000, two appraisals are generally required and the Company utilizes the
lower of the two appraised values for underwriting purposes. The Company's
focus on loans secured by a limited number of property types located in
specific geographic areas enables management to maintain a continually updated
knowledge of collateral values in the areas in which the Company operates. The
Company's policy generally is not to exceed an 80% loan-to-value ratio on
single family loans without mortgage insurance. The Company applies stricter
loan-to-value ratios as the size of the loan increases. Under the Company's
policies, an appraisal is obtained on all multifamily and commercial loans and
the loan-to-value ratios generally do not exceed 75% for multifamily loans and
70% for commercial real estate loans.
The Company applies its collection policies uniformly to both its portfolio
loans and loans serviced for others. It is the Company's policy to discuss each
loan with one or more past due payments at a weekly meeting of all lending
personnel. The Company has policies requiring rapid notification of delinquency
and the prompt initiation of collection actions. The Company primarily utilizes
loan officers and senior management in its collection activities in order to
maximize attention and efficiency.
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 loan. These asset review procedures provide management with
additional information for assessing its asset quality.
At December 31, 1994, single family real estate secured loans, including home
equity loans, represented $843,147,000, or 56% of the Company's loan portfolio.
Approximately 66% of these loans were in the San Francisco Bay Area, and
approximately 26% were in the Los Angeles area. The Company's strategy has been
to lend to borrowers who are successful professionals, business executives, or
entrepreneurs and who are buying or refinancing homes in metropolitan
communities. Many of the borrowers have high liquidity and substantial net
worths, and are not first-time home buyers. Additionally, the Company offers
specific loan programs for first time home buyers and borrowers with low- to
moderate-incomes. These are loans secured by single family detached homes,
condominiums, cooperative apartments, and two-to-four unit properties. At
December 31, 1994, the average single family loan amount, excluding equity
lines of credit, was approximately $633,000 and the approximate average loan-
to-value ratio was 66%, using appraised values at the time of loan origination
and current loan balances outstanding.
2
Due to the Company's focus on upper-end home mortgage loans, the number of
single family loans originated is limited (approximately 1,200 for 1994),
allowing the loan officers and executive management to apply the Company's
underwriting criteria to each loan. Repeat customers or their direct referrals
account for the most important source of the loans originated by the Company.
At December 31, 1994, loans secured by multifamily properties totaled
$367,750,000, or 25% of the Company's loan portfolio. The loans are
predominantly on older buildings in the urban neighborhoods of San Francisco
and Los Angeles. Approximately 42% of the properties securing the Company's
multifamily loans were in the San Francisco Bay Area, approximately 24% were in
Los Angeles County, approximately 6% were in other California areas and
approximately 28% were in Clark County (Las Vegas). The buildings are generally
seasoned operating properties with proven occupancy, rental rates and expense
levels. The neighborhoods tend to be densely populated; the properties are
generally close to employment opportunities; and rent levels are generally low
to moderate. Typically, the borrowers are property owners who are experienced
at operating such type of buildings. At December 31, 1994, the average
multifamily mortgage loan size was approximately $1,100,000 and the approximate
average loan-to-value ratio was 65%, using appraised values at the time of
origination and current loan balances outstanding.
The Company has engaged in commercial real estate lending from its formation
in 1985; however, since 1992, in response to economic conditions, the Company
originated a limited amount of commercial real estate loans. The Company has
not made and does not make commercial real estate construction and development
loans. The real estate securing the Company's existing commercial real estate
loans includes a wide variety of property types, such as office buildings,
smaller shopping centers, owner-user office/warehouses, residential hotels,
motels, mixed-use residential/commercial, and retail properties. At the time of
loan closing, the properties are generally completed and occupied. They are
generally older properties located in metropolitan areas with approximately 71%
in the San Francisco Bay Area, approximately 11% in Los Angeles County,
approximately 4% in other California areas and approximately 12% in Las Vegas.
At December 31, 1994, the average loan size was $1,030,000 and the approximate
average loan-to-value ratio was 60%, using appraised values at the time of loan
origination and current balances outstanding. The total amount of such loans
outstanding on December 31, 1994, was $250,369,000, or 17% of the Company's
loan portfolio.
Since May 1990, the Company has originated construction loans secured by
single family and multifamily residential properties and permanent mortgage
loans primarily secured by multifamily and single family properties in the Las
Vegas, Nevada vicinity. In 1994, such loan originations were approximately
$135,700,000 and approximately $97,900,000 of such loans were repaid, compared
to approximately $146,200,000 of loan originations and $102,400,000 of such
loans that were repaid in 1993. Generally, residential construction loans are
short-term in nature and are repaid upon completion or ultimate sale of the
properties. At December 31, 1994, the outstanding balance of the Company's
construction loans was $24,886,000, or 2% of total loans. Construction loans
are made in Las Vegas by an experienced lending team. As a method for limiting
this type of business, the Company's Board of Directors has approved a current
limit of $80,465,000 of total commitments on single family for sale tracts and
a maximum outstanding balance of $3,500,000 at any time per development. Total
outstanding single family construction loans on 24 separate projects were
$14,227,000 at December 31, 1994 with total additional committed loan amounts
of $25,097,000. The Company also has loans to four separate borrowers on four
separate multifamily properties under construction in Las Vegas totalling
$9,408,000 and has issued permanent take-out commitments of up to $18,691,000
on these multifamily projects, conditioned upon the completion of construction,
satisfactory occupancy and rental rates, and certain other requirements.
For construction loans, a voucher system is used for all disbursements. For
each disbursement, an independent inspection service is utilized to report the
progress and percentage of completion of the project. In addition to these
inspections, regular biweekly inspections of all projects are performed by
senior management of First Republic Savings Bank. Checks are made payable to
the various subcontractors and material suppliers, after they have waived their
labor and/or material lien release rights. The request for payment, via
vouchers, is compared to the individual line item in the approved construction
budget to ensure
3
that the disbursements do not exceed the percentage of completion as reported
by a third party inspection service. All vouchers must be approved by
management prior to being processed for payment.
In 1991, the Company began purchasing loans, including seasoned performing
multifamily and commercial real estate loans. Such loans meet the Company's
normal underwriting standards, are generally located in the Company's primary
lending areas, and may be purchased at a discount to their face value. Prior to
the purchase of loans, management conducts a property visit and applies the
Company's underwriting procedures as if a new loan were being originated. Total
loans purchased by the Company, including single family real estate loans, were
$12,342,000 in 1992, $5,447,000 in 1993, and $8,208,000 in 1994.
Since 1989, First Thrift has offered a home equity line of credit program,
with loans secured by first or second deeds of trust on owner-occupied primary
residences. At December 31, 1994, the outstanding balance due under home equity
lines of credit was $28,137,000 and the unused remaining balance was
$45,325,000. These loans carry interest rates which vary with the prime rate
and may be drawn down and repaid during the first 10 years, after which the
outstanding balance converts to a fully-amortizing loan for the next 15 years.
Commercial business loans are generally secured by a mix of real estate,
equipment, inventory and receivables, are primarily adjustable rate in nature,
and are typically made to small businesses. These loans generally have
maturities of 60 months. The yields on these small business loans are typically
greater than the yields on real estate secured loans, and the difference in
such yields reflects a marketplace assessment of the relative risks to the
lender associated with each type of loan. At December 31, 1994, the Company had
approximately 100 commercial business loans with an aggregate balance of
$5,621,000, which accounted for less than 1% of the Company's loan portfolio.
Additionally, certain of the Company's deposit customers have obtained loans
which are fully secured by their thrift certificate balances. These loans
totalled $636,000 at December 31, 1994.
The following table presents an analysis of the Company's loan portfolio at
December 31, 1994 by property type and geographic location. The table does not
include amounts which the Company is committed to lend but which are
undisbursed.
SAN FRANCISCO LOS ANGELES LAS VEGAS PERCENT
BAY AREA COUNTY NEVADA OTHER TOTAL BY TYPE
------------- ----------- --------- ----- ------ -------
($ IN MILLIONS)
PROPERTY TYPE:
Single family(1)..... $557 $219 $ 10 $57 $ 843 56%
Multifamily.......... 154 87 104 23 368 25%
Commercial........... 178 29 30 13 250 17%
Construction......... -- -- 24 -- 24 2%
Other................ 4 6 -- 4 14 --
---- ---- ---- --- ------ ---
Total.............. $893 $341 $168 $97 $1,499 100%
==== ==== ==== === ====== ===
Percent by location.. 60% 23% 11% 6% 100%
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(1) Includes equity lines of credit secured by single family residences and
single family loans held for sale.
MORTGAGE BANKING OPERATIONS
In addition to originating loans for its own portfolio, the Company
participates in secondary mortgage market activities by selling whole loans and
participations in loans to FNMA and FHLMC and various institutional purchasers
such as insurance companies, mortgage conduits and savings and loan
associations. Mortgage banking operations are conducted primarily by First
Thrift. Secondary market sales allow the Company to make loans during periods
when deposit flows decline, or are not otherwise available, and at times when
customers prefer loans with long-term fixed interest rates which the Company
does not choose to retain in its loan portfolio.
4
The following table sets forth the amount of loans originated and purchased
by the Company and the amount of loans sold to institutional investors in the
secondary market.
YEAR ENDED DECEMBER 31,
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1994 1993 1992
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(IN THOUSANDS)
MORTGAGE BANKING ACTIVITY:
Loans originated.................................... $784,486 $944,796 $826,201
Loans purchased..................................... 8,208 5,447 12,342
-------- -------- --------
Total loans originated and purchased.............. $792,694 $950,243 $838,543
======== ======== ========
Loans sold.......................................... $216,951 $425,475 $373,551
The secondary market for mortgage-backed loans is comprised of institutional
investors who purchase loans meeting certain underwriting specifications with
respect to loan-to-value ratios, maturities and yields. Subject to market
conditions, the Company tailors certain real estate loan programs to meet the
specifications of particular institutional investors. The Company retains a
portion of the loan origination fee (points) paid by the borrower and receives
annual servicing fees as compensation for retaining responsibility for the
servicing of all loans sold to institutional investors. See "--Loan Servicing."
The sale of substantially all loans to institutional investors is nonrecourse
to the Company. From its inception, through December 31, 1994, the Company has
sold approximately $1.7 billion of loans to investors, substantially all
nonrecourse, and has retained the servicing on all such loans except for a
limited amount of FHA/VA loans sold servicing released.
The Company sold loans to ten institutional investors in 1992, to eight
institutional investors in 1993, and to eight institutional investors in 1994.
The terms and conditions under which such sales are made depend upon, among
other things, the specific requirements of each institutional investor, the
type of loan, the interest rate environment and the Company's relationship with
the institutional investor. The majority of the Company's sales of multifamily
and commercial real estate loans have been made pursuant to individually
negotiated whole loan or participation sales agreements for individual loans or
for a package of such loans. In the case of single family residential loans,
the Company obtains in advance formal commitments under which the investors are
committed to purchase up to a specific dollar amount of whole loans over a
specified period of time. The terms of the commitments vary with each
institutional investor and generally range from two months to one year. The
fees paid for such commitments also vary with each investor and by the length
of such commitment. Management expects to enter into additional formal and
informal commitments in the future as it develops working relationships with
additional institutional investors; however, the recent rising interest rate
environment has made it difficult for the Company to obtain commitments for the
sale of loans with acceptable terms on a timely basis. Loans are classified as
held for sale when the Company is waiting for purchase by an investor under a
flow program or is negotiating for the sale of specific loans which meet
selected criteria to a specific investor.
Underwriting criteria established by investors in adjustable and fixed rate
single family residential loans generally include the following: maturities of
15 to 30 years, a loan-to-value ratio no greater than 90% (which percentage
generally decreases as the size of the loan increases and is limited to 80%
unless there is mortgage insurance on the loan), the liquidity of the
borrower's other assets and the borrower's ability to service the debt out of
income. Interest rates on adjustable rate loans are adjusted semiannually or
annually primarily on the basis of either the One-Year Treasury Constant
Maturity Index or the Eleventh District Federal Home Loan Bank Board Cost of
Funds Index. Some loans may be fixed for an initial period of up to several
years and become adjustable thereafter. Except for the amount of the loan, the
underwriting standards of the investors generally conform to certain
requirements established by the Federal National Mortgage Association ("FNMA")
or the Federal Home Loan Mortgage Corporation ("FHLMC"). Underwriting criteria
established by investors in multifamily and commercial real estate loans
generally include the following: maturities of 10 to 30 years, with a 25 to 30
year amortization schedule, a loan-to-value ratio no greater than 75% and a
debt coverage ratio (based on the property's cash flow) of 1-to-1. Loans sold
in the secondary market are generally secured by a first deed of trust.
5
LOAN SERVICING
The Company has retained the servicing on all non-government loans sold to
institutional investors, thereby generating ongoing servicing revenues. Also,
in 1990 and, to a lesser extent, in 1991, it purchased mortgage servicing
rights on the open market. The Company's mortgage servicing portfolio was
$843.1 million and $814.5 million at December 31, 1994 and 1993, respectively.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, holding escrow (impound) funds for payment of taxes and
insurance, making inspections as required of the mortgaged property, collecting
amounts due from delinquent mortgagors, supervising foreclosures in the event
of unremedied defaults and generally administering the loans for the investors
to whom they have been sold. Management believes that the quality of its loan
servicing capability is a factor which permits it to sell its loans in the
secondary market and to purchase servicing rights at competitive prices.
The Company receives fees for servicing mortgage loans, ranging generally
from 0.125% to 1.25% per annum on the declining principal balances of the
loans. The average service fee collected by the Company was 0.36% for 1994,
0.38% for 1993 and 0.41% for 1992. Servicing fees are collected and retained by
the Company out of monthly mortgage payments. The Company's servicing portfolio
is subject to reduction by reason of normal amortization and prepayment or
liquidation of outstanding loans. A significant portion of the loans serviced
by the Company have outstanding balances of greater than $200,000, and at
December 31, 1994 approximately 59% were adjustable rate mortgages. The
weighted-average mortgage loan note rate of the Company's servicing portfolio
at December 31, 1994 was 7.03% for ARMs and 7.68% for fixed rate loans. Many of
the existing servicing programs provide for full payments of principal and
interest to be remitted by the Company, as servicer, to the investor, whether
or not received from the borrower. Upon ultimate collection, including the sale
of foreclosed property, the Company is entitled to recover any such advances
plus late charges prior to payment to the investor.
The Company accounts for revenue from the sale of loans where servicing is
retained in conformity with the requirements of Statement of Financial
Accounting Standards No. 65. Gains and losses are recognized at the time of
sale by comparing sales price with carrying value. A premium results when the
interest rate on the loan, adjusted for a normal service fee, exceeds the pass-
through yield to the buyer. Premiums are calculated as the present value of
excess service fees expected to be collected in future periods and are
amortized over the estimated life of the loans, based on market factors,
including estimated prepayments. The Company adjusts the premium on the sale of
loans on a quarterly basis to reflect actual prepayments on the underlying loan
portfolio. At December 31, 1994, this asset (reported as "premium on sale of
loans" and included in the Company's balance sheet as "Other Assets") was
$793,000 as compared to $903,000 at December 31, 1993.
"Purchased servicing rights" represent the carrying cost of bulk purchases of
servicing rights and are also included in the Company's balance sheet as "Other
Assets." These carrying costs are amortized in proportion to, and over the
period of, estimated net servicing income. No significant servicing rights were
purchased in bulk prior to June 1990. Servicing rights on $443,000,000 of loans
were purchased at a cost of $4,417,000 in early 1991 and the last half of 1990.
No servicing rights were purchased in 1994, 1993 or 1992. The purchases were
made to expand the Company's portfolio of loans serviced for others, allowing
the more effective use of the existing servicing capacity and resulting in
increased efficiency on a per loan basis. In order to hedge against the
possible loss of servicing income that might result from a more rapid than
anticipated prepayment of the underlying loans in the event of a significant
decline in interest rates from purchase until May 1993, the Company purchased
call options on $20 million of ten-year U.S.Treasury Notes, which became more
valuable in a declining interest rate environment. At December 31, 1994, the
carrying cost of the purchased servicing rights described above was fully
amortized. At December 31, 1993, the carrying cost of purchase servicing
rights, net of amortization, was $251,000. Amortization of the carrying value
of premium on sale of loans and the carrying cost on purchased servicing rights
totalled $687,000 in 1994, $1,753,000 in 1993, and $1,960,000 in 1992.
6
A declining and relatively low interest rate environment existed for most of
1992 and 1993. When interest rates are low, the rate at which mortgage loans
are prepaid tends to increase as borrowers refinance fixed rate loans to lower
rates or convert from adjustable rate to fixed rate loans. Low rates also
increase housing affordability, stimulating purchases by first time home buyers
and trade up transactions by existing homeowners. The level and value of the
Company's loan servicing portfolio, including purchased servicing rights, were
adversely affected by the low mortgage interest rates of 1992 and 1993, leading
to higher loan prepayments and lower income generated from the Company's loan
servicing portfolio. This negative effect on the Company's income was offset
somewhat by a rise in origination and servicing income attributable to new loan
originations, which increased during those years. From 1991 to 1993, the
Company closed its loan servicing hedge position, resulting in total gains of
approximately $1,200,000 which were used by the Company to reduce the recorded
value of its purchased servicing rights. In addition, the Company has
amortized, as a reduction of servicing fee revenues, the cost of purchased
servicing rights at a rate generally consistent with the actual repayment
experience. With the increase in general market rates of interest, including
the rates for fixed rate mortgage loans, which occurred throughout 1994, the
Company experienced a lower volume of loan originations, loan sales, gain on
sale of loans and repayments of loans serviced. See "--Asset and Liability
Management."
The following table sets forth the dollar amounts of the Company's mortgage
loan servicing portfolio at the dates indicated, the portion of the Company's
loan servicing portfolio resulting from loan originations and purchases,
respectively, and the carrying value as a percentage of loans serviced.
Although the Company intends to continue to increase the size of its servicing
portfolio, such growth will depend on market conditions including the future
level of loan originations, sales and prepayments.
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
($ IN THOUSANDS)
LOAN SERVICING PORTFOLIO:
Loans originated by the Company and sold......... $783,102 $724,251 $601,212
Purchased mortgage servicing rights.............. 60,042 90,202 180,352
-------- -------- --------
Total.......................................... $843,144 $814,453 $781,564
======== ======== ========
Premium on loans sold and cost of purchased
servicing rights................................ $ 793 $ 1,154 $ 2,956
Premium on loans sold and cost of purchased
servicing rights as a percentage of loans
serviced........................................ 0.09% 0.14% 0.38%
INVESTMENTS
The Company purchases short-term money market instruments as well as U.S.
Government securities and other mortgage-backed securities ("MBS") in order to
maintain a reserve of liquid assets to meet liquidity requirements and as
alternative investments to loans. The Company has generated agency MBS by
originating qualifying adjustable rate mortgage loans for sale to the agencies
and pooling such loans into securities. At December 31, 1994, the Company's
investment portfolio included the following securities in the proportions
listed: U.S. Government--20%; agency MBS--21%; and other MBS--50%.
At December 31, 1994, the Company's investment portfolio totalled
$129,628,000 (8% of total assets) as compared to $84,208,000 (6% of total
assets) at December 31, 1993. The securities in the Company's investment
portfolio at December 31, 1994 had contractual maturities generally ranging
from six months to thirty years.
7
The following table provides the remaining contractual principal maturities
and yields (taxable-equivalent basis) of debt securities within the investment
portfolio at December 31, 1994. The remaining contractual principal maturities
for mortgage-backed securities were allocated assuming no prepayments. Expected
remaining maturities will differ from contractual maturities because borrowers
may have the right to prepay obligations with or without penalties. At December
31, 1994, there were no investment securities classified as held to maturity
owned by the Company with a contractual principal maturity of after one year
but before the end of five years.
REMAINING CONTRACTUAL PRINCIPAL MATURITY
------------------------------------------
WITHIN 1 AFTER 5
WEIGHTED YEAR YEARS AFTER 10 YEARS
TOTAL AVERAGE ------------ ------------ --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- -------- ------ ----- ------ ----- -------- -----
($ IN THOUSANDS)
Held-to-Maturity Debt
Securities:
U.S. Government......... $ 25,431 7.69% $ 897 5.27% $867 7.23% $ 23,667 7.80%
Agency MBS.............. 26,876 5.18 -- -- -- -- 26,876 5.18
Other MBS............... 65,404 6.27 -- -- -- -- 65,404 6.27
Other Debt Securities... 167 8.24 152 8.13 15 9.39 -- --
-------- ---- ------ ---- ---- ---- -------- ----
Total Basis (Cost).... $117,878 6.33% $1,049 5.68% $882 7.26% $115,947 6.33%
======== ==== ====== ==== ==== ==== ======== ====
Estimated Fair Value.... $115,448 $1,039 $875 $113,534
======== ====== ==== ========
At December 31, 1994, the Company owned a portfolio of adjustable rate
perpetual preferred stocks, which have no stated maturities and therefore are
classified as available for sale; these securities, which are considered equity
securities, had an original cost of $13,760,000 and a fair value of $11,750,000
at December 31, 1994.
At December 31, 1994, all but $15,000 of the investment securities were due
in one year or were adjustable, with rates which were generally subject to
change monthly, quarterly or semiannually and varied according to several
interest rate indices. Yields have been calculated by dividing the projected
interest income at current interest rates, including discount or premium, by
the carrying value. Most of the securities having maturities exceeding 10 years
are adjustable U.S. Government guaranteed loan pools, agency MBS and other MBS
which, as a class, have actual maturities substantially shorter than their
contractual maturities.
The following summarizes by category the amortized cost and fair market value
of investment securities which were classified as held for investment at the
dates indicated:
DECEMBER 31, 1993 DECEMBER 31, 1992
----------------- -----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------- --------- -------
(IN THOUSANDS) (IN THOUSANDS)
Investment Securities:
U.S. Government............................ $25,404 $26,135 $27,300 $27,611
Agency MBS................................. 13,788 14,054 5,517 5,501
Other MBS.................................. 44,655 44,513 7,352 7,197
Corporate bonds and other.................. 361 361 469 469
------- ------- ------- -------
Total.................................... $84,208 $85,063 $40,638 $40,778
======= ======= ======= =======
FUNDING SOURCES
The Thrifts obtain funds from depositors by offering passbook accounts and
term investment certificates or term deposits. The Thrifts' accounts are
federally insured by the FDIC up to the legal maximum. First Thrift has
typically offered somewhat higher interest rates to its depositors than do most
full service financial institutions. At the same time, it minimizes the cost of
maintaining these accounts by not offering transaction accounts or high
operating cost services such as full-service checking, safe deposit boxes,
money orders, ATM access and other traditional retail services. This limited
product operation results in substantial cost savings
8
which exceed the differential interest rates paid. The Thrifts effect deposit
withdrawals by issuing checks rather than disbursing cash, which minimizes
operating costs associated with handling and storing cash, of which it does
none. In addition, the Thrifts do not actively solicit deposit accounts of less
than $5,000.
The Thrifts advertise in local newspapers to attract deposits; and since
1988, First Thrift has performed a limited direct telephone solicitation of
potential institutional depositors such as credit unions, small commercial
banks, and pension plans. At December 31, 1994, no individual depositor or
source of deposits represented 0.7% or more of First Thrift's deposits.
Prior to mid-1992, First Thrift utilized certificates with a balance of
$100,000 or more, generally having maturities in excess of six months, to fund
a portion of its assets. Existing bank regulations define brokered deposits,
jumbo certificates and borrowings with a maturity of less than one year as
"volatile liabilities." Volatile liabilities are compared to cash, short-term
investment and investments which mature within one year ("liquid assets") to
calculate the volatile liability "dependency ratio," a measure of regulatory
liquidity. The level of such liquid assets should generally be higher in
comparison with volatile liabilities if a financial institution has large
negotiable liabilities like checking accounts, substantial future lending or
off-balance sheet commitments, or a history of significant asset growth.
Since mid-1992, First Thrift has significantly altered its volatile liability
dependency ratio by maintaining a reduced level of larger certificates and a
higher level of cash and investments relative to its short-term borrowings. At
December 31, 1994, First Thrift's cash and investments exceeded its volatile
liabilities by $62,148,000. First Thrift has adopted a policy to discontinue
accepting most larger certificates and, upon maturity, to return a portion or
all of the funds on existing larger certificates. At year-end 1994, First
Thrift had not accepted brokered deposits for more than five years and the
balance of $99,000 of brokered deposits at December 31, 1994, represented 0.01%
of total deposits. Management does not plan to renew such deposits upon their
scheduled maturity. At December 31, 1994, First Thrift's time certificates
$100,000 or more totalled $39,516,000 of which $37,915,000, or 96%, were from
retail consumer depositors. At December 31, 1994, First Republic Savings Bank
had time certificates over $100,000, totalling $600,000. For the Company,
average maturity of all time certificates was 11 months and the average
certificate amount per depositor was approximately $35,000 at December 31,
1994.
The following table shows the maturity of the Thrifts' certificates of
$100,000 or more at December 31, 1994.
FIRST REPUBLIC
FIRST THRIFT SAVINGS BANK
------------ --------------
($ IN THOUSANDS)
Remaining maturity:
Three months or less.......................... $ 7,862 $--
Over three through six months................ 3,735 --
Over six through 12 months................... 12,008 600
Over 12 months............................... 15,911 --
------- ----
Total......................................... $39,516 $600
======= ====
Percent of total deposits..................... 4.16% 1.77%
First Thrift also utilizes term FHLB advances and, to a lesser extent,
repurchase agreements, as funding sources. Since August 1990, the Company has
utilized term FHLB advances as an alternative 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 December 31, 1994, total FHLB advances
outstanding were $570,530,000. Of this amount, $526,530,000, or 92%, had an
original maturity of 10 years or longer. The remaining $44,000,000 is due in
1995. The longer-term advances provide the Company with a stable primarily
adjustable rate funding source for assets with longer lives. See "--Asset and
Liability Management."
9
First Republic Savings Bank will apply for FHLB membership in 1995 and, if
approved, it is expected that term adjustable rate advances will be used to
fund a portion of its assets.
The following table sets forth certain information with respect to the
Company's short-term borrowings at the dates indicated.
DECEMBER 31,
-------------------------
1994 1993 1992
------- ------- -------
($ IN THOUSANDS)
Short-Term Borrowings(1):
FHLB advances--short-term........................... $ -- $10,000 $ --
Repurchase agreements(2)............................ -- 12,380 --
------- ------- -------
Total............................................. $ -- $22,380 $ --
======= ======= =======
Maximum amount outstanding at any month-end during
period............................................. $18,715 $22,380 $23,780
Average amount outstanding during period............ 2,528 705 6,894
Average rate on short-term borrowings--in period.... 3.66% 3.45% 4.80%
--------
(1) The amounts shown at the dates indicated are not necessarily reflective of
the Company's activity in short-term borrowings during the periods.
(2) See Note 7 of Notes to Consolidated Financial Statements for a discussion
of general terms relating to repurchase agreements.
ASSET AND LIABILITY MANAGEMENT
The Company seeks to manage its asset and liability portfolios to help reduce
any adverse impact on the its net interest income caused by 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 and retention 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 has established a
program to obtain deposits by offering generally six month to five-year term
investment certificates for the purpose of providing funds for adjustable rate
mortgage loans with repricing periods of six months or more and for other
matching term maturities.
10
The following table summarizes the differences between the Company's maturing
or rate adjusting assets and liabilities at December 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; this is the Company's
position as of December 31, 1994 for the three months and less and six months
and less categories, in accordance with its current policy of having more
assets than liabilities reprice for these periods. Conversely, when maturing or
rate adjusting liabilities exceed maturing or rate adjusting assets during a
given period, a rising rate environment generally will inhibit earnings and
declining rates will serve to enhance earnings. The table illustrates projected
maturities or interest rate adjustments based upon the contractual maturities
or adjustment dates at December 31, 1994.
ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
MATURING OR ADJUSTING DURING
PERIODS SUBSEQUENT TO DECEMBER 31, 1994
NON-
3 MONTHS 3 TO 6 6 TO 12 1 TO 2 OVER INTEREST
IMMEDIATE OR LESS MONTHS MONTHS YEARS 2 YEARS SENSITIVE TOTAL
--------- -------- -------- --------- --------- --------- --------- ----------
($ IN THOUSANDS)
Assets:
Loans(1)................ $ -- $776,400 $531,967 $ 123,639 $ 14,300 $ 52,357 $ -- $1,498,663
Securities.............. -- 101,606 34,827 21,707 -- 15 -- 158,155
Cash and short-term
investments............ 16,920 15,698 -- -- -- -- -- 32,618
Noninterest-earning
assets, net............ -- -- -- -- -- -- 17,883 17,883
------- -------- -------- --------- --------- --------- --------- ----------
Total.................. $16,920 $893,704 $566,794 $ 145,346 $ 14,300 $ 52,372 $ 17,883 $1,707,319
======= ======== ======== ========= ========= ========= ========= ==========
Liabilities and
Stockholders' Equity:
Passbooks and MMA
accounts(2)............ $ -- $117,526 $ 12,113 $ 6,134 $ 2,953 $ -- $ -- $ 138,726
Investment certificates:
$100,000 or greater.... -- 7,862 3,735 12,608 11,211 4,700 -- 40,116
Less than $100,000..... -- 177,689 142,567 214,758 174,980 59,997 -- 769,991
FHLB advances--long
term................... -- 280,530 140,000 102,000 -- 48,000 -- 570,530
ESOP debt............... 650 -- -- -- -- -- -- 650
Other short-term debt... -- -- -- -- -- -- -- --
Other liabilities....... -- -- -- -- -- -- 15,843 15,843
Subordinated debentures. -- -- -- -- -- 64,177 -- 64,177
Stockholders' equity.... -- -- -- -- -- -- 107,286 107,286
------- -------- -------- --------- --------- --------- --------- ----------
Total.................. $ 650 $583,607 $298,415 $ 335,500 $ 189,144 $ 176,874 $ 123,129 $1,707,319
======= ======== ======== ========= ========= ========= ========= ==========
Net repricing assets
over (under) repricing
liabilities equals
primary GAP............ $16,270 $310,097 $268,379 $(190,154) $(174,844) $(124,502) $(105,246)
Effect of interest rate
swaps.................. -- 20,000 45,000 (40,000) -- (25,000) --
------- -------- -------- --------- --------- --------- ---------
Hedged GAP.............. $16,270 $290,097 $223,379 $(150,154) $(174,844) $ (99,502) $(105,246)
======= ======== ======== ========= ========= ========= =========
Hedged GAP as a
percentage of total
assets................. 0.95% 16.99% 13.08% (8.79)% (10.24)% (5.82)% (6.16)%
======= ======== ======== ========= ========= ========= =========
Cumulative hedged GAP... $16,270 $306,367 $529,746 $ 379,592 $ 204,748 $ 105,246 $ --
======= ======== ======== ========= ========= ========= =========
Cumulative hedged GAP as
percentage of total
assets................. 0.95% 17.94% 31.03% 22.23% 11.99% 6.16% 0.00%
======= ======== ======== ========= ========= ========= =========
--------
(1) Adjustable rate loans consist principally of real estate secured loans with
a maximum term of 30 years. Such loans are generally adjustable monthly,
semiannually, or annually based upon changes in the One Year Treasury
Constant Maturity Index, the Federal Reserve's Six Month CD Index, or the
FHLB 11th District Cost of Funds Index (COFI), subject generally to a
maximum increase of 2% annually and 5% over the lifetime of the loan.
(2) Passbook and MMA account maturities and rate adjustments are allocated
based upon management's experience of historical interest rate volatility
and erosion rates. However, all passbook and MMA accounts are contractually
subject to immediate withdrawal.
11
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 reprice, 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, 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.
Additional information is provided under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Asset and
Liability Management" on pages 41 and 42 of the Company's 1994 Annual Report to
stockholders.
FIRST REPUBLIC AND SUBSIDIARIES
First Republic was incorporated in February 1985. First Republic, which owns
all of the capital stock of First Thrift, and First Republic Savings Bank,
provides executive management to each of its subsidiaries and formulates and
directs the implementation of an integrated business strategy for the Company.
In June 1985, First Republic purchased all of the outstanding capital stock
of an inactive California-chartered thrift and loan company which had begun
operations in California in 1953. Upon its acquisition by First Republic, the
company was renamed First Republic Thrift & Loan.
In December 1993, First Republic acquired in a purchase transaction all of
the common stock in a Nevada state chartered thrift and loan. Upon approval by
federal and state regulatory agencies, this institution was relocated to Las
Vegas, Nevada in January 1994 and renamed First Republic Savings Bank. The
purpose of this acquisition was to enable the Company to gather deposits in the
Las Vegas, Nevada area and to continue its lending activities under a full
service financial institution. In January 1994, the employees responsible for
construction and income property lending were transferred to First Republic
Savings Bank.
In May 1990, First Republic established a wholly-owned mortgage originating
subsidiary, First Republic Mortgage, Inc., which commenced operations from its
office in Las Vegas. Until January 1994, First Republic Mortgage, Inc.
originated construction loans for First Thrift on low- and moderate-income
single family homes and multifamily units and originated permanent mortgage
loans on low- and moderate-income multifamily units and on commercial real
estate properties, all of which properties are located in and proximate to Las
Vegas. In 1994, First Republic transferred all operations and employees of
First Republic Mortgage Inc. to First Republic Savings Bank and, at December
31, 1994 First Republic Mortgage Inc. had been dissolved.
COMPETITION
The Company faces strong competition both in the attraction of deposits and
in the making of real estate secured loans. The Company competes for deposits
and loans by advertising, by offering competitive interest rates and by seeking
to provide a higher level of personal service than is generally offered by
larger competitors. The Company does not have a significant market share of the
deposit-taking or lending activities in the areas in which it conducts
operations.
Management believes that its most direct competition for deposits comes from
savings and loan associations, other thrift and loan companies, commercial
banks and credit unions. The Company's cost of funds fluctuates with market
interest rates and also has been affected by higher rates being offered by
certain institutions. During certain interest rate environments, additional
significant competition for deposits may be expected to arise from corporate
and governmental debt securities as well as money market mutual funds.
12
The Company's competition in making loans comes principally from savings and
loan associations, mortgage companies, other thrift and loan companies,
commercial banks, and, to a lesser degree, credit unions and insurance
companies. Aggressive pricing policies of the Company's competitors on new ARM
loans, especially during a declining period of mortgage loan originations such
as experienced in 1994, has resulted in a decrease in the Company's mortgage
loan origination volume and a decrease in the profitability of the Company's
loan originations. Many of the nation's largest savings and loan associations,
mortgage companies and commercial banks have a significant number of branch
offices in the areas in which the Company operates. Increased competition for
mortgage loans from larger institutional lenders has resulted and may continue
to result in a decrease in the Company's mortgage loan originations. The
Company competes for loans principally through the quality of service it
provides to borrowers, real estate brokers and loan agents, while maintaining
competitive interest rates, loan fees and other loan terms.
REGULATION
The Thrifts are subject to regulation, supervision and examination under both
federal and state law. First Thrift is subject to supervision and regulation by
the Commissioner of Corporations of the State of California (the "California
Commissioner") and, as a member institution, by the FDIC. First Republic
Savings Bank is subject to supervision and regulation by the Commissioner,
Financial Institutions Division, Department of Commerce, State of Nevada (the
"Nevada Commissioner") and, as a member institution, by the FDIC. Neither First
Republic, nor the Thrifts are regulated or supervised by the Office of Thrift
Supervision, which regulates savings and loan institutions. First Republic is
not directly regulated or supervised by the California Commissioner, the Nevada
Commissioner, the FDIC, the Federal Reserve Board or any other bank regulatory
authority, except with respect to the general regulatory and enforcement
authority of the California Commissioner, the Nevada Commissioner and the FDIC
over transactions and dealings between First Republic and the Thrifts, and
except with respect to both the specific limitations regarding ownership of the
capital stock of the parent company of any thrift and the specific limitations
regarding the payment of dividends from the Thrifts discussed below. Future
federal legislation could cause First Republic to become subject to direct
federal regulatory oversight; however, the full impact of any such legislation
and subsequent regulation cannot be predicted.
California Law
The thrift and loan business conducted by First Thrift is governed by the
California Industrial Loan law and the rules and regulations of the California
Commissioner which, among other things, regulate in certain limited
circumstances the maximum interest rates payable on certain thrift deposits as
well as the collateral requirements and maximum maturities of the various types
of loans that are permitted to be made by California-chartered industrial loan
companies, i.e., thrift and loan companies or thrifts.
Subject to restrictions imposed by applicable California law, First Thrift is
permitted to make secured and unsecured consumer and non-consumer loans. The
maximum term for repayment of loans made by thrift and loan companies range up
to 40 years and 30 days depending upon collateral and priority of secured
position, except that loans with repayment terms in excess of 30 years and 30
days may not in the aggregate exceed 5% of total outstanding loans and
obligations of the thrift. Although secured loans may generally be repayable in
unequal periodic payments during their respective terms, consumer loans secured
by real property with terms in excess of three years must be repayable in
substantially equal periodic payments unless such loans are covered under the
Garn-St. Germain Depository Institutions Act of 1982 which applies primarily to
single family residential loans.
Loans made to persons who reside outside California or who do not have a
place of business in California are limited to a maximum 30% of a thrift and
loan's portfolio; however, this limitation has ceased to apply to loans (i)
made to purchase or refinance single family or multifamily residential
property, (ii) that are saleable in the secondary market, evidenced by a
commitment therefor, and (iii) that are owned by the thrift for 90 days or
less.
13
Upon application to and approval by the California Commissioner, thrifts may
operate loan production offices outside California, subject to certain
conditions as may be imposed by the California Commissioner.
California law contains extensive requirements for the diversification of the
loan portfolios of thrift and loan companies. A thrift and loan with
outstanding investment certificates may not, among other things: (i) place more
than 25% of its loans or other obligations in loans or obligations which are
secured only partially, but not primarily, by real property; (ii) may not make
any one loan secured primarily by improved real property that exceeds 20% of
its paid-up and unimpaired capital stock and surplus not available for
dividends; (iii) may not lend an amount in excess of 5% of its paid-up and
unimpaired capital stock and surplus not available for dividends upon the
security of the stock of any one corporation; (iv) may not make loans to, or
hold the obligations of, any one person as primary obligor in an aggregate
principal amount exceeding 20% of its paid-up and unimpaired capital stock and
surplus not available for dividends; and (v) may have no more than 70% of its
total assets in loans which have remaining terms to maturity in excess of seven
years and are secured solely or primarily by real property. Loans and
obligations are considered as having a term of less than seven years if either
(1) they are guaranteed or insured by any federal or state agency, or, (2) they
are for the purchase or refinance of residential property, salable to qualified
institutional buyers as evidenced by irrevocable commitments, and owned by the
thrift and loan for 90 days or less. At December 31, 1994, First Thrift
satisfied all of these requirements. Management believes that First Thrift can
maintain compliance with these statutory requirements by managing the mix of
its assets and loans without any material adverse impact on earnings or
liquidity.
Under California law, a thrift and loan generally may not make any loan to,
or hold an obligation of, any of its directors or officers, except in specified
cases and subject to regulation by the California Commissioner. In addition, a
thrift and loan may not make any loan to, or hold an obligation of, any of its
shareholders or any shareholder of its holding company or affiliates, except
that this prohibition does not apply to persons who own less than 10% of the
stock of a holding company or affiliate which is listed on a national
securities exchange, such as First Republic. Any person who wishes to acquire
10% or more of the capital stock of a California thrift and loan company or 10%
or more of the voting capital stock or other securities giving control over
management of its parent company must obtain the prior written approval of the
California Commissioner. If a stockholder failed to obtain the required
approval and engaged in a proxy contest in opposition to management of First
Republic, First Republic might seek to utilize the provisions of California law
described above to invalidate that stockholder's votes. It is not certain that
such an attempt by First Republic would be successful under California law.
A thrift is subject to certain leverage limitations that are not generally
applicable to commercial banks or savings and loan associations. In particular,
thrifts which have been in operation in excess of 60 months may, with written
approval of the California Commissioner, have outstanding at any time
investment certificates not to exceed 20 times paid-up and unimpaired capital
and surplus. Increases in leverage under California law must also meet
specified minimum standards for liquidity reserves in cash, loan loss reserves,
minimum capital stock levels and minimum unimpaired paid-in surplus levels.
First Thrift satisfied all of these standards at December 31, 1994. Thrift and
loan companies are not permitted to borrow, except by the sale of investment or
thrift certificates, in an amount exceeding 300% of outstanding capital stock,
surplus and undivided profits, without the California Commissioner's prior
consent. All sums borrowed in excess of 150% of outstanding capital stock,
surplus and undivided profits must be unsecured borrowings or, if secured,
approved in advance by the California Commissioner, and be included as
investment or thrift certificates for purposes of computing the above ratios;
however, collateralized FHLB advances are excluded for this test of secured
borrowings and are not specifically limited by California law.
Under California law, thrift and loan companies are generally limited to
investments which are legal investments for California commercial banks. In
general, California commercial banks are prohibited from investing an amount
exceeding 15% of shareholders' equity in the securities of any one issuer,
except for specified obligations of the United States, California and local
governments and agencies. A thrift and loan company may acquire real property
only in satisfaction of debts previously contracted, pursuant to certain
foreclosure transactions or as may be necessary as premises for the transaction
of its business, in which case
14
such investment is limited to one-third of a thrift and loan's paid in capital
stock and surplus not available for dividends. The Thrifts are also governed by
various state and federal consumer protection laws including Truth in Lending,
Truth in Saving and the Real Estate Settlement Procedures Act.
The California Industrial Loan Law allows a thrift to increase its secondary
capital by issuing interest-bearing capital notes in the form of subordinated
notes and debentures. Such notes are not deposits and are not insured by the
FDIC or any other governmental agency, generally are required to have an
initial maturity of at least seven years, and are subordinated to deposit
holders, general creditors and secured creditors of the issuing thrift.
Nevada Law
The Nevada Thrift Companies Act ("Nevada Act") governs the licensing and
regulations of Nevada thrift companies in much the manner the California
Industrial Loan Law does for California thrift and loan companies. The Nevada
Commissioner is charged with the supervision and regulation of First Republic
Savings Bank ("FRSB"). The Nevada Commissioner approved the change of name from
Silver State Thrift and Loan to FRSB concurrently with the approval of the
acquisition of FRSB by the Company in 1993.
Under the Nevada Act, there is no interest rate limitation on loans; however
any loan in excess of $50,000 must be secured by collateral having a market
value of at least 115 percent of the amount due. The net amount of advance on
loans secured by deposits may not exceed 90 percent of the amount of said
deposit collateral. There are no terms or amortization restrictions on loans.
FRSB is required to invest its funds as set forth in the Nevada Act and in
investments which are legal investments for banks and savings associations
subject to any limitation under federal law (See--"Federal Law"). Secured loans
to one person as primary obligor may not exceed 25 percent of capital and
surplus and, except as to limitations on loans to one borrower, loans secured
by real or personal property, may be made to any person without regard to the
location or nature of the collateral.
Substantially as under the California Industrial Loan Law for California
thrift and loan companies, the Nevada Act restricts transactions with officers,
directors and shareholders as well as transactions with regard to holding,
developing and carrying real property.
In 1985, the Nevada Act was amended to prohibit issuance of thrift
certificates and required insurance for deposits. Therefore, FRSB accepts
deposits rather than issuing investment certificates. However, by order of the
Nevada Commissioner when FRSB was acquired by the Company, FRSB is not
authorized to accept demand deposits. The total number of deposits which FRSB
may accept is governed by limits which may be imposed by the Federal Deposit
Insurance Corporation ("FDIC").
Under the Nevada Act, changes in stock ownership of a thrift company require
notifications to the Nevada Commissioner if ownership of 5 percent or more of
the outstanding voting stock changes. Additionally, if 25 percent or more
thereof changes ownership or there is a change in control resulting from a
change in ownership, then an approval must be first obtained from the Nevada
Commissioner.
In addition to remedies available to the FDIC, the Nevada Commissioner may
take possession of a thrift company if certain conditions exist.
Federal Law
The Thrifts' deposits are insured by the FDIC to the full extent permissible
by law. As an insurer of deposits, the FDIC issues regulations, conducts
examinations, requires the filing of reports and generally supervises the
operations of institutions to which it provides deposit insurance. The Thrifts
are subject to the rules and regulations of the FDIC to the same extent as
other financial institutions which are insured by that entity. The approval of
the FDIC is required prior to any merger, consolidation or change in control,
or the establishment or relocation of any branch office of the Thrifts. This
supervision and regulation is intended primarily for the protection of the
depositors and to ensure services for the public's convenience and advantage.
15
In August 1992, First Thrift agreed pursuant to a Memorandum of Understanding
with the FDIC to limit its net loan growth to not more than 2.5% per quarter,
to enhance certain operating policies and procedures, including its internal
asset review practice, and to provide certain reports to the FDIC. First Thrift
fulfilled its obligations under the agreement, which was rescinded by the FDIC
in May 1993.
Also, First Thrift has enhanced its compliance and loan administration
functions, including the annual revision of its policies and procedures, the
hiring or reallocation of personnel, and the implementation of a more
systematic loan review function.
Pursuant to FDIC regulations, at least 30 days prior to embarking on any
special funding arrangement designed to increase assets of an insured
institution by more than 7.5% in any consecutive three month period, notice
must be given to the FDIC. A special funding arrangement means a specific
effort to increase assets through solicitation and acceptance of fully insured
deposits from or through brokers or affiliates, outside an institution's normal
traffic area, or secured or unsecured borrowings (other than through repurchase
agreements). If a thrift is determined to be undercapitalized, other
restrictions apply to its asset growth. Previously, the Company has given
notice of its intent to increase assets in excess of 7.5% during the following
three months. The FDIC has acknowledged these notices without objection. If
additional notices are required for subsequent periods, there can be no
assurance that future approval from the FDIC will be obtained. Objection by the
FDIC could lead to the requirement that the thrifts limit future asset growth.
In 1989, the FDIC and the other Federal regulatory agencies adopted final
risk-based capital adequacy standards applicable to financial institutions like
the thrifts whose deposits are insured by the FDIC and bank holding companies.
These guidelines provide a measure of capital adequacy and are intended to
reflect the degree of risk associated with both on and off-balance sheet items,
including residential loans sold with recourse, legally binding loan
commitments and standby letters of credit. Under these regulations, financial
institutions are required to maintain capital to support activities which in
the past did not require capital. Unlike the Thrifts, at the present time First
Republic is not directly regulated by any bank regulatory agency and is not
subject to any minimum capital requirements. If First Republic were to become
subject to direct federal regulatory oversight, there can be no assurance that
First Republic's existing senior subordinated debentures would be considered as
Tier 2 capital.
A financial institution's risk-based capital ratio is calculated by dividing
its qualifying capital by its risk-weighted assets. Commencing December 31,
1992, financial institutions generally are expected to meet a minimum ratio of
qualifying total capital to risk-weighted assets of 8%, of which at least 50%
of qualifying total capital must be in the form of core capital (Tier 1)--
common stock, noncumulative perpetual preferred stock, minority interests in
equity capital accounts of consolidated subsidiaries and allowed mortgage
servicing rights less all intangible assets other than allowed mortgage
servicing rights. Supplementary capital (Tier 2) consists of the allowance for
loan losses up to 1.25% of risk-weighted assets, cumulative preferred stock,
term preferred stock, hybrid capital instruments and term subordinated debt.
The maximum amount of Tier 2 capital that may be recognized for risk-based
capital purposes is limited to 100% of Tier 1 capital (after any deductions for
disallowed intangibles). The aggregate amount of term subordinated debt and
intermediate term preferred stock that may be treated as Tier 2 capital is
limited to 50% of Tier 1 capital. Certain other limitations and restrictions
apply as well. At December 31, 1994, the Tier 2 capital of First Thrift
consisted of $10,000,000 of capital notes issued to First Republic and its
allowance for loan losses.
16
The following table presents First Thrift's regulatory capital position at
December 31, 1994 under the risk-based capital guidelines:
PERCENT OF
RISK-ADJUSTED
AMOUNT ASSETS
---------- -------------
($ IN THOUSANDS)
RISK-BASED CAPITAL GUIDELINES:
Tier 1 capital................................... $ 124,549 11.43%
Minimum requirement.............................. 43,603 4.00%
----------
Excess.......................................... $ 80,946
==========
Total capital.................................... 148,175 13.59%
Minimum requirement.............................. 87,207 8.00%
----------
Excess.......................................... $ 60,968
==========
Risk-adjusted assets............................. $1,090,086
==========
The FDIC has adopted a 3% minimum leverage ratio that is intended to
supplement risk-based capital requirements and to ensure that all financial
institutions, even those that invest predominantly in low risk assets, continue
to maintain a minimum level of core capital. The FDIC adopted final
regulations, applicable to First Thrift as of April 10, 1991, which provide
that a financial institution's minimum leverage ratio is determined by dividing
its Tier 1 capital by its quarterly average total assets, less intangibles not
includable in Tier 1 capital.
The leverage ratio represents a minimum standard affecting the ability of
financial institutions, including First Thrift, to increase assets and
liabilities without increasing capital proportionately. The following table
presents First Thrift's leverage ratio at December 31, 1994:
PERCENT OF
AMOUNT ASSETS
---------- ----------
($ IN THOUSANDS)
LEVERAGE RATIO:
Tier 1 capital...................................... $ 124,549 7.73%
Minimum requirement................................. 64,450 4.00%
----------
Excess............................................. $ 60,099
==========
Average total assets................................ $1,611,242
==========
Subsequent to the acquisition of First Republic Savings Bank, First Republic
has contributed $6.1 million of additional capital, resulting in Tier 1 capital
of that entity equaling $7.0 million on a total asset base of $42.4 million, at
December 31, 1994. At such date, the capital ratios of First Republic Savings
Bank exceed all requirements.
Under FDIC regulations, First Thrift has been required to pay annual
insurance premiums of 23 cents per $100 of eligible domestic deposits from July
1, 1991 until December 31, 1992, at which time the premium rate of 23 cents per
$100 became a minimum rate. The rate at which the Thrifts paid insurance
premiums to the FDIC for 1994 was the minimum rate. The FDIC has the authority
to assess additional premiums to cover losses and expenses associated with
insuring deposits maintained at financial institutions. See "--Federal Deposit
Insurance Reform."
In addition, subject to certain exceptions, under federal law no person,
acting directly or indirectly or through or in concert with one or more
persons, may acquire control of any insured depository institution such as the
Company, unless the FDIC has been given 60 days' prior written notice of the
proposed acquisition and within that time period the FDIC has not issued a
notice disapproving the proposed acquisition, or extended the period of time
during which a disapproval may be issued. For purposes of these
17
provisions, "control" is defined as the power, directly or indirectly, to
direct the management or policies of an insured depository institution or to
vote 25% or more of any class of voting securities of an insured depository
institution. The purchase, assignment, transfer, pledge, or other disposition
of voting stock through which any person will acquire ownership, control, or
the power to vote 10% or more of a class of voting securities of the Company
would be presumed to be an acquisition of control. An acquiring person may
request an opportunity to contest any such presumption of control. No assurance
can be given that the FDIC would not disapprove a notice of proposed
acquisition as described above.
The Competitive Equality Banking Act of 1989 ("CEBA") subjects certain
previously unregulated companies to regulations as bank holding companies by
expanding the definition of the term "bank" in the Bank Holding Company Act of
1956. First Republic is, however, exempt from regulation as a bank holding
company and will remain so, while the Thrifts continue to fit within one or
more exceptions to the term "bank" as defined by CEBA. The Thrifts currently
have no plans to engage in any operational practice that would cause them to
fall outside one or more exceptions to the term "bank" as defined by CEBA. The
Thrifts may cease to comply with those exceptions if they engage in certain
operational practices, including accepting demand deposit accounts. Because of
these limitations, the Thrifts currently offer only passbook accounts and term
investment certificates or deposits and do not offer checking accounts. CEBA
does provide that First Republic and its affiliates will be treated as if First
Republic were a bank holding company for the limited purposes of applying
certain restrictions on loans to insiders and anti-tying provisions.
LIMITATIONS ON DIVIDENDS
Under California law, a thrift is not permitted to declare dividends on its
capital stock unless it has at least $750,000 of unimpaired capital plus
additional capital of $50,000 for each branch office maintained. In addition,
no distribution of dividends is permitted unless: (i) such distribution would
not exceed a thrift's retained earnings, (ii) any payment would not result in a
violation of the approved minimum capital to thrift and loan investment
certificates ratio and (iii) after giving effect to the distribution, either
(y) the sum of a thrift's assets (net of goodwill, capitalized research and
development expenses and deferred charges) would be not less than 125% of its
liabilities (net of deferred taxes, income and other credits), or (z) current
assets would be not less than current liabilities (except that if a thrift's
average earnings before taxes for the last two years had been less than average
interest expenses, current assets must be not less than 125% of current
liabilities).
In addition, a thrift is prohibited from paying dividends from that portion
of capital which its board of directors has declared restricted for dividend
payment purposes. The amount of restricted capital maintained by a thrift
provides the basis for establishing the maximum amount that a thrift may lend
to one single borrower. Accordingly, a thrift typically restricts as much
capital as necessary to achieve its desired loan to one borrower limit, which
in turn restricts the funds available for the payment of dividends. Exclusive
of any other limitations which may apply, at December 31, 1994, First Thrift
could have paid additional dividends aggregating approximately $14,500,000.
Under regulations issued by the Nevada Commissioner, a Nevada thrift company
may not pay dividends from its capital surplus account. Dividends may only be
payable from undivided profits. Once funds have been credited to the capital
surplus account, those funds may not be transferred unless (1) such transfer
represents payment for the redemption of shares and (2) the Nevada Commissioner
has acquiesced to the transfer in writing. Further no dividends may be declared
or paid if such would reduce the undivided profits account below 10 percent of
the balance in the capital stock account. Dividend payment authority is subject
to a thrift being current on payments to holders of debt securities and
payments of interest on deposits.
As a matter of practice, the FDIC customarily advises insured institutions
that the payment of cash dividends in excess of current earnings from
operations is inappropriate and may be cause for supervisory action. As a
result of this policy, the Thrifts may find it difficult to pay dividends out
of retained earnings from historical periods prior to the most recent fiscal
year or to take advantage of earnings generated by
18
extraordinary items. Under the Financial Institutions Supervisory Act and
FIRREA, federal regulators also have authority to prohibit financial
institutions from engaging in business practices which are considered to be
unsafe or unsound. It is possible, depending upon the financial condition of
the Thrifts and other factors, that such regulators could assert that the
payment of dividends in some circumstances might constitute unsafe or unsound
practices and prohibit payment of dividends even though technically
permissible.
Federal Deposit Insurance Reform
As a consequence of the extensive regulation of commercial banking activities
in the United States, the business of the Company is particularly susceptible
to being affected by enactment of federal and state legislation which may have
the effect of increasing or decreasing the cost of doing business, modifying
permissible activities, or enhancing the competitive position of other
financial institutions. In response to various business failures in the savings
and loan industry and more recently in the banking industry, in December 1991,
Congress enacted and the President signed significant banking legislation
entitled the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). FDICIA substantially revises the bank regulatory and funding
provisions of the Federal Deposit Insurance Act and makes revisions to several
other federal banking statutes.
Among other things, FDICIA provides increased funding for the Bank Insurance
Fund (the "BIF") of the FDIC, primarily by increasing the authority of the FDIC
to borrow from the United States Treasury Department. It also provides for
expanded regulation of depository institutions and their affiliates. A
significant portion of the borrowings would be repaid by insurance premiums
assessed on BIF members, including the Company. In addition, FDICIA generally
mandates that the FDIC achieve a ratio of reserves to insured deposits of 1.25%
within 15 years, also to be financed by insurance premiums. As a result of
these provisions, there could be a significant increase in the assessment rate
on deposits of BIF members. FDICIA also provides authority for special
assessments against insured deposits. No assurance can be given at this time as
to what the future level of premiums will be.
As required by FDICIA, the FDIC adopted a transitional risk-based assessment
system for deposit insurance premiums effective January 1, 1993. Under this
system, depository institutions are charged anywhere from 23 cents to 31 cents
for every $100 in insured domestic deposits, based on such institutions'
capital levels and supervisory subgroup assignment. The FDIC adopted a
permanent risk-based assessment system effective on January 1, 1994, which
incorporates the same basic rate structure. The limited changes adopted by the
FDIC are those it proposed in December 1992. These amendments clarify the basis
on which supervisory subgroup assignments are made by the FDIC, eliminate from
the assessment classification review procedure the specific reference to an
"informal hearing", provide for the assignment of new institutions to the "well
capitalized" assessment group, and clarify that an institution is to make
timely adjustments as appropriate. FDICIA prohibits assessment rates from
falling below the current annual assessment rate of 23 cents per $100 of
eligible deposits if the FDIC has outstanding borrowings from the United States
Treasury Department or the 1.25% designated reserve ratio has not been met. The
ultimate effect of this risk-based assessment system cannot be determined at
this time.
On February 16, 1995, the FDIC issued a proposed regulation that would
establish a new assessment rate schedule of 4-31 basis points (replacing the
current 23-31 basis point schedule) for members of the BIF. The new schedule
would apply to the semiannual period in which the reserve ratio of the BIF
reaches the FDICIA imposed designated reserve ratio of 1.25% of total estimated
insured deposits, and to semiannual periods thereafter. The FDIC currently
expects the BIF reserve ratio to reach 1.25% of insured deposits sometime
between May 1 and July 31, 1995. The new assessment schedule would retain the
risk-based characteristics of the current system. Thus, if the proposed
regulation is a adopted and if the BIF reserve ratio reaches 1.25%, then "well
capitalized" and "adequately capitalized" institutions with low risk factors
could expect a decrease in their BIF premiums.
