-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, scZ36DtUeLraKURmgEvpNnhfk4LYkDgF3Ks78Mq/OqrdF6+zjr190TUEZ6cLWIuw lchWGKjjuJrOwF5GDIlLwA== 0000950131-94-000456.txt : 19940404 0000950131-94-000456.hdr.sgml : 19940404 ACCESSION NUMBER: 0000950131-94-000456 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST REPUBLIC BANCORP INC CENTRAL INDEX KEY: 0000770975 STANDARD INDUSTRIAL CLASSIFICATION: 6036 IRS NUMBER: 942964497 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-09837 FILM NUMBER: 94519415 BUSINESS ADDRESS: STREET 1: 388 MARKET ST STREET 2: SEOND FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4153921400 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- 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, 1993 COMMISSION FILE NUMBER: 0-15882 ---------------- 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 ---------------- 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. [ ] The aggregate market value of the voting stock held by non affiliates of the registrant, based on the closing price of $15.25 for such stock on March 25, 1994 was $109,373,000. The number of shares outstanding of the registrant's common stock, par value $.01 per share, as of March 25, 1994 was 7,755,244. DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant's Annual Report to Stockholders for the year ended December 31, 1993 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, 1994 (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 34. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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") and a real estate loan origination subsidiary 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 (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, and San Diego County, California and its lending activities are concentrated in the San Francisco, Los Angeles and Las Vegas areas. The San Francisco Bay Area, Los Angeles 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 (formerly Silver State Thrift and Loan), 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 $105,000 at December 31, 1993. 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 is 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, 1993, the Company originated approximately $3.6 billion of loans, of which approximately $1.5 billion were sold to investors. The Company has emphasized the retention of adjustable rate mortgages ("ARMs") in its loan portfolio. At December 31, 1993, over 87% 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 three-, six- or twelve-month periods 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 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 from that which was originally advanced. At December 31, 1993, the amount of loans with the potential for negative amortization held by the Company was approximately 4.8% of total loans and the amount of loans which had experienced increases in principal balance was approximately 0.5% 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 $1,500,000, 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. Also, since September 1992, the Company has maintained an insurance policy to cover a portion of the risk of loss that might result from earthquake damage to properties securing real estate mortgage loans in its loan portfolio. Under a policy extending until August 1994, the Company is self-insuring for the first $12,500,000 of any loss as a result of damages to underlying collateral and the insurance policy covers up to an additional $8,000,000. In connection with obtaining this insurance coverage, the Company was assisted by an engineering consulting firm which analyzed the location and construction attributes of certain of the properties that secure the Company's loans. For additional information regarding the effect of the January 17, 1994 earthquake on the Company's loans in the Los Angeles area, see "Asset Quality--Event Subsequent to December 31, 1993." At December 31, 1993, single family real estate secured loans, including home equity loans, represented $608,489,000, or 48% of the Company's loan portfolio. Approximately 72% of these loans were in the San Francisco Bay Area, and approximately 22% were in the Los Angeles area. The Company's strategy has 2 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. These are loans secured by single family detached homes, condominiums, cooperative apartments, and two-to-four unit properties. At December 31, 1993, the average single family loan amount was approximately $613,000 and the approximate average loan- to-value ratio was 65%, using appraised values at the time of loan origination and current loan balances outstanding. Due to the Company's focus on upper-end home mortgage loans, the number of single family loans originated is limited (approximately 1,450 for 1993), 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, 1993, loans secured by multifamily properties totaled $387,757,000, or 31% of the Company's loan portfolio. The loans are predominantly on older buildings in the urban neighborhoods of San Francisco and Los Angeles. Approximately 39% of the properties securing the Company's multifamily loans were in the San Francisco Bay Area, approximately 27% 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, 1993, the average multifamily mortgage loan size was approximately $1,212,000 and the approximate loan-to-value ratio was 64%, using appraised values at the time of origination and current loan balances outstanding. The Company actively engaged in commercial real estate lending from its formation in 1985; however, from May 1992 through December 31, 1993, in response to economic conditions, the Company entered into a limited number of commitments to make new 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 74% in the San Francisco Bay Area, approximately 13% in Los Angeles County, approximately 4% in other California areas and approximately 7% in Las Vegas. At December 31, 1993, the average loan size was less than $1,000,000 and the approximate average loan-to-value ratio was 56%, using appraised values at the time of loan origination and current balances outstanding. The total amount of such loans outstanding on December 31, 1993, was $229,914,000, or 18% of the Company's loan portfolio, compared to $204,611,000, or 19% at December 31, 1992. 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 1993, such loan originations were approximately $146,200,000 and approximately $102,400,000 of such loans were repaid, compared to approximately $128,100,000 of loan originations and $73,300,000 of such loans that were repaid in 1992. Generally, residential construction loans are short-term in nature and are repaid upon completion or ultimate sale of the properties. At December 31, 1993, the outstanding balance of the Company's construction loans was $20,219,000, or 2% of total loans. Construction loans are made only 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 $78,710,000 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 38 separate projects were $14,512,000 at December 31, 1993 with total additional committed loan amounts of $25,896,000. The Company also has loans to four separate borrowers on four separate multifamily properties 3 under construction in Las Vegas totalling $5,707,000 and has issued permanent take-out commitments of up to $20,770,000 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 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 seasoned performing multifamily and commercial real estate loans. Such loans met the Company's normal underwriting standards, were generally located in the Company's primary lending areas, and were purchased at a discount to their face value. Prior to the purchase of these loans, management conducted a property visit and applied the Company's underwriting procedures as if a new loan were being originated. The Company purchased loans totalling $70,307,000 in 1991, $12,342,000 in the first quarter of 1992, including some single family real estate loans, and $5,440,000 in 1993. The Company currently has no specific plans to make additional purchases of loans, but may do so in the future if attractive opportunities are presented. 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, 1993, the outstanding balance due under home equity lines of credit was $31,213,000 and the unused remaining balance was $39,243,000. 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, 1993, the Company had approximately 139 commercial business loans with an aggregate balance of $8,346,000, 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 $812,000 at December 31, 1993. The following table presents an analysis of the Company's loan portfolio at December 31, 1993 by property type and geographic location. The table does not include amounts which the Company is committed to lend but which are undisbursed.
OTHER SAN FRANCISCO LOS ANGELES CALIFORNIA LAS VEGAS PERCENT BAY AREA COUNTY AREAS NEVADA OTHER TOTAL BY TYPE ------------- ----------- ---------- --------- ------ ---------- ------- (IN THOUSANDS) PROPERTY TYPE: Single family (1-4 $437,122 $134,445 $25,120 $ 7,228 $4,574 $ 608,489 48.4% units)(1)............... Multifamily (5+ units).. 149,905 105,351 22,086 110,415 -- 387,757 30.9 Commercial real estate.. 170,318 29,238 9,603 17,006 3,749 229,914 18.3 Construction loans...... -- -- -- 20,219 -- 20,219 1.6 Commercial Business and 592 7,377 1,170 519 21 9,679 0.8 other................... -------- -------- ------- -------- ------ ---------- ----- Total............... $757,937 $276,411 $57,979 $155,387 $8,344 $1,256,058 100.0% ======== ======== ======= ======== ====== ========== ===== Percent by location..... 60.3% 22.0% 4.6% 12.4% 0.7% 100.0%
- -------- (1) Includes equity lines of credit secured by single family residences and single family loans held for sale. 4 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, and to a lesser extent, by First Republic Mortgage, Inc. 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. 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, -------------------------- 1993 1992 1991 -------- -------- -------- (IN THOUSANDS) MORTGAGE BANKING ACTIVITY: Loans originated.................................... $944,796 $826,201 $444,503 Loans purchased..................................... 5,447 12,342 70,307 -------- -------- -------- Total loans originated and purchased................ $950,243 $838,543 $514,810 ======== ======== ======== Loans sold.......................................... $425,475 $373,551 $119,961
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; however, the Company has on one occasion retained a subordinated interest in loans sold to an institutional investor of which at December 31, 1993, $431,000 remained outstanding. From its inception, through December 31, 1993, the Company has sold approximately $1.5 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 six institutional investors in 1991, to ten institutional investors in 1992 and to eight institutional investors in 1993. 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. Informal commitments are normal in the industry for multifamily and commercial loans, although the Company did not sell any new loans secured by multifamily or commercial properties in 1993 or 1992. Management expects to enter into additional formal and informal commitments in the future as it develops working relationships with additional institutional investors; however, an unstable interest rate environment could make 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. 5 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. 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 $814.5 million and $781.6 million at December 31, 1993 and 1992, 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 0.38% for 1993, 0.41% for 1992 and 0.42% for 1991. 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, 1993 approximately 55% were adjustable rate mortgages. The weighted-average mortgage loan note rate of the Company's servicing portfolio at December 31, 1993 was 6.54% for ARMs and 7.90% 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, 1993, this asset (reported as "premium on sale of loans" and included in the Company's balance sheet as "Other Assets") was $903,000 as compared to $1,454,000 at December 31, 1992. 6 "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 1993 or 1992. At purchase, the underlying loans had an average balance of approximately $200,000, and approximately 75% carried fixed interest rates averaging 10.2%. 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, 1993 and 1992, the carrying cost of purchase servicing rights, net of amortization, was $251,000 and $1,502,000, respectively. Amortization of the carrying value of premium on sale of loans and the carrying cost on purchased servicing rights totalled $1,753,000 in 1993, $1,960,000 in 1992 and $1,820,000 in 1991. A declining and relatively low interest rate environment has 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, have been adversely affected by low mortgage interest rates, leading to higher loan prepayments and lower income generated from the Company's loan servicing portfolio. This negative effect on the Company's income has been offset somewhat by a rise in origination and servicing income attributable to new loan originations, which have increased during the recent period of low mortgage interest rates. 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. The Company believes its carrying basis of $251,000 has been reduced to a modest amount, which approximates the market value of such rights. 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.
DECEMBER 31, ---------------------------- 1993 1992 1991 -------- -------- -------- (IN THOUSANDS) LOAN SERVICING PORTFOLIO: Loans originated by the Company and sold......... $724,251 $601,212 $431,647 Purchased mortgage servicing rights.............. 90,202 180,352 363,246 -------- -------- -------- Total.......................................... $814,453 $781,564 $794,893 ======== ======== ======== Premium on loans sold and cost of purchased servicing rights................................. $ 1,154 $ 2,956 $ 4,366 Premium on loans sold and cost of purchased servicing rights as a percentage of loans serviced........................................ 0.14% 0.38% 0.55%
7 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, 1993, the Company's investment portfolio included the following securities in the proportions listed: U.S. Government--30%; agency MBS 16%; and other MBS--53%. At December 31, 1993, the Company's investment portfolio totalled $84,208,000 (6% of total assets) as compared to $40,638,000 (3% of total assets) at December 31, 1992. The securities in the Company's investment portfolio at December 31, 1993 had maturities ranging from seven months to twenty-nine years. As of December 31, 1993, the market value of securities in the portfolio were $855,000 above cost consisting of total gross unrealized gains of $731,000 on U.S. Government securities, gross unrealized gains of $266,000 on agency MBS and gross unrealized losses of $16,000 and $155,000 on agency MBS and other MBS, respectively. The following summarizes by category the carrying value and approximate market value of investment securities at the dates indicated:
DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991 ------------------ ------------------ ------------------ CARRYING MARKET CARRYING MARKET CARRYING MARKET VALUE VALUE VALUE VALUE VALUE VALUE --------- -------- --------- -------- --------- -------- (IN THOUSANDS) INVESTMENT SECURITIES: U.S. Government......... $25,404 $26,135 $27,300 $27,611 $25,752 $26,051 Agency MBS.............. 13,788 14,054 5,517 5,501 -- -- Other MBS (1)........... 44,655 44,513 7,352 7,197 5,428 5,363 Corporate bonds and other................... 361 361 469 469 4,776 4,295 -------- -------- -------- -------- -------- -------- Total............... $84,208 $85,063 $40,638 $40,778 $35,956 $35,709 ======== ======== ======== ======== ======== ========
- -------- (1) As of December 31, 1991 the Company reclassified a $6,000,000 nonaccruing investment as a nonaccruing commercial real estate loan participation. The Company sold that asset in May 1992 and recorded a loss of $2,220,000. At December 31, 1993, the Company's intent is to hold all investments other than the one corporate bond owned until maturity and management believes that the Company has the ability to do so. The following table summarizes the maturities of the Company's investment securities and their weighted average yields at December 31, 1993:
AFTER ONE YEAR AFTER FIVE YEARS WITHIN BUT THROUGH BUT THROUGH ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS TOTAL ------------ --------------- ------------------ ----------------- ------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ------ ----- ------- ------ -------- -------- --------- ------- ------- ----- (IN THOUSANDS) INVESTMENT SECURITIES: U.S. Government......... $-- -- % $ -- -- % $ 97 5.60% $ 25,307 5.74% $25,404 5.74% Agency MBS.............. -- -- -- -- -- -- 13,788 4.24 13,788 4.24 Other MBS............... -- -- -- -- -- -- 44,655 5.46 44,655 5.46 Other................... 361 -- (1) -- -- -- -- -- -- 361 -- ---- --- ------- ------ ------- -------- --------- ------ ------- ---- Total............... $361 -- % $ 0 -- % $ 97 5.60% $ 83,750 5.34% $84,208 5.32% ==== === ======= ====== ======= ======== ========= ====== ======= ====
- -------- (1) Represents one nonaccruing asset. 8 At December 31, 1993, all 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 face maturities. At December 31, 1993, the net book value of the Company's securities of an unsecured, below investment grade nature was $361,000. At December 31, 1993, First Thrift owned redeemable FHLB stock having a par value of $22,927,000. At December 31, 1993, no other asset and no investment in the Company's portfolio had an aggregate book value exceeding 10% of stockholders' equity. 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 checking, safe deposit boxes, money orders, ATM access and other traditional retail services. This limited product operation results in substantial cost savings which more than 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, 1993, no individual depositor represents 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. In the last six months of 1992 and continuing throughout 1993, First Thrift significantly altered its volatile liability dependency ratio by maintaining a higher level of cash and investments relative to its short-term borrowings and a reduced level of larger certificates. At December 31, 1993, First Thrift's cash and investments exceeded its volatile liabilities by $64,573,000. 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 1993, First Thrift had not accepted brokered deposits for more than four years and the balance of $989,000 of brokered deposits at December 31, 1993, represented less than 0.2% of total deposits. Management does not plan to renew such deposits upon their scheduled maturity. At December 31, 1993, First Thrift's time certificates $100,000 or more totalled $44,847,000 of which $31,653,000, or 70.6%, were from retail consumer depositors. At December 31, 1993, First Republic Savings Bank had one time certificate over $100,000, totalling $112,000. For First Thrift, average maturity of all time certificates was 8.8 months and the average certificate amount per depositor was approximately $42,000 at December 31, 1993. 9 The following table shows the maturity of the Thrifts' certificates of $100,000 or more at December 31, 1993.