19
The FDIC has also issued a Notice of Proposed Rulemaking and solicited
comments on whether the deposit insurance assessment base should be redefined.
The Notice contains seven proposed definitions: (1) retaining the status quo,
(2) retaining the current definition but eliminating assessment base
adjustments such as float deductions, (3) expanding the base to include non-
deposit secured liabilities, (4) expanding the base to include foreign deposits
as well as domestic deposits, (5) expanding the base to include all bank
liabilities, (6) limiting the base to insured deposits only, and (7) expanding
the base to equal a bank's total assets. Because the FDIC has not yet settled
on a single proposed definition, the effect of any future change in the
definition of the deposit-insurance assessment base can not be determined at
this time.
FDICIA required insured depository institutions to undergo a full-scope, on-
site examination by their primary Federal banking agency as least once very 12
months. A transition rule allowed for examination of certain well capitalized
and well managed institutions every 18 months until December 31, 1993. In 1994,
the exemption for smaller institutions, which allowed a substitution of an 18
month schedule for the 12 month examination schedule for qualified smaller
institutions, was amended to increase the asset threshold from $100 million to
$250 million. The cost of examinations of insured depository institutions and
any affiliates may be assessed by the appropriate Federal banking agency
against each institution or affiliate as it deems necessary or appropriate.
FDICIA also requires the federal banking agencies to revise their risk-based
capital guidelines to take into account interest-rate risk, concentration of
credit risk, and the risks associated with nontraditional activities. It also
requires the guidelines to reflect the actual performance and expected risk of
loss on multifamily mortgages. Effective December 31, 1993, the risk based
capital rules were revised to allow certain multifamily loans for BIF members
to be included in the 50% risk weighted category instead of the 100% risk
weighted category. In order to qualify for this lower category, multifamily
loans must meet certain eligibility criteria, including (i) being a first lien;
(ii) having a loan-to-value ratio below 75% for adjustable rate mortgages and a
debt coverage ratio of at least 1.15 times; (iii) having a minimum original
maturity of seven years and a maximum amortization period of 30 years; and (iv)
have a history of timely payments for at least one year and not currently be on
nonaccrual or past due 90 days or more. The ultimate effect of the remaining
FDICIA risk-based capital provisions cannot be determined until implementing
regulations are adopted.
FDICIA requires the federal banking regulators to take "prompt corrective
action" with respect to depository institutions that do not meet minimum
capital requirements. In response to this requirement, the FDIC adopted final
rules based upon FDICIA's five capital tiers. The FDIC's rules provide that an
institution is "well capitalized" if its risk-based capital ratio is 10% or
greater; its Tier 1 risk-based capital ratio is 6% or greater; its leverage
ratio is 5% or greater; and the institution is not subject to a capital
directive. A depository institution is "adequately capitalized" if its risk-
based capital ratio is 8% or greater; its Tier 1 risk-based capital ratio is 4%
or greater; and its leverage ratio is 4% or greater (3% or greater for the
highest rated institutions). An institution is considered "undercapitalized" if
its risk-based capital ratio is less than 8%; its Tier 1 risk-based capital
ratio is less than 4%, or its leverage ratio is 4% or less (less than 3% for
the highest rated institutions). An institution is "significantly
undercapitalized" if its risk-based capital ratio is less than 6%; its Tier 1
risk-based capital ratio is less than 3%; or its leverage ratio is less than
3%. An institution is deemed to be "critically undercapitalized" if its ratio
of tangible equity (Tier 1 capital) to total assets is equal to or less than
2%. An institution may be deemed to be in a capitalization category that is
lower than is indicated by its actual capital position if it engages in unsafe
or unsound banking practices. Under this standard, First Thrift and First
Republic Savings Bank are "well capitalized" at December 31, 1994.
No sanctions apply to institutions which are "well" or "adequately"
capitalized under the prompt corrective action requirements. Undercapitalized
institutions are required to submit a capital restoration plan for improving
capital. In order to be accepted, such plan must include a financial guaranty
from each company having control of such under capitalized institution that the
institution will comply with the capital plan until the institution has been
adequately capitalized on average during each of four consecutive calendar
20
quarters. If such a guarantee were deemed to be a commitment to maintain
capital under the Federal Bankruptcy Code, a claim for a subsequent breach of
the obligations under such guarantee in a bankruptcy proceeding involving the
holding company would be entitled to a priority over third party general
unsecured creditors of the holding company. Undercapitalized institutions are
prohibited from making capital distributions or paying management fees to
controlling persons; may be subject to growth limitations; and acquisitions,
branching and entering into new lines of business are restricted. Finally, the
institution's regulatory agency has discretion to impose certain of the
restrictions generally applicable to significantly undercapitalized
institutions.
In the event an institution is deemed to be significantly undercapitalized,
it may be required to: sell stock; merge or be acquired; restrict transactions
with affiliates; restrict interest rates paid; restrict growth; restrict
compensation to officers; divest a subsidiary; or dismiss specified directors
or officers. If the institution is a bank holding company, it may be prohibited
from making any capital distributions without prior approval of the Federal
Reserve Board and may be required to divest a subsidiary. A critically
undercapitalized institution is generally prohibited from making payments on
subordinated debt and may not, without the approval of the FDIC, enter into a
material transaction other than in the ordinary course of business; engage in
any covered transaction (as defined in Section 23 A (b) of the Federal Reserve
Act); or pay excessive compensation or bonuses. Critically undercapitalized
institutions are subject to appointment of a receiver or conservator.
FDICIA also restricts the acceptance of brokered deposits by certain insured
depository institutions and contains a number of consumer banking provisions,
including disclosure requirements and substantive contractual limitations with
respect to deposit accounts.
FDICIA contains numerous other provisions, including reporting, examination
and auditing requirements, termination of the "too big to fail" doctrine except
in special cases, limitations on the FDIC's payment of deposits at foreign
branches, and revised regulatory standards for, among other things, real estate
lending and capital adequacy.
Implementation of the various provisions of FDICIA are subject to the
adoption of regulations by the various banking agencies or to certain phase-in
periods. The FDIC is the federal banking agency which regulates the Thrifts.
The effect of FDICIA on the Company cannot be determined until complete
implementing regulations are adopted.
FDICIA also contains provisions which: (i) require that a receiver or
conservator be appointed immediately for an institution whose tangible capital
falls below certain levels; (ii) increase assessments for deposit insurance
premiums; (iii) require the FDIC to establish a risk-based assessment system
for insurance premiums; (iv) require federal banking agencies to revise their
risk-based capital guidelines to take into account interest rate risk,
concentration of credit risk and the risk associated with non-traditional
activities; (v) give the FDIC the right to examine bank affiliates such as
First Republic and make assessments for the cost of such examination; and (vi)
limit the availability of brokered deposits. The effectiveness of this statute
is subject to adoption of implementing regulations which are being issued on a
timely basis as required by FDICIA.
EMPLOYEES
As of December 31, 1994, the Company had 141 full-time employees. Management
believes that its relations with employees are satisfactory. The Company is not
a party to any collective bargaining agreement.
STATISTICAL DISCLOSURE REGARDING THE BUSINESS OF THE COMPANY
The following statistical data relating to the Company's operations should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements
and Notes to Consolidated Financial Statements. Average balances are determined
on a daily basis.
21
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES
AND DIFFERENTIALS
The following table presents for the periods indicated the distribution of
consolidated average assets, liabilities and stockholders' equity as well as
the total dollar amounts of interest income from average interest-earning
assets and the resultant yields, and the dollar amounts of interest expense and
average interest-bearing liabilities, expressed both in dollars and in rates.
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 34% prior to
1993 and 35% for 1993 and 1994.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1994 1993 1992
--------------------------- --------------------------- ---------------------------
AVERAGE YIELDS/ AVERAGE YIELDS/ AVERAGE YIELDS/
BALANCE INTEREST RATES BALANCE INTEREST RATES BALANCE INTEREST RATES
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
($ IN THOUSANDS)
ASSETS:
Interest-earning
deposits with other
institutions........... $ 600 $ 29 4.83% $ 646 $ 38 5.88% $ 899 $ 55 6.12%
Short-term investments.. 32,875 1,532 4.66 46,977 1,590 3.38 49,621 1,801 3.63
Investment securities... 128,017 7,148 5.58 74,160 3,541 4.77 50,100 1,905 3.80
Loans................... 1,379,640 100,816 7.31 1,154,680 93,212 8.07 1,008,783 91,828 9.10
---------- ------- ------- ---------- -------
Total interest-earning
assets................ 1,541,132 109,525 7.11 1,276,463 98,381 7.71 1,109,403 95,589 8.62
------- ------- -------
Noninterest-earning
assets................. 14,249 11,609 1,941
---------- ---------- ----------
Total average assets.... $1,555,381 $1,288,072 $1,111,344
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Passbook and MMA
accts.................. $ 123,403 $ 4,445 3.60% $ 118,335 $ 3,803 3.21% $ 103,140 $ 3,902 3.78%
Investment certificates. 734,746 36,579 4.98 597,221 31,516 5.28 573,642 35,734 6.23
---------- ------- ---------- ------- ---------- -------
Total thrift
certificates.......... 858,149 41,024 4.78 715,556 35,319 4.94 676,782 39,636 5.86
Other borrowings........ 515,295 24,735 4.80 406,917 16,362 4.02 306,853 15,083 4.92
Subordinated debentures. 62,975 5,676 9.01 57,088 5,237 9.17 35,061 4,257 12.14
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities........... 1,436,419 71,435 4.97 1,179,561 56,918 4.83 1,018,696 58,976 5.79
------- ------- -------
Noninterest-bearing
liabilities............ 11,080 10,195 9,238
Stockholders' equity.... 107,882 98,316 83,410
---------- ---------- ----------
Total average
liabilities and
stockholders' equity.. $1,555,381 $1,288,072 $1,111,344
========== ========== ==========
Net interest spread(1).. 2.14% 2.88% 2.83%
Net interest income and
net interest margin(2). $38,090 2.47% $41,463 3.25% $36,613 3.30%
======= ======= =======
--------
(1) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
22
Rate and Volume Variances
Net interest income is affected by changes in volume and changes in rates.
Volume changes are caused by differences in the level of interest-earning
assets and interest-bearing liabilities. Rate changes result from differences
in yields earned on assets and rates paid on liabilities.
The following table sets forth, for the periods indicated, a summary of the
changes in interest earned and interest paid resulting from changes in average
asset and liability balances (volume) and changes in average interest rates.
Where significant, the changes in interest due to both volume and rate have
been allocated to the changes due to volume and rate in proportion to the
relationship of absolute dollar amounts in each. Tax-exempt income from short-
term investments is presented on a tax-equivalent basis.
1994 VS. 1993 1993 VS. 1992
------------------------- -------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ -------- ------- ------ -------- -------
(IN THOUSANDS)
INCREASE (DECREASE) IN
INTEREST INCOME:
Interest-earning deposits
with other institutions. $ (3) $ (6) $ (9) $ (15) $ (2) $ (17)
Short-term investments... (589) 531 (58) (92) (119) (211)
Investment securities.... 2,894 713 3,607 1,059 577 1,636
Loans.................... 17,070 (9,466) 7,604 12,529 (11,145) 1,384
------ -------- ------- ------ -------- -------
Total increase
(decrease)............ 19,372 (8,228) 11,144 13,481 (10,689) 2,792
------ -------- ------- ------ -------- -------
INCREASE (DECREASE) IN
INTEREST EXPENSE:
Passbook and MMA
accounts................ 167 475 642 538 (637) (99)
Investment certificates.. 6,952 (1,889) 5,063 1,422 (5,640) (4,218)
Other borrowings......... 4,832 3,541 8,373 4,461 (3,182) 1,279
Subordinated debentures.. 532 (93) 439 2,319 (1,339) 980
------ -------- ------- ------ -------- -------
Total increase
(decrease)............ 12,483 2,034 14,517 8,740 (10,798) (2,058)
------ -------- ------- ------ -------- -------
Increase (decrease) in
net interest income..... $6,889 $(10,262) $(3,373) $4,741 $ 109 $ 4,850
====== ======== ======= ====== ======== =======
Types of Loans
The following table sets forth by category the total loan portfolio of the
Company at the dates indicated:
DECEMBER 31,
------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- -------- --------
(IN THOUSANDS)
LOANS:
Single family (1-4
units)................. $ 820,078 $ 577,276 $ 375,757 $270,655 $177,236
Multifamily (5+ units).. 367,750 387,757 405,399 325,075 219,898
Commercial real estate.. 250,369 229,914 204,611 209,121 156,606
Multifamily construc-
tion................... 9,408 5,707 19,574 19,717 10,510
Single family construc-
tion................... 14,227 14,512 14,703 6,912 5,140
Home equity credit
lines.................. 28,137 31,213 35,255 23,755 13,137
---------- ---------- ---------- -------- --------
Real estate mortgages
subtotal............. 1,489,969 1,246,379 1,055,299 855,235 582,527
Commercial business and
other.................. 8,694 9,679 12,486 16,382 17,976
---------- ---------- ---------- -------- --------
Total loans........... 1,498,663 1,256,058 1,067,785 871,617 600,503
Unearned loan fee in-
come................... (6,816) (9,406) (12,621) (11,550) (4,606)
Reserve for possible
losses................. (14,355) (12,657) (12,686) (11,663) (5,254)
---------- ---------- ---------- -------- --------
Loans, net............ $1,477,492 $1,233,995 $1,042,478 $848,404 $590,643
========== ========== ========== ======== ========
23
The following table shows the maturity distribution of the Company's real
estate construction loans and commercial business loans outstanding as of
December 31, 1994, which, based on remaining scheduled repayments of principal,
were due within the periods indicated. All such loans are adjustable rate in
nature.
AFTER ONE
WITHIN BUT WITHIN MORE THAN
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -------
(IN THOUSANDS)
MATURITY DISTRIBUTION:
Real estate construction loans..... $23,635 $ -- $-- $23,635
Commercial business loans.......... 731 4,754 136 5,621
------- ------ ---- -------
Total............................ $24,366 $4,754 $136 $29,256
======= ====== ==== =======
ASSET QUALITY
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 well secured and in the process
of collection), management determines the ultimate collection of principal or
interest to be unlikely or the Company takes possession of the collateral. Real
estate collateral obtained by the Company is referred to as "REO."
Since the inception of operations in 1985 through December 31, 1994, the
Company has originated approximately $4.4 billion of loans both for sale and
retention in its loan portfolio, on which the Company has experienced $22.9
million of losses. Such losses primarily resulted from the economic recession
which affected the California economy commencing in late 1990 and continuing in
parts of the state through 1994 and the Northridge earthquake which struck the
Los Angeles area in January 1994. At December 31, 1994, management of the
Company believes that the effects of the recession have largely diminished with
respect to properties securing its mortgage loans. As a result of the
Northridge earthquake, which affected primarily the Company's loans secured by
multifamily properties in Los Angeles County, the Company has experienced
increased loan delinquencies and REO, additional loan loss provisions and a
higher level of modified and restructured loans.
The Company's loss experience since inception represents an aggregate total
of approximately 0.50% of loans originated in over nine years, although the
Company's loss experience on single-family mortgage loans has been 0.06% of
loans originated in this period. The Company has experienced a higher level of
chargeoffs since 1991 in connection with the resolution of delinquent loans and
sale of REO than in prior years. The ratio of the Company's net loan chargeoffs
to average loans was 0.74% for 1992, 0.44% for 1993, and 0.37% for 1994. The
Company recorded REO costs and losses related to the disposition of delinquent
loans totaling $1,202,000 in 1994 and $3,477,000 in 1993; such costs increased
from $309,000 in 1992 because substantially all of these costs were reflected
as chargeoffs against the Company's loss reserves prior to 1993.
Additional information is provided under the captions "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Asset
Quality and--Provisions for Losses and Reserve Activity" on pages 38 to 40 of
the Company's 1994 Annual Report to stockholders.
24
The following table presents nonaccruing loans and investments, REO,
restructured performing loans and accruing single family loans more than 90
days past due at the dates indicated.
DECEMBER 31,
-------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -----
($ IN THOUSANDS)
NONACCRUING ASSETS AND OTHER LOANS:
Single family............................ $ -- $ -- $ -- $ -- $ --
Multifamily.............................. 29,049 6,740 3,894 3,525 --
Commercial real estate................... 3,400 4,862 5,524 9,674 768
Other.................................... 174 16 140 -- --
Real estate owned ("REO")................ 8,500 9,961 8,937 -- --
------- ------- ------- ------- -----
Nonaccruing loans and REO.............. 41,123 21,579 18,495 13,199 768
Nonaccruing investments.................. -- 361 469 800 --
------- ------- ------- ------- -----
Total nonaccruing assets............... 41,123 21,940 18,964 13,999 768
Restructured performing loans............ 17,489 6,342 3,366 3,366 --
------- ------- ------- ------- -----
Total nonaccruing assets and
restructured performing loans......... $58,612 $28,282 $22,330 $17,365 $ 768
======= ======= ======= ======= =====
Accruing single family loans more than 90
days past due........................... $ 2,587 $ 1,390 $ 3,541 $ 2,880 $ --
======= ======= ======= ======= =====
PERCENT OF TOTAL ASSETS:
All nonaccruing assets................... 2.41% 1.55% 1.54% 1.50% 0.11%
Nonaccruing assets and restructured
performing loans........................ 3.43% 2.00% 1.81% 1.86% 0.11%
25
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.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- -------- --------
($ IN THOUSANDS)
RESERVE FOR POSSIBLE
LOSSES:
Balance beginning of pe-
riod................... $ 12,657 $ 12,686 $ 11,663 $ 5,254 $ 2,659
Provision charged to ex-
pense:
Regular reserve........ 220 806 1,649 921 963
Recession reserve...... 1,750 4,000 6,413 5,320 1,754
Earthquake reserve..... 7,750 -- -- -- --
Reserve from purchased
loans.................. 34 200 466 2,240 --
Reserve of First
Republic Savings Bank
at acquisition......... -- 24 -- -- --
Chargeoffs on originated
loans:
Single family.......... (210) (209) (328) (259) --
Multifamily............ (7,177) (3,367) (3,961) (706) (139)
Commercial real estate. (695) (1,547) (3,750) (1,001) --
Commercial business
loans................. (79) (76) (213) (186) (21)
Recoveries on originated
loans:
Single family.......... 11 -- 50 -- --
Multifamily............ 119 -- 5 10 --
Commercial real estate. -- 92 654 -- --
Commercial business
loans................. 15 43 12 4 --
Acquired loans:
Chargeoffs............. (47) -- -- (16) (174)
Recoveries............. 7 5 26 82 212
---------- ---------- ---------- -------- --------
Total chargeoffs, net of
recoveries............. (8,056) (5,059) (7,505) (2,072) (122)
---------- ---------- ---------- -------- --------
Balance end of period... $ 14,355 $ 12,657 $ 12,686 $ 11,663 $ 5,254
========== ========== ========== ======== ========
Average loans for the
period................. $1,379,640 $1,154,680 $1,008,783 $700,917 $491,295
Total loans at period
end.................... 1,498,663 1,256,058 1,067,785 871,617 600,503
Ratios of reserve to:
Total loans............ 0.96% 1.01% 1.19% 1.34% 0.87%
Nonaccruing loans...... 44% 109% 133% 88% 684%
Nonaccruing assets and
restructured
performing loans...... 24% 45% 57% 67% 684%
Net chargeoffs to
average loans.......... 0.58% 0.44% 0.74% 0.30% 0.04%
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, past
loan loss experience, the results of the Company's ongoing loan grading
process, the amount of past due and nonperforming loans, observations of
auditors, legal requirements, recommendations or requirements of regulatory
authorities, prevailing economic conditions and other factors. These factors
are essentially judgmental and may not be reduced to a mathematical formula. As
a percentage of nonaccruing loans, the reserve for possible losses was 44% at
December 31, 1994 and 109% at December 31, 1993. While this ratio declined,
management considers the $14,355,000 reserve at December 31, 1994 to be
adequate as an allowance against foreseeable losses in the loan portfolio.
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
26
procedures for reviewing and grading all of 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's assessment
considers the current status of properties securing loans, the trends in
collateral values in each of the Company's geographic markets and the amount of
specific reserves previously used to writedown problem or nonaccruing loans.
Management's continuing evaluation of the loan portfolio and assessment of
economic conditions and collateral values will dictate future reserve levels.
Management currently anticipates that it will continue to provide additional
reserves so long as, in its judgement, any additional adverse effects of the
earthquake on its assets arise. Although the amount of loans that were
adversely affected by the earthquake and remain unresolved at December 31, 1994
has been reduced, management anticipates that the ultimate resolution of the
remaining loans may require additional reserves in 1995.
The following table sets forth management's historical allocation of the
reserve for possible losses by loan category and the percentage of loans in
each category to total loans at the dates indicated:
DECEMBER 31,
------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------- ------------- ------------- ------------- -------------
RESERVE RESERVE RESERVE RESERVE RESERVE
FOR % OF FOR % OF FOR % OF FOR % OF FOR % OF
LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES LOANS
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
($ IN THOUSANDS)
LOAN CATEGORY:
Single family........... $ -- 54.7% $ -- 46.0% $ -- 35.2% $ -- 31.0% $ -- 29.5%
Multifamily............. 5,600 24.6 2,600 30.9 1,700 38.0 1,325 37.3 -- 36.6
Commercial real estate.. 600 16.7 1,300 18.3 2,000 19.2 1,725 24.0 -- 26.1
Multifamily
construction........... -- 0.6 -- 0.4 -- 1.8 -- 2.3 -- 1.7
Single family
construction........... 100 0.9 -- 1.1 -- 1.4 -- 0.8 -- 0.9
Home equity credit
lines.................. -- 1.9 -- 2.5 -- 3.3 -- 2.7 -- 2.2
Other loans............. 55 0.6 -- 0.8 100 1.1 200 1.9 -- 3.0
Unallocated reserves.... 8,000 -- 8,757 -- 8,886 -- 8,413 -- 5,254 --
------- ----- ------- ----- ------- ----- ------- ----- ------ -----
$14,355 100.0% $12,657 100.0% $12,686 100.0% $11,663 100.0% $5,254 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ====== =====
At December 31, 1994, management had allocated from its general reserves
$5,600,000 to the multifamily loan category, $600,000 to the commercial real
estate loan category, $100,000 to the single-family construction category, and
$55,000 to other loans, based upon management's estimate of the risk of loss
inherent in its nonaccruing or other possible problem loans in those
categories. The allocation of such reserve will change whenever management
determines that the risk characteristics of its assets or specific assets have
changed. The amount available for future chargeoffs that might occur within a
particular category is not limited to the amount allocated to that category,
since the allowance is a general reserve available for all loans in the
Company's portfolio. In addition, the amounts so allocated by category may not
be indicative of future chargeoff trends.
FINANCIAL RATIOS
The following table shows certain key financial ratios for the Company for
the periods indicated.
YEAR ENDING
DECEMBER 31,
------------------
1994 1993 1992
---- ----- -----
KEY FINANCIAL RATIOS:
Return on average total assets....................... 0.47% 0.97% 1.06%
Return on average stockholders' equity............... 6.77% 12.65% 14.10%
Average stockholders' equity as a percentage of
average total assets................................ 6.94% 7.63% 7.51%
27
ITEM 2. PROPERTIES
First Republic does not own any real property. In 1990, First Republic
entered into a 10-year lease, with three 5-year options to extend, for
headquarters space at 388 Market Street, mezzanine floor, in the San Francisco
financial district. Management believes that the Company's current and planned
facilities are adequate for its current level of operations.
First Republic's subsidiaries lease offices at the following locations, with
terms expiring at dates ranging from August 1997 to December 2002:
NAME ADDRESS
---- -------
First Thrift...................... 101 Pine Street, San Francisco, CA
5628 Geary Boulevard, San Francisco, CA
1088 Stockton Street, San Francisco, CA
3928 Wilshire Blvd., Los Angeles, CA
9593 Wilshire Blvd., Beverly Hills, CA
116 E. Grand Avenue, Escondido, CA
8347 La Mesa Blvd., La Mesa, CA
1110 Camino Del Mar, Del Mar, CA
First Republic Savings Bank....... 2510 South Maryland Parkway, Las Vegas, NV
ITEM 3. LEGAL PROCEEDINGS
There is no pending proceeding, other than ordinary routine litigation
incidental to the Company's business, to which the Company is a party or to
which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the year
ended December 31, 1994.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
This information is incorporated by reference to page 48 of the Company's
Annual Report to Stockholders for the year ended December 31, 1994.
ITEM 6. SELECTED FINANCIAL DATA
This information is incorporated by reference to the inside front cover of
the Company's Annual Report to Stockholders for the year ended December 31,
1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This information is incorporated by reference to pages 36 through 45 of the
Company's Annual Report to Stockholders for the year ended December 31, 1994.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information is incorporated by reference to pages 20 through 35 and to
page 48 of the Company's Annual Report to Stockholders for the year ended
December 31, 1994.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There have been no changes in or disagreements with Accountants during the
Company's two most recent fiscal years.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the directors and executive officers of First
Republic and certain pertinent information about them.
AGE POSITION HELD WITH THE COMPANY
--- ------------------------------
Roger O. Walther(1)(2)(3) 59 Chairman of the Board
President, Chief Executive Officer and
James H. Herbert, II(1) 50 Director
Katherine August-deWilde(1) 47 Executive Vice President and Director
Senior Vice President and Chief Financial
Willis H. Newton, Jr. 45 Officer
Linda G. Moulds 44 Vice President, Secretary and Controller
Edward J. Dobranski 44 Vice President, General Counsel
David B. Lichtman 31 Vice President, Credit Officer
Richard M. Cox-Johnson 60 Director
Kenneth W. Dougherty 68 Director
Frank J. Fahrenkopf, Jr. 55 Director
L. Martin Gibbs(2) 57 Director
James F. Joy(2) 57 Director
John F. Mangan 58 Director
Barrant V. Merrill(2)(3) 64 Director
--------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
The directors of First Republic serve three-year terms. The terms are
staggered to provide for the election of approximately one-third of the Board
members each year. Each director (except Mr. Cox-Johnson who was elected in
October 1986 and Ms. August-deWilde who was elected in April 1988) has served
in such capacity since the inception of First Republic. Messrs. Walther and
Herbert have served as officers of First Republic since its inception. Ms.
August-deWilde has served as an officer since July 1985 and as a director since
April 1988, while Ms. Moulds has served as an officer since June 1985. Mr.
Newton became an officer of First Republic in August 1988.
The backgrounds of the directors and executive officers of First Republic are
as follows:
Roger O. Walther is Chairman of the Board of Directors and a director of
First Republic serving until 1997. Mr. Walther is Chairman and Chief Executive
Officer of ELS Educational Services, Inc., the largest teacher of English as a
second language in the United States. He is a director of Charles Schwab & Co.,
Inc. From 1980 to 1984, Mr. Walther served as Chairman of the Board of San
Francisco Bancorp. He is a graduate of the United States Coast Guard Academy,
B.S. 1958, and the Wharton School, University of Pennsylvania, M.B.A. 1961 and
is a member of the Graduate Executive Board of the Wharton School.
James H. Herbert, II is President, Chief Executive Officer and a director of
First Republic, serving until 1997, and has held such positions since First
Republic's inception in 1985. From 1980 to July 1985, Mr. Herbert was
President, Chief Executive Officer and a director of San Francisco Bancorp, as
well as Chairman of the Board of its operating subsidiaries in California, Utah
and Nevada. He is a past president and currently a director of the California
Association of Thrift and Loan Companies and is on the California Commissioner
of Corporations' Industrial Loan Law Advisory Committee. He is a graduate of
Babson College, B.S., 1966, and New York University, M.B.A., 1969. He is a
member of The Babson Corporation.
29
Katherine August-deWilde is Executive Vice President and a director of First
Republic serving until 1995. She joined the Company in June 1985 as Vice
President and Chief Financial Officer. From 1982 to 1985, she was Senior Vice
President and Chief Financial Officer at PMI Mortgage Insurance Co., a
subsidiary of Sears/Allstate. She is a graduate of Goucher College, A.B., 1969,
and Stanford University, M.B.A., 1975.
Willis H. Newton, Jr. has been Senior Vice President and Chief Financial
Officer of First Republic since August 1988. From 1985 to August 1988, he was
Vice President and Controller of Homestead Financial Corporation. He is a
graduate of Dartmouth College, B.A., 1971 and Stanford University, M.B.A.,
1976. Mr. Newton is a Certified Public Accountant.
Linda G. Moulds is Vice President, Secretary and Controller of First
Republic, serving with the Company since inception. From 1980 to July 1985, Ms.
Moulds was Secretary and Controller of San Francisco Bancorp and a director of
First United. She is a graduate of Temple University B.S., 1971.
Edward J. Dobranski joined the company in August 1992 as General Counsel and
was appointed a Vice President in 1993. He also serves as the Company's
Compliance Officer and Community Reinvestment Officer. From 1990 to 1992, Mr.