FIRST REPUBLIC FIRST THRIFT SAVINGS BANK ------------ -------------- (IN THOUSANDS) Remaining maturity: Three months or less........................ $12,389 $-- Over three through six months............... 6,086 -- Over six through 12 months.................. 9,582 112 Over 12 months.............................. 16,790 -- ------- ---- Total..................................... $44,847 $112 ======= ==== Percent of total deposits..................... 6.0% 15.1%
First Thrift also utilizes term FHLB advances and, to a lesser extent, bank lines of credit 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, 1993, total FHLB advances outstanding were $468,530,000. Of this amount, $414,530,000, or 88%, had an original maturity of 10 years or longer. Of the remaining, $10,000,000 was repaid in January 1994 and $44,000,000 was due between one and two years. The longer-term advances provide the Company with a stable and well-matched funding source for assets with longer lives. See "--Asset and Liability Management." First Republic Savings Bank will apply for FHLB membership in 1994 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, ------------------------- 1993 1992 1991 ------- ------- ------- (IN THOUSANDS) SHORT-TERM BORROWINGS(1): FHLB advances--short-term..................... $10,000 $ -- $51,000 Repurchase agreements(2)...................... 12,380 -- -- Bank lines of credit.......................... -- -- 5,500 ------- ------- ------- Total....................................... $22,380 $ -- $56,500 ======= ======= ======= Maximum amount outstanding at any month-end during period................................ $22,380 $23,780 $56,500 Average amount outstanding during period...... 705 6,894 14,809 Average rate on short-term borrowings-in period........................................ 3.45% 4.80% 7.48%
- -------- (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 Management seeks to manage its asset and liability portfolios to help reduce any adverse impact on the Company's 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 repricings with short- and intermediate-term investment certificates and adjustable rate borrowings. The Company has established a program to obtain deposits by offering 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, 1993. 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 cumulative position as of December 31, 1993 for the six month and twelve month categories in accordance with its 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, 1993. ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY MATURING OR ADJUSTING DURING PERIODS SUBSEQUENT TO DECEMBER 31, 1993
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)................ $ -- $253,846 $400,689 $441,565 $ 106,018 $ 53,940 $ -- $1,256,058 Securities.............. -- 73,668 9,611 23,856 -- -- -- 107,135 Cash and short-term investments............. 19,903 17,592 881 1,002 -- -- -- 39,378 Noninterest-earnings assets, net............ -- -- -- -- -- -- 14,622 14,622 ------- -------- -------- -------- --------- --------- --------- ---------- Total............... $19,903 $345,106 $411,181 $466,423 $ 106,108 $ 53,940 $ 14,622 $1,417,193 ======= ======== ======== ======== ========= ========= ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY: Passbooks(2)............ $ -- $ 51,187 $ 20,988 $ 21,082 $ 21,469 $ 2,435 $ -- $ 117,161 Investment certificates: $100,000 or greater.... -- 12,389 6,086 9,582 5,675 11,115 -- 44,847 Less than $100,000..... -- 110,112 85,794 155,234 156,916 81,607 -- 589,663 FHLB advances-long term. -- 223,530 115,000 40,000 40,000 40,000 -- 458,530 ESOP debt............... 1,200 -- -- -- -- -- -- 1,200 Other short-term debt... -- 22,380 -- -- -- -- -- 22,380 Other liabilities....... -- -- -- -- -- -- 17,509 17,509 Subordinated debentures. -- -- -- -- -- 60,957 -- 60,957 Stockholders' equity.... -- -- -- -- -- -- 104,946 104,946 ------- -------- -------- -------- --------- --------- --------- ---------- Total............... $ 1,200 $419,598 $227,868 $225,898 $ 224,060 $ 196,114 $ 122,455 $1,417,193 ======= ======== ======== ======== ========= ========= ========= ========== Net repricing assets over (under) repricing liabilities equals primary GAP............ $18,703 $(74,492) $183,313 $240,525 $(118,042) $(142,174) $(107,833) Effect of interest rate swaps................... -- 20,000 45,000 -- (40,000) (25,000) -- ------- -------- -------- -------- --------- --------- --------- Hedged GAP.............. 18,703 (94,492) 138,313 240,525 (78,042) (117,174) (107,833) ======= ======== ======== ======== ========= ========= ========= Hedged GAP as a percentage of total assets................. 1.32% (6.67)% 9.76% 16.97% (5.51)% (8.27)% (7.61)% ======= ======== ======== ======== ========= ========= ========= Cumulative hedged GAP... $18,703 $(75,789) $ 62,524 $303,049 $ 225,007 $ 107,833 $ -- ======= ======== ======== ======== ========= ========= ========= Cumulative hedged GAP as percentage of total assets................. 1.32% (5.35)% 4.41% 21.38% 15.88% 7.61% 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 semiannually 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, subject generally to a maximum increase of 2% annually and 5% over the lifetime of the loan. (2) Passbook maturities and rate adjustments are allocated based upon management's experience of historical interest rate volatility and passbook erosion rates. However, all passbook 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. First Thrift has entered into interest rate cap transactions in the aggregate notional principal amount of $945,000,000 which terminate in periods ranging from March 1994 through September 2000. Under the terms of these transactions, which have been entered into with nine different commercial or investment banking institutions or their affiliates, First Thrift will be reimbursed quarterly for increases in the London Inter-Bank Offer Rate ("LIBOR") for any quarter during the term of the applicable transaction in which such rate exceeds a rate ranging from 9% to 13% as established for the applicable transaction. The interest rate cap transactions are intended to act as hedges for the interest rate risk created by restrictions on the maximum yield of certain variable rate loans and investment securities held by First Thrift which may, therefore, at times be exposed to the effect of unrestricted increases in the rates paid on the liabilities which fund these assets. The cost of these interest rate cap transactions is amortized over their lives and totalled $850,000 in 1993, $672,000 in 1992 and $539,000 in 1991. Although these costs reduce current earnings, the Company believes that the cost is justified by the protection these interest rate cap transactions provide against increased interest rates. Additionally, $37,400,000 of First Thrift's advances with the FHLB contain interest rate caps of 12% as part of the borrowing agreement. The effect of these interest rate cap transactions is not factored into the determination of interest rate adjustments provided in the table above. The Company has entered into interest rate swaps with the FHLB for $45,000,000 of FHLB advances and with an investment banking firm for $20,000,000 of FHLB advances to convert the fixed rate on long-term FHLB advances to semi-annual adjustable liabilities. Under these swaps, the Company has collected and recorded as a reduction in interest expense on borrowings $3,151,000 in 1993, $2,562,000 in 1992 and $1,227,000 in 1991. The availability of long-term, adjustable rate FHLB advances, with a weighted average maturity of 12 years at December 31, 1993, reduces the repricing volatility in the Company's balance sheet and the Company's dependence upon retail deposits, which generally have a shorter maturity than the contractual life of mortgage loans. The Company will continue to consider the utilization of FHLB advances as an integral part of its asset and liability management program. Additionally, in January 1992, the Company entered into $50,000,000 of interest rate swaps with the FHLB and a commercial bank to fix the cost of certain adjustable rate borrowings at an average rate of 4.90% for a period which ended in July 1993. Under these swaps, the Company paid and recorded as an increase in interest expense on borrowings $442,000 in 1993 and $501,000 in 1992. The Company is exposed to credit and market losses if the counterparties to its interest rate cap and swap agreements fail to perform; however, the Company does not anticipate such nonperformance. FIRST REPUBLIC AND SUBSIDIARIES First Republic was incorporated in February 1985. First Republic, which owns all of the capital stock of First Thrift, First Republic Savings Bank, and First Republic Mortgage, Inc., provides executive management to each of its subsidiaries and formulates and directs the implementation of an integrated business strategy for the Company. First Republic is also directly engaged in the mortgage lending, originating and servicing businesses. 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. 12 On December 31, 1985, First Republic acquired, for $1.00, all of the outstanding capital stock of a California-chartered thrift and loan company, which was subsequently named First Republic Thrift & Loan of San Diego. At the time of the acquisition, First Republic Thrift & Loan of San Diego was operating at a loss, had a regulatory capital deficiency of approximately $3,000,000 and had a significant amount of delinquent net receivables. On December 31, 1991, pursuant to regulatory approval obtained from the FDIC and the Commissioner of Corporations of the State of California, the Company effected a combination of its two California thrifts by the merger of First Republic Thrift & Loan of San Diego into 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. It is expected that upon approval by FHA/VA and other governmental agencies, all permanent single family lending and related employees will be transferred from First Republic Mortgage Inc. 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. It continues to be an approved FHA-insured and VA guaranteed lender for permanent mortgage loans on single family homes. Upon receipt of all governmental agency approvals, First Republic intends to transfer in 1994 the remaining employees of First Republic Mortgage Inc. to First Republic Savings Bank and, ultimately, to dissolve First Republic Mortgage Inc. 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. 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, especially during a declining period of mortgage loan originations could in the future result in a decrease in the Company's mortgage loan origination volume and/or 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 may 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 13 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, effective January 1, 1994, this limitation 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. Effective January 1, 1994, 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 14 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. After January 1, 1994, any loan guaranteed or insured by a federal or state agency is deemed to have a term less than seven years. At December 31, 1993, 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, 1993. 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 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. Effective January 1, 1991, the California Industrial Loan Law allowed 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. 15 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. On August 6, 1992, First Thrift entered into a Memorandum of Understanding (the "Memorandum") with the FDIC regarding certain concerns arising out of the FDIC's 1992 examination of First Thrift, primarily related to the rapid loan growth of First Thrift. First Thrift agreed to limit its net loan growth, excluding loans held for resale in the secondary markets, to not more than 2.5% in any one calendar quarter, beginning with the quarter that began on October 1, 1992, to enhance certain operating policies and 16 procedures, including its internal asset review practice, and to provide certain reports to the FDIC. In May 1993, the FDIC rescinded in full the Memorandum. In the last half of 1992 and in 1993, the Company took actions to meet the requirements of the Memorandum. The Company has always functioned partially as a balance sheet lender and partially as a mortgage banker, which sells loans to investors and retains servicing. An increased emphasis was placed on mortgage banking activity, continuing a trend already begun in early 1992. In 1992, the Company shifted its new loan originations primarily towards single family mortgages at a time when demand for loans in the secondary market was high. In 1992, the Company sold $373,551,000 of loans to secondary market investors, including $132,974,000 of adjustable rate mortgages which generally met the Company's underwriting and pricing criteria for retention on its balance sheet. In 1993, the Company sold $425,475,000 of loans, including $85,822,000 of ARMs. First Thrift also took steps to enhance 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 onand 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, 1993, the Tier 2 capital of First Thrift consisted of $15,000,000 of capital notes issued to First Republic and its allowance for loan losses. 17 The following table presents First Thrift's regulatory capital position at December, 1993 under the risk-based capital guidelines:
PERCENT OF RISK-ADJUSTED AMOUNT ASSETS -------- ------------- (IN THOUSANDS) RISK-BASED CAPITAL GUIDELINES: Tier 1 capital..................................... $119,396 12.00% Minimum requirement................................ 39,788 4.00 -------- Excess........................................... $ 79,608 ======== Total capital...................................... $146,830 14.76% Minimum requirement................................ 79,576 8.00 -------- Excess........................................... $ 67,254 ======== Risk-adjusted assets............................... $994,704 ========
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, 1993:
PERCENT AMOUNT OF ASSETS ---------- --------- (IN THOUSANDS) LEVERAGE RATIO: Tier 1 capital....................................... $ 119,396 8.88% Minimum requirement.................................. 53,782 4.00 ---------- Excess............................................. $ 65,614 ========== Average total assets................................. $1,344,550 ==========
Subsequent to the acquisition of First Republic Savings Bank and prior to December 31, 1993, First Republic contributed additional capital, resulting in Tier 1 and total capital of that entity equaling $5.1 million on a total asset base of $5.9 million. At December 31, 1993, 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 will be required to pay insurance premiums to the FDIC for the first six months of 1994 will be 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 18 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 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, 1993, First Thrift could have paid additional dividends aggregating approximately $9,400,000. 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 thirft 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 19 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 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 the next 15 years, also to be financed by insurance premiums. The result of these provisions 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 will be charged anywhere from 23 cents to 31 cents for every $100 in insured domestic deposits, based on such institutions' capital levels and supervisory ratings. The FDIC adopted amendments to this assessment system which become effective with the assessment period commencing January 1, 1994 which makes limited changes to the transitional risk-based system. 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 until the permanent system becomes effective in 1994. 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 effect on the Company and First Thrift of these new guidelines was to reduce total risk adjusted assets by approximately $65 million at December 31, 1993 and to increase their total capital ratios by approximately 1.06% and 0.89%, 20 respectively. 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, 1993. 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 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 21 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, 1993, the Company had 148 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. 22 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. Beginning with the purchase of tax exempt securities in 1989, 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.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------- 1993 1992 1991 --------------------------- --------------------------- ------------------------- AVERAGE YIELDS/ AVERAGE YIELDS/ AVERAGE YIELDS/ BALANCE INTEREST RATES BALANCE INTEREST RATES BALANCE INTEREST RATES ---------- -------- ------- ---------- -------- ------- -------- -------- ------- (IN THOUSANDS) ASSETS: Interest-earning deposits with other institutions........... $ 646 $ 38 5.88% $ 899 $ 55 6.12% $ 1,671 $ 135 8.08% Short-term investments.. 46,977 1,590 3.38 49,621 1,801 3.63 14,930 1,031 6.91 Investment securities... 74,160 3,541 4.77 50,100 1,905 3.80 59,939 4,698 7.84 Loans................... 1,154,680 93,212 8.07 1,008,783 91,828 9.10 700,917 76,766 10.95 ---------- ------- ---------- ----- -------- ------- Total interest-earning assets............. 1,276,463 98,381 7.71 1,109,403 95,589 8.62 777,457 82,630 10.63 ------- ------- ------- Noninterest-earning assets.................. 11,609 1,941 7,388 ---------- ---------- -------- Total average assets.. $1,288,072 $1,111,344 $784,845 ========== ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Passbooks............... $ 118,335 $ 3,803 3.21% $ 103,140 $ 3,902 3.78% $ 82,259 $ 4,828 5.87% Investment certificates. 597,221 31,516 5.28 573,642 35,734 6.23 483,454 37,853 7.83 ---------- ------- ---------- ------- -------- ------- Total thrift certificates....... 715,556 35,319 4.94 676,782 39,636 5.86 565,713 42,681 7.54 Other borrowings........ 406,917 16,362 4.02 306,853 15,083 4.92 141,529 9,917 7.01 Subordinated debentures. 57,088 5,237 9.17 35,061 4,257 12.14 24,973 3,239 12.97 ---------- ------- ---------- ------- -------- ------- Total interest-bearing liabilities........ 1,179,561 56,918 4.83 1,018,696 58,976 5.79 732,215 55,837 7.63 ------- ------- ------- Noninterest-bearing liabilities............. 10,195 9,238 9,055 Stockholders' equity.... 98,316 83,410 43,575 ---------- ---------- -------- Total average liabilities and stockholders' equity............. $1,288,072 $1,111,344 $784,845 ========== ========== ======== Net interest spread (1). 2.88% 2.83% 3.00% Net interest income and net interest margin (2).................... $41,463 3.25% $36,613 3.30% $26,793 3.45% ======= ======= =======
- -------- (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. 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. 23 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.
1993 VS. 1992 1992 VS. 1991 ----------------------- ------------------------ VOLUME RATE TOTAL VOLUME RATE TOTAL ------ ------- ------ ------- ------- ------ (IN THOUSANDS) INCREASE (DECREASE) IN INTEREST INCOME: Interest-earning deposits with other institutions..... $ (15) $ (2) $ (17) $ (51) $ (29) $ (80) Short-term investments...... (92) (119) (211) 1,901 (1,131) 770 Investment securities....... 1,059 577 1,636 (709) (2,084) (2,793) Loans....................... 12,529 (11,145) 1,384 30,300 (15,238) 15,062 ------ ------- ------ ------- ------- ------ Total increase (decrease). 13,481 (10,689) 2,792 31,441 (18,482) 12,959 ------ ------- ------ ------- ------- ------ INCREASE (DECREASE) IN INTEREST EXPENSE: Passbooks................... 538 (637) (99) 1,109 (2,035) (926) Investment certificates..... 1,422 (5,640) (4,218) 6,514 (8,633) (2,119) Other borrowings............ 4,461 (3,182) 1,279 9,652 (4,486) 5,166 Subordinated debentures..... 2,319 (1,339) 980 1,241 (223) 1,018 ------ ------- ------ ------- ------- ------ Total increase (decrease). 8,740 (10,798) (2,058) 18,516 (15,377) 3,139 ------ ------- ------ ------- ------- ------ Increase in net interest income...................... $4,741 $ 109 $4,850 $12,925 $(3,105) $9,820 ====== ======= ====== ======= ======= ======
Types of Loans The following table sets forth by category the total loan portfolio of the Company at the dates indicated:
DECEMBER 31, ---------------------------------------------------- 1993 1992 1991 1990 1989 ---------- ---------- -------- -------- -------- (IN THOUSANDS) LOANS: Single family (1-4 units)................... $ 577,276 $ 375,757 $270,655 $177,236 $137,898 Multifamily (5+ units)... 387,757 405,399 325,075 219,898 117,200 Commercial real estate... 229,914 204,611 209,121 156,606 131,048 Multifamily construction. 5,707 19,574 19,717 10,510 1,984 Single family construction............. 14,512 14,703 6,912 5,140 -- Home equity credit lines. 31,213 35,255 23,755 13,137 4,712 ---------- ---------- -------- -------- -------- Real estate mortgages subtotal.............. 1,246,379 1,055,299 855,235 582,527 392,842 Commercial business and other.................... 9,679 12,486 16,382 17,976 16,092 ---------- ---------- -------- -------- -------- Total loans............ 1,256,058 1,067,785 871,617 600,503 408,934 Unearned fee income...... (9,406) (12,621) (11,550) (4,606) (2,081) Reserve for possible losses................... (12,657) (12,686) (11,663) (5,254) (2,659) ---------- ---------- -------- -------- -------- Loans, net............. $1,233,995 $1,042,478 $848,404 $590,643 $404,194 ========== ========== ======== ======== ========
24 The following table shows the maturity distribution of the Company's real estate construction loans and commercial business loans outstanding as of December 31, 1993, which, based on remaining scheduled repayments of principal, were due within the periods indicated. All such loans are adjustable rate in nature.
AFTER ONE MORE THAN WITHIN BUT WITHIN FIVE ONE YEAR FIVE YEARS YEARS TOTAL -------- ---------- --------- ------- (IN THOUSANDS) MATURITY DISTRIBUTION: Real estate construction loans...... $20,219 $ -- $-- $20,219 Commercial business loans........... 591 7,350 405 8,346 ------- ------ ---- ------- Total............................. $20,810 $7,350 $405 $28,565 ======= ====== ==== =======
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, management deems a loan to be an in- substance foreclosure, or the Company takes possession of the collateral. Real estate collateral obtained by the Company or deemed to be foreclosed in substance is collectively referred to as "REO." Since the inception of operations in 1985 through December 31, 1993, the Company has originated approximately $3.6 billion of loans both for sale and retention in its loan portfolio, on which the Company has experienced $14.6 million of losses, primarily as a result of the economic recession which has affected the California economy commencing in late 1990 and continue in parts of the state through 1993. Currently management of the Company believes that the adverse effects of the recession are substantially diminished in the San Francisco Bay Area, while the effects of the recession are more severe on the Company's loans in the Los Angeles area. The Company's loss experience since inception represents an aggregate total of 0.40% of loans originated in over eight years. The Company has experienced a higher level of chargeoffs during 1991, 1992 and 1993 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 0.30% for 1991, 0.74% for 1992 and 0.44% for 1993. The Company recorded REO costs and losses related to the disposition of delinquent loans totaling $3,477,000 in 1993; such costs increased from $309,000 in 1992 and $330,000 in 1991 because substantially all of these costs were reflected as chargeoffs against the Company's loss reserves prior to 1993. 25 The Company's general policy is to attempt to resolve problem assets quickly and to sell such problem assets when acquired as rapidly as possible at prices available in the prevailing market. The 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, ------------------------------------- 1993 1992 1991 1990 1989 ------- ------- ------- ---- ---- (IN THOUSANDS) NONACCRUING ASSETS AND OTHER LOANS: Single family........................... $ -- $ -- $ -- $-- $-- Multifamily............................. 6,740 3,894 3,525 -- -- Commercial real estate.................. 4,862 5,524 9,674 768 -- Other................................... 16 140 -- -- 78 Real estate owned ("REO")............... 9,961 8,937 -- -- -- ------- ------- ------- ---- ---- Nonaccruing loans and REO............. 21,579 18,495 13,199 768 78 Nonaccruing investments................. 361 469 800 -- -- ------- ------- ------- ---- ---- Total nonaccruing assets.............. 21,940 18,964 13,999 768 78 Restructured performing loans........... 6,342 3,366 3,366 -- -- ------- ------- ------- ---- ---- Total nonaccruing assets and restructured performing loans...... $28,282 $22,330 $17,365 $768 $ 78 ======= ======= ======= ==== ==== Accruing single family loans more than 90 days past due....................... $ 1,390 $ 3,541 $ 2,880 $-- $-- ======= ======= ======= ==== ==== PERCENT OF TOTAL ASSETS: All nonaccruing assets.................. 1.55% 1.54% 1.50% 0.11% 0.02% Nonaccruing assets and restructured performing loans....................... 2.00% 1.81% 1.86% 0.11% 0.02%
In February 1993, the Company restructured the terms of a $6,258,000 first trust deed loan secured by a 208 unit multifamily complex in Los Angeles. This loan was made by the Company in connection with the REO sale of the property by the Company to the borrower in March 1992 for $7,000,000. In order to facilitate the stabilization of the occupancy level at monthly rents appropriate for long-term tenants, the Company agreed to reduce the interest rate on its adjustable rate loan for a two year period. At December 31, 1993, there were no other loans that constituted troubled debt restructurings as defined in Statement of Financial Accounting Standards No. 15. The Company resolves problem assets by restructuring a loan when it determines the benefits of such a workout exeed the value of any concessions granted, it believes the borrower is committed to the terms of the new loan and it believes a successful outcome is likely. 26 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, ---------------------------------------------------- 1993 1992 1991 1990 1989 ---------- ---------- -------- -------- -------- (IN THOUSANDS) RESERVE FOR POSSIBLE LOSSES: Balance beginning of period.................. $ 12,686 $ 11,663 $ 5,254 $ 2,659 $ 1,964 Provision charged to expense: Regular reserve....... 806 1,649 921 963 680 Recession reserve..... 4,000 6,413 5,320 1,754 -- Reserve from purchased loans................... 200 466 2,240 -- -- Reserve of First Republic Savings Bank at acquisition......... 24 -- -- -- -- Chargeoffs on originated loans: Single family......... (209) (328) (259) -- -- Multifamily........... (3,367) (3,961) (706) (139) -- Commercial real estate................ (1,547) (3,750) (1,001) -- -- Commercial business loans................ (76) (213) (186) (21) -- Recoveries on originated loans: Single family......... -- 50 -- -- -- Multifamily........... -- 5 10 -- -- Commercial real estate................ 92 654 -- -- -- Commercial business loans................ 43 12 4 -- -- Acquired loans: Chargeoffs............ -- -- (16) (174) (291) Recoveries............ 5 26 82 212 306 ---------- ---------- -------- -------- -------- Total chargeoffs, net of recoveries............ (5,059) (7,505) (2,072) (122) 15 ---------- ---------- -------- -------- -------- Balance end of period... $ 12,657 $ 12,686 $ 11,663 $ 5,254 $ 2,659 ========== ========== ======== ======== ======== Average loans for the period................ $1,154,680 $1,008,783 $700,917 $491,295 $310,097 Total loans at period end................... 1,233,955 1,067,785 871,617 600,503 408,934 Ratios of reserve to: Total loans........... 1.01% 1.19% 1.34% 0.87% 0.65% Nonaccruing loans..... 109% 133% 88% 684% 3,409% Nonaccruing assets and restructured performing loans... 45% 57% 67% 684% 3,409% Net chargeoffs to average loans........... 0.44% 0.74% 0.30% 0.04% (0.01)%
All chargeoff and recovery transactions during 1989 in the table above resulted only from loans acquired in a transaction occurring in 1985. The Company's reserve for possible losses is maintained at a level estimated by management to be adequate to provide for losses that can be reasonably anticipated based upon specific conditions as determined by management, historical loan loss experience, the results of the Company's ongoing loan grading process, the amount of past due and nonperforming loans, observations of auditors, legal requirements, recommendations or 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 109% at December 31, 1993 and 133% at December 31, 1992. While this ratio declined, management considers the $12,657,000 reserve at December 31, 1993 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. 27 The adequacy of the Company's total reserves is reviewed quarterly. Management closely monitors all past due loans in assessing the adequacy of its total reserves. In addition, the Company has instituted procedures for reviewing and grading 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 currently anticipates that it will continue to provide additional recession reserves so long as, in its judgement, the effects of the recessionary conditions on its assets continue. When management determines that the effects of the recessionary conditions have diminished, management currently anticipates that it would reduce or eliminate such future provisions to the recession reserve, although the Company may continue to maintain total reserves at a level higher than existed prior to this recession. Management does not intend to increase earnings in future periods by reversing amounts in the recession reserve. 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, ------------------------------------------------------------------------- 1993 1992 1991 1990 1989 ------------- ------------- ------------- ------------- ------------- 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........... $ -- 46.0% $ -- 35.2% $ -- 31.0% $ -- 29.5% $ -- 33.7% Multifamily............. 2,600 30.9 1,700 38.0 1,325 37.3 -- 36.6 -- 28.7 Commercial real estate.. 1,300 18.3 2,000 19.2 1,725 24.0 -- 26.1 -- 32.0 Multifamily construction............ -- 0.4 -- 1.8 -- 2.3 -- 1.7 -- 0.5 Single family construction............ -- 1.1 -- 1.4 -- 0.8 -- 0.9 -- 0.0 Home equity credit lines................... -- 2.5 -- 3.3 -- 2.7 -- 2.2 -- 1.2 Other loans............. -- 0.8 100 1.1 200 1.9 -- 3.0 150 3.9 Unallocated recession reserve................. 1,204 -- 2,212 -- 3,469 -- 1,754 -- -- -- Unallocated regular reserve................. 7,553 -- 6,674 -- 4,944 -- 3,500 -- 2,509 -- ------- ----- ------- ----- ------- ----- ------ ----- ------ ----- $12,657 100.0% $12,686 100.0% $11,663 100.0% $5,254 100.0% $2,659 100.0% ======= ===== ======= ===== ======= ===== ====== ===== ====== =====
At December 31, 1993, management had allocated from its recession reserve $2,600,000 to the multifamily loan category and $1,300,000 to the commercial real estate loan category, 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. Event Subsequent to December 31, 1993 On January 17, 1994, the greater Los Angeles area experienced an earthquake which caused significant damage to the freeway system and real estate throughout the area. Some of the Company's borrowers were adversely affected by this event, with direct property damage or loss of tenants, or are expected to be affected in the future as a result of lower rental revenues or further economic difficulties. First Republic is currently working with those borrowers who have been identified to assist them with obtaining available disaster relief funding or to assist them by modifying the terms of loans. Such loan modifications may defer the timing of payments, reduce the rate of interest collected or possibly lower the principal balance. As of March 18, 1994, approximately $35 million of the Company's loans, secured primarily by larger multifamily properties, appeared to be adversely impacted by the earthquake. Based upon the Company's best estimate as of such 28 date of damage or related economic impact to borrowers and their properties, a special loan valuation reserve of $4,000,000 will be provided in the quarter ended March 31, 1994. Because of this earthquake, management of the Company expects the level of loan delinquencies and REO to increase during 1994 as problems related to this natural disaster are addressed and resolved. FINANCIAL RATIOS The following table shows certain key financial ratios for the Company for the periods indicated.
YEAR ENDING DECEMBER 31, -------------------------- 1993 1992 1991 -------- -------- -------- KEY FINANCIAL RATIOS: Return on average total assets................... 0.97% 1.06% 0.96% Return on average shareholders' equity........... 12.65% 14.10% 17.22% Average stockholders' equity as a percentage of average total assets............................. 7.63% 7.51% 5.55%
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 April 1994 to December 2002:
NAME ADDRESS ---- ------- First Thrift................ 101 Pine Street, San Francisco, CA 5628 Geary Boulevard, San Francisco, CA 1088 Stockton Street, San Francisco (opened January 18, 1994) 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 (opened January 18, 1994) First Republic Mortgage Inc......................... 2510 South Maryland Parkway, Las Vegas, LV
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, 1993. 29 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS This information is incorporated by reference to page 44 of the Company's Annual Report to Stockholders for the year ended December 31, 1993. 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, 1993. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information is incorporated by reference to pages 34 through 41 of the Company's Annual Report to Stockholders for the year ended December 31, 1993. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This information is incorporated by reference to pages 20 through 33 and to page 44 of the Company's Annual Report to Stockholders for the year ended December 31, 1993. 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. 30 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) 58 Chairman of the Board James H. Herbert, II(1) 49 President, Chief Executive Officer and Director Katherine August(1) 46 Executive Vice President and Director Willis H. Newton, Jr. 44 Senior Vice President and Chief Financial Officer Linda G. Moulds 43 Vice President, Secretary and Controller Christina L. Coulston 46 Vice President, Loan Administration Edward J. Dobranski 43 Vice President, Corporate Counsel David B. Lichtman 30 Vice President, Credit Administration Richard M. Cox-Johnson 59 Director Kenneth W. Dougherty 67 Director Frank J. Fahrenkopf, Jr. 54 Director L. Martin Gibbs(2) 56 Director James F. Joy(2) 56 Director John F. Mangan 57 Director Barrant V. Merrill(2)(3) 63 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 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 has served as an officer since July 1985 and as a director since April of 1988, while Ms. Moulds has served as an officer since June 1985. Mr. Newton became an officer of First Republic in August 1988 and Ms. Coulston became an officer in 1990. 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 1994. 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. 31 James H. Herbert, II is President, Chief Executive Officer and a director of First Republic, serving until 1994, 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 of, a director of and a Legislative Committee member 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. Katherine August 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. Christina L. Coulston has been Vice President, Loan Administration at First Republic since July 1989. From 1985 to June 1989, she was in charge of the loan servicing function for Atlantic Financial Savings. She is a graduate of Oregon State University B.S., 1969. Edward J. Dobranski joined the company in August 1992 as Corporate 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 Administration, 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. He was President of Gill & Duffus International Inc. from November 1981 to May 1984, and was an executive of Farr Man & Co., Inc. prior to that, serving as President of that corporation from 1978 to 1981. Both Gill & Duffus and Farr Man & Co. 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 Washington, D.C. 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 has been a partner with the law firm of Rogers & Wells, counsel to the Company, since November 1987. For the five years prior to 32 joining Rogers & Wells, Mr. Gibbs was the President and sole stockholder of a professional corporation which was a partner in the law firm of Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey ("Finley Kumble"). Finley Kumble rendered legal services to the Company from 1985 to 1987. 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 1994. Mr. Joy is Director--European Business Development--CVC Capital Partners-Europe, and a non-executive director of Sylvania Lighting International. Formerly, he was Chairman of Real Estate Research Corporation, President of Stanger Joy Associates, financial consultants, and Vice-President--Corporate Finance at Thomson McKinnon Securities, Inc. In May 1989, Mr. Joy filed a petition under Chapter 11 of the U.S. Bankruptcy Code and in 1990, on consent of all parties, the court dismissed the case. 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 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 1994. 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. 33 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, 1993 and 1992: Consolidated Balance Sheet...................................... 20 Years ended December 31, 1993, 1992 and 1991: 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.................................... 33
All schedules are omitted as not applicable. (b) Reports on Form 8-K. The Company filed a report dated October 20, 1993 on Form 8-K reporting the Company's earnings for the quarter and nine months ended September 30, 1993. The Company filed a report dated February 7, 1994 on Form 8-K reporting the Company's earnings for the quarter and year ended December 31, 1993, and the declaration of a 3% stock dividend to stockholders of record on February 18, 1994. The Company filed a report dated March 18, 1994 on Form 8-K reporting the impact on the Company's earnings from the January 17, 1994 earthquake in the Los Angeles, California area. (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 (q) are incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1988; Exhibits marked with two diamonds (qq) are incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1989; Exhibits marked with three diamonds (qqq) 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 (-) are incorporated by reference to the Registrant's Registration Statement on Form S-3 (No. 33-60958). Exhibits marked with two daggers (--) 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. 34 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) 10.3** 1985 Stock Option Plan. (10.3) 10.4+ Employment offers of James H. Herbert, II, Katherine August, 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) 10.8q Employment offer of Willis H. Newton, Jr. (10.37) 10.9q Term Loan Agreement between the Registrant and Imperial Bank. (10.38) 10.10q 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) 10.11q 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) 10.12q 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) 10.13q Secured Promissory Note dated November 22, 1988 of First Republic Bancorp Inc. Employee Stock Ownership Trust in favor of the Registrant. (10.42) 10.14qq 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) 10.15qq Lease Agreement dated January 5, 1990 between the Registrant and Honorway Investment Corporation. (10.45) 10.16qqq 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)
35 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# Agreement of Merger dated as of October 8, 1991 between First Republic Thrift & Loan of San Diego and First Republic Thrift & Loan. (10.35) 10.20### 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) 10.21### Form of Performance-Based Contingent Stock Option Agreement. (10.35) 10.22#### 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 1993 Annual Report to Stockholders 22.1 Subsidiaries of First Republic Bancorp Inc. 23.1 Consent of KPMG Peat Marwick (see page II-7).
36 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 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 30, 1994 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Roger O. Walther - ------------------------------------ (Roger O. Walther) Chairman of the Board March 28, 1994 /s/ James H. Herbert, II - ------------------------------------ (James H. Herbert, II) President, Chief Executive Officer and Director March 30, 1994 /s/ Katherine August - ------------------------------------ (Katherine August) Executive Vice President and Director March 30, 1994 /s/ Willis H. Newton, Jr. - ------------------------------------ (Willis H. Newton, Jr.) Senior Vice President and Chief Financial Officer (Principal Financial Officer) March 30, 1994 /s/ Linda G. Moulds - ------------------------------------ (Linda G. Moulds) Vice President, Secretary and Controller (Principal Accounting Officer) March 30, 1994 /s/ Richard M. Cox-Johnson - ------------------------------------ (Richard M. Cox-Johnson) Director March 28, 1994 /s/ Kenneth W. Dougherty - ------------------------------------ (Kenneth W. Dougherty) Director March 30, 1994 /s/ Frank J. Fahrenkopf, Jr. - ------------------------------------ (Frank J. Fahrenkopf, Jr.) Director March 28, 1994
37
SIGNATURE TITLE DATE --------- ----- ---- /s/ L. Martin Gibbs - ------------------------------------ (L. Martin Gibbs) Director March 28, 1994 /s/ James F. Joy - ------------------------------------ (James F. Joy) Director March 28, 1994 /s/ John F. Mangan - ------------------------------------ (John F. Mangan) Director March 25, 1994 /s/ Barrant V. Merrill - ------------------------------------ (Barrant V. Merrill) Director March 25, 1994