Dobranski was Of Counsel at Jackson Cole & Black in San Francisco, specializing
in banking, real estate and corporate law, and from 1987 to 1990 he was a
partner in the San Francisco office of Rose Wachtell & Gilbert. Mr. Dobranski
is a graduate of Coe College-Iowa, B.A. 1972 and Creighton University-Nebraska,
J.D. 1975.
David B. Lichtman was appointed Vice President, Credit Officer, in January
1994. Mr. Lichtman served as a loan processor with First Thrift from 1986 to
1990, as a loan officer with First Republic Mortgage Inc. from 1990 through
1991, and as a credit officer with First Thrift from 1992 through December
1993. Mr. Lichtman is a graduate of Vassar College, B.A. 1985 and the
University of California, Berkeley, M.B.A. 1990.
Richard M. Cox-Johnson is a director of First Republic serving until 1996.
Mr. Cox-Johnson is a director of Premier Consolidated Oilfields PLC and Marine
and General Mutual Life Assurance Society. He is a graduate of Oxford
University 1955.
Kenneth W. Dougherty is a director of First Republic serving until 1996. Mr.
Dougherty is an investor and was previously President of Gill & Duffus
International Inc. and Farr Man & Co. Inc., which are international commodity
trading companies. He was a director of San Francisco Bancorp from 1982 to
1984. Mr. Dougherty is a graduate of the University of Pennsylvania, B.A. 1948.
Frank J. Fahrenkopf, Jr., is a director of First Republic serving until 1996.
Since 1985, Mr. Fahrenkopf has been a partner in the law firm of Hogan &
Hartson. From January 1983 until January 1989, he was Chairman of the
Republican National Committee. Mr. Fahrenkopf is a graduate of the University
of Nevada-Reno, B.A. 1962, and the University of California-Berkeley, L.L.B.
1965.
L. Martin Gibbs is a director of First Republic serving until 1995. Mr. Gibbs
is a partner in the law firm of Rogers & Wells, counsel to the Company. He is a
graduate of Brown University, B.A. 1959 and Columbia University, J.D. 1962.
James F. Joy is a director of First Republic serving until 1997. Mr. Joy is
Director-European Business Development for CVC Capital Partners Europe Limited,
and a non-executive director of Sylvania Lighting International. Formerly, he
was Managing Director of Citicorp Venture Capital and Citicorp Corporate
Finance from 1989 to 1993. He is a graduate of Trinity College, B.S. 1959,
B.S.E.E. 1960 and New York University, M.B.A. 1964.
John F. Mangan is a director of First Republic serving until 1995. Mr. Mangan
is an investor and was previously President of Prudential-Bache Capital
Partners, Inc. (a wholly owned subsidiary of Prudential-Bache Securities,
Inc.). Prior to that, he was the managing general partner of Rose Investment
Company, a venture capital partnership. Mr. Mangan was a member of the New York
Stock Exchange for over 13 years
30
and was previously vice president and a partner of Pershing & Co., Inc. He has
been a director of Noel Group, Inc., New York, N.Y., and the Hutton-Deutsch
Collection Ltd., London. Mr. Mangan is a graduate of the University of
Pennsylvania, B.A. 1959.
Barrant V. Merrill is a director of First Republic serving until 1997. Mr.
Merrill has been Managing Partner of Sun Valley Partners, a private investment
company, since July 1982. From 1984 until January 1989, he was a general
partner of Dakota Partners, a private investment partnership. From 1980 to
1984, Mr. Merrill was a director of San Francisco Bancorp. From 1978 until
1982, he was Chairman of Pershing & Co. Inc., a division of Donaldson, Lufkin &
Jenrette. Mr. Merrill is a graduate of Cornell University, B.A. 1953.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference to the Company's definitive
proxy statement to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to the Company's definitive
proxy statement to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to the Company's definitive
proxy statement under the caption "Executive Compensation" to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the end of
the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 10-K
(a) Financial Statements and Schedules.
The following financial statements are contained in registrant's 1993 Annual
Report to Stockholders and are incorporated in this Report on Form 10-K by this
reference:
PAGE OF
ANNUAL REPORT
-------------
First Republic Bancorp Inc.
At December 31, 1994 and 1993:
Consolidated Balance Sheet...................................... 20
Years ended December 31, 1994, 1993 and 1992:
Consolidated Statement of Income................................ 22
Consolidated Statement of Stockholders' Equity.................. 23
Consolidated Statement of Cash Flows............................ 24
Notes to Consolidated Financial Statements........................ 25
Report of Independent Auditors.................................... 35
All schedules are omitted as not applicable.
(b) Reports on Form 8-K.
31
The Company filed a report dated October 27, 1994 on Form 8-K reporting the
Company's earnings for the quarter and nine months ended September 30, 1994.
The Company filed a report dated January 26, 1995 on Form 8-K reporting the
Company's earnings for the quarter and year ended December 31, 1994.
The Company filed a report dated March 14, 1995 on Form 8-K reporting that
the Company's Board of Director's authorized an increase of 250,000 shares in
the Company's common stock repurchase program.
(c) Exhibits.
NOTE: Exhibits marked with a plus sign (+) are incorporated by reference to
the Registrant's Registration Statement on Form S-1 (No. 33-4608); Exhibits
marked with two plus signs (++) are incorporated by reference to the
Registrant's Form 10-Q for the quarter ended September 30, 1987; Exhibits
marked with three plus signs (+++) are incorporated by reference to the
Registrant's Registration Statement on Form S-1 (No. 33-18963); Exhibits marked
with a diamond (.) are incorporated by reference to the Registrant's Form 10-K
for the year ended December 31, 1988; Exhibits marked with two diamonds (..)
are incorporated by reference to the Registrant's Form 10-K for the year ended
December 31, 1989; Exhibits marked with three diamonds (...) are incorporated
by reference to the Registrant's Form 10-K for the year ended December 31,
1990; Exhibits marked with two asterisks (**) are incorporated by reference to
Registrant's Registration Statement on Form S-2 (No. 33-40182); Exhibits marked
with three asterisks (***) are incorporated by reference to Registrant's
Registration Statement on Form S-2 (No. 33-42426); Exhibits marked with one
pound sign (#) are incorporated by reference to Registrant's Registration
Statement on Form S-2 (No. 33-43858); Exhibits marked with two pound signs (##)
are incorporated by reference to the Registrant's Registration Statement on
Form S-2 (No. 33- 45435). Exhibits marked with three pound signs (###) are
incorporated by reference to the Registrant's Registration Statement on Form S-
2 (No. 33-54136). Exhibits marked with four pound signs (####) are incorporated
by reference to Registrant's Form 10-K for the year ended December 31, 1992.
Exhibits marked with one dagger sign (+) are incorporated by reference to the
Registrant's Registration Statement on Form S-3 (No. 33-60958). Exhibits marked
with two dagger signs (++) are incorporated by reference to the Registrant's
Registration Statement on Form S-3 (No. 33-66336). Each such Exhibit had the
number in parentheses immediately following the description of the Exhibit
herein.
3.1### Certificate of Incorporation, as amended. (3.1)
3.2+++ By-Laws as currently in effect.
4.1# Indenture dated as of September 1, 1991 between First Republic
Bancorp Inc. and National City Bank of Minneapolis. (10.35)
4.2## Supplemental Indenture dated as of November 1, 1991 between First
Republic Bancorp Inc. and National City Bank of Minneapolis.
(10.35)
4.3### Indenture dated as of December 1, 1992 between First Republic
Bancorp Inc. and U.S. Trust Company of California, N.A. (4.1)
4.4+ Indenture dated as of May 15,1993, between First Republic Bancorp
Inc. and United States Trust Company of New York. (4.1)
4.5++ Indenture dated as of August 4, 1993, between First Republic
Bancorp Inc. and United States Trust Company of New York. (4.1)
10.1+ Employee Stock Ownership Plan. (10.15)
10.2+ Employee Stock Ownership Trust. (10.16)
32
10.3** 1985 Stock Option Plan. (10.3)
10.4+ Employment offers of James H. Herbert, II, Katherine August-
deWilde, and Linda G. Moulds. (10.22)
10.5++ Continuing Guarantee dated August 3, 1987 of the Registrant. (19.2)
10.6++ Pledge Agreement dated September 8, 1987 between Pacific Trust
Company, as trustee for the First Republic Bancorp Inc. Employee
Stock Ownership Plan and the Registrant. (19.6(b))
10.7+++ Key man life insurance policy on James H. Herbert, II. (10.33)
10.8. Employment offer of Willis H. Newton, Jr. (10.37)
10.9. Term Loan Agreement between the Registrant and Imperial Bank.
(10.38)
10.10. Loan and Pledge Agreement by and between the Registrant and the
First Republic Bancorp Inc. Employment Stock Ownership Plan and
Trust dated November 22, 1988. (10.39)
10.11. Restated Secured Promissory Note of September 8, 1987, dated
November 22, 1988, of First Republic Bancorp Inc. Employee Stock
Ownership Trust in favor of the Registrant. (10.40)
10.12. Restated Secured Promissory Note of December 9, 1987, dated
November 22, 1988, of First Republic Bancorp Inc. Employee Stock
Ownership Trust in favor of the Registrant. (10.41)
10.13. Secured Promissory Note dated November 22, 1988 of First Republic
Bancorp Inc. Employee Stock Ownership Trust in favor of the
Registrant. (10.42)
10.14... Sublease Agreement dated October 20, 1989 between the Registrant,
Wells Fargo Bank and 111 Pine Street Associates with related master
lease and amendments thereto attached. (10.44)
10.15.. Lease Agreement dated January 5, 1990 between the Registrant and
Honorway Investment Corporation. (10.45)
10.16... Agreement re: Executive Bonuses for 1990 and 1991. (10.51)
10.17** Amendment dated December 29, 1989 to Term Loan Agreement between
the Registrant and Imperial Bank. (10.32)
10.18*** Advances and Security Agreement dated as of June 24, 1991 between
the Federal Home Loan Bank of San Francisco ("FHLB") and First
Republic Thrift & Loan. (10.29)
10.19### Subordinated Capital Notes by First Republic Thrift & Loan to First
Republic Bancorp Inc. outstanding as of October 30, 1992, nos.
1001-1010 and no. 1013. (10.34)
10.20### Form of 1992 Performance-Based Contingent Stock Option Agreement.
(10.35)
10.21#### Employee Stock Purchase Plan. (10.23)
11.1 Statement of Computation of Earnings Per Share.
12.1 Statement of Computation of Ratios of Earnings to Fixed Charges.
13.1 1994 Annual Report to Stockholders
22.1 Subsidiaries of First Republic Bancorp Inc.
23.1 Consent of KPMG Peat Marwick LLP (see page 40).
27 Financial Data Schedule
33
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES 13 OR 15(D) 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.
/s/ Willis H. Newton, Jr.
By:____________________________
Willis H. Newton, Jr.
Senior Vice President and
Chief Financial Officer
March 29, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRATION AND IN
THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
------------------------------------ Chairman of the Board March , 1995
(Roger O. Walther)
/s/ James H. Herbert, II
------------------------------------ March 29, 1995
(James H. Herbert, II) President, Chief Executive
Officer and Director
/s/ Katherine August-deWilde
------------------------------------ March 29, 1995
(Katherine August-deWilde) Executive Vice President
and Director
/s/ Willis H. Newton, Jr.
------------------------------------ March 29, 1995
(Willis H. Newton, Jr.) Senior Vice President and
Chief Financial Officer
(Principal Financial
Officer)
/s/ Linda G. Moulds
------------------------------------ March 29, 1995
(Linda G. Moulds) Vice President, Secretary
and Contoller (Principal
Accounting Officer)
/s/ Richard M. Cox-Johnson
------------------------------------ Director March 24, 1995
(Richard M. Cox-Johnson)
------------------------------------ Director March , 1995
(Kenneth W. Doughery)
/s/ Frank J. Fahrenkopf, Jr.
------------------------------------ Director March 23, 1995
(Frank J. Fahrenkopf, Jr.)
34
SIGNATURE TITLE DATE
--------- ----- ----
/s/ L. Martin Gibbs
------------------------------------ March 29, 1995
(L. Martin Gibbs) Director
/s/ James F. Joy
------------------------------------ March 23, 1995
(James F. Joy) Director
/s/ John F. Mangan
------------------------------------ March 24, 1995
(John F. Mangan) Director
------------------------------------ March , 1995
(Barrant V. Merrill) Director
35
EXHIBIT NO. DESCRIPTION
----------- -----------
11.1 Statement of Computation of Earnings Per Share
12.1 Statement of Computation of Ratios of Earnings to Fixed Charges
13.1 1994 Annual Report to Stockholders
22.1 Subsidiaries of First Republic Bancorp Inc.
23.1 Consent of KPMG Peat Marwick
27 Financial Data Schedule
36
EX-11.1
2
COMPUTATION OF EARNINGS
EXHIBIT 11.1
FIRST REPUBLIC BANCORP INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1994 1993 1992 1991 1990
---------- ----------- ----------- ---------- ----------
Primary:
Net income............ $7,303,000 $12,439,000 $11,762,000 $7,505,000 $3,804,000
Less: Dividends on
Series B Preferred
Stock(1)............. -- -- -- (340,000) (224,000)
---------- ----------- ----------- ---------- ----------
Net income available
to common stock...... 7,303,000 12,439,000 11,762,000 7,165,000 3,580,000
Effect of convertible
subordinated
debentures, net of
taxes(2)............. 1,597,000 1,599,000 94,000 -- --
---------- ----------- ----------- ---------- ----------
Adjusted net income
for fully-diluted
calculation.......... $8,900,000 $14,038,000 $11,856,000 $7,505,000 $3,804,000
========== =========== =========== ========== ==========
Wtd. avg. shares
outstanding,
excluding treasury
shares............... 7,743,965 7,716,086 7,340,523 3,998,403 3,284,526
Wtd. avg. shares
issuable from
Preferred Stock,
Series A............. -- -- -- 260,725 297,150
Wtd. avg. shares
issuable from
Preferred Stock,
Series C............. -- -- -- 32,854 30,410
Effect of stock
options exercised
during period........ 15,275 7,472 33,667 7,718 32,590
Wtd. avg. shares of
dilutive stock
options under
treasury stock
method(3)............ 298,340 284,512 284,017 169,676 --
Wtd. avg. shares of
stock purchased by
employees............ 5,624 2,746 -- -- --
Wtd. avg. shares of
treasury stock....... (92,371) (141) -- -- --
---------- ----------- ----------- ---------- ----------
Adjusted shares
outstanding--primary. 7,970,833 8,010,675 7,691,061 4,466,932 3,614,266
========== =========== =========== ========== ==========
Net income per share--
primary.............. $0.92 $1.55 $1.53 $1.60 $0.99
========== =========== =========== ========== ==========
Fully-Diluted.........
Adjusted shares--
primary, from above.. 7,970,833 8,010,675 7,691,061 4,466,932 3,614,266
Wtd. avg. shares
issuable upon
conversion of
convertible
subordinated
debentures(2)........ 2,524,210 2,524,210 134,637 -- --
Additional wtd. avg.
shares of dilutive
stock options
converted at period--
end stock price under
the treasury stock
method(4)............ 4,904 32,915 67,864 8,296 --
Additional wtd. avg.
shares issuable from
conversion of
Preferred Stock,
Series B(1).......... -- -- -- 562,703 379,869
---------- ----------- ----------- ---------- ----------
Adjusted shares
outstanding--fully-
diluted.............. 10,499,947 10,567,800 7,832,484 5,077,931 3,994,135
========== =========== =========== ========== ==========
Net income per share--
fully-diluted........ $0.85 $1.33 $1.51 $1.48 $0.95
========== =========== =========== ========== ==========
--------
Per share amounts and numbers of shares have been adjusted to reflect the
effect of two 3% stock dividends declared by the Company's Board of Directors
to stockholders of record on February 25, 1993 and February 18, 1994.
(1) Not applicable after 1991. The Series B Preferred Stock was outstanding
from May 30, 1990 to November 13, 1991.
(2) Due to the issuance of convertible subordinated debentures in December
1992, the fully-diluted calculation includes the number of shares which
would be outstanding if all such debentures were converted and adjusts
reported net income for the effect of interest expense on the debentures,
net of taxes.
(3) Stock options were not dilutive for 1990 as the average stock price was
lower than the exercise price on options outstanding for that year.
(4) The result of the computation of the fully-dilutive impact of stock options
outstanding is antidilutive in 1990 and is not reflected in the table above
because the year-end price of the Company's common stock is less than the
average exercise price of the outstanding stock options. During 1991 and
portions of 1992, 1993 and 1994, the quarter ending market price exceeded
the average exercise price resulting in additional shares for the fully-
diluted calculation.
37
EX-12.1
3
RATIO OF EARNINGS TO FIXED CHARGES
EXHIBIT 12.1
FIRST REPUBLIC BANCORP INC.
RATIO OF EARNINGS TO FIXED CHARGES
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
($ IN THOUSANDS)
Income before income taxes............. $12,238 $21,399 $19,805 $12,546 $ 5,503
======= ======= ======= ======= =======
Add fixed charges, excluding interest
on thrift accounts:
Total interest on debentures and
other borrowings.................... $30,411 $21,599 $19,340 $13,156 $ 6,238
======= ======= ======= ======= =======
Ratio of earnings to fixed charges
excluding interest on thrift accounts. 1.40 1.99 2.02 1.95 1.88
Including interest on thrift accounts:
Interest on thrift accounts.......... 41,024 35,318 39,636 42,681 44,234
------- ------- ------- ------- -------
Total fixed charges including
interest on thrift accounts......... $71,435 $56,917 $58,976 $55,837 $50,472
======= ======= ======= ======= =======
Ratio of earnings to fixed charges
including interest on thrift accounts. 1.17 1.38 1.34 1.23 1.11
38
EX-13
4
ANNUAL REPORT
--------------------------------------------------------------------------------
1994 Annual Report
First Republic Bancorp
[PHOTO APPEARS HERE
OF DEPOSIT CUSTOMERS]
* Security and Stability Derived
from Capital Strength
[PHOTO APPEARS HERE
OF BORROWER AND HIS FAMILY
AT THEIR HOME]
* Extraordinary Customer Service
Delivered by Experienced Professionals
[PHOTO APPEARS HERE
OF CHILDREN'S SOCCER TEAM
ON PLAYING FIELD FINANCED
BY COMPANY]
[Logo of First Republic Bancorp Inc. appears here]
First Republic Bancorp Inc.
Financial Highlights
At Year End 1994 1993 1992 1991 1990
-------------- -------------- -------------- ------------ ------------
Total Assets $1,707,319,000 $1,417,193,000 $1,232,517,000 $932,065,000 $706,160,000
Cash and Investments 190,773,000 146,513,000 158,306,000 62,107,000 96,104,000
Loans, Net 1,477,492,000 1,233,995,000 1,042,478,000 848,404,000 590,643,000
Thrift Certificates 948,833,000 751,671,000 698,772,000 605,765,000 538,270,000
FHLB Advances 570,530,000 468,530,000 373,530,000 214,970,000 87,470,000
Subordinated Debentures 64,177,000 60,957,000 55,050,000 33,322,000 23,583,000
Stockholders' Equity 107,286,000 104,946,000 92,125,000 59,312,000 33,172,000
Loans Serviced
for Others 843,144,000 814,453,000 781,564,000 794,893,000 796,583,000
Tangible Book Value
Per Share $14.40 $13.58 $11.94 $9.59 $7.71
For The Year 1994 1993 1992 1991 1990
-------------- -------------- -------------- ------------ ------------
Total Interest Income $ 109,365,000 $ 98,347,000 $ 95,563,000 $ 82,583,000 $ 66,298,000
Net Interest Income 37,930,000 41,430,000 36,587,000 26,746,000 15,826,000
Net Income $ 7,303,000 $ 12,439,000 $ 11,762,000 $ 7,505,000 $ 3,804,000
Average Fully-diluted
Shares Outstanding 10,499,947 10,567,800 7,832,484 5,077,931 3,994,135
Fully-diluted Earnings
Per Share $0.85 $1.33 $1.51 $1.48 $.98
Net Income Total Assets Total Capital
In $ Millions In $ Millions In $ Millions
1990.................... 3.8 1990.................... 706 1990.................... 62
1991.................... 7.5 1991.................... 932 1991.................... 104
1992.................... 11.8 1992.................... 1,233 1992.................... 160
1993.................... 12.4 1993.................... 1,417 1993.................... 179
1994.................... 7.3* 1994.................... 1,707 1994.................... 186
*Adversely affected by 1994 Northridge
earthquake, as discussed on page 3 and
elsewhere in this annual report.
First Republic Bancorp
--------------------------------------------------------------------------------
Corporate
Profile
[LOGO OF FDIC APPEARS HERE]
[LOGO OF NYSE APPEARS HERE]
[LOGO OF FEDERAL HOME LOAN BANK SYSTEM APPEARS HERE]
First Republic is a leading banking and mortgage banking institution with
growing operations in four major urban markets - San Francisco, Los Angeles and
San Diego, California and Las Vegas, Nevada. We are financially strong, customer
service-oriented and narrowly focused on our core lending and savings
businesses. We believe that the critical measure of our success is the high
number of satisfied, repeat customers we are privileged to serve.
First Republic's customers benefit substantially from:
* A strong capital position of 16.3% risk-based capital, which is over
204% of regulatory guidelines.
* Professional, personal customer service with expanding products and
locations.
* Experienced, high quality, long-term personnel.
* Specialized and flexible product lines.
* Competitive terms and rates.
* Operating cost efficiency.
--------------------------------------------------------------------------------
1
--------------------------------------------------------------------------------
Stockholders'
Message
This past year was the most difficult in First Republic's history. However,
despite the challenges of the January 1994 Northridge earthquake, the
continuing recession in California, and rapidly rising interest rates, we
achieved consecutive quarterly profits, annual net income of $7.3 million
and an overall, after tax return on equity of 6.8%. This is the first year
that the Company's earnings have not exceeded the prior year's. Our primary
subsidiary, First Republic Thrift & Loan, California's largest, achieved
its 113th consecutively profitable quarter.
1994 Operating Results. In the context of this very challenging operating
environment, some of our key results for 1994 were:
* Tangible book value per share rose to $14.40 at year-end. This level
represents a 103% increase achieved over the past five years or a
compounded annual growth rate of 15.2%, after taxes. This annual rate of
growth compares very favorably to the 8.7% per annum, pretax return of the
S&P 500 Index over the same five years.
"Because of the Company's strong capital position, we have been able to
remain consistently profitable and pursue opportunities even while
confronting adversity."
[QUOTATION APPEARS HERE]
* Net earnings were $7.3 million, or $0.85 fully diluted earnings per share.
* Total assets increased 20% to more than $1.7 billion.
* Deposits grew 26% during the year to $949 million.
* Assets per full-time employee at year-end were $11.9 million, a 24%
improvement over year-end 1993.
* Loan originations were $784 million, a 17% decline from 1993 - a much
smaller decline than the nationwide decrease in home mortgage originations.
* Two new deposit branches were opened.
* The start-up of our full service subsidiary in Nevada, First Republic
Savings Bank, was highly successful and profitable.
* General and administrative expenses, as a percentage of average assets,
declined nearly 4% to 1.28% in 1994. Our operating efficiency ratio was
47%.
Capital Strength. We have always adhered to the philosophy that the
maintenance of capital strength is essential to long-term success in the
financial services industry and 1994 underscored the wisdom of this
approach. Because of the Company's strong capital position, we have been
able to remain consistently profitable and pursue opportunities even while
confronting adversity. At
--------------------------------------------------------------------------------
2
First Republic Bancorp
--------------------------------------------------------------------------------
year-end 1994, our total capital was a strong 16.3% of risk adjusted assets,
or over 204% of regulatory requirements.
Northridge Earthquake. The Northridge earthquake of January 1994 has proven
to be a major setback. This earthquake - particularly as it came on the heels
of a severe four-year recession in the Los Angeles area - resulted in direct
costs of nearly $8 million for First Republic in 1994. We estimate that if
these direct costs plus a modest rate of interest on the affected loans were
added back to our 1994 results, our after tax earnings would have been
approximately $12.6 million and our adjusted return on equity 12%.
It is worth noting that over 99% of our earthquake losses were on loans
secured by apartment buildings in Los Angeles County, 100% of which were
located in low- to moderate-income census tracts. Of these losses, more than
73% involved already seismically reinforced masonry buildings.
As of December 31, 1994, the Company had incurred no losses among its
$248.7 million of single family and commercial property loans in the Los
Angeles area and only $320,000 of loans to small businesses in the area were
adversely impacted. This experience, however painfully gained, provides us
with clear and useful lessons for our future lending activities.
We entered 1995 with many of the problem loans from this experience
"resolved" by either workouts, foreclosures, or writedowns and we expect to
deal with most of the remaining issues during the first two quarters of the
year. We will, however, continue to bear the burden of lower income from
workout loans for several years.
Asset Quality and Reserves. We have always worked to maintain careful
control over asset quality and 1994 was no exception. Nonaccruing assets and
real estate owned equaled 2.41% of total assets at year-end and has never
exceeded 3.13% at the end of any quarter. Maintaining these low levels under
difficult circumstances reflects our diversified portfolio, careful initial
underwriting, rapid writedowns if needed, and enormous workout efforts by
our staff.
Our balance sheet is increasingly conservative. During the last three years
the percentage of our loans represented by single family home loans has
increased steadily from 31% at December 31, 1991 to 56% at December 31, 1994. We
expect this trend to continue during 1995.
[PHOTO OF JAMES H. HERBERT, II, AND ROGER O. WALTHER APPEARS HERE]
James H. Herbert, II, President and CEO (left); Roger O. Walther, Chairman
--------------------------------------------------------------------------------
3
We have also maintained reserves at a level that we feel is adequate at any
point in time. In the face of what appears to be, at long last, a slowly
recovering California economy, the Company discontinued additions to its
recession reserve as of December 31, 1994. While rising interest rates will
slow the recovery, we do not believe this recovery will stall during 1995. We
are also hopeful that our reserve additions for the impact of the Northridge
earthquake have been substantially completed, although there can be no
assurances that additional reserves will not be needed.
"Our deposit franchise has experienced steady growth through periods of
both declining and rising interest rates."
[QUOTATION APPEARS HERE]
Deposit Franchise Growth. We continued to expand our deposit franchise in
1994 by opening a branch in the Chinatown area of San Francisco and
initiating deposit taking in Las Vegas, Nevada. By year end, our three newest
locations held $107 million of deposits.
We also attracted new customers and enhanced our deposit services by
introducing limited checking accounts.
Our nine retail deposit branches operate in four dynamic and diversified
metropolitan areas - San Francisco, Los Angeles, San Diego and Las Vegas.
With over $105 million of average deposits per branch, our deposit franchise
has experienced steady growth through periods of both declining and rising
interest rates.
To further strengthen our service to deposit customers, we introduced
Saturday hours at several branches, with considerable success, and plan
further expansion. Additionally, we expect to add at least two and possibly
three new California retail deposit branches during 1995.
Asset and Liability Matching. First Republic emphasizes adjustable rate real
estate secured assets, which are funded by deposits and variable rate Federal
Home Loan Bank ("FHLB") advances. The cost of our deposits closely follows
the 11th District Cost of Funds Index ("COFI") and we maintain assets that
adjust on COFI approximately equal to our total deposits. During 1994, the
cost of our deposits rose 0.64% and the COFI index increased 0.49%; both
significantly lagged short-term interest rates, which rose more than 3.25%.
Our FHLB borrowings fund assets that reprice using market rate indices;
however, home mortgage loans often adjust more slowly, offer incentive
introductory rates and have limitations
Total Deposits
$ Millions
----------
1990 $538
1991 606
1992 699
1993 752
1994 949
Plus 16.4% per Annum Rate of Growth for the past five years
4
First Republic Bancorp
--------------------------------------------------------------------------------
as to periodic rate increases. During 1994, our net interest spread decreased
as our liability costs rose more quickly than our asset yields - a trend that
is expected to continue into 1995.
Although our balance sheet has grown, due to competitive conditions it
is increasingly difficult to originate new loans at a profit during the
initial year of loan life because of the disparity between start rates on
adjustable rate mortgages and our incremental liability costs. First Republic
has purchased $1.5 billion of interest rate caps to protect against an even
more significant rise in interest rates.
Looking Forward. First Republic continues to be well positioned financially
and operationally to benefit from a strengthening economy in our markets. The
economic outlook for 1995 is for a somewhat better year than 1994 and it is
our expectation that single family home resale markets in California will
remain reasonably strong during the coming year.
On the other hand, we expect that refinance volume will remain quite low
during 1995 and that home purchase volume will be approximately equal to
1994. As a result, our loan origination volume will probably decline further
in 1995. We also anticipate increased margin pressure during 1995,
particularly in the first and second quarters due to the upward repricing
of a large share of our FHLB advances.
In our letter to you a year ago, we stated that our objectives for 1994
were to: 1) expand our deposit franchise; 2) focus more on single family
home loans with a modest re-entry into multifamily or commercial mortgage
lending; and 3) improve operating efficiencies while utilizing our
substantial capital base more fully through asset growth. These objectives
were achieved in spite of the difficult environment in 1994. During 1995 we
plan to continue our focus on these same three goals.