38 FIRST REPUBLIC BANCORP INC. 1993 ANNUAL REPORT EDGAR VERSION DESCRIPTION OF PHOTOS AND GRAPHS COVER PAGE: Photos are presented of landmarks in the Company's four geographical operating markets -San Francisco, San Diego and Los Angeles, California and Las Vegas, Nevada. INSIDE FRONT COVER: Three graphs are presented as follows, left to right: 1) Net income for the last five years in millions of dollars, as included in the table above. 2) Total assets in millions of dollars as presented in the table above. 3) Total capital in millions of dollars for the past five years, which was $52 million at the end of 1989, $62 million at the end of 1990, $104 million at the end of 1991, $160 million at the end of 1992 and $179 million at the end of 1993. PAGE 2: A bar chart is presented, representing the tangible book value per share of the Company's common stock for the past five years, which was $7.11 at the end of 1989, $7.71 at the end of 1990, $9.59 at the end of 1991, $11.94 at the end of 1992 and $13.58 at the end of 1993. This chart represents a plus 16% per annum rate of growth for the past five years. PAGE 3: A photo is presented of the Company's President and Chief Executive Officer and the Company's Chairman of the Board of Directors. PAGE 5: A bar chart is presented, representing the Company's return on equity as a percent of average equity for the past five years, which was 4.7% for 1989, 12.8% for 1990, 17.2% for 1991, 14.1% for 1992 and 12.7% for 1993. PAGE 6: A bar chart is presented, representing the Company's risk adjusted capital ratios in comparison with the minimum required amount. First Republic is shown as having 17.6% total risk adjusted capital, compared to 8.0% required. PAGE 7: A photo is presented, representing a street scene in the Chinatown District of San Francisco, California, where the Company maintains a branch, plus a smaller picture of a depositor, Dr. Godwin S. Wong, who was quoted on page 6 and materials used in the retail deposit gathering function of the Company. First Republic Bancorp Inc. 1993 Annual Report Edgar Version Page 2 PAGE 8 AND CARRY OVER TO PAGE 9: A photo appears here of the Company's Vice President of Savings and some of her customers. Additionally, small photos of the three of the Company's branch locations are included. PAGE 10: A bar chart appears, representing loans originated in dollars (millions) for the last five years, which were $324 million in 1989, $341 million in 1990, $445 million in 1991, $826 million in 1992 and $945 million 1993. PAGE 11: A photo appears, representing one of the Company's mortgage loan borrowers, Mr. Barry Bonds of the San Francisco Giants baseball team, who was quoted on page 10. Mr. Bonds appears in his home. Additionally, there is a smaller photo of Mr. Bonds on a baseball card and a mortgage loan advertisement for the Company. PAGE 12: A bar chart appears here, representing the Company's loan service for others in dollars (million) at the end of the last five years, which was $426 million at the end of 1989, $797 million at the end of 1990, $795 million at the end of 1991, $782 million at the end of 1992 and $814 million at the end of 1993. PAGE 13: Photo appears on page 13 with carryover to page 12. One of the Company's borrowers, Mr. Lenore Conroy, is pictured in front of her home with the family dog. Additionally, small photos appear of her husband and author, Mr. Pat Conroy, and the cover of his novel, The Prince of Tides. PAGE 14: A pie chart appears, representing the composition of the Company's loan portfolio at December 31, 1993, which was 48% secured by single family residences, 31% secured by multifamily properties, 18% secured by commercial real estate properties and 3% related to other types of loans. PAGE 15: A photo appears of a single family residential housing tract under construction, along with a smaller photo of a family of one of the Company's borrowers who is quoted on page 14. Additionally, there is a photo representing an advertisement by Federal National Mortgage Association. First Republic Bancorp Inc. 1993 Annual Report Edgar Version Page 3 PAGE 16: A photo appears here and carries over to page 17, depicting one of the Company's borrowers in front of his low to moderate income apartment building with several of his tenants. Additionally, smaller photos are presented of the property and the First Republic Thrift & Loan Fair Lending Statement. PAGE 17: A pie chart appears, representing the Company's residential loan profile by housing units. 63% of the Company's loans are located in low to moderate income census tracts, as measured by housing units, while 37% of the Company's loans are located in all other census tracts. PAGE 18: A bar chart appears, which represents the total loans in dollars (millions) at the end of the last five years, which was $409 million at the end of 1989, $601 million at the end of 1990, $872 million at the end of 1991, $1.068 billion at the end of 1992 and $1.256 billion at the end of 1993. PAGE 19: A photo appears here of a historic landmark building in San Francisco called The Flood Building. This property was renovated with the assistance of First Republic. Also included are small photos representing newspaper articles on the renovation and the owner-developer, Mr. James C. Flood, at the ribbon cutting ceremony with the mayor of San Francisco, Mr. Frank Jordan. PAGE 42: A photo appears here depicting the Company's Board of Directors as described in the caption below the photo, in front of a single family home in the process of construction by one of the Company's borrowers. PAGE 44: Three bar charts are presented, representing the following: 1. The left chart represents average assets per employee in dollars (millions) for the last five years, which were $6.0 million for 1989, $7.1 million for 1990, $8.3 million for 1991, $9.6 million for 1992 and $9.8 million for 1993. 2. The middle chart represents net income earned per employee in dollars (thousands), which was $15,000 for 1989, $44,000 for 1990, $79,000 for 1991, $101,000 for 1992, and $94,000 for 1993. First Republic Bancorp Inc. 1993 Annual Report Edgar Version Page 4 3. The right-hand chart represents the Company's trend in general and administrative expenses as a percent of average assets, which was 1.67% in 1989, 1.49% in 1990, 1.44% in 1991, 1.30% in 1992 and 1.33% in 1993. EX-11 2 COMPUTATION OF EARNINGS EXHIBIT 11.1 FIRST REPUBLIC BANCORP INC. STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 1993 1992 1991 1990 1989 ----------- ----------- ---------- ---------- ---------- Primary: Net Income............ $12,439,000 $11,762,000 $7,505,000 $3,804,000 $1,110,000 Less: Dividends on Series B Preferred Stock(1)................ -- -- (340,000) (224,000) -- ----------- ----------- ---------- ---------- ---------- Net income available to common stock......... 12,439,000 11,762,000 7,165,000 3,580,000 1,110,000 Effect of convertible subordinated debentures, net of taxes(2)............ 1,599,000 94,000 -- -- -- ----------- ----------- ---------- ---------- ---------- Adjusted net income for fully-diluted calculation............. $14,038,000 $11,856,000 $7,505,000 $3,804,000 $1,110,000 =========== =========== ========== ========== ========== Weighted average shares outstanding, excluding treasury shares.............. 7,716,086 7,340,523 3,998,403 3,284,526 3,284,526 Wtd. avg. shares issuable from Preferred Stock, Series A......... -- -- 260,725 297,150 297,150 Wtd. avg. shares issuable from Preferred Stock, Series C......... -- -- 32,854 30,410 -- Effect of stock options exercised during period.................. 7,472 33,667 7,718 32,590 -- Wtd. avg. shares of dilutive stock options under treasury stock method(3)........... 284,512 284,017 169,676 -- -- Wtd. avg. shares of stock purchased by employees............... 2,746 -- -- -- -- Wtd. avg. shares of treasury stock.......... (141) -- -- -- -- ----------- ----------- ---------- ---------- ---------- Adjusted shares outstanding--primary.... 8,010,675 7,691,061 4,466,932 3,614,266 3,581,676 =========== =========== ========== ========== ========== Net income per share-- primary................. $1.55 $1.53 $1.60 $0.99 $0.31 =========== =========== ========== ========== ========== Fully-Diluted: Adjusted shares-- primary, from above..... 8,010,675 7,691,061 4,466,932 3,614,266 3,581,676 Wtd. avg. shares issuable upon conversion of convertible subordinated debentures(2)....... 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)..... 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................. 10,567,800 7,832,484 5,077,931 3,994,135 3,581,676 =========== =========== ========== ========== ========== Net income per share-- fully-diluted........... $1.33 $1.51 $1.48 $0.95 $0.31 =========== =========== ========== ========== ==========
- -------- 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 prior to 1990 and 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 or 1989 as the average stock price was lower than the exercise price on options outstanding for those periods. (4) The result of the computation of the fully-dilutive impact of stock options outstanding is antidilutive in 1989 and 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 1993 and 1992, the quarter ending market price exceeded the average exercise price resulting in additional shares for the fully-diluted calculation. EX-12 3 RATIO OF EARNINGS EXHIBIT 12.1 FIRST REPUBLIC BANCORP INC. RATIO OF EARNINGS TO FIXED CHARGES
YEAR ENDED DECEMBER 31, --------------------------------------- 1993 1992 1991 1990 1989 ------- ------- ------- ------- ------- (IN THOUSANDS) Income before income taxes............. $21,399 $19,805 $12,546 $ 5,503 $ 1,761 ======= ======= ======= ======= ======= Add fixed charges, excluding interest on thrift accounts: Total interest on notes and debentures and other borrowing...... $21,599 $19,340 $13,156 $ 6,238 $ 3,819 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges excluding interest on thrift accounts. 1.99 2.02 1.95 1.88 1.46 Including interest on thrift accounts: Interest on thrift accounts.......... 35,318 39,636 42,681 44,234 33,801 ------- ------- ------- ------- ------- Total fixed charges including interest on thrift accounts......... $56,917 $58,976 $55,837 $50,472 $37,620 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges including interest on thrift accounts. 1.38 1.34 1.23 1.11 1.05
EX-13 4 ANNUAL REPORT [LOGO OF FIRST REPUBLIC BANCORP INC.] _______________________________________________________________________________ FIRST REPUBLIC BANCORP INC. 1993 ANNUAL REPORT [PHOTOS APPEAR HERE] ``FIRST REPUBLIC BANCORP ENDED ITS EIGHTH CONSECUTIVE YEAR OF STEADILY IMPROVED EARNINGS. TANGIBLE BOOK VALUE PER SHARE INCREASED 108% OVER THE PAST FIVE YEARS.'' FINANCIAL HIGHLIGHTS
AT YEAR END 1993 1992 1991 1990 1989 - ----------------------------- -------------- -------------- -------------- -------------- -------------- Total Assets $1,417,193,000 $1,232,517,000 $ 932,065,000 $706,160,000 $518,571,000 Cash and Investments 146,513,000 158,306,000 62,107,000 96,104,000 101,257,000 Loans, Net 1,233,995,000 1,042,478,000 848,404,000 590,643,000 404,194,000 Thrift Certificates 751,671,000 698,772,000 605,765,000 538,270,000 444,374,000 FHLB Advances 468,530,000 363,530,000 214,970,000 87,470,000 -- Subordinated Debentures 60,957,000 55,050,000 33,322,000 23,583,000 23,875,000 Stockholders' Equity 104,946,000 92,125,000 59,312,000 33,172,000 25,555,000 Loans Serviced For Others 814,453,000 781,561,000 794,893,000 796,583,000 426,138,000 Tangible Book Value Per Share $13.58 $11.94 $9.59 $7.71 $7.11 FOR THE YEAR 1993 1992 1991 1990 1989 - ----------------------------- -------------- -------------- -------------- -------------- -------------- Total Interest Income $ 98,347,000 $ 95,563,000 $ 82,583,000 $ 66,298,000 $ 46,049,000 Net Interest Income 41,430,000 36,587,000 26,746,000 15,826,000 8,429,000 Net Income $ 12,439,000 $ 11,762,000 $ 7,505,000 $ 3,804,000 $ 1,110,000 Average Fully-diluted Shares Outstanding 10,567,800 7,832,484 5,077,931 3,994,135 3,581,676 Fully-diluted Earnings Per Share $1.33 $1.51 $1.48 $.98 $.32 - ----------------------------- -------------- -------------- -------------- -------------- --------------
Stock Dividend: The Company declared a 3% common stock dividend to stockholders of record February 18, 1994. All share, per share and related financial information included in this Annual Report has been restated to give effect to this stock dividend. NET INCOME In $ Millions [ Net Income graph goes here ] TOTAL ASSETS In $ Millions [ Total Assets graph goes here ] TOTAL CAPITAL In $ Millions [ Total Capital graph goes here ] FIRST REPUBLIC CORPORATE PROFILE First Republic is a leading banking and mortgage banking institution serving four major urban markets - San Francisco, Los Angeles and San Diego, California and Las Vegas, Nevada. We are financially very 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 very strong capital position of 17.6% risk-based capital (over 220% of regulatory guidelines). - Old-fashioned personal customer service. - Extremely high quality, long-term personnel. - Specialized product lines. - Operating cost efficiency. - Competitive terms and rates. First Republic Bancorp Inc.'s stock is traded on the New York Stock Exchange under the symbol FRC. 1 STOCKHOLDERS' MESSAGE OUR STRONG CAPITAL POSITION ALLOWS US TO TAKE ADVANTAGE OF OPPORTUNITIES. Dear Stockholders: Despite the ongoing recession in California, we are pleased to report that First Republic had another successful year in 1993_our 8th year of consecutively improved profitability. We continued to build our balance sheet, increase our capital account, and improve asset quality. As part of our strategy of expanding our deposit-taking franchise, we also opened two new San Francisco branches and, near year end, acquired a deposit-taking, FDIC-insured thrift and loan in Las Vegas, Nevada, renamed First Republic Savings Bank. CAPITAL STRENGTH We believe that our solid performance in the face of continued weakness in our California markets is a favorable reflection upon our long-term, conservative, asset and capital strategies. First Republic adheres to a philosophy that places the utmost importance upon the safety and financial strength of the enterprise. During the early 1990's, when it was obvious that the country and California were experiencing a significant recession, we completed several financings to raise additional capital that would protect the Company through difficult times. These steps proved to be very sound, if in retrospect even a bit excessive. At year end 1993, our total risk-based capital was 17.6% of total assets_220% of regulatory requirements. 1993 OPERATING RESULTS At First Republic, we continue to work hard to maintain a consistent record of financial performance. Our delinquent assets have never exceeded 2.6% of total assets at the end of any quarter and equaled 1.55% at year end. In the context of the challenging economic environment in which we operated, let us review some of the key financial results for 1993: [BAR CHART] 2 Net earnings grew 6% to $12,439,000, or fully-diluted earnings per share of $1.33 on 35% more shares. Tangible book value per share was $13.58 at year end (after our recent stock dividend), a 14% increase during 1993. Tangible book value per share has increased 108% over the past five years or a compounded annual growth rate of 16%. Total assets reached $1,417,193,000, a 15% increase for the year. Loan originations increased to $944,796,000. Return on average equity was 12.7%. Deposit locations increased 50% to 9 from 6 a year ago. General and administrative expenses remained low at 1.33% of average assets. Assets per full-time employee averaged approximately $10,000,000. Profits per full-time employee were $94,200. [PHOTO APPEARS HERE] James H. Herbert, II President & CEO (left) Roger O. Walther, Chairman DEPOSIT FRANCHISE DEVELOPMENT We had targeted deposit franchise improvement as an area of opportunity for First Republic. In September 1993, we opened our first neighborhood deposit branch in San Francisco, on Geary Boulevard, which in its first months is proving to be quite successful. In early January 1994, we opened a second San Francisco neighborhood branch, in the city's Chinatown district, which we expect to be a significant savings branch over the long term. First Republic has been an active lender in Las Vegas, Nevada for several years but has not had deposit-taking capability in this rapidly growing market. In January 1994, we completed the conversion of the Nevada thrift and loan we acquired in late 1993 into First Republic Savings Bank. This establishes a full deposit-taking presence for us in Las Vegas and is proving quite successful. 3 STOCKHOLDERS' MESSAGE FIRST REPUBLIC THRIFT & LOAN HAS ACHIEVED OVER 109 CONSECUTIVELY PROFITABLE QUARTERS. During 1993, we expanded our use of Federal Home Loan Bank long-term advances to $468,530,000. These primarily adjustable rate advances have an average maturity of 12 years and are an attractively priced source of matched funds. A significant portion of these funds was used to continue our commitment to provide low- and moderate-income housing in our markets, making First Republic a disproportionately large user of such special advances. QUALITY OF ASSETS High asset quality, a continuous top priority at First Republic, remained satisfactory in 1993. In the face of the depressed real estate market and general economy in California, nonaccruing assets and real estate owned were only 1.55% of total assets at year end. At the end of 1993, reserves represented 1.01% of total loans and 109% of nonaccruing loans. Writedowns and chargeoffs during 1993 were primarily in our multifamily loan portfolios in Northern and Southern California. LOOKING AHEAD First Republic is well positioned financially and operationally to benefit from an economic recovery in our markets. Although it is difficult to predict the California economic outlook, we are encouraged by the steady turnaround of the national economy, which is slowly having a favorable effect upon California. As a result of the Northridge, California earthquake of January 17, 1994, approximately $35 million of our Southern California loans appear to be adversely impacted. Based on our current best estimate of damage or related economic impact to borrowers and their properties, we will provide a special loan valuation reserve of $4,000,000 during the quarter ending March 31, 1994. This provision is intended to maintain the integrity of our reserve level. 4 As a result of our strong capital position, we have been able to build our Company as many competing financial institutions have faltered. The banking industry will continue to consolidate both as a result of weaker institutions being eliminated and mergers and acquisitions_including the inevitable advance of interstate banking. In this environment, we believe that well-capitalized institutions with established customer franchises and clearly focused geographic and product strategies will prevail. First Republic is such an institution. In our letter to you last year, we stated that our objectives for 1993 were to gain market share in residential lending and build our retail deposit franchise. We accomplished both goals. Our plans for 1994 include expanding our deposit franchise by adding new customers; focusing on single family home loans, with a cautious reentry into multifamily and commercial mortgage lending; improving operating efficiencies and more fully utilize our substantial capital base through asset growth. We enter 1994 optimistic about the future of First Republic. Based upon the satisfactory results of 1993, the Board of Directors declared a 3% stock dividend payable to our stockholders of record as of February 18, 1994. 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 [BAR CHART] 5 SAFETY THROUGH CAPITAL STRENGTH FIRST REPUBLIC'S STRONG CAPITAL POSITION IS A VITAL SAFEGUARD FOR OUR CUSTOMERS' ASSETS. Serious savers are prudent savers. They want to bank with an institution whose safety and stability are unquestioned and they want to earn competitive rates on their deposits. At First Republic, we meet both these goals by combining capital strength and profitability_and we add a strong commitment to friendly, efficient customer service. First Republic has assets of more than $1.4 billion. And we have an exceptionally strong capital foundation with the seventh highest ratio of capital to risk-adjusted assets among the 50 largest financial institutions in California. At December 31, 1993, our risk-adjusted ratio was 17.6%, or more than 220% of regulatory guidelines. Deposits are FDIC-insured, an added measure of security and peace of mind. We maintain our strong capital position through prudent, conservative lending and by working hard to ensure that our activities, both lending and deposit-taking, are profitable. Through year end 1993, First Republic Thrift & Loan had 109 consecutive quarters of profitability. We are proud of this record_but not complacent_improving productivity and keeping costs low remain priorities. [BAR CHART] 6 [PHOTO APPEARS HERE] 7 ``I HAVE BEEN A STEADFAST FIRST REPUBLIC CUSTOMER FOR OVER 8 YEARS AND THEY HAVE HELPED ME INVEST IN THE FUTURE. I AM DELIGHTED TO SEE THEM BRINGING THEIR FRIENDLY SERVICE TO A GREATER NUMBER OF CUSTOMERS.'' Rosa Maria Rodriguez, Owner of Pepito's Northern California restaurants [PHOTO APPEARS HERE] 8 COMPETITIVE RATES WE OFFER THE PRODUCTS YOU NEED, THE RATES YOU DESERVE, CAPITAL STRENGTH AND A GROWING BRANCH NETWORK. Focusing on operating efficiency and profitability helps us pay competitive rates on customer deposits_safely. To our way of thinking, prudent expense management is compatible with a commitment to customer service. We concentrate only on a few products that are the most valuable to our customers. You won't find a First Republic branch on every corner, but you will find highly personalized service and a wide range of flexible, custom-tailored savings products_and no service charges. First Republic depositors can choose a term account that's right for them, with virtually any maturity date. We offer a competitive interest paying money market account with unlimited transactions, and in 1994, we'll introduce a limited check writing money market account. Expanding our deposit customer base is an increasingly important part of the First Republic strategy. We added many new customers during the past year. One reason was our decision last year to lower our minimum account size from $10,000 to $5,000. To better serve a broader diversity of customers, we have opened two new branch offices in San Francisco_one on Geary Boulevard and one in Chinatown. In January 1994, we opened an FDIC-insured deposit-taking institution, First Republic Savings Bank, in Las Vegas, Nevada. New and old customers benefit from the increased convenience of a larger branch network. [PHOTO APPEARS HERE] Carol Meek, Vice President Savings, (center) with her First Republic customers Curt Peterson, Lea Stublarec and their daughters Whitney & Hillary, Rosa Maria Rodriguez and Mr. and Mrs. Elliot Wolf. 9 EXTENSIVE EXPERIENCE IN HOME LENDING WE KNOW THE MARKETS WE SERVE, WE UNDERSTAND OUR BORROWERS' UNIQUE NEEDS AND OUR LENDING PROFESSIONALS DELIVER. We do best what we know best, and we have chosen our lending niches carefully, specializing in lending (for homes and multifamily units) in the urban areas of San Francisco, Los Angeles, and Las Vegas. The cornerstone of our lending philosophy is a keen understanding of and commitment to the markets we serve. The last several years have underscored how this focused approach_implemented by an experienced, professional team_translates into increased business and our position as a respected residential lender. Local market knowledge is key. It enables our bankers to accurately assess property values, serve customers and evaluate market dynamics. First Republic loan officers use their market expertise to evaluate every transaction. Moreover, a member of our executive loan team visits virtually every property before we make a loan_critical first hand input to the decision-making process and continued market knowledge. We work closely with our borrowing customers to understand their often unique needs and their credit and financial strength. Knowing our clients is the foundation of long-term relationships and helps us provide the outstanding customer service that is a First Republic hallmark. [BAR CHART] ``FIRST REPUBLIC GAVE US GREAT SERVICE, SAVING US TIME THAT WE CAN SPEND AT HOME WITH OUR FAMILY.'' Barry Bonds, San Francisco Giants 10 [PHOTOS APPEAR HERE] 11 MEETING THE COMPLEX NEEDS OF BORROWERS WE PROVIDE OBJECTIVE COUNSEL AND PERSONALIZED ATTENTION TO BORROWERS AT EVERY STAGE OF A TRANSACTION. Customer service is as important in lending as it is in deposit-taking. Our lending professionals serve as guides throughout the entire borrowing process. We respond to loan requests quickly and with a high level of individual attention. Beyond personal service, we provide a full array of loan products. We provide both fixed and adjustable loans, plus customized products to give customers even more flexibility_including bridge loans, blended mortgages and our First Line[TM] home equity credit line. For customers who prefer fixed-rate loans, First Republic is a major mortgage banker_an intermediary for investors. Last year we placed more than $425 million of mortgages for our customers with private and institutional investors. We work with delegated lending authority for extra promptness. We always retain the role of servicing the loans we place with investors and thus remain as your banker. Servicing a mortgage is critical to building ongoing relationships, and relationships are pivotal to our high level of repeat business and client referrals. Last year, for example, over 53% of our loan originations came from existing customers or their direct referrals. [PHOTO APPEARS HERE] [BAR CHART] 12 ``DISCREET, EFFICIENT AND THOROUGH_THAT'S HOW WE WOULD DESCRIBE OUR BANKERS AT FIRST REPUBLIC.'' Lenore Conroy and her husband Pat Conroy, author of The Prince of Tides and forthcoming novel Beach Music. [PHOTOS APPEAR HERE] 13 INVESTING IN THE COMMUNITIES WE SERVE MEETING THE CREDIT NEEDS OF LOW- AND MODERATE-INCOME NEIGHBORHOODS HAS LONG BEEN A VITAL PART OF OUR MISSION. Since our inception, First Republic has worked hard to meet the needs of our communities_particularly the challenge of providing affordable housing. We are an active provider of ``conforming'' single family mortgages (designed for first-time and moderate-income buyers) and a very significant lender for lowand moderate-income multifamily housing. Part of the challenge is to ensure that our lending standards are applied fairly and uniformly. All First Republic loan officers are trained and must comply with our written ``Fair Lending'' policy. In addition, our dedicated teams of professionals actively market our services in low- and moderate-income neighborhoods. We offer special first-time home buyer programs, lines of credit for home owners, and seismic upgrades to existing older buildings in more densely populated areas. First Republic is one of the largest users of the special Federal Home Loan Bank Community Investment Program, providing funds to creditworthy local builders, renovators, and housing developers in low- to moderate-income areas. We have financed the construction of 3,000 modestly priced homes and over 3,000 multifamily housing units in the Las Vegas, Nevada area. We were the first, and remain the largest, user of the FHLB Community Rebuilding Funds to reconstruct parts of central Los Angeles. [PIE CHART] ``OWNING A HOME IS PART OF THE AMERICAN DREAM. THANKS TO FIRST REPUBLIC, THAT DREAM IS A REALITY FOR US.'' Mr. and Mrs. Antonio Martinez with their children, Antonio Jr. and Daniela. 14 [PHOTOS APPEAR HERE] 15 ``FIRST REPUBLIC SHARES MY COMMITMENT TO THE COMMUNITY AND HELPED ME FIND AN INNOVATIVE FINANCING SOLUTION.'' Louis Gage, San Francisco apartment owner Louis Gage (far right) and some of his family of tenants, Mr. Robert Baldwin (left), Ms. Gertie Crayton and daughter Denise, and Mrs. Jessie Godine (right). [PHOTO APPEARS HERE] 16 SUPPORTING HIGH QUALITY AFFORDABLE HOUSING FIRST REPUBLIC ACTIVELY SUPPORTS CLEAN, SAFE AND AFFORDABLE HOUSING. When lending to owners and developers of low- and moderate-income housing, our goal is not merely to increase the number of units available but to increase housing quality as well. At December 31, 1993, First Republic held millions of dollars of loans secured by low- to moderate-income apartment buildings, representing 63% of all of our residential loans by housing units. To make sure our investments are working hard to benefit the urban communities in which we operate, we seek building owners with a demonstrated commitment to innovation and a desire to improve the living standards of their tenants. As a result, First Republic has helped finance and renovate a large number and variety of multifamily properties in inner cities that are clean, safe and affordable. We are willing to invest the time and effort to identify high-quality affordable housing projects. For example, First Republic went the extra step to create a workable financing solution for Louis Gage, an innovative San Francisco apartment owner. Today Mr. Gage's apartment buildings in San Francisco's Western Addition are models of affordable urban low-income housing_they provide tenants with high-quality living conditions, a clean, secure environment, and a genuine sense of community. [PIE CHART] 17 MANY WAYS TO MEET COMMUNITY NEEDS AT FIRST REPUBLIC, OUR COMMUNITY INVOLVEMENT IS EXTENSIVE, DIVERSE AND INNOVATIVE. We focus on innovative ways to apply our capabilities to the needs of our communities. Often these lending projects are nontraditional, such as our small business loans in Los Angeles and rehabilitation projects for housing and commercial properties that preserve the character of our neighborhoods. We have made loans for such diverse projects as the conversion of industrial spaces into housing lofts and the seismic upgrading of several schools. In one recent project, we provided a construction loan to renovate San Francisco's historic Flood Building, a downtown landmark that was seeking to modernize. With our help, the Flood Building has been fully restored and developed into an array of successful retail shops and offices. We also have an active program that aids many nonprofit educational, social, and cultural organizations in our markets. One notable program is assistance to the clients of Raphael House, a shelter for homeless families in San Francisco that assists them in obtaining benefits, finding employment, and securing permanent housing. Another is the sponsorship of the San Francisco Exploratorium's community outreach program which brings this wonderful institution's teaching activities into inner-city neighborhoods. [BAR CHART] ``WITHOUT FIRST REPUBLIC'S HELP, WE WOULD NOT HAVE BEEN ABLE TO RENOVATE THE HISTORIC FLOOD BUILDING, A SAN FRANCISO LANDMARK SINCE 1903.'' James C. Flood, Owner/Developer 18 [PHOTOS APPEAR HERE] 19 CONSOLIDATED BALANCE SHEET December 31, 1993 and 1992
ASSETS 1993 1992 --------------- --------------- Cash $ 19,903,000 $ 11,862,000 Federal funds sold and short-term investments 18,883,000 86,439,000 Interest bearing deposits at other financial institutions 592,000 690,000 Investment securities (market value $85,063,000 and $40,778,000 at December 31, 1993 and 1992, respectively) (Note 2) 84,208,000 40,638,000 Federal Home Loan Bank stock, at cost 22,927,000 18,677,000 -------------- -------------- 146,513,000 158,306,000 Loans (Note 3): Single family (1-4 unit) mortgages 546,232,000 366,612,000 Multifamily (5+ units) mortgages 387,757,000 405,399,000 Commercial real estate mortgages 229,914,000 204,611,000 Commercial business loans 8,346,000 11,981,000 Multifamily construction loans 5,707,000 19,574,000 Single family construction loans 14,512,000 14,703,000 Equity lines of credit 31,213,000 35,255,000 Leases, contracts and other 1,333,000 451,000 Loans held for sale 31,044,000 9,199,000 -------------- -------------- 1,256,058,000 1,067,785,000 Less: Unearned fee income (9,406,000) (12,621,000) Reserve for possible losses (12,657,000) (12,686,000) -------------- -------------- Net loans 1,233,995,000 1,042,478,000 Accrued interest receivable 8,110,000 8,265,000 Prepaid expenses and other assets (Note 4) 14,940,000 11,920,000 Other real estate owned 9,961,000 8,937,000 Premises, equipment and leasehold improvements, net of accumulated depreciation of $4,031,000 in 1993 and $3,411,000 in 1992 3,674,000 2,611,000 -------------- -------------- Total Assets $1,417,193,000 $1,232,517,000 ============== ==============
See accompanying notes. 20 CONSOLIDATED BALANCE SHEET December 31, 1993 and 1992
LIABILITIES AND STOCKHOLDERS' EQUITY 1993 1992 -------------- -------------- Liabilities: Thrift certificates (Note 5): Passbook accounts $ 117,161,000 $ 111,089,000 Investment certificates 634,510,000 587,683,000 -------------- -------------- Total thrift certificates 751,671,000 698,772,000 Interest payable 8,105,000 7,832,000 Custodial receipts on loans serviced for others 1,046,000 1,673,000 Other liabilities 8,358,000 1,860,000 Federal Home Loan Bank advances (Note 6) 468,530,000 373,530,000 Other borrowings (Note 7) 13,580,000 1,675,000 -------------- -------------- Total senior liabilities 1,251,290,000 1,085,342,000 Senior subordinated debentures (Note 8) 9,981,000 20,550,000 Subordinated debentures (Note 9) 16,476,000 -- Convertible subordinated debentures (Note 10) 34,500,000 34,500,000 -------------- -------------- Total liabilities 1,312,247,000 1,140,392,000 -------------- -------------- Commitments (Note 14) Stockholders' equity (Notes 13 and 15): Common stock, $.01 par value; 20,000,000 shares authorized, 7,744,541 and 7,716,086 shares issued and outstanding at December 31, 1993 and 1992, respectively 77,000 77,000 Capital in excess of par value 71,124,000 67,920,000 Retained earnings 35,296,000 25,803,000 Deferred compensation--ESOP (1,200,000) (1,675,000) Treasury stock, at cost; 25,750 shares at December 31, 1993 (351,000) -- -------------- -------------- Total stockholders' equity 104,946,000 92,125,000 -------------- -------------- Total Liabilities and Stockholders' Equity $1,417,193,000 $1,232,517,000 ============== ============== See accompanying notes.
21 CONSOLIDATED STATEMENT OF INCOME Years ended December 31, 1993, 1992 and 1991
1993 1992 1991 ----------- -------------- -------------- Interest income: Interest on real estate and other loans $93,212,000 $ 91,828,000 $ 76,766,000 Interest on investments 5,135,000 3,735,000 5,817,000 ----------- -------------- -------------- Total interest income 98,347,000 95,563,000 82,583,000 ----------- -------------- -------------- Interest expense: Interest on thrift accounts 35,318,000 39,636,000 42,681,000 Interest on debentures and other borrowings 21,599,000 19,340,000 13,156,000 ----------- -------------- -------------- Total interest expense 56,917,000 58,976,000 55,837,000 ----------- -------------- -------------- Net interest income 41,430,000 36,587,000 26,746,000 Provision for losses (Note 3) 4,806,000 7,783,000 6,241,000 ----------- -------------- -------------- Net interest income after provision for losses 36,624,000 28,804,000 20,505,000 ----------- -------------- -------------- Non-interest income: Servicing fees, net 1,233,000 1,110,000 1,694,000 Loan and related fees 1,937,000 1,975,000 1,220,000 Gain on sale of loans 2,250,000 3,257,000 599,000 Loss on sale of investment securities -- (852,000) (563,000) Other income 2,000 7,000 390,000 ----------- -------------- -------------- Total non-interest income 5,422,000 5,497,000 3,340,000 ----------- -------------- -------------- Non-interest expense: Salaries and related benefits 5,393,000 5,173,000 4,567,000 Occupancy 1,872,000 1,460,000 1,158,000 Advertising 1,340,000 1,047,000 832,000 Professional fees 542,000 660,000 459,000 REO costs and losses 3,477,000 309,000 330,000 Other general and administrative 8,023,000 5,847,000 3,953,000 ----------- -------------- -------------- Total non-interest expense 20,647,000 14,496,000 11,299,000 ----------- -------------- -------------- Income before provision for income taxes 21,399,000 19,805,000 12,546,000 Provision for income taxes (Note 12) 8,960,000 8,043,000 5,041,000 ----------- -------------- -------------- Net income $12,439,000 $ 11,762,000 $ 7,505,000 =========== -------------- -------------- Net income applicable to common stock $12,439,000 $ 11,762,000 $ 7,165,000 =========== ============== ============== Primary earnings per share $ 1.55 $ 1.53 $ 1.60 =========== ============== ============== Fully-diluted earnings per share $ 1.33 $ 1.51 $ 1.48 =========== ============== ============== Weighted average fully-diluted shares outstanding 10,567,800 7,832,484 5,077,931 =========== ============== ==============
See accompanying notes. 22 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Capital in Preferred Common excess of Retained YEARS ENDED DECEMBER 31, 1991, 1992 and 1993 stock stock par value earnings - --------------------------------------------- --------- -------- ----------- ----------- Balance at January 1, 1991 $ 2,000 $ 30,000 $26,595,000 $ 6,876,000 Loss on sale of fixed-income fund securities Deferred compensation--ESOP Dividends on Series B preferred stock (340,000) Exercise of options on 24,029 shares of common stock 213,000 Issuance of 1,816,188 shares of common stock 18,000 17,901,000 Resale of 307,661 shares of common stock, previously subject to repurchase 3,000 2,584,000 Conversion of preferred into common stock (1,000) 8,000 (7,000) Net income 7,505,000 - --------------------------------------------- ------- -------- ----------- ----------- Balance at December 31, 1991 1,000 59,000 47,286,000 14,041,000 Deferred compensation--ESOP Exercise of options on 43,284 shares of common stock 87,000 Issuance of 1,490,540 shares of common stock 15,000 20,549,000 Conversion of preferred into common stock (1,000) 3,000 (2,000) Net income 11,762,000 - --------------------------------------------- ------ -------- ----------- ----------- Balance at December 31, 1992 -- 77,000 67,920,000 25,803,000 Deferred compensation--ESOP Effect of stock dividend 2,946,000 (2,946,000) Exercise of options on 21,028 shares of common stock 177,000 Issuance of 6,856 shares of common stock 81,000 Purchase of 25,750 treasury stock Net income 12,439,000 - --------------------------------------------- ------- -------- ----------- ----------- Balance at December 31, 1993 $ -- $ 77,000 $71,124,000 $35,296,000 ============================================= ======= ======== =========== ===========
Allowance for market decline of fixed- Deferred Total YEARS ENDED DECEMBER 31, income fund compensation-- Treasury stockholders' 1991, 1992 and 1993 securities ESOP stock equity - --------------------------------------------- -------------- -------------- --------- ------------- Balance at January 1, 1991 $(518,000) $(2,400,000) $ -- $ 30,585,000 Loss on sale of fixed-income fund securities 518,000 518,000 Deferred compensation--ESOP 325,000 325,000 Dividends on Series B preferred stock (340,000) Exercise of options on 24,029 shares of common stock 213,000 Issuance of 1,816,188 shares of common stock 17,919,000 Resale of 307,661 shares of common stock, previously subject to repurchase 2,587,000 Conversion of preferred into common stock -- Net income 7,505,000 - --------------------------------------------- --------- ----------- --------- ------------ Balance at December 31, 1991 -- (2,075,000) -- 59,312,000 Deferred compensation--ESOP 400,000 400,000 Exercise of options on 43,284 shares of common stock 87,000 Issuance of 1,490,540 shares of common stock 20,564,000 Conversion of preferred into common stock -- Net income 11,762,000 - -------------------------------------------- --------- ----------- --------- ------------ Balance at December 31, 1992 -- (1,675,000) -- 92,125,000 Deferred compensation--ESOP 475,000 475,000 Effect of stock dividend -- Exercise of options on 21,028 shares of common stock 177,000 Issuance of 6,856 shares of common stock 81,000 Purchase of 25,750 treasury stock (351,000) (351,000) Net income 12,439,000 - --------------------------------------------- --------- ----------- ---------- ------------ Balance at December 31, 1993 $ -- $(1,200,000) $(351,000) $104,946,000 ============================================= ========= =========== ========= ============
See accompanying notes. 23 CONSOLIDATED STATEMENT OF CASH FLOW Years ended December 31, 1993, 1992 and 1991
1993 1992 1991 -------------- -------------- -------------- Operating Activities Net Income $ 12,439,000 $ 11,762,000 $ 7,505,000 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for losses 4,806,000 7,783,000 6,241,000 Provision for depreciation and amortization 1,892,000 1,673,000 1,787,000 Amortization of loan fees (4,688,000) (4,482,000) (2,669,000) Amortization of investment securities discounts (1,000) (125,000) (171,000) Amortization of investment securities premiums 125,000 203,000 256,000 Loans originated for sale (361,498,000) (226,507,000) (124,543,000) Loans sold into commitments 339,653,000 240,577,000 103,565,000 (Increase) decrease in deferred taxes 655,000 (944,000) (2,310,000) Net losses on investment securities -- 852,000 563,000 Net gains on sale of loans (2,250,000) (3,257,000) (599,000) (Increase) decrease in interest receivable (384,000) 568,000 (2,299,000) Increase in interest payable 273,000 835,000 351,000 Increase in other assets (4,049,000) (2,685,000) (1,055,000) Increase in other liabilities 5,216,000 353,000 1,094,000 ------------- ------------- ------------- Net Cash Provided (Used) By Operating Activities (7,811,000) 26,606,000 (12,284,000) Investment Activities Loans originated (583,298,000) (599,694,000) (319,960,000) Loans purchased (5,447,000) (12,342,000) (70,307,000) Other loans sold 85,822,000 132,974,000 16,396,000 Principal payments on loans 305,594,000 241,467,000 135,040,000 Purchases of investment securities (44,230,000) (19,406,000) (8,964,000) Sales of investment securities -- 3,247,000 22,167,000 Repayments of investment securities 5,814,000 3,333,000 6,011,000 Net decrease in short-term investments 979,000 410,000 1,106,000 Additions to fixed assets (1,660,000) (708,000) (664,000) Net proceeds from sale of REO (Note 1) 18,629,000 19,756,000 4,875,000 ------------- ------------- ------------- Net Cash Used By Investing Activities (217,797,000) (230,963,000) (214,300,000) Financing Activities Net increase in thrift passbooks 6,072,000 26,896,000 12,429,000 Issuance of investment certificates 308,860,000 362,419,000 334,606,000 Repayments of investment certificates (262,033,000) (296,308,000) (279,540,000) Increase in long-term FHLB advances 85,000,000 209,560,000 105,000,000 Repayments of long-term borrowings (475,000) (400,000) (325,000) Net increase (decrease) in short-term borrowings 22,380,000 (56,500,000) 18,381,000 Decrease in deferred compensation--ESOP 475,000 400,000 325,000 Issuance of debentures 16,476,000 34,500,000 10,000,000 Repayment of subordinated debentures (10,569,000) (12,772,000) (261,000) Sale of common stock 81,000 20,564,000 17,919,000 Proceeds from common stock options exercised 177,000 87,000 213,000 Purchase of treasury stock (351,000) -- -- ------------- ------------- ------------- Net Cash Provided By Financing Activities 166,093,000 288,446,000 218,747,000 Increase (decrease) in Cash and Cash Equivalents (59,515,000) 84,089,000 (7,837,000) Cash and Cash Equivalents at Beginning of Year 98,301,000 14,212,000 22,049,000 ------------- ------------- ------------- Cash and Cash Equivalents at End of Year $ 38,786,000 $ 98,301,000 $ 14,212,000 ============= ============= =============