We are cautious about 1995. It is going to be a difficult year; however,
we believe it will be a successful year. The Company should end 1995 with an
even stronger customer franchise, an improved branch network, and a more
mature and even more profitable Las Vegas-based First Republic Savings Bank
operation.
We appreciate the continuing confidence and support of our customers,
stockholders and First Republic family.
/s/ Roger O. Walther /s/ James H. Herbert, II
Roger O. Walther James H. Herbert, II
Chairman President and Chief Executive Officer
Tangible Book
Value Per Share
$
---------------
1990 7.71
1991 9.59
1992 11.94
1993 13.58
1994 14.40
Plus 15.2% per Annum Rate of Growth for the past five years
5
Savings Security
First Republic offers what our customers value most: savings security,
competitive rates, and great personal service.
Risk Adjusted
Capital Ratios
--------------
Required 8.0%
First Republic Bancorp 16.3%
[LOGO OF FDIC INSURED APPEARS HERE]
6
First Republic Bancorp
--------------------------------------------------------------------------------
At First Republic, our capital strength is our customers' security. We
combine a solid capital foundation, conservative financial management and our
history of profitability to provide the stability and confidence our
customers seek. With a growing array of products and services, First Republic
is expanding in all the markets we serve.
At the end of 1994, First Republic had assets of more than $1.7 billion.
And our ratio of capital to risk adjusted assets was 16.3 percent, 204% of
regulatory requirements. First Republic Thrift & Loan's capital ratio is the
11th strongest among the 40 largest California financial institutions. Our
customers have the additional security of knowing their deposits are insured
by the Federal Deposit Insurance Corporation.
[LOGO OF FIRST REPUBLIC APPEARS HERE]
Over 40 Years
California's Largest
[PHOTO OF CUSTOMER MAUREEN O'CONNOR AND EMPLOYEE NANCI MCKISSICK APPEARS HERE]
Customer and former San Diego Mayor, Maureen O'Connor (far left), is pictured
with Regional Savings Manager Nanci McKissick in our Del Mar Branch.
7
Savings Convenience
Through our growing branch network, expanded services and Saturday hours, we
deliver what prudent savers want: capital safety, competitive rates, good
service and convenience.
At each of First Republic's nine branches, we provide personalized service
and products tailored to meet customer needs. As an added convenience, our
customers can now access their savings by writing a check. Our CD's offer
virtually any maturity. Our rates are highly competitive. And we have no service
charges. Most importantly, our highly trained and very stable staff is
professional, proficient, and expert in working with depositor customers to find
the right savings solution.
[PHOTO OF CUSTOMER, HIS WIFE AND AN EMPLOYEE APPEARS HERE]
Tailored certificates of deposit and money market accounts are useful tools
for creating a secure income stream in retirement. Whether in California or
Southern Nevada, a First Republic branch is nearby with knowledgeable and
friendly people to serve our customers.
"First Republic provides the financial security we seek plus all the
savings programs we need for our retirement. It's good to have a bank we
can bank on."
Retired Air Force Colonel Don Kahley and his wife, Ruth Kahley
8
First Republic Bancorp
--------------------------------------------------------------------------------
"Our customers come to us initially because of our competitive savings
rates and capital strength. They stay because of our good service and ability
to understand their needs."
Sylvia Lai
Manager, Chinatown Branch
[PHOTO OF EXTERIOR OF CHINATOWN BRANCH APPEARS HERE]
At every First Republic branch, knowing the neighborhood is the key to
first-rate customer service. In our Chinatown branch, a crossroad of
cultures, languages and generations, we have well-trained bilingual
personnel and offer extended hours to provide the most responsive service.
"After working together for many years, First Republic has earned our
trust and our respect."
Daniel Leibsohn
Executive Director, The Low Income Housing Fund
[PHOTO OF EMPLOYEE AND CUSTOMER AT SAN FRANCISCO BRANCH APPEARS HERE]
We are proud to serve clients who are committed to affordable housing. The
Low Income Housing Fund, which provides innovative financing for low income
housing, has been a First Republic customer for seven years. The Fund invests
its deposits with us, relying on our capital strength and the professional
service of our branch staff in San Francisco.
9
Focus on Home Loans
"With First Republic I know there won't be any surprises. They are highly
personalized, discreet and rock solid."
Charles Bronson
Actor
Our commitment to customers only begins at the closing of escrow. We work to
build long-term relationships and meet the changing needs of our customers.
10
First Republic Bancorp
--------------------------------------------------------------------------------
[PHOTO OF BORROWER CHARLES BRONSON IN HIS HOME APPEARS HERE]
Making housing loans is our core business at First Republic. Specializing in
higher end residential mortgages and offering flexible loans for first time
homebuyers, we have established a position as a respected residential lender
in the urban markets we serve - San Francisco, Los Angeles, San Diego and Las
Vegas. This geographic focus enables us to stay current with local property
values and market dynamics that are critical in every home loan transaction.
We offer customers a wide range of loan products to choose from:
adjustable and fixed rate loans and a selection of customized products,
including bridge loans, blended mortgages and our First Line/(TM)/ home
equity line of credit. With every loan we originate, we work hard to meet the
needs and expectations of each individual customer, providing personalized
attention and timely response.
11
Serving Our Customers
Customer service is our top priority. We work with our loan customers to
understand their unique needs, credit situation and time schedule. Our loan
officers are highly responsive and look for ways to keep paperwork and
meetings to a minimum. Their job is to make obtaining and processing a loan
through First Republic as easy as possible.
We also know how important realtors are in every real estate
transaction, so we build strong ties with the real estate brokerage
community. This teamwork is another way we make transactions simpler and more
efficient for our customers.
"Our realtor suggested we use First Republic because of their reliability.
It was the best advice he could have given us."
Doyle and Cathe Moon
Restaurateurs
[PHOTO OF DOYLE AND CATHE MOON WITH THEIR REALTOR, BILL BULLOCK,
IN THE BALBOA CAFE APPEARS HERE]
As co-owners of San Francisco's Balboa Cafe, Doyle and Cathe Moon have many
demands on their time. When they found a new home, we worked with their
realtor, Bill Bullock (center), to make the loan process easy and meet their
tight schedule.
12
First Republic Bancorp
--------------------------------------------------------------------------------
[PHOTO OF JERRY D. FLORENCE AND FAMILY IN FRONT OF THEIR HOME APPEARS HERE]
We work closely with our loan customers to respond to their needs and time
frame. With our market knowledge and extensive track record, we strive for a
home loan process that is seamless from start to finish.
"At Nissan, we appreciate a high quality product and great customer
service - First Republic has both."
Jerry D. Florence (with family)
Vice President, Marketing,
Nissan Motor Corporation USA
Loans Originated
In $ Millions
----------------
1990 $341
1991 445
1992 826
1993 945
1994 784
--------------------------------------------------------------------------------
13
--------------------------------------------------------------------------------
Affordable Housing
"First Republic provided the needed financial support for our apartment
project. The bank is a creative and reliable resource and it was great to
have them on our team."
Scott J. Barker
Executive Vice President, Village Investments
Scott Barker's 198 unit apartment building, located in the Long Beach area of
Los Angeles County, is an example of the successful renovation of an older
structure. We will continue our efforts to support affordable housing and better
facilities for our neighbors in all our markets.
Residential Loan Profile
By Housing Units
------------------------
Low to Moderate Income
Census Tracts 57%
All Other Census Tracts 43%
--------------------------------------------------------------------------------
14
First Republic Bancorp
--------------------------------------------------------------------------------
[PHOTO OF TENANT FAMILIES AT THE PLAYGROUND IN FRONT OF APARTMENTS
SECURING ONE OF COMPANY'S LOANS APPEARS HERE]
An integral part of our commitment to the urban markets we serve is our
strong belief that low to moderate priced housing should be quality housing -
well constructed, safe and attractive. That's why First Republic finances new
construction of multifamily units, as well as refurbishment and renovation of
older multifamily housing stock. At December 31, 1994, fully 57% of the
housing units securing First Republic's loans were located in low- to
moderate-income areas.
We also recognize that lending is not a one-time event: change is
inevitable over the life of a loan. We work with our borrowers to help them
accommodate change.
--------------------------------------------------------------------------------
15
Supporting Education
Since First Republic's inception, community involvement has been a
cornerstone of our mission. While we support many initiatives, we are a very
active participant in the enrichment of our communities' school and
educational programs.
We are particularly proud of First Republic's leadership role in school
financing. Over the past few years, we have worked with many primary and
secondary schools to help finance everything from seismic retrofits to large
scale new construction. Examples of recent projects in the San Francisco Bay
Area are featured here.
[PHOTO OF ADMISTRATOR AND CHILDREN APPEARS HERE]
"With commitment, flexibility, follow through and expertise, First
republic's innovative financing enabled us to purchase our campus."
John Bloom
Head Administrator, Waldorf School
[PHOTO OF TWO STUDENTS PLAYING VIOLIN APPEARS HERE]
"While musical vibrations can be sublime, seismic ones are not. Studies told us
we needed to retrofit our buildings to guard against earthquake damage. First
Republic provided the financing to get the job done and shore up our peace of
mind."
Richard Chenault
Business Manager, Schools of the Sacred Heart
[PHOTO OF CONSTRUCTION WORKER APPEARS HERE]
"Imagination needs room to grow and so do schools. First Republic was
there, in advance, with the financing structure we needed to plan and
complete our wonderful new wing and auditorium."
James Telander
Headmaster, San Francisco Day School
16
[PHOTO OF BOYS PLAYING SOCCER APPEARS HERE]
"First Republic's loan helped us meet our goal of creating a first class
soccer and playfield. Their professional backing makes First Republic a
winner in our book."
Karen McCown
Founder, Nueva School
[PHOTO OF HIGH SCHOOL LIBRARY APPEARS HERE]
"When it comes to school financing, First Republic has done their homework.
They understood not only what we needed in our expansion project, but why
we needed it that way. Their forward commitment and flexibility were key to
our success."
Mark Salkind
Director, The Urban School
[PHOTO OF CLASSROOM APPEARS HERE]
"Equal amounts of understanding and financial support from First Republic
gave us the foundation we needed to acquire a great facility."
Marcus Byruck
Board Chair, Sierra School
[PHOTO OF CHILDREN IN FRONT OF CONSTRUCTION PROJECT APPEARS HERE]
"Building a new school gym is anything but child's play. First Republic's
financing program gave us the resources and confidence to get the job
done."
Kathleen M. Mecca, Ph.D.
Director, Mt. Tamalpais School
17
Community Investment
"We had a vision of creating a mobile home park that would provide a
beautiful and very affordable home for senior citizens. The great success
of our 466 unit Las Vegas park wouldn't have been possible without First
Republic."
Jeff Margolin
Current President, Las Vegas Jaycees Senior Citizen
Mobile Home Community
[PHOTO OF MOBILE HOME PARK RESIDENTS APPEARS HERE]
First Republic's Jim Baumberger, pictured center, worked with the Senior
Citizens Mobile Home Community and the Las Vegas Jaycees former board
president Harold Klein, pictured far left, to make their modern mobile home
park project a reality. Citing the project as an example of what the private and
public sectors can do in partnership, U.S. Congressman James Bilbray has
congratulated First Republic on its role in this unique and successful project.
18
First Republic Bancorp
--------------------------------------------------------------------------------
First Republic seeks out special opportunities to meet the needs of customers
in our communities. We actively encourage first time home buyers, and have
developed special programs to meet their needs. In our Las Vegas area market,
the construction of new homes and moderate income housing is a primary activity.
In our five years in Nevada, First Republic has financed over 13,000 housing
units, the majority of which have been new starter homes or low- to moderate-
income multifamily housing.
Also in Las Vegas, we have played a major role in creating affordable
housing for retirees on fixed incomes. The partnership of the Jaycees,
community groups and First Republic resulted in an excellent new facility.
[PHOTO OF LETTER FROM DISTRICT'S U.S. CONGRESS REPRESENTATIVE APPEARS HERE]
19
--------------------------------------------------------------------------------
Consolidated Balance Sheet
December 31, 1994 1993
-------------- --------------
Assets
Cash $ 16,920,000 $ 19,903,000
Federal funds sold and short term investments 15,500,000 18,883,000
Interest bearing deposits at other financial
institutions 198,000 592,000
Investment securities (fair value $127,199,000
and $85,063,000 at December 31, 1994 and
1993, respectively) (Note 2) 129,628,000 84,208,000
Federal Home Loan Bank stock, at cost 28,527,000 22,927,000
-------------- --------------
190,773,000 146,513,000
Loans (Note 3):
Single family (1-4 unit) mortgages 815,010,000 546,232,000
Multifamily (5+ units) mortgages 367,750,000 387,757,000
Commercial real estate mortgages 250,369,000 229,914,000
Commercial business loans 5,621,000 8,346,000
Multifamily construction 9,408,000 5,707,000
Single family construction 14,227,000 14,512,000
Equity lines of credit 28,137,000 31,213,000
Leases, contracts and other 975,000 1,333,000
Loans held for sale 7,166,000 31,044,000
-------------- --------------
1,498,663,000 1,256,058,000
Less:
Unearned loan fee income (6,816,000) (9,406,000)
Reserve for possible losses (14,355,000) (12,657,000)
-------------- --------------
Net loans 1,477,492,000 1,233,995,000
Interest receivable 10,172,000 8,110,000
Prepaid expenses and other assets (Note 4) 16,282,000 14,940,000
Other real estate owned 8,500,000 9,961,000
Premises, equipment and leasehold improvements,
net of accumulated depreciation of $5,009,000
and $4,031,000 at December 31, 1994 and 1993,
respectively 4,100,000 3,674,000
-------------- --------------
Total Assets $1,707,319,000 $1,417,193,000
============== ==============
See accompanying notes.
20
First Republic Bancorp
--------------------------------------------------------------------------------
December 31, 1994 1993
-------------- --------------
Liabilities and Stockholders' Equity
Liabilities:
Thrift certificates (Note 5):
Passbook and MMA accounts $ 138,726,000 $ 117,161,000
Investment certificates 810,107,000 634,510,000
-------------- --------------
Total thrift certificates 948,833,000 751,671,000
Interest payable 12,332,000 8,105,000
Custodial receipts on loans serviced for others 96,000 1,046,000
Other liabilities 3,415,000 8,358,000
Federal Home Loan Bank advances (Note 6) 570,530,000 468,530,000
Other borrowings (Note 7) 650,000 13,580,000
-------------- --------------
Total senior liabilities 1,535,856,000 1,251,290,000
Senior subordinated debentures (Note 8) 9,978,000 9,981,000
Subordinated debentures (Note 9) 19,699,000 16,476,000
Convertible subordinated debentures (Note 10) 34,500,000 34,500,000
-------------- --------------
Total liabilities 1,600,033,000 1,312,247,000
Commitments (Note 14)
Stockholders' equity (Note 13 and 15):
Common stock, $.01 par value; 20,000,000
shares authorized, 7,797,100 and 7,744,541
shares issued and outstanding at December
31, 1994 and 1993, respectively 78,000 78,000
Capital in excess of par value 74,745,000 71,123,000
Retained earnings 39,438,000 35,296,000
Deferred compensation -- ESOP (650,000) (1,200,000)
Treasury stock, at cost; 352,397 shares and
25,750 shares at December 31, 1994 and 1993,
respectively (4,315,000) (351,000)
Unrealized loss on available for sale
securities (Note 2) (2,010,000) --
-------------- --------------
Total stockholders' equity 107,286,000 104,946,000
-------------- --------------
Total Liabilities and Stockholders' Equity $1,707,319,000 $1,417,193,000
============== ==============
21
First Republic Bancorp
--------------------------------------------------------------------------------
Consolidated Statement of Income
Year Ended December 31, 1994 1993 1992
------------ ----------- -----------
Interest income:
Interest on real estate and other loans $100,816,000 $93,212,000 $91,828,000
Interest on investments 8,549,000 5,135,000 3,735,000
------------ ----------- -----------
Total interest income 109,365,000 98,347,000 95,563,000
------------ ----------- -----------
Interest expense:
Interest on thrift accounts 41,024,000 35,318,000 39,636,000
Interest on debentures and other borrowings 30,411,000 21,599,000 19,340,000
------------ ----------- -----------
Total interest expense 71,435,000 56,917,000 58,976,000
------------ ----------- -----------
Net interest income 37,930,000 41,430,000 36,587,000
Provision for losses 9,720,000 4,806,000 7,783,000
------------ ----------- -----------
Net interest income after provision for losses 28,210,000 36,624,000 28,804,000
------------ ----------- -----------
Non-interest income:
Servicing fees, net 2,330,000 1,233,000 1,110,000
Loan and related fees 1,915,000 1,937,000 1,975,000
Gain on sale of loans 430,000 2,250,000 3,257,000
Loss on sale of investment securities -- -- (852,000)
Other income 458,000 2,000 7,000
------------ ----------- -----------
Total non-interest income 5,133,000 5,422,000 5,497,000
------------ ----------- -----------
Non-interest expense:
Salaries and related benefits 7,175,000 5,393,000 5,173,000
Occupancy 2,501,000 1,872,000 1,460,000
Advertising 1,863,000 1,340,000 1,047,000
Professional fees 542,000 542,000 660,000
FDIC insurance premiums 1,809,000 1,816,000 1,455,000
REO costs and losses 1,202,000 3,477,000 309,000
Other general and administrative 6,013,000 6,207,000 4,392,000
------------ ----------- -----------
Total non-interest expense 21,105,000 20,647,000 14,496,000
------------ ----------- -----------
Income before income taxes 12,238,000 21,399,000 19,805,000
Provision for income taxes (Note 12) 4,935,000 8,960,000 8,043,000
------------ ----------- -----------
Net income $ 7,303,000 $12,439,000 $11,762,000
============ =========== ===========
Primary earnings per share $ 0.92 $ 1.55 $ 1.53
============ =========== ===========
Fully diluted earnings per share $ 0.85 $ 1.33 $ 1.51
============ =========== ===========
Weighted average fully-diluted shares outstanding 10,499,947 10,567,800 7,832,484
============ =========== ===========
See accompanying notes.
22
First Republic Bancorp
--------------------------------------------------------------------------------
Consolidated Statement of Stockholders' Equity
Deferred Unrealized loss Total
Capital in compen- on available stock-
Years Ended December 31, Preferred Common excess of Retained sation- for sale Treasury holders'
1992, 1993 and 1994 stock stock par value earnings ESOP securities stock equity
------- ------- ----------- ----------- ----------- ----------- ----------- ------------
Balance at
January 1, 1992 $ 1,000 $60,000 $47,285,000 $14,041,000 $(2,075,000) $ -- $ -- $ 59,312,000
Deferred compensation-
ESOP 400,000 400,000
Exercise of options
on 48,284 shares
of common stock 87,000 87,000
Issuance of 1,490,540
shares of common
stock 15,000 20,549,000 20,564,000
Conversion of preferred
into common stock (1,000) 3,000 (2,000) --
Net income 11,762,000 11,762,000
------- ------- ----------- ----------- ----------- ----------- ----------- ------------
Balance at
December 31, 1992 -- 78,000 67,919,000 25,803,000 (1,675,000) -- -- 92,125,000
Deferred compensation-
ESOP 475,000 475,000
Effect of stock dividend 2,946,000 (2,946,000) --
Exercise of options
on 21,028 shares
of common stock 177,000 177,000
Issuance of 6,856 shares
of common stock 81,000 81,000
Purchase of 25,750 shares
of treasury stock (351,000) (351,000)
Net income 12,439,000 12,439,000
------- ------- ----------- ----------- ----------- ----------- ----------- ------------
Balance at
December 31, 1993 -- 78,000 71,123,000 35,296,000 (1,200,000) -- (351,000) 104,946,000
Deferred compensation-
ESOP 550,000 550,000
Unrealized loss on available
for sale securities (2,010,000) (2,010,000)
Effect of stock dividend 3,159,000 (3,161,000) (2,000)
Exercise of options
on 40,378 shares
of common stock 321,000 321,000
Issuance of 12,181 shares
of common stock 142,000 142,000
Purchase of 326,647 shares
of treasury stock (3,964,000) (3,964,000)
Net income 7,303,000 7,303,000
------- ------- ----------- ----------- ----------- ----------- ----------- ------------
Balance at
December 31, 1994 $ -- $78,000 $74,745,000 $39,438,000 $ (650,000) $(2,010,000) $(4,315,000) $107,286,000
======= ======= =========== =========== =========== =========== =========== ============
See accompanying notes.
23
First Republic Bancorp
--------------------------------------------------------------------------------
Consolidated Statement of Cash Flows
Year Ended December 31, 1994 1993 1992
------------- ------------- -------------
Operating Activities
Net Income $ 7,303,000 $ 12,439,000 $ 11,762,000
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for losses 9,720,000 4,806,000 7,783,000
Provision for depreciation and amortization 2,687,000 1,892,000 1,673,000
Amortization of loan fees (4,371,000) (4,688,000) (4,482,000)
Amortization of loan servicing fees 687,000 1,753,000 1,960,000
Amortization of investment securities discounts (12,000) (1,000) (125,000)
Amortization of investment securities premiums 230,000 125,000 203,000
Loans originated for sale (82,173,000) (361,498,000) (226,507,000)
Loans sold into commitments 85,543,000 339,653,000 240,577,000
(Increase) decrease in deferred taxes 1,338,000 655,000 (944,000)
Net losses on investment securities -- -- 852,000
Net gains on sale of loans (430,000) (2,250,000) (3,257,000)
(Increase) decrease in interest receivable (3,201,000) (384,000) 568,000
Increase in interest payable 4,227,000 273,000 835,000
Increase in other assets (2,855,000) (5,802,000) (4,645,000)
Increase (decrease) in other liabilities (7,233,000) 5,216,000 353,000
------------- ------------- -------------
Net Cash Provided (Used) By Operating Activities 11,460,000 (7,811,000) 26,606,000
Investing Activities
Loans originated (702,313,000) (583,298,000) (599,694,000)
Loans purchased (8,208,000) (5,447,000) (12,342,000)
Other loans sold 131,408,000 85,822,000 132,974,000
Principal payments on loans 306,496,000 305,594,000 241,467,000
Purchase of investment securities (49,037,000) (44,230,000) (19,406,000)
Sales of investment securities -- -- 3,247,000
Repayments of investment securities 10,176,000 5,814,000 3,333,000
Net decrease in short term investments 394,000 979,000 410,000
Additions to fixed assets (1,359,000) (1,660,000) (708,000)
Net proceeds from sale of REO (Note 1) 8,116,000 18,629,000 19,756,000
------------- ------------- -------------
Net Cash Used by Investing Activities (304,327,000) (217,797,000) (230,963,000)
Financing Activities
Net increase in passbook and MMA accounts 21,565,000 6,072,000 26,896,000
Issuance of investment certificates 395,684,000 308,860,000 362,419,000
Repayments of investment certificates (220,087,000) (262,033,000) (296,308,000)
Increase in long-term FHLB advances 112,000,000 85,000,000 209,560,000
Repayments of long-term borrowings (550,000) (475,000) (400,000)
Net increase (decrease) in short-term borrowings (22,380,000) 22,380,000 (56,500,000)
Decrease in deferred compensation - ESOP 550,000 475,000 400,000
Issuance of subordinated debentures 3,245,000 16,476,000 34,500,000
Repayment of subordinated debentures (25,000) (10,569,000) (12,772,000)
Sale of common stock 142,000 81,000 20,564,000
Proceeds from common stock options exercised 321,000 177,000 87,000
Purchase of treasury stock (3,964,000) (351,000) --
------------- ------------- -------------
Net Cash Provided by Financing Activities 286,501,000 166,093,000 288,446,000
Increase (decrease) in Cash and Cash Equivalents (6,366,000) (59,515,000) 84,089,000
Cash and Cash Equivalents at Beginning of Year 38,786,000 98,301,000 14,212,000
------------- ------------- -------------
Cash and Cash Equivalents at End of Year $ 32,420,000 $ 38,786,000 $ 98,301,000
============= ============= =============
See accompanying notes.
24
First Republic Bancorp
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1994 and 1993
1 Summary of Significant Accounting Policies
Basis of presentation and organization
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. In December 1993, First Republic
purchased First Republic Savings Bank which was relocated to Las Vegas,
Nevada and commenced operations in January 1994. 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 and 1992 financial
statements in order for them to conform with the 1994 presentation.
Recognition of income on loans
Interest income from real estate and business loans is recognized in the
month earned. Interest income is not recorded on loans when they become more
than 90 days delinquent, except for single family loans which are well
secured and in the process of collection, or at such earlier time as
management determines that the collectibility of such interest is unlikely.
For nonaccrual loans, interest income is recorded when cash is received.
Substantially all loan origination fees and direct loan origination
costs are deferred and amortized as a yield adjustment over the expected
lives of the loans using the interest method.
Reserve for possible losses
The Company provides for losses by charging current income in such amounts as
are required to establish a reserve for possible losses that management
considers to be adequate, based upon a number of factors, including loan
delinquencies, asset classifications, past loss experience, estimated
collateral values, management's assessment of credit risk inherent in the
loan portfolio, ratio analysis, delinquency and migration analysis, and the
Company's underwriting policies. The reserve is reviewed and adjusted
quarterly. It is the Company's policy to charge off balances that are deemed
uncollectible.
As a result of the Northridge earthquake which struck the Los Angeles
area in January 1994, the Company provided reserves totalling $7,750,000 during
1994 related to the damage or adverse economic impact on properties securing the
Company's loans. Chargeoffs against this reserve were $6,133,000 in 1994,
including $543,000 related to interest deemed to be uncollectible, $4,780,000 of
principal reductions on nonaccrual and restructured loans and $810,000 of costs
and losses related to real estate acquired. At December 31, 1994, the balance of
the earthquake reserve was $1,618,000.
In May 1993, the FASB issued Statement of Financial Accounting Standards
("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, (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. The
Company plans to implement SFAS No. 114 as of January 1, 1995. The impact of
the statement on the Company's results of operations and financial position
is not expected to be material.
Investment securities
Effective January 1, 1994, the Company adopted SFAS No. 115 "Accounting For
Certain Investments in Debt and Equity Securities" which addresses the
accounting and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt securities.
SFAS No. 115 establishes classification of investments into three categories:
(i) debt securities that the entity has the positive intent and ability to
hold to maturity are classified as "held to maturity" and reported at
amortized cost; (ii) debt securities that are held for current resale are
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 and
equity securities are classified as securities available for sale, and
reported at fair value, with unrealized gains and losses excluded from
operations and reported as a separate component of stockholders' equity.
Investment securities classified as held to maturity are recorded at
historical cost, adjusted for amortization of premium and accretion of
discount, where appropriate. Realized and unrealized gains and losses on
investment securities are computed based on the cost basis of securities
specifically identified. At December 31, 1994 and 1993, no trading securities
were owned and during 1994 the Company did not buy or sell any trading
securities.
25
--------------------------------------------------------------------------------
Other real estate owned
Real estate acquired through foreclosure is recorded at the lower of cost or
fair value minus estimated costs to sell. Costs related to holding real
estate are recorded as expenses when incurred. The Company owned, or treated
as foreclosed in substance, real estate of $8,500,000 at December 31, 1994
and $9,961,000 at December 31, 1993.
Loans in the amount of $10,186,000 in 1994 and $21,954,000 in 1993 were
transferred to other real estate owned. Additionally, subsequent loans to
facilitate the sale of other real estate owned were $7,091,000 and
$13,833,000 in 1994 and 1993, respectively.
Premises, equipment and leasehold improvements
Premises, equipment and leasehold improvements are recorded at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
calculated on a straight-line basis over the estimated useful lives of the
assets which range from three to ten years or the term of the lease,
whichever is shorter.
Mortgage banking activities
The Company sells loans and participating interests in loans on a non-recourse
basis to generate servicing income and to provide funds for additional lending.
Loans sold includes loans originated into investor commitments with the sale
approved prior to origination. Gains and losses are recognized at the time of
sale by comparing sales price with carrying value. A premium results when the
interest rate on the loan, adjusted for a normal service fee, exceeds the pass
through yield to the buyer. Premiums are calculated as the present value of
excess service fees expected to be collected in future periods and are amortized
over the estimated life of the loans, based on market factors.
Purchased mortgage loan servicing rights represent the cost of acquiring
the rights to service mortgage loans, which cost is amortized over the
estimated life of the loans based on the interest method. The carrying value
of purchased mortgage servicing rights and premium on loans sold is
periodically measured based on actual prepayment experience compared to
projected prepayments; writedowns and adjustments in the amortization rates
are made when an impairment is indicated. The amount of loans being serviced
for others was $843,144,000 and $814,453,000 at December 31, 1994 and 1993,
respectively.
Loans are classified as held for sale when the Company is waiting on a
preapproved investor purchase or is negotiating for the sale of specific
loans which meet selected criteria to a specific investor. Loans held for
sale are carried at the lower of cost, including unearned loan fees, or
market.