See accompanying notes. 24 FIRST REPUBLIC BANCORP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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"), First Republic Mortgage Inc. and First Republic Savings Bank. First Republic Savings Bank, an FDIC-insured Nevada Thrift and Loan, was acquired in December 1993 for a cash purchase price of $1,414,000; at acquisition, its assets totalled $2,105,000 and its deposit liabilities totalled $762,000. First Republic and its subsidiaries are collectively referred to as the "Company." All material intercompany transactions and balances are eliminated in consolidation. Certain reclassifications have been made to the 1992 and 1991 financial statements in order for them to conform with the 1993 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. 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 review of past loss experience, loan delinquencies, and the underlying collateral value of loans and investments. It is the Company's policy to charge off balances that are deemed uncollectible. Anticipating a possible recession, the Company began to provide additional reserves in July 1990 by establishing a recession reserve category. The total of such reserves was $6,012,000 at December 31, 1992, after provisions of $7,270,000 and net chargeoffs of $8,362,000 during 1992. The total of such reserves was $5,104,000 at December 31, 1993, after provisions of $4,000,000 and net chargeoffs of $5,058,000 during 1993. As long as recessionary conditions continue, such reserve will be added to at the discretion of management, based on analyses performed each quarter. 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. SFAS No. 114 applies to financial statements for fiscal years beginning after December 15,1994. Earlier implementation is permitted. The Company plans to implement SFAS No. 114 for the year ended December 31, 1995. The impact of the statement on the Company's results of operations and financial position is expected to be immaterial. Investment securities --------------------- Investment securities are recorded at historical cost, adjusted for amortization of premium and accretion of discount, where appropriate. Realized gains and losses on the sale of investment securities are computed based on the cost basis of securities specifically identified. Investments acquired for short term appreciation or other trading purposes are recorded in a trading portfolio and are carried at market value. Realized and unrealized gains and losses are reported in non-interest income. At December 31, 1993 and 1992, no trading assets were owned. In May 1993, the FASB issued SFAS No. 115 "Accounting For Certain Investments in Debt and Equity Securities" addressing the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments would be classified in three categories and accounted for as follows: (i) debt securities that the entity has the positive intent and ability to hold to maturity would be classified as "held to maturity" and reported at amortized cost; (ii) debt securities that are held for current resale would be classified as trading securities and reported at fair value, with unrealized gains and losses included in operations; and (iii) debt securities not classified as either securities held to maturity or trading securities would be classified as securities available for sale, and reported at fair value, with unrealized gains and losses excluded from operations and reported as a separate component of stockholders' equity. The Company will implement SFAS No. 115 in the first quarter of 1994. The impact on the Company's results of operations and financial position is expected to be immaterial. 25 FIRST REPUBLIC BANCORP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $9,961,000 at December 31, 1993 and $8,937,000 at December 31, 1992. Loans in the amount of $21,954,000 in 1993 and $32,576,000 in 1992 were transferred to other real estate owned. Additionally, subsequent loans to facilitate the sale of other real estate owned were $13,833,000 and $18,494,000 in 1993 and 1992, 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 amount of loans being serviced for others totalled approximately $814,453,000 and $781,564,000 at December 31, 1993 and 1992, 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. Interest rate cap and swap agreements ------------------------------------- Interest rate cap agreements are purchased 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 using the straight-line method over the life of the agreements, and benefits are recognized when realized. Interest rate swap agreements convert the cost of certain Federal Home Loan Bank advances from a fixed rate to a variable rate. The differential to be paid or received is accrued as an adjustment to interest expense as interest rates change. Income taxes ------------ First Republic and its subsidiaries file a consolidated federal income tax return and a combined state tax return. Prior to January 1, 1992, the Company accounted for income taxes under SFAS No. 96, which specified that the liability method be used to account for income taxes. Effective January 1, 1992, the Company changed its method of accounting for income taxes to adopt SFAS No. 109, "Accounting for Income Taxes," which supersedes SFAS No. 96. Under the asset and liability method prescribed by SFAS No.109, 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Under SFAS No. 109, 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. 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 $56,644,000 in 1993, $58,141,000 in 1992 and $55,486,000 in 1991. Additionally, the Company paid income taxes of $8,324,000, $9,075,000 and $7,932,000 for the years ended December 31, 1993, 1992 and 1991, respectively. 26 FIRST REPUBLIC BANCORP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Earnings per share - ------------------ Primary earnings per share is computed by dividing net income (less dividends on Series B preferred stock) by the weighted average number of common shares outstanding, plus the effect, when dilutive, of stock options. Fully diluted earnings per share is computed by dividing net income by primary shares outstanding plus the potential effect of the conversion of the Series B preferred stock outstanding from January to November 1991. Due to the issuance of convertible subordinated debentures in December 1992, this calculation adds back to the Company's reported net income the effect of interest expense on these debentures, net of taxes, and increases the number of shares outstanding as if the debentures were converted into common stock. Effective February 18, 1994, the Company issued a 3% stock dividend to stockholders of record. All share, per share, and related information has been restated to give retroactive effect to this stock dividend. 2. Investment Securities --------------------- The following summarizes by category the carrying value and approximate market value of investment securities, including mortgage backed securities ("MBS"), at December 31:
1993 1992 ------------------------ ------------------------ Carrying Market Carrying Market Value Value Value Value ----------- ----------- ----------- ----------- U.S. Government $25,404,000 $26,135,000 $27,300,000 $27,611,000 Agency MBS 13,788,000 14,054,000 5,517,000 5,501,000 Other MBS 44,655,000 44,513,000 7,352,000 7,197,000 Other 361,000 361,000 469,000 469,000 ----------- ----------- ----------- ----------- $84,208,000 $85,063,000 $40,638,000 $40,778,000 =========== =========== =========== ===========
At December 31, 1993, all of the investment securities carried interest rates which adjust annually or more frequently. Market values are determined by current quotation, when available, or analysis of estimated future cash flows. The difference between market value and carrying value is represented by gross unrealized gains of $731,000 on U.S. Government securities, gross unrealized gains of $266,000 on Agency MBS and gross unrealized gains of $60,000 and losses of $202,000 on Other MBS at December, 31, 1993. There were gross unrealized gains of $311,000 on U.S. Government securities, and gross unrealized losses of $16,000 and $155,000 on Agency MBS and Other MBS, respectively, at December 31, 1992. At December 31, 1993, Agency MBS with a book value of $12,701,000 and a market value of $12,946,000 are pledged as collateral for repurchase agreements (see Note 7). The following table summarizes the Company's carrying value and estimated market value by maturity of investment securities owned at December 31, 1993:
Carrying Market Value Value ----------- ----------- Due in one year or less $ 361,000 $ 361,000 Due after one year through five years -- -- Due after five years through ten years -- -- Due after ten years 25,404,000 26,135,000 ----------- ----------- 25,765,000 26,496,000 Mortgage backed securities 58,443,000 58,567,000 ----------- ----------- $84,208,000 $85,063,000 =========== ===========
Proceeds, gross gains and gross losses from sales of investment securities for each of the past three years were as follows:
1993 1992 1991 ---------- ---------- ----------- Proceeds $ -- $3,247,000 $22,167,000 Gross gains $ -- $ 5,000 $ 158,000 Gross losses -- (857,000) (721,000) ---------- ---------- ----------- Net gains (losses) $ -- $ (852,000) $ (563,000) ========== ========== ===========
3. Loans ----- Real estate loans are secured by real property and mature over periods ranging up to thirty years. At December 31, 1993, loans of $679,755,000 are pledged as collateral for FHLB advances. Nonaccrual loans totalled $11,618,000 and $9,558,000 at December 31, 1993 and 1992, respectively. Restructured performing loans totalled $6,342,000 at December 31, 1993 and $3,366,000 at December 31, 1992. If nonaccrual loans had continued to realize interest in accordance with their original terms, approximately $1,136,000 and $712,000 of additional interest income would have been realized in 1993 and 1992, respectively. Interest income realized on these loans was approximately $324,000 and $170,000 in 1993 and 1992, respectively. If restructured loans had continued to realize interest in accordance with their original terms, approximately $106,000 and $116,000 of additional interest income would have been realized in 1993 and 1992, respectively. Interest income realized on these loans was approximately $284,000 and $165,000 in 1993 and 1992, respectively. 27 FIRST REPUBLIC BANCORP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS An analysis of the changes in the reserve for possible losses for the past three years follows:
1993 1992 1991 ------------ ------------ ------------ Balance at beginning of year $12,686,000 $11,663,000 $ 5,254,000 Provision charged to operations 4,806,000 8,062,000 6,241,000 Reserve from purchased loans 200,000 466,000 2,240,000 Reserve of First Republic Savings Bank at acquisition 24,000 -- -- Chargeoffs on originated loans: Single family (209,000) (328,000) (259,000) Multifamily (3,367,000) (3,961,000) (706,000) Commercial real estate (1,547,000) (3,750,000) (1,001,000) Commercial business loans (76,000) (213,000) (186,000) Recoveries on originated loans: Single family -- 50,000 -- Multifamily -- 5,000 10,000 Commercial real estate 92,000 654,000 -- Commercial business loans 43,000 12,000 4,000 Acquired loans, net 5,000 26,000 66,000 ----------- ----------- ----------- Balance at end of year $12,657,000 $12,686,000 $11,663,000 =========== =========== ===========
4. Prepaid Expenses and Other Assets --------------------------------- At December 31, prepaid expenses and other assets consist of the following:
1993 1992 ----------- ----------- Purchased servicing rights and premium on $ 1,154,000 $ 2,956,000 sale of loans, net Debt issuance costs, net 5,372,000 4,695,000 Interest rate cap agreements, net 3,479,000 2,235,000 Prepaid expenses 1,118,000 999,000 Other assets 3,817,000 1,035,000 ----------- ----------- $14,940,000 $11,920,000 =========== ===========
Amortization of purchased servicing rights and the premium on sale of loans reduces service fee income and totalled $1,753,000 in 1993, $1,960,000 in 1992 and $1,820,000 in 1991. As a hedge against the possible loss of future servicing income from a more rapid than anticipated prepayment of loans underlying purchased servicing rights, the Company purchased in 1990 call options on $20.0 million of ten-year U.S. Treasury Notes. In early 1993, the Company closed the final contracts of its hedge position, resulting in total gains from all such call options of approximately $1,200,000 which have been recorded as a reduction in the carrying value of purchased servicing rights. 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 accounts, which have no contractual maturity, pay interest at rates ranging from 2.3% to 3.1% per annum and 3.0% to 3.7% per annum at December 31, 1993 and 1992, respectively, compounded daily. Investment certificates have maturities ranging from 91 days to 120 months and bear interest at varying rates based on money market conditions, generally ranging from 3.1% to 10.3% and from 3.7% to 10.3% at December 31, 1993 and 1992, 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, 1993, based on the amount of thrift certificates outstanding, First Thrift was required to maintain shareholder's equity of approximately $38,000,000, compared with actual shareholder's equity of $119,396,000. 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 -------------------------------- During 1990, First Thrift became a voluntary member of the Federal Home Loan Bank of San Francisco ("FHLB"). FHLB advances are primarily adjustable rate in nature, including the effect of interest rate swap agreements, and consist of the following at December 31:
1993 1992 ------------------- ------------------- Advances maturing in Amount Rate Amount Rate ------------ ----- ------------ ----- One year or less $ 10,000,000 3.66% $ -- --% 1 to 2 years 44,000,000 4.16% 3,200,000 4.10% 2 to 3 years -- -- 44,000,000 4.25% 3 to 4 years -- -- -- -- 4 to 5 years -- -- -- -- After five years 414,530,000 3.94% 326,330,000 4.35% ------------ ---- ------------ ---- $468,530,000 3.95% $373,530,000 4.34% ============ ==== ============ ====
The stated interest rates include the effect of interest rate swap agreements of $65,000,000 in 1993 and $90,000,000 in 1992. The Company is exposed to market loss if the swap counterparties fail to perform; however, the Company does not anticipate such nonperformance. First Thrift was approved for $486,000,000 of FHLB advances at December 31, 1993. First Thrift owned FHLB stock of $22,927,000 at December 31, 1993, or 5% of the FHLB advances outstanding. FHLB stock is recorded at cost and is redeemable at par. 7. Other Borrowings ----------------- At December 31, 1993 and 1992, other borrowings included borrowings of the Company's Employee Stock Ownership Plan Trust from unaffiliated commercial banks totalling 28 FIRST REPUBLIC BANCORP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $1,200,000 and $1,675,000, respectively. These borrowings are guaranteed by First Republic, have interest at approximately 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 fixed rates of interest 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%. There were no such borrowings in 1992. 8. Senior Subordinated Debentures ------------------------------ Senior subordinated debentures include the following at December 31:
1993 1992 ---------- ----------- Series 11% Senior Subordinated Debentures due February 1, 2000 $ -- $10,563,000 Senior Subordinated Debentures due September 30, 2003 (average rate 10.6%) 9,981,000 9,987,000 ---------- ----------- $9,981,000 $20,550,000 ========== ===========
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. In June 1993, the Company redeemed all of the outstanding 11% senior subordinated debentures. 9. Subordinated Debentures ----------------------- 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. In August 1993, the Company commenced the public offering of up to $15,000,000 of subordinated debentures, which pay interest quarterly at 8.0% and mature January 15, 2009; at December 31, 1993, $3,476,000 of these debentures had been sold and were outstanding. 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, at December 31, 1993, First Thrift has purchased interest rate cap contracts in the aggregate notional amount of $945,000,000, which mature in periods ranging from March 1994 through September 2000. 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. 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 cap costs increased interest expense by $850,000 in 1993 $672,000 in 1992, and $539,000 in 1991. 12. Income Taxes ------------ The Company followed SFAS No. 96 for 1991 and adopted SFAS No. 109 for 1992 and 1993. The annual provision for income taxes consists of the following:
1993 1992 1991 ---------- ----------- ------------ Federal taxes: $6,047,000 $6,916,000 $ 5,551,000 Current 456,000 (261,000) (1,924,000) Deferred ---------- ---------- ----------- 6,503,000 6,655,000 3,627,000 ---------- ---------- ----------- State taxes: Current 2,258,000 2,071,000 1,800,000 Deferred 199,000 (683,000) (386,000) ---------- ---------- ----------- 2,457,000 1,388,000 1,414,000 ---------- ---------- ----------- Total $8,960,000 $8,043,000 $ 5,041,000 ========== ========== ===========
Components of current and deferred taxes for 1993 are based on assumptions as of the date of this report and may vary from amounts shown on the tax returns as filed. Accordingly, the variances from such component amounts reported for prior years are primarily the result of adjustments to conform to the tax returns as filed. 29 FIRST REPUBLIC BANCORP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The effective income tax rate differs from the federal statutory rate due to the following for the past three years:
1993 1992 1991 ----- ----- ------ Expected statutory rate 35.0% 34.0% 34.0% State taxes, net of federal benefits 7.5 7.3 7.4 Effect of utilizing net operating loss carryforward -- -- (0.5) Capital loss not currently deductible for tax purposes -- -- 1.4 Dividends received deduction -- -- (0.2) Change in valuation allowance 0.9 (0.7) -- Other, net (1.5) -- (1.9%) ---- ---- ---- Effective tax rate 41.9% 40.6% 40.2% ==== ==== ====
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:
1993 1992 ----------- ----------- Deferred tax assets: $4,378,000 $3,925,000 Bad debt deduction Deferred franchise tax 870,000 804,000 Deferred income 270,000 559,000 ---------- ---------- Total gross deferred tax assets 5,518,000 5,288,000 Less valuation allowance (421,000) (233,000) ---------- ---------- Deferred tax assets 5,097,000 5,055,000 ---------- ---------- Deferred tax liabilities: Loan fee income 3,154,000 2,471,000 FHLB stock dividend income 274,000 274,000 Depreciation and amortization 57,000 43,000 ---------- ---------- Total gross deferred tax liabilities 3,485,000 2,788,000 ---------- ---------- Net deferred tax assets $1,612,000 $2,267,000 ========== ==========
The following is a summary of changes in deferred tax related accounts for 1992 and 1993 under SFAS No. 109:
Deferred Valuation Deferred Tax Asset Allowance Tax Liability Net Total ---------- ---------- -------------- ----------- January 1, 1992 $3,608,000 $(339,000) $(1,946,000) $1,323,000 Changes 1,680,000 106,000 (842,000) 944,000 ---------- --------- ----------- ---------- December 31, 1992 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 ========== ========= =========== ==========
The net total deferred tax asset represents recoverable taxes. 13. Stockholders' Equity -------------------- In June and December 1991, the Company completed public offerings of common stock for 2,546,160 shares, of which 1,816,189 were newly issued, resulting in net proceeds of $17,919,000. 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 1,490,541 new shares. In 1991, all of the Company's Series B preferred stock was exchanged for Series C preferred stock, which did not pay a dividend and was convertible into 688,007 shares of common stock. In November 1991 and in February 1992, all shares of 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. In December 1993, 25,750 shares were repurchased at a cost of $351,000 and are held as treasury stock at December 31, 1993. Under First Republic's 1985 Stock Option Plan (the "Plan") at December 31, 1993, there were remaining options on 680,102 shares of common stock reserved for issuance and options on 656,389 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, 1992 598,825 $6.74 - $12.84 Options Granted 27,848 6.74 - 15.55 Options Exercised (11,457) 6.74 - 11.78 ------- -------------- Balance, December 31, 1992 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 ======= ==============
Additionally, the outside directors of the Company and its subsidiaries hold stock options which are not in the Plan for a total of 227,020 shares of common stock which were issued since August 1989, at prices ranging from $6.74 to $14.84 and options for 10,300 shares of common stock at $13.96 which were granted in December 1993 and are subject to stockholder approval. Executive officers hold additional stock options for 74,263 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 38,012 shares of common stock were granted to other employees in 1993. As of December 31, 1993, approximately 48% of such options were vested. A former and a current officer have exercised 51,718 options during 1990 and 31,827 options during 1992 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 30 FIRST REPUBLIC BANCORP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS purchase of up to 424,360 shares of common stock by eligible employees. During 1993, 6,857 shares of common stock were sold to employees under this plan resulting in net proceeds to the Company of $81,000. The Company's ability to pay cash dividends on its common stock is restricted to approximately $3,424,000 at December 31, 1993 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. Also, certain regulatory requirements limit the amount of dividends that First Thrift may pay to First Republic to approximately $9,400,000 at December 31, 1993. 14. Commitments ----------- At December 31, 1993, the Company had conditional commitments to originate loans of $15,709,000, and to disburse additional funds on existing loans and lines of credit of $87,844,000. 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, 1993 are as follows: 1994--$1,164,000; 1995--$1,328,000; 1996--$1,363,000; 1997-- $1,309,000; 1998--$1,121,000; thereafter--$2,290,000. Rent and related occupancy expense was $1,132,000 in 1993, $842,000 in 1992 and $603,000 in 1991. 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 1993, 1992 and 1991 were approximately $295,000, $300,000 and $195,000, 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 $3,225,000 and purchased 436,967 shares of Common Stock at the market price at the time of purchase, an average of $7.38. The Company has guaranteed these borrowings and makes contributions to the Trust, in amounts required to make principal and interest payments. As the debt is repaid, the Common Stock will be allocated to the accounts of the ESOP's participants, with vesting over a period of five years. The Company made contributions of $558,000, $512,000 and $510,000 to the ESOP in 1993, 1992 and 1991, respectively, of which $83,000, $112,000 and $185,000 represents interest expense. Compensation expense is recognized using the shares allocated method. Since inception, the Company has not offered any other employee benefit plans and, at December 31, 1993, has no requirement to accrue additional expenses for any pension or other post-employment benefits. Generally, employees are eligible for the Company's 401k and ESOP plans after six months of full time employment. 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 judgment in assessing fair value, there are inherent weaknesses in any estimating technique that may be reflected in the fair values disclosed. The fair value estimates 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 judgment. 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, 1993 and 1992; 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 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 or market approximate estimated fair value. 31 FIRST REPUBLIC BANCORP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Investment Securities: For securities at amortized cost, current market prices 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, maturity, estimated credit risk, and accrual status. The fair value of single family mortgages is based primarily upon prices of similar loans sold recently by the Company, adjusted for differences in loan characteristics and market conditions. The fair value of other loans is estimated 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. Additionally, the Company has 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. FHLB Advances: The Company's FHLB advances consist primarily of long-term adjustable rate borrowings. Using current quoted terms, the estimated fair value is based on the discounted value of contractual cash flows for the remaining maturity, adjusted for the effect of interest rate swap and cap agreements related to these advances. Debentures: The fair value is based on current market prices for traded issues or on terms of recently completed issues for obligations of similar maturity. 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 this table. Off-Balance Sheet Instruments: The estimated amounts that the Company would receive, based upon dealer quotes, to terminate such agreements are used to determine estimated fair value.
December 31, 1993 December 31, 1992 ------------------------------ ------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------------- -------------- -------------- -------------- Assets: Cash $ 39,378,000 $ 39,385,000 $ 98,991,000 $ 98,991,000 Investments 84,208,000 85,063,000 40,638,000 40,778,000 FHLB stock 22,927,000 22,927,000 18,677,000 18,677,000 Loans, net 1,233,995,000 1,258,734,000 1,042,478,000 1,059,150,000 Servicing rights 903,000 8,000,000 1,455,000 5,000,000 Liabilities: Deposits 751,671,000 758,241,000 698,772,000 707,020,000 Borrowings 482,110,000 488,154,000 375,205,000 374,246,000 Subordinated debentures 26,457,000 26,200,000 20,550,000 21,680,000 Convertible debentures 34,500,000 42,953,000 34,500,000 34,500,000 Off-balance sheet: Interest rate caps 3,479,000 2,321,000 2,235,000 550,000
17. First Republic Bancorp Inc. ---------------------------
(Parent Company Only) Condensed Balance Sheet December 31, 1993 1992 ------------ ------------ Assets Cash and investments $ 6,034,000 $ 10,191,000 Loans, net 2,078,000 6,452,000 Investment in subsidiaries 139,982,000 120,439,000 Advance to subsidiaries 1,030,000 218,000 Other assets 18,890,000 12,045,000 ------------ ------------ $168,014,000 $149,345,000 ============ ============ Liabilities and Stockholders' Equity Accounts payable and accrued liabilities $ 911,000 $ 495,000 Other borrowings 1,200,000 1,675,000 Subordinated debentures 26,457,000 20,550,000 Convertible subordinated debentures 34,500,000 34,500,000 ------------ ------------ 63,068,000 57,220,000 ------------ ------------ Stockholders' equity 104,946,000 92,125,000 ------------ ------------ $168,014,000 $149,345,000 ============ ============
32 FIRST REPUBLIC BANCORP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statement of Income Year ended December 31, 1993 1992 1991 ----------- ------------ ----------- Interest income $ 758,000 $ 1,011,000 $ 574,000 Interest expense 5,321,000 4,370,000 3,437,000 Dividends from subsidiaries 1,963,000 1,160,000 2,234,000 Other income 1,933,000 2,980,000 1,459,000 General and admin. expense 1,280,000 1,954,000 710,000 ----------- ------------ ----------- Operating income (loss) (1,947,000) (1,173,000) 120,000 Equity in undistributed earnings of subsidiaries 14,386,000 12,935,000 7,385,000 ----------- ------------ ----------- Net income $12,439,000 $ 11,762,000 $ 7,505,000 =========== ============ =========== Condensed Statement of Cash Flows Year ended December 31, 1993 1992 1991 ----------- ------------ ----------- Operating Activities: Net Income $12,439,000 $ 11,762,000 $ 7,505,000 Adjustments to net cash from operating activities: Provision for losses (33,000) 14,000 291,000 (Increase) in other assets (6,751,000) (3,030,000) (2,477,000) Increase (decrease) in other liabilities 416,000 (1,235,000) 1,352,000 Equity in undistributed earnings of subs. (14,386,000) (12,935,000) (7,385,000) ----------- ------------ ----------- Net Cash Used (8,315,000) (5,424,000) (714,000) Investment Activities: Loans originated (6,303,000) (11,953,000) (21,558,000) Loans sold 10,616,000 14,028,000 13,581,000 Capital into subs. (5,157,000) (31,100,000) (20,000,000) Advances to subs. (812,000) 623,000 (279,000) ----------- ------------ ----------- Net Cash Used (1,656,000) (28,402,000) (28,256,000) Financing Activities: Net decrease in other borrowings (475,000) (400,000) (325,000) Net decrease in def. comp.--ESOP 475,000 400,000 325,000 Issuance of subordinated debentures, net 5,907,000 21,728,000 9,739,000 Sale of stock 258,000 20,651,000 18,132,000 Purchase of treasury stock (351,000) -- -- ----------- ------------ ----------- Net Cash Provided 5,814,000 42,379,000 27,871,000 Increase (decrease) in Cash (4,157,000) 8,553,000 (1,099,000) Cash at start of year 10,092,000 1,539,000 2,638,000 ----------- ------------ ----------- Cash at end of year $ 5,935,000 $ 10,092,000 $ 1,539,000 =========== ============ ===========
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, 1993 and 1992, 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, 1993. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on 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, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. San Francisco, California January 25, 1994 KPMG Peat Marwick 33 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; (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 1993, First Republic's eighth full year of operations, total capital resources increased 12% as a result of earnings and increases in debentures outstanding, net of redemptions, of $5,900,000. Loan origination volume increased to $944,796,000 compared to $826,201,000 in 1992, primarily due to increased single family lending resulting from an increase in the number of loan officers employed by the Company. Total assets increased to $1,417,193,000 at December 31, 1993 from $1,232,517,000 at December 31, 1992, as the Company expanded its single family mortgage loans by $176,000,000. From mid-1992 to mid-1993, the Company limited its loan growth to 2.5% per quarter, and increased its mortgage banking operations, including the sale of a higher level of adjustable rate mortgage loans. During 1993, total deposits increased $52,900,000 and Federal Home Loan Bank (``FHLB'') advances and other borrowings increased $106,900,000. As more fully described below, during 1993 net interest income increased as a result of the larger average balance sheet, the total of provision for losses and losses on real estate owned (``REO'') remained at a high level due to the effect of the recession and active resolution of problem assets, total non-interest income was relatively unchanged, and total non-interest expense increased in amount and was consistent as a percentage of total average assets. In 1993, the Company's provision for taxes increased relative to the prior year and net income increased 6% to $12,439,000, while fully-diluted earnings per share decreased to $1.33 from $1.51 in 1992 as the result of a 35% increase in shares outstanding. INTEREST INCOME AND EXPENSE Interest income on loans rose to $93,212,000 in 1993 from $91,828,000 in 1992 and $76,766,000 in 1991, primarily due to increased average loan balances outstanding for each year. The Company's adjustable rate mortgage loans earn interest at rates which fluctuate with market rates, which have generally declined during 1993 and 1992. The Company's loans earned an average rate of 8.07% for 1993 compared to 9.10% in 1992 and 10.95% in 1991. For 1993, the average balance on the Company's loans was $1,154,680,000, compared to $1,008,783,000 and $700,917,000 for 1992 and 1991, respectively. Loans totaled $1,256,058,000 at December 31, 1993. Interest income on short-term cash, investments and FHLB stock increased to $5,135,000 in 1993 from $3,735,000 in 1992 as a result of increased investment securities and higher FHLB dividends. Such interest income was $5,817,000 in 1991 when interest rates were higher. The average rates earned on these assets, adjusted for the effect of tax-exempt securities, were 4.24% in 1993 compared to 3.74% in 1992 and 7.66% in 1991. At December 31, 1993, the book value of cash, short-term investments, investment securities and FHLB stock was $146,513,000 compared to $158,306,000 at December 31, 1992. Total interest expense decreased to $56,917,000 in 1993 compared to $58,976,000 in 1992 and was $55,837,000 in 1991. Total interest expense consists of two components_interest expense on deposits and interest expense on notes, debentures and other borrowings. Interest expense on deposits, comprised of passbook accounts and investment certificates, was $35,318,000 in 1993 compared to $39,636,000 in 1992 and $42,681,000 in 1991. The Company's outstanding deposits have grown to $751,671,000 at December 31, 1993 from $698,772,000 at December 31, 1992 and $605,765,000 at December 31, 1991. 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 4.94% for 1993 from 5.86% in 1992 and 7.54% in 1991. The general decline in market interest rates over the past three years contributed to the reduction in the Company's cost of deposits. This fact, coupled with a reduction in the rate of deposit growth over the past three years as the Company utilized increased FHLB advances to fund a significant portion of asset growth, enabled the Company to pay interest rates on new and roll-over deposits which were lower, relative to market rates, than in prior periods when new deposits were being more actively sought. In mid-1990, the Company implemented a funding strategy which resulted in a lower average total cost of funds and reduced certain non-interest expenses such as deposit 34 advertising costs. 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 an alternative source of funds from asset growth. The Company's total outstanding FHLB advances were $468,530,000 and $373,530,000 at December 31, 1993 and 1992, respectively. The total cost of FHLB advances is lower than the total cost of deposits, partly because such advances require no deposit insurance premiums and operational overhead costs are less than those associated with deposits. 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, 1993, First Thrift had an approved borrowing capacity with the FHLB of $486,000,000, approximately 35% of its total assets. However, since the Company expects that deposits will fund a greater percentage of future asset growth, average total cost of funds may increase as the costs of expanding the Company's retail deposit base are incurred. Total interest expense on debentures, FHLB advances and other borrowings was $21,599,000 in 1993 as compared with $19,340,000 in 1992 and $13,156,000 in 1991. The average cost of these liabilities, which include the Company's term capital-related debentures, decreased to 4.65% in 1993 as compared to 5.66% in 1992 and 7.90% in 1991, primarily due to lower market interest rates, the increased utilization of FHLB advances and the redemption of higher cost debentures. 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, 1993, the Company owned $982,000,000 of interest rate cap agreements with a net cost of $3,479,000. These costs are amortized over the lives of the agreements, resulting in expenses of $850,000 in 1993, $672,000 in 1992 and $539,000 in 1991. These costs added approximately 0.07% to the overall rate paid on liabilities in the past three years. NET INTEREST INCOME Net interest income constitutes the principal source of income for the Company. The Company's net interest income was $41,430,000 in 1993, a 13% increase from $36,587,000 in 1992. Net interest income for 1992 increased 37% from $26,746,000 in 1991. These increases are primarily a result of larger average balances outstanding for each year. Other contributing factors were the amortization of loan origination fees, the improved management of liability costs for retail deposits, the use of lower-priced FHLB advances and lower interest rates on debentures. 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.
1993 1992 1991 - ---------------------------------- ----- ----- ----- Cash and investments 4.24% 3.74% 7.66% Loans 8.07 9.10 10.95 - ---------------------------------- ----- ----- ----- All interest-earning assets 7.71% 8.62% 10.63% ================================== ===== ===== ===== Deposits 4.94% 5.86% 7.54% Borrowings 4.65 5.66 7.90 - ---------------------------------- ----- ----- ----- All interest-bearing liabilities 4.83% 5.79% 7.63% ================================== ===== ===== ===== Net interest spread 2.88% 2.83% 3.00% ================================== ===== ===== ===== Interest-earning assets as % of interest-bearing liabilities 108% 109% 106% ================================== ===== ===== =====
Net interest spread increased to 2.88% in 1993 from 2.83% in 1992 primarily due to a lower average balance of non-accrual loans and higher rates earned on a higher average balance of investments. Net interest spread declined in 1992 from 3.00% in 1991 due to a higher average balance of nonaccrual loans, lower interest rates earned on a higher average balance of short-term investments and lower interest rates earned on FHLB stock. 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, 1993, over 87% of loans on the Company's balance sheet were adjustable rate or were due within one year. A substantial portion of single family loans, including most 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, 1993, the Company has originated approximately $3.6 billion of loans, of which approximately $1.5 billion have been sold to investors. For the past three years, the Company has originated an increasing level of loans, with originations of $994,796,000 in 1993, $826,201,000 in 1992 and $444,503,000 in 1991. Loan originations for 1993 and 1992 increased primarily due to increased single family lending resulting from an increase in the number of loan officers employed by the Company and the lower rates of interest available to borrowers. 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. 35 The following table shows the Company's loan originations during the past two years by property type and location:
1993 1992 ------------ ------------ (In $ millions) $ % $ % - ------------------ ------ --- ------ --- Single Family: San Francisco $599.5 63% $455.1 55% Los Angeles 138.9 15 92.2 11 Las Vegas 18.7 2 1.0 _ - ------------------ ------ --- ------ --- 757.1 80 548.3 66 - ------------------ ------ --- ------ --- Income Property: San Francisco 49.7 5 96.9 12 Los Angeles 6.0 1 53.4 6 Las Vegas 32.1 3 13.7 2 - ------------------ ------ --- ------ --- 87.8 9 164.0 20 - ------------------ ------ --- ------ --- Construction 98.5 11 111.7 14 Other 1.4 _ 2.2 _ - ------------------ ------ --- ------ --- Total $944.8 100% $826.2 100% ================== ====== ==== ====== ====
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 $1,500,000. 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. The Company generally does not exceed 75% loan-to-value ratios for multi-family 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, 1993, 60% of the Company's loans are secured by properties located in the San Francisco Bay Area, 27% in Los Angeles County and other areas of California and 12% in Las Vegas, Nevada. By property type, single family mortgage loans aggregated $608,489,000 and accounted for 48% of the Company's total loans, while multifamily loans were $387,757,000 or 31%, and loans secured by commercial real estate were $229,914,000 or 18%. During 1993, 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 residences. The following table presents an analysis of the Company's loan portfolio at December 31, 1993 by property type and major geographic location.
San Los Angeles Francisco and Other Las Vegas, (In $ thousands) Bay Area California Nevada Total - ------------------ --------- ----------- ---------- ----------- Single family $437,122 $159,565 $ 7,228 $ 608,489 Multifamily 149,905 127,437 110,415 387,757 Commercial 170,318 38,841 17,006 229,914 Construction -- -- 20,219 20,219 Other 592 8,547 519 9,679 - ------------------ --------- ---------- ---------- ----------- Total $757,937 $334,390 $155,387 $1,256,058 ================== ========= ========== ========== =========== Percent by location 60.3% 26.6% 12.4% 100.0%
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 accrued interest to be unlikely, management deems a loan to be an in-substance foreclosure, or the Company takes possession of the collateral. Real estate collateral obtained by the Company or deemed to be foreclosed in-substance is collectively referred to as ``REO.'' During the past two years, the Company has experienced an increased level of nonaccrual and restructured loans, primarily due to the effects of the recessionary conditions in California on a portion of the Company's borrowers. The recession has reduced the ability of some of the Company's borrowers to perform under the terms of their loan agreements and the value of some of the properties securing the Company's loans. The recession has primarily impacted the Company's multifamily and commercial real estate loan portfolios. The Company's policy is to attempt to resolve problem assets quickly, including the aggressive pursuit of foreclosure or other workout procedures. It is the Company's policy to sell such problem assets when acquired as rapidly as possible at prices available in the prevailing market. The following table summarizes the dollar amount of non-accruing assets and restructured loans and ratio to total assets of such assets at the end of the last two years. At December 31, 1993, the REO balance of $9,961,000 includes 10 properties, of which six were acquired in the last six months of 1993 and one was classified as an in-substance foreclosure. Since late 1992, the Company has owned an 800 acre parcel of land in the San Francisco Bay Area with a carrying value of $5,054,000. Also, there were single family loans of $1,390,000 at December 31, 1993 and $3,541,000 at December 31, 1992, which were more than 90 days past due but accruing because these assets were well secured and in the process of collection. 36 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.