Derivative financial instruments -- interest rate cap and swap agreements
The Company uses interest rate cap agreements and interest rate swap
agreements, known as derivative financial instruments, for interest rate risk
protection or liability matching. Interest rate cap agreements are purchased
primarily to reduce the Company's exposure to rising interest rates which
would increase the cost of liabilities above the maximum yield which could be
earned on certain adjustable rate mortgages and investments. Costs are
amortized to interest expense using the straight-line method over the life of
interest rate cap agreements, and benefits are recognized when realized. The
unamortized cost of interest rate cap agreements is included in other assets.
Interest rate swap agreements match asset yields with liability costs by
converting the cost of specific Federal Home Loan Bank advances from a fixed
rate to a variable rate, with the term of each swap agreement matched to the
maturity of the underlying advance. The differential to be paid or received
is accrued as an adjustment to interest expense as interest rates change. The
related receivable from counterparties is included in interest receivable.
The fair values of interest rate swap agreements are not recognized in the
financial statements. The Company is an end-user of derivative financial
instruments and does not conduct trading activities for derivatives.
The Company adopted SFAS No. 119 "Disclosures about Derivative Financial
Instruments and Fair Value on Financial Instruments" on December 31, 1994.
SFAS No. 119 requires various disclosures regarding derivative activities
which are detailed in Notes 6 and 11.
Income taxes
First Republic and its subsidiaries file a consolidated federal income tax
return and a combined state tax return.
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes". Deferred tax assets and liabilities are recognized for the
future tax consequences of differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards, and then a valuation
allowance is established to reduce that deferred tax asset if it is "more
likely than not" that the related tax benefits will not be realized.
26
First Republic Bancorp
--------------------------------------------------------------------------------
Statement of cash flows
For the purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and short term investments such as
federal funds sold with maturity dates of less than ninety days. The Company
paid interest of approximately $67,208,000 in 1994, $56,644,000 in 1993 and
$58,141,000 in 1992. Additionally, the Company paid income taxes of
$6,620,000, $8,324,000, and $9,075,000 for the years ended December 31, 1994,
1993 and 1992, respectively.
Earnings per share
Primary earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding, plus the effect, when dilutive,
of stock options. Shares repurchased by the Company are deducted from shares
outstanding for earnings per share calculations.
Due to the issuance of convertible subordinated debentures in December
1992, the calculation of fully diluted earnings per share adds back to the
Company's reported net income the effect of interest expense on such
convertible debentures, net of taxes, and increases the number of shares
outstanding as if the debentures were converted into common stock.
2 Investment Securities
Under SFAS No. 115, the Company's investment securities, including mortgage
backed securities ("MBS"), are classified as held to maturity or available
for sale at December 31, 1994. All investment securities at December 31, 1993
were held for investment and carried at amortized cost.
Estimated Estimated Estimated
Amortized Unrealized Unrealized Fair
(In $ thousands) Cost Gross Gains Gross Losses Value
--------- ----------- ------------ ---------
December 31, 1994
Held to Maturity
Securities at Cost:
U.S. Government $ 25,431 $ 311 $ (249) $ 25,493
Agency MBS 26,876 9 (627) 26,258
Other MBS 65,404 20 (1,894) 63,530
Other 167 -- -- 167
-------- ------ ------- --------
Total $117,878 $ 340 $(2,770) $115,448
======== ====== ======= ========
Available for Sale Securities
at Fair Value:
Equity Securities $ 13,760 $ -- $(2,010) $ 11,750
======== ====== ======= ========
December 31, 1993
U.S. Government $ 25,404 $ 731 $ -- $ 26,135
Agency MBS 13,788 266 -- 14,054
Other MBS 44,655 60 (202) 44,513
Other 361 -- -- 361
-------- ------ ------- --------
$ 84,208 $1,057 $ (202) $ 85,063
======== ====== ======= ========
Available for sale securities at December 31, 1994 consisted of a
portfolio of adjustable rate perpetual preferred stocks, which have no stated
maturities and therefore are classified as available for sale; because such
securities are equity securities and generate capital gains or losses for tax
purposes, the amount of unrealized losses recorded as a reduction in
stockholders' equity has not been reduced for the effect of taxes.
At December 31, 1994, all of the Company's investment securities carried
interest rates which adjust annually or more frequently; the weighted average
yield earned was 6.33% for held to maturity investments and 9.07% for
available for sale securities, on a tax equivalent basis. At December 31,
1994, the amortized cost of Agency MBS included $24,989,000 of securities
converted from Company originated loans.
Market values are determined by current quotation, or analysis of
estimated future cash flows. The following table summarizes the Company's
carrying value and estimated fair value by maturity of investment securities
owned at December 31, 1994 and classified as held to maturity.
Carrying Estimated
Value Fair Value
------------ ------------
Due in one year or less $ 1,049,000 $ 1,039,000
Due after one year through five years -- --
Due after five years through ten years 882,000 875,000
Due after ten years 23,667,000 23,746,000
------------ ------------
25,598,000 25,660,000
Mortgage backed securities 92,280,000 89,788,000
------------ ------------
$117,878,000 $115,448,000
============ ============
During 1994 and 1993, the Company did not sell any investment
securities. In 1992, proceeds from the sale of securities were $3,247,000,
resulting in gross gains of $5,000 and gross losses of $857,000.
3 Loans
Real estate loans are secured by real property and mature over periods
primarily ranging up to thirty years. At December 31, 1994, loans of
$834,342,000 are pledged as collateral for FHLB advances.
The Company restructures loans, generally because of borrower's
financial difficulties, by granting concessions to reduce the interest rate,
to waive or defer payments or, in some cases, to reduce the principal balance
of the loan.
27
--------------------------------------------------------------------------------
Loans that were past due more than 90 days (nonaccrual loans)
and restructured loans, together with the related interest income
information, are summarized as follows:
At or for the year ended December 31, 1994 1993
----------- -----------
Nonaccrual loans:
Balance at year end $32,623,000 $11,618,000
Interest foregone 1,646,000 1,136,000
Restructured loans:
Balance at year end 17,489,000 6,342,000
(Net of nonaccrual loans)
Actual interest income recognized 813,000 284,000
Pro forma interest income under
original terms $ 1,313,000 $ 390,000
Loans that have been modified in troubled debt restructurings which
result in more than four monthly payments being deferred, capitalized or
waived are reported as nonaccrual loans until at least six consecutive
payments are received subsequent to the loan modification.
An analysis of the changes in the reserve for possible losses for the
past three years follows:
1994 1993 1992
----------- ----------- -----------
Balance at beginning of year $12,657,000 $12,686,000 $11,663,000
Provision charged to
operations 9,720,000 4,806,000 8,062,000
Reserve from purchased loans 34,000 200,000 466,000
Reserve of First Republic
Savings Bank at acquisition -- 24,000 --
Chargeoffs on originated loans:
Single family (210,000) (209,000) (328,000)
Multifamily (7,177,000) (3,367,000) (3,961,000)
Commercial real estate (695,000) (1,547,000) (3,750,000)
Commercial business loans (79,000) (76,000) (213,000)
Recoveries on originated loans:
Single family 11,000 -- 50,000
Multifamily 119,000 -- 5,000
Commercial real estate -- 92,000 654,000
Commercial business loans 15,000 43,000 12,000
Acquired loans, net (40,000) 5,000 26,000
----------- ----------- -----------
Balance at end of year $14,355,000 $12,657,000 $12,686,000
=========== =========== ===========
4 Prepaid Expenses and Other Assets
At December 31, prepaid expenses and other assets consist of the following:
1994 1993
Purchased servicing rights and premium
on loans sold, net $ 793,000 $ 1,154,000
Debt issuance costs, net 5,301,000 5,372,000
Interest rate cap agreements, net 5,918,000 3,479,000
Prepaid expenses 1,948,000 1,118,000
Other assets 2,322,000 3,817,000
----------- -----------
$16,282,000 $14,940,000
=========== ===========
Debt issuance costs are amortized over the life of the issue on a
straight line basis which approximates a level yield method.
5 Thrift Certificates
Passbook and money market accounts, which have no contractual maturity, pay
interest at rates ranging from 2.3% to 4.9% per annum and 2.3% to 3.1% per
annum at December 31, 1994 and 1993, respectively, compounded daily. Investment
certificates have maturities primarily ranging from 91 days to 60 months and
bear interest at varying rates based on money market conditions, generally
ranging from 3.5% to 10.3% and from 3.1% to 10.3% at December 31, 1994 and 1993,
respectively.
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 December 31, 1994, based on the amount
of thrift certificates outstanding, First Thrift was required to maintain
shareholder's equity of approximately $46,000,000, compared with actual
shareholder's equity of $124,549,000.
First Thrift and First Republic Savings Bank are members of the FDIC and
their thrift accounts are insured by the FDIC up to $100,000 each per insured
depositor.
6 Federal Home Loan Bank Advances
First Thrift is a voluntary member of the Federal Home Loan Bank of San
Francisco ("FHLB"). First Thrift was approved for $657,000,000 of FHLB
advances at December 31, 1994. First Thrift owned FHLB stock of $28,527,000
28
First Repbulic Bancorp
--------------------------------------------------------------------------------
at December 31, 1994 or 5% of the FHLB advances outstanding. FHLB stock is
recorded at cost, is redeemable at par and is pledged as collateral for FHLB
advances. FHLB advances are primarily adjustable rate in nature, including
the effect of interest rate swap agreements, and consist of the following at
December 31:
1994 1993
---------------- ----------------
Advances maturing in Amount Rate Amount Rate
------------ ----- ------------ -----
One year or less $ 44,000,000 6.68% $ 10,000,000 3.66%
1 to 2 years -- -- 44,000,000 4.16
2 to 5 years -- -- -- --
After five years 526,530,000 5.90 414,530,000 3.94
------------ ----- ------------ -----
$570,530,000 5.96% $468,530,000 3.95%
============ ===== ============ =====
The stated interest rates include the effect of interest rate swap
agreements with a total notional principal amount of $65,000,000, of which
$40,000,000 mature in 1995 and $25,000,000 mature in 2001. Under the
Company's interest swap agreements, a fixed rate which is equal to the fixed
rate paid on FHLB advances is received and the Company pays a rate which
varies semiannually with market rates of interest. During 1994, the Company
did not enter into any new interest rate swap agreements and $2,376,000 under
outstanding interest rate swap agreements was recorded as a reduction in
interest expense on borrowings. The Company is exposed to loss if the swap
counterparties fail to perform; however, the Company does not anticipate such
nonperformance. The Company does not obtain collateral under its interest
rate swap agreements but monitors the credit standing of its swap
counterparties; at December 31, 1994, the Company had pledged to one of its
swap counterparties collateral with a book value of $897,000.
7 Other Borrowings
At December 31, 1994 and 1993, other borrowings included borrowings of the
Company's Employee Stock Ownership Plan Trust from unaffiliated commercial
banks totalling $650,000 and $1,200,000, respectively. These borrowings are
guaranteed by First Republic, have interest rates at prime less 0.5% and
provide for quarterly interest payments and gradual principal reduction until
final maturity at December 31, 1995 (see Note 15).
The Company maintains accounts with certain primary securities dealers
and, since February 1988, has entered into repurchase agreements to borrow
short-term funds with investment securities as collateral. These borrowings
bear interest at rates which vary with market conditions. For 1993, borrowings
under repurchase agreements averaged $577,000 and the maximum amount outstanding
at any month-end was the $12,380,000 outstanding at December 31, 1993, which
matured on January 18, 1994 and carried an interest rate of 3.5%. Subsequent to
this maturity, there were no such borrowings in 1994.
8 Senior Subordinated Debentures
Senior subordinated debentures are due September 30, 2003 and bear interest
ranging from 10% to 11% (average rate 10.6%). The senior subordinated
debentures pay interest monthly. The Company may be required to redeem the
senior subordinated debentures early only upon death of the holder.
9 Subordinated Debentures
The Company's subordinated debentures consist of two issues. In May 1993, the
Company issued in a public offering $13,000,000 of subordinated debentures,
which pay interest semi-annually at 8.5% and mature May 15, 2008. At December
31, 1994 and 1993, the balance outstanding of these subordinated debentures
was $12,993,000 and $13,000,000, respectively.
In August 1993, the Company commenced the public offering of subordinated
debentures, which pay interest quarterly at 8.0% until maturity on January 15,
2009; there were $5,440,000 and $3,476,000 of these debentures outstanding at
December 31, 1994 and 1993, respectively. Additionally, during 1994 the Company
completed the debenture offering and at December 31, 1994, there were $1,266,000
of 8% reset subordinated debentures outstanding
29
--------------------------------------------------------------------------------
with a maturity of January 15, 2009. These reset subordinated debentures pay
interest quarterly at an initial rate of 8% with the interest rate subject to
two adjustments in July 1999 and July 2004, at which time the rate paid will
reset at a rate between 6% and 10% depending on market conditions.
10 Convertible Subordinated Debentures
In December 1992, the Company issued in a public offering $34,500,000 of
convertible subordinated debentures maturing December 1, 2002. The debentures
pay interest semi-annually at a 7-1/4% rate, are convertible into 2,524,210
shares of common stock at approximately $13.67 per share, and may be redeemed
beginning December 1, 1995 at a price of 103.5%, with the redemption premium
declining ratable to par at maturity.
11 Interest Rate Caps
In connection with its asset and liability management policies, First Thrift
purchases interest rate cap contracts primarily as a protection against
interest rates rising above the maximum rates on its adjustable rate loans.
At December 31, 1994, the aggregate notional amount of interest rate cap
contracts was $1,260,000,000, which mature in periods ranging from January
1995 through September 2000. At December 31, 1993, the notional amount of
interest rate cap contracts owned by First Thrift was $945,000,000 and during
1994 there were purchases of $345,000,000 and maturities of $30,000,000. The
terms and amount of interest rate caps maintained by the Company is based on
management's expectations about future interest rates and the level of
maximum interest rates inherent in the Company's loans. Under the terms of
the cap contracts, each with an unrelated commercial or investment banking
institution, First Thrift will be reimbursed quarterly for increases in the
London Inter-Bank Offer Rate ("LIBOR") for any period during the agreement in
which such rate exceeds a rate ranging from 9.0% to 13.0% as established in
each agreement. The Company has no future financial obligation related to its
cap contracts. Additionally, $37,400,000 of First Thrift's advances with the
FHLB contain interest rate caps of 12% as part of the borrowing agreement
and, at December 31, 1994, First Republic Savings Bank owns $10,000,000 of
10% LIBOR interest rate caps. The Company evaluates the credit worthiness of
its counterparties under interest rate cap contracts and has established an
approved limit for each institution. The Company is exposed to market risk to
the extent its counterparties are unable to perform; however, the Company
does not expect such nonperformance. The amortization of interest rate cap
costs increased interest expense by $1,210,000 in 1994, $850,000 in 1993, and
$672,000 in 1992.
Additionally, at December 31, 1994, First Thrift owned certain shorter-
term interest rate cap contracts purchased as protection against further
increases in interest rates during 1995 and 1996. Monthly repricing caps in the
notional principal amount of $150,000,000 carry a strike rate which increases
from 6.75% to 8.92% over the period from April 1995 to maturity in July 1996 and
$50,000,000 of interest rate caps carry a strike rate of 8% until maturity in
December 1996.
12 Income Taxes
The annual provision for income taxes consists of the following:
1994 1993 1992
---------- ---------- ----------
Federal taxes:
Current $2,761,000 $6,047,000 $6,916,000
Deferred 771,000 456,000 (261,000)
---------- ---------- ----------
3,532,000 6,503,000 6,655,000
---------- ---------- ----------
State taxes:
Current 836,000 2,258,000 2,071,000
Deferred 567,000 199,000 (683,000)
---------- ---------- ----------
1,403,000 2,457,000 1,388,000
---------- ---------- ----------
Total $4,935,000 $8,960,000 $8,043,000
========== ========== ==========
The effective income tax rate differs from the federal statutory rate
due to the following for the past three years:
1994 1993 1992
----- ----- -----
Expected statutory rate 35.0% 35.0% 34.0%
State taxes, net of federal benefits 7.5 7.5 7.3
Change in valuation allowance -- 0.9 (0.7)
Other, net (2.2) (1.5) --
----- ----- -----
Effective tax rate 40.3% 41.9% 40.6%
===== ===== =====
30
First Republic Bancorp
--------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below at December 31:
1994 1993
---------- ----------
Deferred tax assets:
Bad debt deduction $4,351,000 $4,378,000
Deferred franchise tax 445,000 870,000
Deferred income 279,000 270,000
---------- ----------
Total gross deferred tax assets 5,075,000 5,518,000
Less valuation allowance (421,000) (421,000)
---------- ----------
Deferred tax assets 4,654,000 5,097,000
---------- ----------
Deferred tax liabilities:
Loan fee income 3,616,000 3,154,000
FHLB stock dividend income 274,000 274,000
Prepaid FDIC premiums 456,000 --
Depreciation and amortization 34,000 57,000
---------- ----------
Total gross deferred tax liabilities 4,380,000 3,485,000
---------- ----------
Net deferred tax asset $ 274,000 $1,612,000
========== ==========
The following is a summary of changes in deferred tax related accounts
for 1993 and 1994 under SFAS No. 109:
Deferred Valuation Deferred
Tax Asset Allowance Tax Liability Net
---------- --------- ------------- -----------
January 1, 1993 $5,288,000 $(233,000) $(2,788,000) $ 2,267,000
Changes 230,000 (188,000) (697,000) (655,000)
---------- --------- ----------- -----------
December 31, 1993 5,518,000 (421,000) (3,485,000) 1,612,000
Changes (443,000) -- (895,000) (1,338,000)
---------- --------- ----------- -----------
December 31, 1994 $5,075,000 $(421,000) $(4,380,000) $ 274,000
========== ========= =========== ===========
The net deferred tax asset represents recoverable taxes and is included
in other assets.
13 Stockholders' Equity
In March 1992, 2,013,058 shares of common stock were sold in a public
offering, resulting in net proceeds of $20,564,000 on the sale of 1,490,540
new shares. In February 1992, the remaining shares of the Company's Series C
preferred stock were converted into shares of common stock.
In May 1993, the Company's Board of Directors authorized the repurchase
of up to 206,000 shares of the Company's common stock and this authorized level
was increased to 406,000 in October 1994. In 1993, 25,750 shares were purchased
at a cost of $351,000 and were held as treasury stock at December 31, 1993.
During 1994, 326,647 shares were repurchased, bringing the total shares held as
treasury stock to 352,397 with a total cost of $4,315,000 at December 31, 1994.
Under First Republic's 1985 Stock Option Plan (the "Plan") at December
31, 1994, there were remaining options on 639,658 shares of common stock
reserved for issuance and options on 618,430 shares had been granted, all of
which were exercisable.
The Company's stock options expire ten years from the date granted and
transactions under the Plan are summarized as follows:
Number Price
of Shares Per Share
Balance, January 1, 1993 615,216 $ 6.74 - $15.55
Options Granted 66,624 12.34 - 14.96
Options Exercised (21,028) 6.74 - 12.62
Options Cancelled (4,423) 11.78 - 14.26
------- ---------------
Balance, December 31, 1993 656,389 6.74 - 15.55
Options Granted 17,800 10.00 - 14.75
Options Exercised (40,444) 6.74 - 12.62
Options Cancelled (15,315) 11.78 - $14.85
------- ---------------
Balance, December 31, 1994 618,430 $ 6.74 - $15.55
======= ===============
Additionally, the outside directors of the Company and its subsidiaries
hold stock options which are not in the Plan for a total of 326,720 shares of
common stock which were issued since August 1989, at prices ranging from
$6.74 to $16.02. Executive officers hold additional stock options for 74,262
shares of common stock granted in October 1991 at $12.73.
In 1992, certain of the Company's officers were granted stock options on
434,969 shares of common stock (out of a total of 477,405 such option shares
authorized by the Board of Directors and not in the Plan) at an exercise
price of $14.84 per share; 20% of such options vested immediately upon grant,
with the remainder contingent upon the achievement of specified annual
increases in the tangible book value per share of the Company's common stock.
Additional stock options of this type on 39,780 shares of common stock were
granted to other employees in 1994 and 1993. As of December 31, 1994,
approximately 67% of such options were vested.
31
--------------------------------------------------------------------------------
A former and a current officer have exercised 83,545 options in exchange
for notes payable to the Company totalling $704,000 and bearing interest at a
7.8% average rate.
After stockholder approval, the Company established an Employee Stock
Purchase Plan which provides for the purchase of up to 424,360 shares of
common stock by eligible employees. Common stock sold to employees under this
plan were 12,181 shares in 1994 and 6,856 shares in 1993, resulting in net
proceeds to the Company of $142,000 and $81,000, respectively.
The Company's ability to pay cash dividends on its common stock is
restricted to approximately $3,575,000 at December 31, 1994 under terms of
its subordinated debentures. No cash dividends may be paid by the Company if,
upon giving effect to such dividend, a default in the payment of interest or
principal on the convertible subordinated debentures shall exist or occur.
During 1994, First Thrift paid $2,500,000 of dividends to First Republic. At
December 31, 1994 certain regulatory requirements limit the amount of
dividends that First Thrift may pay to First Republic to approximately
$14,500,000.
14 Commitments
At December 31, 1994, the Company had conditional commitments to originate
loans of $12,049,000 and to disburse additional funds on existing loans and
lines of credit of $70,658,000. The Company's commitments to originate loans
are agreements to lend to a customer as long as there is no violation of any
of several credit or other established conditions. Commitments generally have
fixed expiration dates or other termination clauses and may require payment
of a fee. Since commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Future minimum rental payments required under operating leases,
including the Company's office facilities, that have initial or remaining
noncancellable terms in excess of one year at December 31, 1994 are as
follows: 1995--$1,451,000; 1996--$1,460,000; 1997--$1,405,000;
1998--$1,218,000; 1999--$990,000; thereafter--$1,344,000. Rent
and related occupancy expense was $1,398,000 in 1994, $1,132,000 in 1993 and
$842,000 in 1992.
15 Employee Benefit Plans
The Company has a deferred compensation plan ("the 401k Plan") under section
401(k) of the Internal Revenue Code under which it matches, with
contributions from net income, up to 5% of each contributing member
employee's compensation. Company contributions to the 401k Plan in 1994, 1993
and 1992 were approximately $325,000, $280,000 and $300,000, respectively.
The Company established an Employee Stock Ownership Plan ("ESOP") in
1985 which enables eligible employees to own Common Stock of First Republic.
The ESOP Trust has borrowed funds to purchase shares of Common Stock at the
market price at the time of purchase. The Company has guaranteed these
borrowings and make contributions to the Trust, in amounts required to make
principal and interest payments. As the debt is repaid, the Common Stock is
allocated to the accounts of the ESOP's participants, with vesting over a
period of five years. The Company made contributions of $615,000, $558,000
and $512,000 to the ESOP in 1994, 1993 and 1992, respectively, of which
$65,000, $83,000 and $112,000 represents interest expense. Compensation
expense is recognized using the shares allocated method. The number of shares
allocated by the ESOP were 60,549 in 1994, 53,617 in 1993, and 50,697 in
1992. At December 31, 1994, the ESOP holds 312,133 shares allocated to
participants and 67,154 unallocated shares.
Since inception, the Company has not offered any other employee benefit
plans and, at December 31, 1994, has no requirement to accrue additional
expenses for any pension or other post-employment benefits. Generally, employees
are eligible to participate in the Company's 401k and ESOP plans after six
months of full time employment and in the Employee Stock Purchase Plan after one
year.
16 Fair Value of Financial Instruments
SFAS No 107, Disclosures About Fair Value of Financial Instruments, requires
that the Company disclose the fair value of financial instruments for which
it is practicable to estimate that value. Although management uses its best
32
First Repbulic Bancorp
--------------------------------------------------------------------------------
judgement in assessing fair value, there are inherent weaknesses in any
estimates that are made at a discrete point in time based on relevant market
data, information about the financial instruments, and other factors. Estimates
of fair value of instruments without quoted market prices are subjective in
nature and involve various assumptions and estimates that are matters of
judgement. Changes in the assumptions used could significantly affect these
estimates. Fair values have not been adjusted to reflect changes in market
conditions subsequent to December 31, 1994 and 1993; therefore estimates
presented herein are not necessarily indicative of amounts which could be
realized in a current transaction.
The estimated fair values presented neither include nor give effect to
the values associated with the Company's existing customer relationships,
lending and deposit branch networks, or certain tax implications related to
the realization of unrealized gains or losses. Also, under SFAS No. 107, the
fair value of money market and passbook accounts is equal to the carrying amount
because these liabilities have no stated maturity; under such approach, the
benefit that results from the lower cost funding provided by such liabilities,
as compared to alternative sources of funding, is excluded.
Methods and assumptions used to estimate the fair value of each major
classification of financial instruments were:
Cash, short-term investments and deposits: Current carrying amounts
approximate estimated fair value.
Investment securities: For securities held to maturity and carried at
amortized cost, as well as available for sale securities, current market
prices or quotations were used to determine fair value.
FHLB stock: FHLB stock has no trading market, is required as part of
membership, and is redeemable at par; therefore, its fair value is presented
at cost.
Loans receivable: The carrying amount of loans is net of unearned fee income
and the reserve for possible losses. To estimate fair value of the Company's
loans, primarily adjustable rate real estate secured mortgages, each loan
collateral type is segmented into categories based on fixed or adjustable
interest rate terms (index, margin, current rate and time to next
adjustment), maturity, estimated credit risk, and accrual status.
The fair value of single family mortgages is based primarily upon prices
of loans with similar terms obtained by or quoted to the Company, adjusted
for differences in loan characteristics and market conditions. The fair value
of other loans is estimated using quoted prices and by comparing the contractual
cash flows and the current interest rates at which similar loans would be made
to borrowers with similar credit ratings. Assumptions regarding liquidity risk
and credit risk are judgmentally determined using available internal and market
information.
The fair value of nonaccruing loans and certain other loans is further
adjusted with an additional risk factor reflecting the individual
characteristics of the loans and the results of the Company's internal loan
grading process.
Mortgage servicing rights: The fair value of excess servicing rights related
to loans originated and sold by the Company is based on estimates of current
market values for similar loans with comparable terms, with no value
attributed to past due loans. Additionally, at December 31, 1993, the Company
had purchased mortgage servicing rights with a fair value approximately equal
to their carrying value of $251,000; these amounts are not included in the
following table.
Deposit liabilities: The fair value of deposits with a stated maturity is
based on the discounted value of contractual cash flows, using a discount
rate based on rates currently offered for deposits of similar remaining
maturities. The intangible value of long-term relationships with depositors
is not taken into account in estimating the fair values disclosed.
FHLB advances: The Company's FHLB advances consist primarily of long-term
adjustable rate borrowings. Using current terms quoted by the FHLB to the
Company, the estimated fair value is based on the discounted value of
contractual cash flows for the remaining maturity, and includes approximately
$200,000 for the fair value of $37.4 million of interest rate cap agreements
with the FHLB imbedded in these advances.
Debentures: The fair value is based on current market prices for traded
issues.
33
--------------------------------------------------------------------------------
Commitments to extend credit: The majority of the Company's commitments to
extend credit carry current market interest rates if converted to loans.
Because these commitments are generally unassignable by either the Company or
the borrower, they only have value to the Company and the borrower. The
estimated fair value approximates the recorded deferred fee amounts and is
excluded from the table.
Derivative financial instruments: The fair value of interest rate cap and
swap agreements generally reflects the estimated amounts that the Company
would receive or pay, based upon dealer quotes, to terminate such agreements
at the reporting date.
December 31, 1994 December 31, 1993
--------------------- ---------------------
Carrying Fair Carrying Fair
(In $ thousands) Amount Value Amount Value
-------- -------- -------- --------
Assets:
Cash $ 32,618 $ 32,618 $ 39,378 $ 39,385
Investments 129,628 127,199 84,208 85,063
FHLB stock 28,527 28,527 22,927 22,927
Loans, net 1,477,492 1,462,192 1,233,995 1,258,734
Servicing rights 793 8,650 903 8,000
Liabilities:
Deposits 948,833 943,770 751,671 758,241
Borrowings 571,180 568,956 482,110 480,609
Subordinated debentures 29,677 26,504 26,457 26,200
Convertible debentures 34,500 32,258 34,500 42,953
Off-balance sheet:
Interest rate caps 5,918 10,935 3,479 2,321
Interest rate swaps -- 1,195 -- 7,545
17 First Republic Bancorp Inc.
(Parent Company Only)
Condensed Balance Sheet
December 31, 1994 1993
------------ ------------
Assets
Cash and investments $ 10,240,000 $ 6,034,000
Loans, net 1,669,000 2,078,000
Investment in subsidiaries 140,776,000 139,982,000
Advance to subsidiaries 214,000 1,030,000
Other assets 20,710,000 18,890,000
------------ ------------
$173,599,000 $168,014,000
============ ============
Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities $ 1,486,000 $ 911,000
Other borrowings 650,000 1,200,000
Subordinated debentures 29,677,000 26,457,000
Convertible subordinated debentures 34,500,000 34,500,000
------------ ------------
66,313,000 63,068,000
------------ ------------
Stockholders' equity 107,286,000 104,946,000
------------ ------------
$173,599,000 $168,014,000
============ ============
Condensed Statement of Income
Year Ended December 31, 1994 1993 1992
----------- ----------- -----------
Interest income $ 286,000 $ 758,000 $ 1,011,000
Interest expense 5,742,000 5,321,000 4,370,000
Dividends from subsidiaries 2,500,000 1,963,000 1,160,000
Other income 5,031,000 4,931,000 4,694,000
General and administrative
expense 1,979,000 4,278,000 3,668,000
----------- ----------- -----------
Operating income (loss) 96,000 (1,947,000) (1,173,000)
Equity in undistributed
earnings of subsidiaries 7,207,000 14,386,000 12,935,000
----------- ----------- -----------
Net income $ 7,303,000 $12,439,000 $11,762,000
=========== =========== ===========
34
First Republic Bancorp
--------------------------------------------------------------------------------
Condensed Statement of Cash Flows
Year Ended December 31, 1994 1993 1992
----------- ------------ ------------
Operating Activities:
Net Income $ 7,303,000 $ 12,439,000 $ 11,762,000
Adjustments to net cash from
operating activities:
Provision for losses -- (33,000) 14,000
Gain on sale of servicing (703,000) -- --
Increase in other assets (1,631,000) (6,751,000) (3,030,000)
Increase (decrease) in
other liabilities 575,000 416,000 (1,235,000)
Equity in undistributed
earnings of subs. (7,207,000) (14,386,000) (12,935,000)
----------- ------------ ------------
Net Cash Used (1,663,000) (8,315,000) (5,424,000)
Investment Activities:
Loans originated (1,358,000) (6,303,000) (11,953,000)
Loans sold 1,640,000 10,616,000 14,028,000
Servicing sold 738,000 -- --
Capital from (into) subs. 4,413,000 (5,157,000) (31,100,000)
Advances to subs. 816,000 (812,000) 623,000
----------- ------------ ------------
Net Cash Provided (Used) 6,249,000 (1,656,000) (28,402,000)
Financing Activities:
Net decrease in other
borrowings (550,000) (475,000) (400,000)
Net decrease in
def. Comp. -- ESOP 550,000 475,000 400,000
Issuance of subordinated
debentures, net 3,220,000 5,907,000 21,728,000
Sale of stock 463,000 258,000 20,651,000
Purchase of treasury stock (3,964,000) (351,000) --
----------- ------------ ------------
Net Cash Provided (Used) (281,000) 5,814,000 42,379,000
Increase (decrease) in Cash 4,305,000 (4,157,000) 8,553,000
Cash at start of year 5,935,000 10,092,000 1,539,000
----------- ------------ ------------
Cash at end of year $10,240,000 $ 5,935,000 $ 10,092,000
=========== ============ ============
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
First Republic Bancorp Inc.:
We have audited the accompanying consolidated balance sheet of First Republic
Bancorp Inc. and subsidiaries as of December 31, 1994 and 1993 and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1994.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion of these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Republic Bancorp Inc. and subsidiaries as of December 31, 1994 and 1993, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
San Francisco, California
January 26, 1995
35
-------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
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-bearing 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. The
discussion of the Company's results of operations for the past three fiscal
years which follows should be read in conjunction with the Consolidated
Financial Statements and related notes thereto presented elsewhere and
incorporates the charts shown in this annual report.
In 1994, First Republic's earnings were adversely impacted by the
January 1994 Northridge earthquake and rapidly rising interest rates, which
caused higher provision for losses, lower net interest income and higher
nonearning assets. Loan origination volume decreased to $784,486,000 compared
to $944,796,000 in 1993, primarily due to higher interest rates and lower
refinancings of home loans. Total assets increased to $1,707,319,000 at
December 31, 1994 from $1,417,193,000 at December 31, 1993, as the Company
expanded its single family mortgage loans to $843,147,000, or 56% of the
total loan portfolio. During 1994, total deposits increased $197,162,000, or
26%, as a result of having three new deposit locations for the full year.
Interest Income and Expense
Interest income on loans rose to $100,816,000 in 1994 from $93,212,000 in
1993 and $91,828,000 in 1992, primarily due to increased average loan
balances outstanding for each year. The Company's adjustable rate mortgage
loans earn interest at rates which change depending on loan terms and market
interest rates, which have generally increased throughout 1994 after
declining during 1993 and 1992. The Company's loans earned an average rate of
7.31% for 1994 compared to 8.07% in 1993 and 9.10% in 1992. The average yield
on the Company's loans decreased in 1994 for a number of reasons. As a result of
low market rates and competitive conditions, the Company added single family
home loans with low initial introductory rates and other loans were repaid or
repriced downwards. In addition, loans adversely affected by the January 1994
Northridge earthquake were modified to lower interest rates or became nonearning
assets. Also, the rates paid on mortgage loans varies with the index underlying
the loan, and periodic interest rate increases are generally limited in
frequency and amount. Approximately 60% of the Company's loans adjust based on
the Eleventh District Cost of Funds Index ("COFI") which represents the average
cost of all funds for savings institutions in California, Nevada and Arizona.
COFI historically lags changes in market rates of interest and, during periods
such as 1994 when market short term interest rates first began to rise, this
index continued to decline. For 1994, the average balance on the Company's loans
was $1,379,640,000, compared to $1,154,680,000 and $1,008,783,000 for 1993 and
1992, respectively. Loans totalled $1,498,663,000 at December 31, 1994.
Interest income on short-term cash, investment securities and FHLB stock
increased to $8,549,000 in 1994 from $5,135,000 in 1993 and $3,735,000 in
1992, as a result of increased average balances earning higher rates. The
average rates earned on these assets, adjusted for the effect of tax-exempt
securities, were 5.39% in 1994 compared to 4.24% in 1993 and 3.74% in 1992.
During 1994, the interest rates earned on the Company's investments
increased, although not as rapidly as short term interest rates. At December
31, 1994, the book value of cash, short-term investments, investment
securities and FHLB stock was $190,773,000 compared to $146,513,000 at
December 31, 1993.
Total interest expense increased to $71,345,000 in 1994 compared to
$56,917,000 in 1993 and $58,976,000 in 1992. Total interest expense consists
of two components--interest expense on deposits and interest expense on
debentures and other borrowings. Interest expense on deposits, comprised of
money market and passbook accounts and investment certificates, was
$41,024,000 in 1994 compared to $35,318,000 in 1993 and $39,636,000 in 1992.
The Company's outstanding deposits have grown to $948,833,000 at December 31,
1994 from $751,671,000 at December 31, 1993 and $698,772,000 at December 31,
1992. This deposit growth is attributable to increased deposit-gathering
activities and the opening of additional branches. The Company's average cost
of deposits decreased to 4.78% for 1994 from 4.94% in 1993 and 5.86% in 1992.
The general decline in market interest rates from 1991 to 1993 contributed to
the lower average cost of deposits for 1994. In 1994, the Company's new
branches allowed additional deposits to be raised in existing markets at
competitive terms, although rapidly rising interest rates and extensive
competition for new deposits increased the cost of incremental deposit funds in
the last six months of 1994. At December 31, 1994, the weighted average rate
paid by the Company on its deposits was 5.16%, compared to 4.79% at December 31,
1993.
First Republic Thrift & Loan ("First Thrift") became the first voluntary
member of the San Francisco FHLB in 1990 and began to utilize FHLB advances
as a cost effective alternative source of funds for asset growth. The
Company's total outstanding FHLB advances were $570,530,000 and
36
First Republic Bancorp
--------------------------------------------------------------------------------
$468,530,000 at December 31, 1994 and 1993, respectively. Until 1994, the
average cost of FHLB advances was lower than the total costs of deposits, in
part because market rates of interest were declining and because such advances
require no deposit insurance premiums. Also, operational overhead costs are less
for FHLB advances than those associated with deposits. Throughout 1994, the cost
of FHLB advances increased more rapidly than the cost of the Company's deposits,
due to rapidly rising short term interest rates. The Company's advances have
interest rates which generally adjust semiannually and to a lesser extent
annually, with repricing points spread throughout the year. There are no
limitations or interim caps on the amount that the interest rate on FHLB
advances may increase. Thus, at each repricing point, the cost of an FHLB
advance fully reflects market rates. 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 December 31, 1994, First Thrift had an approved borrowing capacity
with the FHLB of $657,000,000, approximately 40% of its total assets. The
Company expects that the interest rate paid on FHLB advances will continue to
increase in 1995 as a result of higher market rates and is planning for deposits
to fund a greater percentage of future asset growth.
Total interest expense on debentures and other borrowings, including
FHLB advances, was $30,411,000 in 1994 as compared with $21,599,000 in 1993
and $19,340,000 in 1992. The average cost of these liabilities, which include
the Company's term capital-related debentures, increased to 5.26% in 1994 as
compared to 4.65% in 1993, primarily due to higher market interest rates in
1994 and the higher average balance of FHLB advances, offset in part by the
redemption of higher cost debentures. The average cost of these liabilities
was 5.66% in 1992 when market rates of interest were higher. At December 31,
1994 and 1993, the weighted average rate paid on the Company's FHLB advance
was 5.96% and 3.95%, respectively, and the weighted average rate paid on
outstanding debentures was 8.10% and 8.11%, respectively.
Included in interest expense is the amortization of the cost of interest
rate cap agreements which are purchased to reduce the Company's exposure to
rising interest rates. At December 31, 1994, the Company owned a portfolio of
interest rate cap agreements with a net cost of $5,918,000. The Company
purchases interest rate cap agreements to reduce its exposure to rising
interest rates, as more fully discussed under the caption "Asset and
Liability Management." These costs are amortized over the lives of the
agreements, resulting in expenses of $1,210,000 in 1994, $850,000 in 1993 and
$672,000 in 1992. These costs added approximately 0.08% to the overall rate
paid on liabilities in 1994 and 0.07% in each of the prior two years.
Net Interest Income
Net interest income constitutes the principal source of income for the Company.
The Company's net interest income was $37,930,000 in 1994, a decrease from
$41,430,000 in 1993. Net interest income for 1992 was $36,587,000. The decrease
in net interest income for 1994 resulted primarily from rapidly increasing
market rates of interest and a lagging COFI for most of the year, which resulted
in the average yield on loans declining more rapidly than the average cost of
deposits while the average cost of borrowings increased in connection with
rising market rates of interest.
The following table presents the average yields earned and rates paid on
the Company's interest-earning assets and interest-bearing liabilities for
the past three years.
1994 1993 1992
----- ----- -----
Cash and investments 5.39% 4.24% 3.74%
Loans 7.31% 8.07% 9.10%
----- ----- -----
All interest-earning assets 7.11% 7.71% 8.62%
===== ===== =====
Deposits 4.78% 4.94% 5.86%
Borrowings 5.26% 4.65% 5.66%
----- ----- -----
All interest-bearing liabilities 4.97% 4.83% 5.79%
===== ===== =====
Net interest spread 2.14% 2.88% 2.83%
===== ===== =====
Interest-earning assets as %
of interest-bearing liabilities 107% 108% 109%
===== ===== =====
Net interest spread decreased to 2.14% in 1994 from 2.88% in 1993 and
2.83% in 1992. In 1994 as compared to 1993, the Company earned a lower
average rate on a 19% higher average balance of loans and paid a higher average
rate on a 25% higher average balance of other borrowings, primarily FHLB
advances which adjusted upwards with market rates of interest; the Company also
had a 33% higher level of average investments earning a higher average rate and
a 20% higher average balance of deposits paying a lower average rate.
Profile of Lending Activities
The Company primarily originates loans secured by single family residences,
multifamily buildings and seasoned commercial real estate properties. At
December 31, 1994, 96% of loans on the Company's balance sheet were
adjustable rate or were due within one year. As a mortgage banker and a
portfolio lender, some single family loans, including
37
--------------------------------------------------------------------------------
substantially all fixed rate loans, are originated for sale in the secondary
market, whereas historically a small percentage of apartment and commercial
loans has been sold. From its inception in 1985 through December 31, 1994, the
Company has originated approximately $4.4 billion of loans, of which
approximately $1.7 billion have been sold to investors. For the past three
years, the Company's loan originations have been above the level for 1991 and
prior years and totalled $784,486,000 in 1994, $944,796,000 in 1993 and
$826,201,000 in 1992. The level of loan originations in 1992, 1993 and early
1994 reflected increased single family lending resulting from an increase in the
number of loan officers employed by the Company and the relatively lower rates
of interest available to borrowers. As interest rates increased throughout 1994,
refinance activity of home loans into long term, fixed rate mortgages declined
to a low level. The Company believes that the decrease in loan origination
volume for 1994 as compared to 1993 was substantially less than the decrease
experienced nationwide by mortgage lenders. Management expects that loan
origination volume may continue to decrease, subject to changes in interest
rates and the secondary market for mortgage loans.
The Company focuses on originating a limited number of loans by property
type, location and borrower. The Company's loans are of sufficient average
size to justify executive management's involvement in most transactions.
Approximately 80% of the Company's loans are secured by properties located
within 20 miles of one of the Company's offices.
The following table shows the Company's loan originations during the
past two years by property type and location:
1994 1993
---------------- ----------------
(In $ millions) $ % $ %
------ ---- ------ ----
Single Family:
San Francisco $434.2 56% $599.5 63%
Los Angeles 157.2 20 138.9 15
Las Vegas 7.7 1 18.7 2
------ ---- ------ ----
599.1 77 757.1 80
------ ---- ------ ----
Income Property:
San Francisco 50.0 6 49.7 5
Los Angeles 6.0 1 6.0 1
Las Vegas 50.1 6 32.1 3
------ ---- ------ ----
106.1 13 87.8 9
------ ---- ------ ----
Construction 76.8 10 98.5 11
Other 2.5 -- 1.4 --
------ ---- ------ ----
Total $784.5 100% $944.8 100%
====== ==== ====== ====
The Company has approved a limited group of third-party appraisers for
appraising all of the properties on which it makes loans and requires two
appraisals for single family loans in excess of $1,100,000. The Company's
policy is to seldom exceed an 80% loan-to-value ratio on single family loans
without mortgage insurance. Loan-to-value ratios decline as the size of the
loan increases. At origination, the Company generally does not exceed 75%
loan-to-value ratios for multifamily loans and 70% loan-to-value ratios for
commercial real estate loans. The Company's collection policies are highly
focused both with respect to its portfolio loans and loans serviced for
others. The Company has policies requiring rapid notification of delinquency
and the prompt initiation of collection actions.
At December 31, 1994, 60% of the Company's loans are secured by
properties located in the San Francisco Bay Area, 23% in Los Angeles County
and 11% in the Las Vegas, Nevada area. By property type, single family
mortgage loans, including home equity lines of credit, aggregated
$843,147,000 and accounted for 56% of the Company's total loans, while
multifamily loans were $367,650,000 or 25% and loans secured by commercial
real estate were $250,369,000 or 17%. During 1994, the Company's continued
emphasis on single family mortgage lending resulted in an increase in the
dollar amount and proportion of its loans secured by single family homes.
The following table presents an analysis of the Company's loan portfolio
at December 31, 1994 by property type and major geographic location.
San Los Total
Francisco Angeles Las Vegas, ---------------
(In $ millions) Bay Area County Nevada Other $ %
--------- ------- ---------- ----- ------ ----
Single family $557 $219 $ 10 $57 $ 843 56%
Multifamily 154 87 104 23 368 25%
Commercial 178 29 30 13 250 17%
Construction -- -- 24 -- 24 2%
Other 4 6 -- 4 14 --
--------- ------- ---------- ----- ------ ----
Total $893 $341 $168 $97 $1,499 100%
Percent by
location 60% 23% 11% 6% 100%
Asset Quality
The Company places an asset on nonaccrual status when one of the following
events occurs: any installment of principal or interest is more than 90 days
past due (except for single family loans which are well secured and in the
process of collection), management determines the ultimate collection of
principal or accrued interest to be unlikely, or the Company takes possession
of the collateral. Real estate collateral obtained by the Company is referred
to as "REO". Restructured loans where the Company defers or waives more than
four payments are reported as nonaccrual loans until at least six consecutive
payments are received.
On January 17, 1994, the Northridge earthquake struck the Los Angeles
area, causing significant damage to the freeway system and real estate
throughout the area. The
38
First Republic Bancorp
--------------------------------------------------------------------------------
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. The
37/+/ unit multifamily loan portfolio in Los Angeles County, which was most
affected by the earthquake, represented approximately 4% of the Company's total
assets at December 31, 1994. First Republic promptly identified and began
working with those borrowers to assist them, including applying for disaster
relief funds and modifying the terms of loans. Such loan modifications generally
have deferred the timing of payments, reduced the rate of interest collected or,
in some cases, the Company lowered the principal balance or foreclosed on the
property. The Company has experienced increased loan delinquencies and
additional loan loss provisions as a result of this natural disaster.
As of December 31, 1994, the Company has granted forbearance as to
principal and interest payments, generally amounting to two to four months of
payments, on $14,726,000 of earthquake affected loans; as a result of these
forbearance agreements, the Company has recorded as a receivable at December 31,
1994 approximately $170,000 of interest, which was not collected but is expected
to be collected over the next three years. These loans will be placed on
nonaccrual status if the borrowers become unable to perform under the terms of
these forbearance agreements. If losses result from the inability of borrowers
to comply with these agreements, such losses of principal or forbearance
interest will be charged to the Company's earthquake reserve.
Additionally, the Company has modified the terms of $27,166,000 of
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 December 31, 1994, $14,274,000 of these modified
loans are reported as restructured performing loans. In the event that the
Company's borrowers are unable to meet their obligations under modified or
restructured loans and a loss is incurred, the Company will charge the
earthquake reserve. Additional forbearance agreements and loan modifications,
including loan restructurings, are expected to continue for earthquake
affected loans in the first six months of 1995.
In addition to the adverse effect of the Northridge earthquake, the
Company has experienced an increased level of nonaccrual and restructured
loans during the past three years, due to the effects of the recessionary
conditions in California on a portion of the Company's borrowers.
The recession reduced the ability of some of the Company's income property
borrowers to perform under the terms of their loan agreements and the value
of some of the properties securing the Company's loans. The Company's policy
is to attempt to resolve problem assets 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 rapidly as
possible at prices available in the prevailing market. For certain properties
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.
The following table presents the dollar amount of nonaccruing loans and
investments, REO, restructured performing loans, and accruing single family
loans over 90 days past due, as well as the ratio to total assets at the end of
the last two years.
December 31, 1994 1993
----------- -----------
Nonaccruing loans $32,623,000 $11,618,000
Real estate owned 8,500,000 9,961,000
Nonaccruing investments -- 361,000
----------- -----------
Total nonaccruing assets 41,123,000 21,940,000
Restructured performing loans 17,489,000 6,342,000
----------- -----------
Nonaccruing and restructured assets $58,612,000 $28,282,000
=========== ===========
Accruing single family loans
over 90 days past due $ 2,587,000 $ 1,390,000
=========== ===========
Percent of Total Assets:
All nonaccruing assets 2.41% 1.55%
Nonaccruing and restructured assets 3.43% 2.00%
At December 31, 1994, nonaccruing assets and their percentage of total
assets were above the level at December 31, 1993, primarily due to the
Northridge earthquake. At December 31, 1994, nonaccruing loans included
$25,583,000 of loans and $2,777,000 of REO adversely affected by the
earthquake, collectively 1.66% of total assets; at such date, nonaccruing
loans and REO had declined approximately 15% from the level at June 30, 1994
and September 30, 1994, as a result of loan workouts, writedowns, REO sales
and the movement of $7,349,000 of loans to the restructured performing loan
category based upon actual payment history. Restructured performing loans are
primarily secured by properties adversely affected by the Northridge
earthquake and were earning a weighted average rate of 4.6% at December 31,
1994. The future level of nonaccruing assets depends upon the timing of the
sale of existing and future REO properties, loan workouts on
39
--------------------------------------------------------------------------------
remaining nonaccrual loans, new loans which may become nonaccruing, and the
performance of borrowers under modified loan terms.
At December 31, 1994, the REO balance of $8,500,000 includes seven
properties, four of which were acquired after November 30, 1994; four of
these REO properties were related to the earthquake. Since late 1992, the
Company has owned an 800 acre parcel of land in the San Francisco Bay Area
with a current carrying value of $5,093,000. There were single family loans
of $2,587,000 at December 31, 1994 and $1,390,000 at December 31, 1993, which
were more than 90 days past due but accruing because these assets were well
secured and in the process of collection. If the Company determines that the
ultimate collectibility of principal and accrued interest on such single
family loans is in doubt, loans in this category will be transferred to
nonaccrual status.
Provisions for Losses and Reserve Activity
At the time each loan is originated, the Company establishes a reserve for
the inherent risk of potential future losses, based upon established
criteria, including 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 may be designated as a reserve for
possible losses and is thereafter unavailable to be amortized as an increase
in interest income.
Since inception through December 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 December 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 67% of the Company's total loans at December
31, 1994.
Anticipating a possible recession, the Company began to provide
additional reserves in July 1990 by establishing a recession reserve
category. These provisions reduced earnings by $1,750,000 in 1994, $4,000,000
in 1993, and $7,270,000 in 1992. The total of such reserves was $4,897,000 at
December 31, 1994, after net chargeoffs of $1,957,000 during 1994 and
$5,058,000 during 1993. At December 31, 1994, management believes that the
effects of the recession have largely diminished with respect to properties
securing its mortgage loans.
Chargeoffs and losses on REO related to loans originated by the Company
have increased above historical levels in 1994 due to the earthquake and in 1993
and 1992 due to difficult economic conditions in the Company's California
markets. Net chargeoffs to the reserve for losses, including chargeoffs to the
recession reserve described above, were $8,056,000 in 1994, $5,059,000 in 1993,
and $7,505,000 in 1992. During 1994, net chargeoffs of $6,133,000, or 78% of
total chargeoffs for the year, resulted from loans adversely affected by the
Northridge earthquake. Chargeoffs during 1992 included a loss of $2,220,000 on
the sale of a minority interest in a commercial real estate participation loan
which the Company purchased in a previous year. Chargeoffs which reduced the
carrying balance of the Company's nonaccrual loans and REO at year end were
$6,177,000 in 1994 and $1,835,000 in 1993. During 1994, chargeoffs on problem
assets were $210,000 for single family, $7,177,000 for multifamily and $695,000
for commercial real estate loans, representing 5%, 15% and 18%, respectively, of
the loan balances prior to their reduction.
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, 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, prevailing economic conditions and other factors. These factors are
essentially judgmental and may not be reduced to a mathematical formula. As a
percentage of nonaccruing loans, the reserve for possible losses was 44% at
December 31, 1994 and 109% at December 31, 1993. While this ratio declined,
management considers the $14,355,000 reserve at December 31, 1994 to be adequate
as an allowance against foreseeable losses in the Company's loan portfolio;
management's assessment considers the current status of properties securing
loans, the trends in collateral values in each of the Company's geographic
markets and the amount of specific reserves previously used to writedown problem
or nonaccruing loans. Management's continuing evaluation of the loan portfolio
and assessment of economic conditions and collateral values will dictate future
reserve levels. Management currently anticipates that it will continue to
provide additional reserves so long as, in its judgment, any additional adverse
effects of the earthquake on its assets arise. Although the amount of loans that
were adversely affected by the earthquake and remain unresolved at December 31,
1994 has been reduced, management anticipates that the ultimate resolution of
the remaining loans may require additional reserves in 1995.
40
First Republic Bancorp
--------------------------------------------------------------------------------
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 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. At the end of 1993, the Company
maintained a positive 21% one year cumulative gap in anticipation of the
possibility of rising interest rates. Throughout 1994, the Company continued
to seek opportunities to extend the repricing terms of deposit liabilities, even
though the yield curve was very steep, and short term interest rates were well
below rates for 18 months or longer. At December 31, 1994, approximately 96% of
the Company's interest-earning assets and 78% of interest-bearing liabilities
will reprice within the next year and the Company's one-year cumulative GAP is
positive 22.2%. Despite the Company's positive repricing position at December
31, 1994, the Company's net interest margin is expected to decrease in 1995 as
interest rates continue to increase. Important factors include the lagging
nature of COFI, mortgage loan repricings being subject to interim limitations on
asset repricings, some restructured loans are earning fixed or subsidized rates,
the Company's strategy to increase its home loans which carry lower margins, and
marginal liability costs presently exceeding the yield which can be earned
initially on new home loans.
Since 1986, the Company has entered into interest rate cap transactions
primarily as a protection against interest rates rising above the maximum
rates which can be earned on its adjustable rate loans. Under the terms of
these transactions, which have been entered into with ten unrelated
commercial or investment banking institutions, the Company generally will be
reimbursed quarterly for increases in three-month LIBOR for any quarter
during the terms of the applicable transaction in which such rate, known as
the strike rate, exceeds a rate ranging from 9% to 13%. The Company monitors
the maximum rates, or life caps, on its loans as the loan portfolio changes
due to loan originations and repayments. Generally, interest rate cap
agreements are purchased with original terms of 3 years to 7 years and have
strike rates which are 1% to 2% below the level of life caps on loans being
originated at the time. The amount and terms of interest rate caps purchased
depends on the Company's assessment of future interest rates, economic
conditions and trends, and the general position in the interest rate cycle,
as well as the current and expected composition of the loan portfolio.
In both 1993 and 1994, the Company increased the amount of interest rate
caps owned. At December 31, 1994, the Company held an aggregate notional
principal amount of approximately $1.3 billion as compared to $982 million at
December 31, 1993. During 1994, the company purchased $345 million of
interest rate caps which had strike rates of 9% or 9.5% (weighted average of
9.1%) and original terms of 3 to 5 years. During 1993, the Company purchased
$340 million of 5 and 7 year interest rate caps with strike rates ranging
from 9% to 11% (weighted average of 10.0%).
Additionally, at December 31, 1994, First Thrift owned certain
shorter-term interest rate cap contracts purchased as protection against further
increases in interest rates during 1995 and 1996. These caps were purchased
because the periodic adjustments on a portion of the Company's loans are limited
over this period. Monthly repricing caps in the notional principal amount of
$150 million carry a strike rate which increases from 6.75% to 8.92% over the
period from April 1995 to maturity in July 1996 and $50 million of interest rate
caps carry a strike rate of 8% until maturity in December 1996.
The Company has entered into interest rate swap agreements in the
notional principal amount of $65 million related to specific long term FHLB
advances which bear a fixed rate of interest. The Company receives a fixed rate
of interest under the swap agreements and pays a variable rate of interest to
its swap counterparties, with the net differential paid on a periodic basis.
During 1994, the Company did not enter into any new interest rate swap
agreements. The Company collected $2,376,000 for 1994 and $2,709,000 for 1993
from its swap counterparties which was recorded as a reduction of interest
expense on borrowing. The weighted average rates paid for FHLB advances include
the effect of interest rate swaps.
The Company's asset and liability management policies have a direct effect
on the fair value of its financial instruments, which are presented on pages 32
to 34 of this annual report. Because interest rates generally declined
throughout 1993 and rose throughout 1994, current market rates at the end of
each year varied significantly from those in effect at the time the Company took
steps to manage its interest rate risk, match its asset and liability repricings
and establish terms for loan and deposit products. Therefore, the Company's
assets and liabilities have an estimated "fair value" at December 31, 1994 and
1993, which differs from their carrying amount. At December 31, 1994, the
Company's adjustable rate loans and investments, in general, have a fair value
below their carrying amount due to the sharp increase in market rates of
interest throughout 1994. As the interest rates on these adjustable assets
increase, the Company expects that the fair values of its assets may increase,
relative to their carrying values. Other factors affecting the Company's
estimates of fair value include the conditions in the secondary market for
single family mortgages, and the credit risk and liquidity risk assumptions used
in these calculations.
41
------------------------------------------------------------------------------------------------------------
Summary information regarding the Company's asset and liability repricing
at December 31, 1994 is as follows:
0-6 7-12 1-5 Over Not Rate
(In $ millions) Months Months Years 5 Years Sensitive Total
-------- ------- ------- ------- --------- --------
Cash and investments $ 169.1 $ 21.7 $ -- $ -- $ -- $ 190.8
Loans 1,308.4 123.6 39.1 27.6 -- 1,498.7
Other assets -- -- -- -- 17.8 17.8
-------- ------- ------- ------- --------- --------
Total Assets 1,477.5 145.3 39.1 27.6 17.8 1,707.3
-------- ------- ------- ------- --------- --------
Deposits 461.5 233.5 251.4 2.4 -- 948.8
FHLB advances and borrowings 421.2 102.0 8.0 40.0 -- 571.2
Debentures -- -- 1.3 62.9 -- 64.2
Other -- -- -- -- 15.8 15.8
Equity -- -- -- -- 107.3 107.3
-------- ------- ------- ------- --------- --------
Total liabilities and equity 882.7 335.5 260.7 105.3 123.1 $1,707.3
========
Effect of interest rate swaps --
pay variable rates 65.0 (40.0) -- (25.0) --
-------- ------- ------- ------- ---------
Repricing gap-positive (negative) $ 529.8 $(150.2) $(221.6) $(52.7) $(105.3)
======== ======= ======= ======= =========
Cumulative Repricing Gap:
Dollar amount $ 529.8 $ 379.6 $ 158.0 $105.3 --
Percent of total assets 31.0% 22.2% 9.2% 6.2% --
Non-Interest Income
For 1994, service fee revenue, net of amortization costs on the Company's
premium on sale of loans and purchased mortgage servicing rights, was $2,330,000
compared to $1,233,000 for 1993 and $1,110,000 for 1992. During the first six
months of 1994 and all of 1993 and 1992, the Company experienced a high level of
repayments on loans in its servicing portfolio and maintained at a high level
its amortization of purchased servicing rights and premium on sale of loans. A
higher average balance of loans serviced during 1994, as compared with 1993 and
1992, also contributed to higher servicing revenues. Prior to 1992, the Company
purchased the servicing rights on $443,000,000 of single family loans at a cost
of $4,417,000. As a hedge against the possible loss of servicing income from a
more rapid than anticipated prepayment of the underlying loans, the Company
purchased call options which have been closed and resulted in total gains of
approximately $1,200,000, all of which were recorded as a reduction in the
carrying value of the purchased servicing rights. At December 31, 1994, the cost
of these purchased servicing rights had been fully amortized. Given the present
size of the servicing portfolio and the current level of interest rates, the
Company expects that the future level of net service fee revenues will be at or
above the 1994 level.
Total loans serviced were $843,144,000 at December 31, 1994, with an
average portfolio of $849,652,000 for 1994, $789,071,000 for 1993 and
$755,830,000 for 1992. The percentage of service fees received depends upon the
terms of the loans as originated and conditions in the secondary market when
loans are sold. The Company receives service fees generally ranging from 0.125%
to 1.25% and averaged 0.36% for 1994, 0.38% for 1993 and 0.41% for 1992.
Loan and related fee income was $1,915,000 in 1994, $1,937,000 in 1993 and
$1,975,000 in 1992. This category includes documentation and processing fees
which vary with loan volume, late charge income which increases as the average
loan and servicing portfolios grow, and prepayment penalty income which varies
with loan activity.
The Company sells whole loans and loan participations in the secondary
market under several specific programs. Loan sales were $216,951,000 in 1994,
$425,475,000 in 1993 and $373,551,000 in 1992. In 1994, approximately 88% of
the Company's loan sales occurred in the first six months of the year. The
level of loans sold in the first six months of 1994 and the prior two years
was a result of higher single family lending volume, lower interest rates
which created more customer demand for fixed rate loans, and the demand for
loans in the secondary market. The focus of the Company's mortgage banking
activities is 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. Loans sold under these relationships vary with market
conditions and represented 39% of the total sold in 1994, 80% in 1993 and 64%
in 1992. Also, the Company has identified secondary market sources
42
First Republic Bancorp
--------------------------------------------------------------------------------
which desire adjustable rate loans of the type the Company originates primarily
for its portfolio. The Company sold $131,408,000, $85,822,000, and $132,974,000
of adjustable rate loans to these investors in 1994, 1993, and 1992,
respectively, in part to limit the amount of the Company's annual mortgage loan
growth. During 1994, one pool of adjustable rate mortgage loans was sold from
the Company's loan portfolio to reduce interest rate risk because such loans
were unlikely to respond satisfactorily to an expected increase in interest
rates, due to historically low introductory interest rates and annual interest
rate adjustments; a total of $67,300,000 of loans were sold, resulting in a loss
of $471,000.
The amount of loans which are sold is dependent upon conditions in both
the mortgage origination and secondary loan sales markets and the level of
gains fluctuates with the amount of loans sold and market conditions. The
Company computes a gain or loss at the time of sale by comparing sales price
with carrying value. A premium results when the inter est 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, net of losses, of $430,000 in 1994 compared
to $2,250,000 in 1993 and $3,257,000 in 1992. Loan sales volume was lower in
1994 as compared to 1993 and 1992 and the average price for fixed rate loans
sold decreased from 1992 to a lower level for 1994 and most of 1993. Of the net
gains recorded by the Company in 1994, approximately $103,000 represented an
excess of cash received over the carrying basis of the loans sold and $327,000
represented a capitalized premium. The Company did not anticipate that the
level of gains on loan sales that were recorded in 1993 and 1992 would be
maintained in 1994; the Company currently expects that the future level of loan
sales and related gains may be minimal until interest rates stabilize or decline
and secondary market conditions improve.
Over the past three years, the Company has expanded its investment
portfolio. There were no sales of investment securities in 1994 or 1993. In
1992, a net loss of $852,000 was recorded upon sale of certain investments
with deteriorating credit conditions. Purchases over the past three years
related primarily to U.S. Government guaranteed investments which adjust with
the prime rate, agency adjustable rate mortgage backed securities, or other
mortgage backed securities rated "A" or better. As of December 31, 1994, 91%
of these investments were U.S. Government, agency or other mortgage backed
securities and 100% were adjustable, repricing annually or more frequently.
During 1994, First Thrift made four investments in newly issued, adjustable
rate, perpetual preferred stocks with an aggregate cost of $13,760,000. Under
SFAS No. 115, these investments are equity securities and are classified as
available for sale, with unrealized gains and losses recorded as an adjustment
to the Company's stockholders' equity. These investments were purchased for
their yield which varies quarterly at approximately 83% of the highest rate
derived from short term, intermediate-term or long-term U.S. Treasury
instruments. A portion of the income from these investments is not subject to
federal income tax and at December 31, 1994 the tax equivalent yield on these
investments was 9.07%. Although these investments are classified as available
for sale, the Company does not presently intend to sell these securities. As a
result of rising interest rates in the last six months of 1994, the market value
of these preferred stocks declined by $2,010,000 from the date of acquisition
until December 31, 1994, and the Company recorded an unrealized loss of this
amount at year end as a reduction in stockholders' equity. Because these
investments receive capital gain and loss treatment under tax rules, the
unrealized loss has not been reduced by the effect of any potential tax
benefits.
Non-Interest Expense
Non-interest expense consists of salary, occupancy and other expenses related
to developing and maintaining the operations of the Company. These expenses
were $21,105,000 in 1994, $20,647,000 in 1993 and $14,496,000 in 1992. The
Company has capitalized general and administrative costs related to loan
originations totalling $5,654,000 in 1994, $6,788,000 in 1993 and $5,452,000
in 1992; the amount of capitalized costs varies directly with the volume of
loan originations and the cost incurred to make new loans. On the Company's
balance sheet, unearned loan fees, net of costs, were $6,816,000 at December
31, 1994, $9,406,000 at December 31, 1993 and $12,621,000 at December 31,
1992. During 1993 and the first six months of 1994, the Company originated
more single family "no points" loans, resulting in a decrease in unearned
fees net of costs at December 31, 1994 and 1993. Non-interest expenses before
such capitalized costs have increased, primarily due to operating a growing
company with expanding branch locations and to originating a higher level of
loans.
Salaries and related benefits, the largest component of non-interest
expense, includes the cost of benefit plans, health insurance and payroll
taxes, which have increased in each of the past three years. Before
capitalized costs, 1994 salary expense increased 5% over 1993, compared to a
1993 salary expense increase of 15% over 1992. In 1994, there was a 20%
increase in total assets and a 12% increase in average employees, although
the number of employees
43
--------------------------------------------------------------------------------
at the end of 1994 had been reduced below the level at the end of 1993. Net
income per average employee was $49,300 in 1994 compared to $94,200 in 1993 and
$101,400 in 1992, with the decline primarily related to the lower level of
income.
Occupancy costs were $2,501,000 in 1994 compared to $1,872,000 in 1993
and $1,460,000 in 1992. The increase for 1994 is related to having three new
deposit branches in San Francisco and Las Vegas for all of 1994 versus only a
portion of 1993, as well as expanded facilities in San Francisco and Beverly
Hills since mid-1993.
Advertising expense was $1,863,000 in 1994 compared to $1,340,000 in
1993 and $1,047,000 in 1992. Newspaper ads are placed primarily to support
retail deposit gathering and, in 1994 and 1993, there was increased promotional
and advertising costs associated with the Company's new loan originations. In
1993 and 1992, use of FHLB advances as a primary funding source reduced retail
deposit needs; deposit-related advertising expense as a percentage of average
deposits was 0.08% and 0.06%, respectively, as compared to 0.12% in 1994. These
expenses may continue to increase in the future as the Company emphasizes
deposits as a funding source and opens new deposit branches.
Professional fees relate primarily to legal and accounting advice required
to complete transactions, resolve delinquent loans and operate in a regulatory
environment. Such fees were $542,000 for 1994, $542,000 for 1993 and $660,000
for 1992.
Under accounting rules for 1994 and 1993, the results of operating REO
properties after foreclosure, any changes in the value of REO properties and the
gain or loss upon sale of these properties are charged directly to the income
statement. In 1992, most of these expenses were reflected as chargeoffs against
the Company's loss reserves. In 1994, losses on loans adversely affected by the
Northridge earthquake and subsequently becoming REO have been charged to that
portion of the Company's reserves established for this specific natural
disaster. As a result of the Company's resolution of problem assets, costs and
losses related to the disposition of REO, which is presented as a separate line
item in the income statement, was $1,202,000 in 1994, $3,477,000 in 1993 and
$309,000 in 1992. This expense category included gains or recoveries on the sale
of non-earthquake affected REO of $161,000 in 1994, compared to writedowns or
losses of $1,993,000 in 1993; taxes, insurance, maintenance and other operating
expenses, net of income, of $957,000 in 1994 and $1,255,000 in 1993; and
collection costs of $406,000 in 1994 and $229,000 in 1993. The future level of
these expenses depends primarily upon the amount of the Company's nonearning
loans that become REO and the changes in the fair value of such properties
subsequent to foreclosure.
The cost of FDIC insurance varies with the level of deposits as well as the
rates assessed and was $1,809,000 in 1994 and $1,816,000 in 1993, compared to
$1,455,000 in 1992. In 1994, the Company had higher average deposits and a lower
insurance premium rate, as compared to 1993.
Other general and administrative expenses were $6,013,000 in 1994 and
$6,207,000 in 1993 compared to $4,392,000 in 1992. These costs include
defeasance costs recorded on the early redemption of the Company's senior
subordinated debentures of $1,132,000 in 1993 and $1,125,000 in 1992. Other
expenses in this category liability were insurance costs, which increased in
1993, and expenses resulting from the origination of single family loans on
which processing fees or points were not collected, which increased in both 1994
and 1993. Also included in this category is data processing, communications,
travel and other operating costs which vary in proportion with the number of
locations, transaction volume and inflation.
A financial institution's operating efficiency may be measured by
comparing its ratio of operational expenses to the sum of net interest income
and recurring non-interest income. For 1994, the Company's operating efficiency
ratio was 47%, compared to 38% for 1993 and 36% for 1992, with the increase in
this ratio resulting primarily from the lower level of net interest income in
1994. As a measure of its ability to control costs, the Company computes total
non-interest expense as a percentage of average total assets. This ratio
declined to 1.28% in 1994 from 1.33% in 1993 and 1.30% in 1992. The Company
believes that it operates at a relatively high level of efficiency by most
measures used for financial institutions.
Provision for Income Taxes
The provision for income taxes varies due to the amount and timing of income
for financial statement and tax purposes, the availability of tax benefits
and the rates charged by federal and state authorities. The 1994 provision
for income taxes of $4,935,000 represents an effective tax rate of 40.3%,
compared to $8,960,000 or 41.9% for 1993, and $8,043,000 or 40.6% for 1992.
The provision for income taxes in 1994 decreased primarily as a result of the
decrease in the Company's income before taxes to $12,238,000 in 1994 from
$21,399,000 in 1993 and $19,805,000 in 1992, as well as the availability of
certain California tax credits and income earned in Nevada which does not
assess state taxes.
Liquidity
Liquidity refers to the ability to maintain a cash flow adequate to fund
operations and to meet present and future financial obligations of the
Company either through the sale
44
First Republic Bancorp
--------------------------------------------------------------------------------
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, including U.S. Government agency
and mortgage-backed instruments, from which funds could be promptly generated.
At December 31, 1994, the investment securities portfolio of $129,628,000 and
cash plus short-term investments of $32,618,000 amounted to over 9% of total
assets. Additionally, the Company had available unused FHLB advances of
approximately $86,000,000. Management believes that the sources of available
liquidity are adequate to meet all reasonably foreseeable short-term and long-
term demands.
The Company's loan and investment portfolio is repayable in monthly
installments over terms ranging primarily from six months to thirty years;
however, market experience is that many longer-term real estate mortgage
loans and investments are likely to prepay prior to their final maturity. The
Company's deposits generally mature over shorter periods than its assets,
requiring the Company to renew deposits or raise new liabilities at current
interest rates.
The Company's asset/liability management program attempts to achieve a
matching of the pricing characteristics of variable rate assets with the
timing of liability maturities and pricings. At December 31, 1994, 87% of the
Company's interest-earning assets possess the ability to reprice within six
months. As part of a long term strategy, having assets on which the interest
rate adjusts frequently allows the Company more flexibility in setting rates
required to obtain deposits and other liabilities.
As shown in the Company's Consolidated Statement of Cash Flows, the
source of funds to finance the $784,486,000 of loans originated in 1994 was
diversified and included loan principal repayments of $306,496,000, the sale of
$216,951,000 of loans, a net increase in deposits of $197,162,000, and an
increase in long term FHLB advances of $112,000,000. In 1993 and 1992, the
Company's loan origination activities and asset growth were financed by a
similar combination of loan principal repayments, FHLB advances, deposit
increases and, to a greater extent, loan sales. In each of the past three years,
First Republic has generated funds from the sale of debentures or common stock.
In 1994 First Republic used funds of $3,964,000 to repurchase 326,647 shares of
common stock on the open market.
Capital Resources
At December 31, 1994, the Company's capital, consisting of stockholders' equity,
long-term debentures and reserves, was $185,818,000, or 10.9% of total assets.
First Republic is not a bank holding company and is not subject to the Federal
Reserve Board's bank holding company regulations. However, if such regulations
applied, the Company's minimum required 1994 total risk-based capital ratio
would be 8.0%, as compared to the Company's actual ratio of 16.32% at December
31, 1994, as calculated by management.
First Republic has used the proceeds of the issuance of common stock and
debentures to, in part, provide capital to its thrift and loan subsidiaries,
First Thrift and First Republic Savings Bank. First Republic is a legal entity
separate and distinct from its subsidiaries and is dependent upon its own
operations and dividends from its subsidiaries as the source of cash to service
and ultimately repay its outstanding debt. At December 31, 1994, First Republic
has invested $10,000,000 in First Thrift as interest-bearing capital notes, with
interest and principal payments which generally correspond to the payment terms
of First Republic's subordinated debentures. At December 31, 1994, First
Republic had $29,677,000 of long-term subordinated debentures outstanding with
maturities ranging from 2003 to 2009 and $34,500,000 of convertible subordinated
debentures maturing in 2002. First Republic has issued its subordinated
debentures in amounts, and with scheduled maturity dates and early redemption
provisions, that First Republic believes will allow it to repay all of its
subordinated debentures in accordance with their respective terms. At December
31, 1994, First Republic had stockholders' equity of $107,286,000 and its
investment was $133,725,000 in First Thrift and $6,954,000 in First Republic
Savings Bank.
First Republic received dividends of $2,500,000 for 1994, $1,963,000 for
1993 and $1,160,000 for 1992 from First Thrift. These dividends represented
approximately 26% in 1994, 12% in 1993 and 8% in 1992 of the earnings of First
Thrift for such periods. Additionally, First Republic received interest payments
from First Thrift of $1,540,000 in 1994, $1,554,000 in 1993 and $1,908,000 in
1992; during 1994, $5,000,000 of capital notes were repaid by First Thrift. The
ability of First Republic to receive future dividends depends upon the operating
results of and government regulations applicable to its subsidiaries. First
Republic's ability to meet its reasonably foreseeable obligations, including the
payment of debt service on its debentures, is dependent upon cash flow from its
own operations, the receipt of interest payments on capital notes issued to
First Thrift and the continued receipt of dividends from First Thrift.
45
Directors and Corporate Officers
The Directors of First
Republic Bancorp are
pictured at the 1994 San
Francisco Decorator
Showcase home, financed
by the Company. Standing
from left to right,
Kenneth W. Dougherty,
John F. Mangan, [Photo of Directors appears here]
Roger O. Walther,
James H. Herbert, II,
Barrant V. Merrill,
Katherine August-deWilde,
L. Martin Gibbs,
James F. Joy,
Richard M. Cox-Johnson
(Frank J. Fahrenkopf, Jr.,
not shown)
Roger O. Walther, James H. Herbert, II,
59, Chairman of the Board 50, President, Chief
of Directors. Mr. Walther Executive Officer and
is Chairman and Chief Director. From 1980 to July
Executive Officer of ELS 1985, Mr. Herbert was
Educational Services, Inc., President, Chief Executive
America's largest teacher of Officer and a director of San
English as a second language. Francisco Bancorp. He is a
He is a director of Charles director of the California
Schwab & Co., Inc. He was Association of Thrift & Loan
formerly Chairman of San Companies and is on the
Francisco Bancorp. B.S., California Commissioner of
1958, United States Coast Corporations' Industrial
Guard Academy; M.B.A., Loan Advisory Committee.
1961, Wharton School, B.S., 1966, Babson College;
University of Pennsylvania; M.B.A., 1969, New York
and member of the Graduate University; and a member of
Executive Board of the Babson Corporation.
Wharton School.
Katherine August-deWilde, Willis H. Newton, Jr.,
47, Executive Vice President 45, Senior V.P. and Chief
and Director. Previously, Financial Officer. Formerly,
Ms. August-deWilde was Mr. Newton was V.P. and
Senior V.P. and Chief Controller of Homestead
Financial Officer at PMI Financial. B.A., 1971,
Mortgage Insurance Co., a Dartmouth College; M.B.A.,
subsidiary of Sears/Allstate. 1976, Stanford University.
A.B., 1969, Goucher
College; M.B.A., 1975,
Stanford University.
First Republic Bancorp
--------------------------------------------------------------------------------
Linda G. Moulds, Frank J. Fahrenkopf, Jr.,
44, Vice President, Secretary 55, Director. Mr. Fahrenkopf
and Controller. Previously, is a partner in the Washing-
Ms. Moulds was Secretary ton, D.C., law firm of Hogan
and Controller of San & Hartson. From 1983 to
Francisco Bancorp and a 1989, he was Chairman of
director of First United B.S., the Republican National
1971, Temple University. Committee. B.A., 1962,
University of Nevada-Reno;
Edward J. Dobranski, L.L.B., 1965, University of
California-Berkeley.
44, Vice President,
General Counsel. Previously L. Martin Gibbs,
Mr. Dobranski was of
Counsel at Jackson, Tufts, 57, Director, Mr. Gibbs
Cole & Black in San Fran- is a partner with the
cisco, specializing in banking, New York law firm of
real estate and corporate law. Rogers & Wells, counsel to
B.A., 1972 Coe College-Iowa; the Company. B.A., 1959,
J.D., 1975, Creighton Brown University; J.D.,
University-Nebraska. 1962, Columbia University.
David B. Lichtman, James F. Joy,
31, Vice President, Credit 57, Director. Mr. Joy is
Officer. Since 1986, Director-European Business
Mr. Lichtman has held posi- Development for CVC
tions in all phases of First Capital Partners Europe
Republic's lending operations. Limited and a non-executive
B.A., 1985, Vassar College; director of Sylvania Lighting
M.B.A., 1990, University of International. B.S., 1959 and
California-Berkeley. B.S.E.E., 1960, Trinity
College; M.B.A., 1964, New
Richard M. Cox-Johnson, York University.
60, Director. Mr. Cox-Johnson John F. Mangan,
is a director of Premier
Consolidated Oilfields PLC. 58, Director. Mr. Mangan
Graduate of Oxford Univer- is an investor and was
sity, 1955. previously President of
Prudential-Bache Capital
Kenneth W. Dougherty, Partners, Inc., and a
Managing Director of
68, Director. Mr. Dougherty Prudential-Bache Securities,
is an investor and was Inc. He has been a director
previously President of of Noel Group Inc.,
Gill & Duffus International New York, N.Y., and the
Inc. and Farr Man & Co. Inc., Hulton-Deutsch Collection
which are international com- Ltd., London. B.A., 1959,
modity trading companies. University of Pennsylvania.
B.A., 1948, University of
Pennsylvania. Barrant V. Merrill,
64, Director. Mr. Merrill is
the Managing Partner of Sun
Valley Partners. Previously,
he was General Partner of
Dakota Partners and Chair-
man of Pershing & Co., Inc.,
a division of Donaldson,
Lufkin & Jenrette. B.A.,
1953, Cornell University.
First Republic Bancorp
--------------------------------------------------------------------------------
Quarterly and Additional Information
Fully- Common Stock
Total Net Provision Diluted Price Range
Interest Interest For Pretax Net Earnings ----------------
Income Income Losses Income Income Per Share High Low
----------- ----------- ---------- ---------- ---------- --------- ------ ------
1994 1Q $24,933,000 $10,050,000 $5,005,000 $1,141,000 $ 660,000 $.08 $16.38 $13.59
2Q 26,168,000 9,650,000 675,000 4,397,000 2,529,000 .28 15.75 12.88
3Q 28,124,000 9,270,000 1,502,000 4,298,000 2,552,000 .28 15.50 13.00
4Q 30,140,000 8,960,000 2,538,000 2,402,000 1,562,000 .19 13.38 10.00
1993 1Q $24,209,000 $10,043,000 $1,283,000 $4,993,000 $2,946,000 $.32 $14.32 $10.60
2Q 24,364,000 10,305,000 1,302,000 4,507,000 2,645,000 .29 12.74 10.19
3Q 24,734,000 10,445,000 1,030,000 5,975,000 3,427,000 .36 16.26 12.38
4Q 25,040,000 10,637,000 1,191,000 5,924,000 3,421,000 .36 15.78 13.59
=========== =========== ========== ========== ========== ========= ====== ======
First Republic Bancorp Inc. Common Stock is traded on the New York and Pacific
Stock Exchanges under the symbol FRC. At December 31, 1994, there were
approximately 200 stockholders of record, although the Company believes that its
shares are held beneficially by over 2,000 stockholders.
First Republic Bancorp Inc. is a financial services company operating
principally in California and Nevada as a holding company for two FDIC-insured,
state-chartered industrial bank subsidiaries. The Company functions as a direct
lender as well as a mortgage banking company, originating, holding or selling
and servicing mortgage loans. The Company has purchased servicing rights and
retains responsibility for servicing loans which it has sold in the secondary
market, thereby earning ongoing servicing fee revenues.
The Company emphasizes real estate secured lending and mortgage banking
operations that are targeted primarily toward loans secured by single family
residences and by existing multifamily and commercial properties.
From its inception in 1985 through December 31, 1994, the Company has
originated $4.4 billion of loans, $1.7 billion of which have been sold in the
secondary market to institutional investors. At December 31, 1994, the Company's
loan portfolio of $1.5 billion consisted primarily of real estate secured loans,
96% of which were adjustable rate mortgages or mature within one year. The
Company obtains funds primarily from FDIC-insured deposit accounts and FHLB
advances, as well as the issuance of subordinated and convertible subordinated
debentures, and equity financings.
Average Assets Net Income Trend in General
Per Employee Per Employee and Administrative
$ in Millions In $ Thousands Expenses
% of Average Assets
1990.............. 7.1 1990.............. 44 1990.............. 1.49
1991.............. 8.3 1991.............. 79 1991.............. 1.44
1992.............. 9.6 1992.............. 101 1992.............. 1.30
1993.............. 9.8 1993.............. 94 1993.............. 1.33
1994.............. 10.5 1994.............. 49* 1994.............. 1.28
*Adversely affected by 1994
Northridge earthquake, as
discussed on page 3 and
elsewhere in this annual
report
Officers, Directors and Corporate Information
Officers
Roger O. Walther
Chairman, Board
of Directors
James H. Herbert, II
President and
Chief Executive Officer
Director
Katherine August-deWilde
Executive Vice President
Director
Willis H. Newton, Jr.
Senior Vice President and
Chief Financial Officer
Linda G. Moulds
Vice President,
Secretary and Controller
Edward J. Dobranski
Vice President,
General Counsel
David B. Lichtman
Vice President,
Credit Officer
Directors
R.M. Cox-Johnson
Director
Director, Premier
Consolidated Oilfields PLC
Kenneth W. Dougherty
Director
Consultant
Frank J. Fahrenkopf, Jr.
Director
Partner, Hogan & Hartson
L. Martin Gibbs
Director
Partner, Rogers & Wells
James F. Joy
Director-European Business
Development for CVC Capital
Partners Europe Limited
John F. Mangan
Director
Investments
Barrant V. Merrill
Director
Investments
Stock Exchanges
Common Stock listed on the
New York and Pacific Stock
Exchanges - Symbol FRC
General Counsel
Rogers & Wells
Auditors
KPMG Peat Marwick LLP
Registrars/Transfer Agent:
Common Stock --
First Interstate
Bank Of California
Subordinated and Convertible
Debentures --
U.S. Trust Company
of California or National
City Bank
The Company's Annual
Stockholders' Meeting will be
held on Thursday, May 4, 1995
at 1pm at the New York Yacht
Club, 37 West 44th Street,
New York, New York 10036.
Corporate Office
First Republic Bancorp Inc.
388 Market Street
San Francisco, California 94111
(415)392-1400
(800)392-1400 (California)
Branch Locations
First Republic Thrift & Loan
101 Pine Street
San Francisco, California 94111
(415)392-1400
(800)392-1400 (California)
1088 Stockton Street
San Francisco, California 94108
(415)834-0888
5628 Geary Boulevard
San Francisco, California 94121
(415)751-3888
3928 Wilshire Boulevard
Los Angeles, California 90010
(213)384-0777
(800)777-9507 (So. California)
9593 Wilshire Boulevard
Beverly Hills, California 90212
(310)288-0777
116 East Grand Avenue
Escondido, California 92025
(619)740-7000
1110 Camino Del Mar
Del Mar, California 92014
(619)755-5600
(800)221-9333 (So. California)
8347 La Mesa Boulevard
La Mesa, California 91941
(619)462-6700
New Locations - Summer 1995
1809 Irving at 19th Avenue
San Francisco, California 94122
1099 Fourth Street
San Rafael, California 94901
First Republic Savings Bank
2510 South Maryland Parkway
Las Vegas, Nevada 89109
(702)792-2200
Design of Annual Report:
Howry Design Associates
San Francisco
[LOGO OF NEW YORK STOCK EXCHANGE APPEARS HERE]
[LOGO OF FEDERAL HOME LOAN BANK SYSTEM APPEARS HERE]
[EQUAL HOUSING LENDER LOGO APPEARS HERE]
[LOGO OF FDIC APPEARS HERE]
[Logo of First Republic Bancorp Inc. appears here]
First Republic Bancorp Inc.
388 Market Street
San Francisco, California 94111
(415) 392-1400
EX-22.1
5
SUBSIDIARIES
EXHIBIT 22.1
SUBSIDIARIES OF FIRST REPUBLIC BANCORP INC.
First Republic Bancorp Inc. has the following wholly-owned subsidiaries as of
this date:
1. First Republic Thrift & Loan-a California state chartered industrial
banking company.
2. First Republic Savings Bank-a Nevada state chartered industrial banking
company
39
EX-23.1
6
CONSENT OF KPMG
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-65806) pertaining to the First Republic Bancorp Inc. 1985
Stock Option Plan, in the Registration Statement (Form S-8 No. 33-58978)
pertaining to the First Republic Bancorp Inc. Employee Stock Purchase Plan, and
in the Registration Statement (Form S-3 No. 33-66336) and related Prospectus
pertaining to the Subordinated Debentures Due 2009 of our report dated January
26, 1995, relating to the Consolidated Balance Sheet of First Republic Bancorp
Inc. and subsidiaries as of December 31, 1994 and 1993, and the related
Consolidated Statements of Income, Stockholders' Equity and Cash Flows for each
of the years in the three-year period ended December 31, 1994, which report
appears in the December 31, 1994 Annual Report of First Republic Bancorp Inc.
incorporated by reference in this Annual Report on Form 10-K for the year ended
December 31, 1994.
KPMG Peat Marwick LLP
San Francisco, California
March 28, 1995
40
EX-27
7
FINANCIAL DATA SCHEDULE
9
1,000
YEAR
DEC-31-1994
DEC-31-1994
16,920
198
15,500
0
11,750
146,405
143,975
1,498,663
14,355
1,707,319
948,833
0
15,843
635,357
74,823
0
0
32,463
1,707,319
100,816
8,549
0
109,365
41,024
71,435
37,930
9,720
0
21,105
12,238
12,238
0
0
7,303
0.92
0.85
2.47
32,623
2,587
17,489
8,000
12,657
8,161
145
14,355
14,355
0
8,000