December 31, 1993 1992 - ----------------------------------- ----------- ----------- Nonaccruing loans $11,618,000 $ 9,558,000 Real estate owned 9,961,000 8,937,000 Nonaccruing investments 361,000 469,000 - ----------------------------------- ----------- ----------- Total nonaccruing assets 21,940,000 18,964,000 Restructured performing loans 6,342,000 3,366,000 - ----------------------------------- ----------- ----------- Nonaccruing and restructured assets $28,282,000 $22,330,000 =================================== =========== =========== Accruing single family loans over 90 days past due $ 1,390,000 $ 3,541,000 =================================== =========== =========== Percent of Total Assets: All nonaccruing assets 1.55% 1.54% Nonaccruing and restructured assets 2.00% 1.81%
As a percentage of total assets, nonaccruing assets at December 31, 1993 are consistent with that at December 31, 1992 and below all quarter-end points during 1993, as a result of loan workouts and foreclosures. The future amount of nonaccruing loans and total nonaccruing assets depends upon whether existing REO properties can be sold or loan workouts completed at a rate exceeding the level of new loans which may become nonaccruing. On January 17, 1994, the greater Los Angeles area experienced an earthquake which caused significant damage to the freeway system and real estate throughout the area. Some of the Company's borrowers were adversely affected by this event, with direct property damage or loss of tenants, or are expected to be affected in the future as a result of lower rental revenues or further economic difficulties. First Republic is currently working with those borrowers who have been identified to assist them with obtaining available disaster relief funding or to assist them by modifying the terms of loans. Such loan modifications may defer the timing of payments, reduce the rate of interest collected or possibly lower the principal balance. As of March 18, 1994, approximately $35 million of the Company's loans, secured primarily by larger multifamily properties, appeared to be adversely impacted by the earthquake. Based upon the Company's best estimate of damage or related economic impact to borrowers and their properties, a special loan valuation reserve of $4,000,000 will be provided in the quarter ended March 31, 1994. Management of the Company expects the level of loan delinquencies and REO to increase during 1994 as problems related to this natural disaster are addressed and resolved. 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 is designated as a reserve for possible losses and is thereafter unavailable to be amortized as an increase in interest income. Anticipating a possible recession, the Company began to provide additional reserves in July 1990 by establishing a recession reserve category. The provisions for the recession reserve were not required or recommended by any regulatory authority. These provisions reduced earnings by $4,000,000 in 1993, $7,270,000 in 1992 and $5,520,00O in 1991. Also, the Company increased its reserve for possible losses, including its recession reserve category by allocating a total of $200,000 in 1993, $466,000 in 1992 and $2,240,000 in 1991 from discounts on loans purchased. Management views the recession reserve as part of its total unallocated reserves available to absorb losses on the Company's loans that may result from general economic conditions. Chargeoffs and losses on REO related to loans originated by the Company have increased in 1993 and 1992 above historical levels. Total chargeoffs to the reserve for losses, net of recoveries, were $5,059,000 in 1993 and $7,505,000 in 1992. In addition to chargeoffs in 1993, the Company recorded losses of $3,477,000 as REO costs and losses under a new accounting rule related to the disposition of problem assets, an increase from $309,000 in 1992. 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 was purchased. Chargeoffs which reduced the balance of non-accrual loans originated by the Company and REO remaining on the books at year end were $1,835,000 in 1993 and $1,014,000 in 1992. During 1993, chargeoffs on problem assets were $209,000 for single family, $3,367,000 for multifamily and $1,547,000 for commercial real estate loans, representing 15%, 22% and 25%, 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, historical loan loss experience, the results of the Company's ongoing 37 loan grading process, the amount of past due and non-performing 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 109% at December 31, 1993 and 133% at December 31, 1992. While this ratio declined, management considers the $12,657,000 reserve at December 30, 1993 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. Management currently anticipates that it will continue to provide additional recession reserves so long as, in its judgment, the effects of the recessionary conditions on its assets continue. When management determines that the effects of the recessionary conditions have diminished, management currently anticipates that it would reduce or eliminate such future provisions to the recession reserve, although the Company may continue to maintain total reserves at a level higher than existed prior to this recession. Management does not intend to increase earnings in future periods by reversing amounts in the recession reserve. 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 December 31, 1993, approximately 88% of the Company's interest-earning assets and 72% of interest-bearing liabilities will reprice within the next year and the Company's one-year cumulative GAP is positive 21%. At December 31, 1993, the Company's repricing position is such that, in a rising interest rate environment, its net interest margin may tend to increase as assets reprice more rapidly than liabilities, subject to interim limitations on asset repricings. The Company has entered into interest rate cap transactions in the aggregate notional principal amount of $982,000,000 which terminate in periods ranging from March 1994 through March 2002. Under the terms of these transactions, which have been entered into with eight unrelated commercial or investment banking institutions, the Company generally will be reimbursed quarterly for increases in the three-month LIBOR for any quarter during the term of the applicable transaction in which such rate exceeds a rate ranging from 9% to 13%. 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 31 and 32 of this annual report. With the general decline in interest rates throughout 1993 and 1992, current market rates at the end of each year were below those in effect at the time the Company took steps to protect against a potential rise in rates. Therefore, the Company's deposit liabilities with a longer maturity and purchased interest rate cap contracts have a ``fair value'' at December 31, 1993 and 1992, which is lower than their carrying amount. The Company's adjustable rate loans and investments, in general, have a fair value above their carrying amount due to the decline in interest rates and the fact that a significant amount of loans have minimum interest rate floors in effect and carry prepayment penalties. Summary information regarding the Company's asset and liability repricing at December 31, 1993 is as follows:
0-6 7-12 1-5 Over Not Rate (In $ millions) Months Months Years 5 Years Sensitive Total - --------------------------------- ------ ------ ------- ------- --------- -------- Cash and investments $121.7 $ 24.8 $ -- $ -- $ -- $ 146.5 Loans 654.5 441.6 120.7 39.3 -- 1,256.1 Other assets -- -- -- -- 14.6 14.6 - --------------------------------- ------ ------ ------- ------- --------- -------- Total assets 776.2 466.4 120.7 39.3 14.6 1,417.2 - --------------------------------- ------ ------ ------- ------- --------- -------- Deposits 286.6 185.9 273.8 5.4 -- 751.7 FHLB advances and borrowings 362.1 40.0 40.0 40.0 -- 482.1 Debentures -- -- -- 61.0 -- 61.0 Other -- -- -- -- 17.5 17.5 Equity -- -- -- -- 104.9 104.9 Effect of hedging activities 65.0 -- (40.0) (25.0) -- -- - --------------------------------- ------ ------ ------- ------- --------- -------- Total liabilities and equity 713.7 225.9 273.8 81.4 122.4 $1,417.2 - --------------------------------- ------ ------ ------- ------- --------- ======== Repricing gap-positive (negative) $ 62.5 $240.5 $(153.1) $(42.1) $(107.8) ================================= ====== ====== ======= ======= ========= Cumulative repricing gap: Dollar amount $62.5 $303.0 $149.9 $107.8 -- Percent of total assets 4.4% 21.4% 10.6% 7.6% --
38 NON-INTEREST INCOME For 1993, service fee revenue, net of amortization costs on the Company's premium on sale of loans and purchased mortgage servicing rights, was $1,233,000 compared to $1,110,000 for 1992 and $1,694,000 for 1991. During 1993, the Company continued to experience 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 lower average balance of loans serviced during 1993 and 1992, as compared with 1991, also contributed to lower servicing revenues. In 1990 and 1991, 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, al1 of which were recorded as a reduction in the carrying value of the purchased servicing rights. Total loans serviced were $814,453,000 at December 31, 1993, with an average portfolio of $789,071,000 for 1993, $755,830,000 for 1992 and $812,829,000 for 1991. 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 0.38% for 1993, 0.41% for 1992 and 0.42% for 1991. Loan and related fee income was $1,937,000 in 1993, $1,975,000 in 1992 and $1,220,000 in 1991. 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 $425,475,000 in 1993, $373,551,000 in 1992 and $119,961,000 in 1991. The amount of loans sold increased in 1993 and 1992, as a result of higher lending volume, lower interest rates which created more customer demand for fixed rate loans, and good conditions 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 investors shortly after funding. Loans sold under these relationships represented 80% of the total sold in 1993, 64% in 1992 and 87% in 1991. Also, the Company has identified secondary market sources which desire adjustable rate loans of the type the Company originates primarily for its portfolio. The Company sold $85,822,000 and $132,974,000 of adjustable rate loans to these investors in 1993 and 1992, respectively, in part to meet a regulatory restriction that had been in effect for a portion of each of those years on the amount of mortgage loan growth. 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, if any, 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. The sale of loans resulted in gains of $2,250,000 in 1993 compared to $3,257,000 in 1992 and $599,000 in 1991. Loan sales volume was higher in 1993 compared to 1992, but the average price for fixed rate loans declined and a lower volume of adjustable rate loans were sold. Of the gains recorded by the Company in 1993, approximately $1,836,000 represented an excess of cash received over the carrying basis of the loans sold and $414,000 represented a capitalized premium. The Company did not anticipate that the level of gains on loan sales that were recorded in 1992 would be maintained in 1993 and currently expects that the future level of loan sales and related gains may decline. There were no sales of investment securities in 1993. In 1992, a net loss of $852,000 was recorded upon sale of certain investments with deteriorating credit conditions. A loss of $519,000 was recognized in 1991 upon sale of all shares on a U.S. Government bond mutual fund to redeploy the proceeds into higher yielding loans. Also in 1991, the Company sold, at a gain of $156,000, certain adjustable rate mortgage-backed securities to avoid potential decreases in value from conversion of underlying real estate loans to fixed rates. In 1993, the Company continued to expand and upgrade its investment portfolio purchasing $44,230,000 of investment securities. Purchases in 1993 and the prior two 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, 1993, substantially all of these investments were U.S. Government, agency or other mortgage-backed securities and 100% were adjustable, repricing annually or more frequently. 39 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 $20,647,000 in 1993, $14,496,000 in 1992 and $11,299,000 in 1991. The Company has capitalized general and administrative costs related to loan originations totalling $6,788,000 in 1993, $5,452,000 in 1992 and $3,277,000 in 1991; 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 $9,406,000 at December 31, 1993, $12,621,000 at December 31, 1992 and $11,550,000 at December 31, 1991. During 1993, the Company originated more single family ``no points'' loans, resulting in a decrease in unearned fees net of costs at December 31, 1993. Non-interest expenses before such capitalized costs have increased each year, primarily due to operating a growing company and originating more loans. Salaries and related benefits, the largest component of non-interest expense, include the cost of benefit plans, health insurance and payroll taxes, which have increased in each of the past three years. Before capitalized costs, 1993 salary expense increased 15% over 1992 and 1992 salary expense increased 35% over 1991. In 1993, there was a 14% increase in average employees and compensation was also higher due to increased loan origination volume. Net income per employee was $94,200 in 1993 compared to $101,400 in 1992 and $79,000 in 1991. Although net income per employee declined, the Company believes its 1993 level of net income per employee remains higher than that of banks of comparable asset size. Occupancy costs were $1,872,000 in 1993 compared to $1,460,000 in 1992 and $1,158,000 in 1991. The increase for 1993 is related to the opening of two deposit branches in San Francisco and expanded facilities in San Francisco, Las Vegas, and Beverly Hills. Advertising expense was $1,340,000 in 1993 compared to $1,047,000 in 1992 and $832,000 in 1991. Newspaper ads are placed to support retail deposit gathering and, in 1993 and 1992, there was increased promotional and advertising costs associated with the Company's higher lending volume. In 1992 and 1991, FHLB advance borrowings reduced retail deposit needs; deposit-related advertising expense as a percentage of average deposits was 0.06% and 0.05%, respectively, as compared to 0.08% in 1993. These expenses may increase in the future as the Company emphasizes deposits as a funding source and has opened 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 1993, $660,000 for 1992 and $459,000 for 1991. Under accounting rules for 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 and 1991, most of these expenses were reflected as chargeoffs against the Company's loss reserves. As a result of these new rules and the Company's continued resolution of a high volume of problem assets, REO costs and losses related to the disposition of delinquent loans are presented as a separate line item in the income statement which increased to $3,477,000 in 1993 compared to $309,000 charged to the income statement in 1992 and $330,000 in 1991. This expense category in 1993 included writedowns or losses on the sale of REO of $1,993,000; taxes, insurance, maintenance and other operating expenses, net of income, of $1,255,000; and collection costs of $229,000. Other general and administrative expenses were $8,023,000 in 1993 and $5,847,000 in 1992 compared to $3,953,000 in 1991. These costs increased in part due to 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 include deposit insurance premiums, liability insurance costs, as well as data processing, utilities and other operating costs which vary with transaction volume and inflation. The cost of FDIC insurance has increased to $1,816,000 in 1993 from $1,455,000 in 1992 and $1,203,000 in 1991, because of higher average deposits and higher insurance premium rates. A financial institution's operating efficiency is frequently measured by comparing non-interest expense to net interest income and to average total assets. For 1993, total net interest income of $41,430,000 exceeded recurring non-interest expense of $17,170,000 by $24,260,000 compared to an excess of $22,400,000 in 1992 and an excess of $15,777,000 in 1991. As a measure of its ability to control costs, the Company computes recurring non-interest expense as a percentage of average total assets. This ratio was 1.33% in 1993 and 1.30% in 1992, down from 1.44% in 1991. 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 1993 provision for income taxes of $8,960,000 represents an effective tax rate of 41.9%, compared to $8,043,000 or 40.6% for 1992, and $5,041,000 or 40.2% for 1991. The provision for income taxes increased primarily as a result of increases in the Company's income before taxes to $21,399,000 in 1993 and $19,805,000 in 1992 from $12,546,000 in 1991 and the increase by 1.0% in the Federal tax rate for 1993. 40 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 or maturity of existing assets or by the acquisition of funds through liability management. The Company maintains a portion of its assets in a diversified portfolio of marketable investment securities, which includes U.S. Government agency and mortgage-backed instruments. At December 31, 1993, the investment securities portfolio of $84,208,000 and cash plus short-term investments of $39,378,000 amounted to 9% of total assets. Additionally, the Company had available unused FHLB advances of approximately $18,000,000. 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 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, 1993, 55% of the Company's interest-earning assets reprice within six months. By having assets on which the interest rate adjusts frequently, the Company has 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 $944,796,000 of loans originated in 1993 was diversified and included the sale of $425,475,000 of loans, loan principal repayments of $305,594,000, an increase in long-term FHLB advances of $85,000,000, and a net increase in deposits of $52,899,000. In 1992 and 1991 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 lesser extent in 1991, loan sales. In each of the past three years, the Company has generated funds from the sale of debentures or common stock. CAPITAL RESOURCES At December 31, 1993, the Company's capital, consisting of stockholders' equity, long-term debentures and reserves, was $178,560,000, or 12.6% of total assets. In 1993, the Company's total capital position increased $18,699,000, or 12%, compared to increases of $55,564,000 in 1992 and $42,288,000 in 1991, primarily due to the proceeds from the sale of common stock and debentures in those years, as well as earnings and additions to loss reserves. 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 1993 total risk-based capital ratio would be 8.0%, as compared to the Company's actual ratio of approximately 17.6% at December 31, 1993, 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. First Republic has invested the net proceeds from 1992 and 1991 sales of its common stock and subordinated debentures into First Thrift, in the form of $36,000,000 as equity and $15,000,000 as interest-bearing capital notes. Therefore, First Republic expects to receive payments of interest and principal from First Thrift which generally correspond to the payment terms of $15,000,000 of its subordinated debentures. At December 31, 1993, First Republic had $26,457,000 of long-term subordinated debentures outstanding with maturities ranging from 2003 to 2009. 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, 1993, First Republic had stockholders' equity of $104,946,000 and its investment was $134,309,000 in First Thrift and $5,126,000 in First Republic Savings Bank. First Republic received dividends of $1,963,000 for 1993, $1,160,000 for 1992 and $2,234,000 for 1991 from First Thrift. These dividends represented approximately 12% in 1993, 8% in 1992 and 25% in 1991 of the earnings of First Thrift for such periods. Additionally, First Republic received interest payments from First Thrift of $1,554,000 in 1993, $1,908,000 in 1992 and $126,000 in 1991. The ability of First Republic to receive future dividends depends upon the operating results of First Thrift, and government regulations applicable to First Thrift. 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. 41 DIRECTORS AND CORPORATE OFFICERS OF FIRST REPUBLIC BANCORP INC. ROGER O. WALTHER, 58, Chairman of the Board of Directors. Mr. Walther is Chairman and Chief Executive Officer of ELS Educational Services, Inc., America's largest teacher of English as a second language. He is a director of Charles Schwab & Co., Inc. He was formerly Chairman of San Francisco Bancorp. B.S., 1958, United States Coast Guard Academy; M.B.A., 1961, Wharton School, University of Pennsylvania; and member of the Graduate Executive Board of the Wharton School. JAMES H. HERBERT, II, 49, President, Chief Executive Officer and Director. From 1980 to July 1985, Mr. Herbert was President, Chief Executive Officer and a director of San Francisco Bancorp. He is a director of the California Association of Thrift & Loan Companies and is on the California Commissioner of Corporations' Industrial Loan Advisory Committee. B.S., 1966, Babson College; M.B.A., 1969, New York University; and a member of Babson Corporation. KATHERINE AUGUST, 46, Executive Vice President and Director. Previously, Ms. August was Senior V.P. and Chief Financial Officer at PMI Mortgage Insurance Co., a subsidiary of Sears/Allstate. A.B., 1969, Goucher College; M.B.A., 1975, Stanford University. WILLIS H. NEWTON, JR., 44, Senior V.P. and Chief Financial Officer. Formerly, Mr. Newton was V.P. and Controller of Homestead Financial. B.A., 1971, Dartmouth College; M.B.A., 1976, Stanford University; Certified Public Accountant. [PHOTO APPEARS HERE] The Directors of First Republic Bancorp: standing left to right: John F. Mangan, Richard M. Cox-Johnson, Barrant V. Merrill, L. Martin Gibbs, James H. Herbert, II, Katherine August, Roger O. Walther, Kenneth W. Dougherty, James F. Joy, Frank J. Fahrenkopf, Jr. 42 LINDA G. MOULDS, 43, Vice President, Secretary and Controller. Previously, Ms. Moulds was Secretary and Controller of San Francisco Bancorp and a director of First United. B.S. 1971, Temple University. CHRISTINA L. COULSTON, 46, Vice President, Loan Administration. From 1985 to June 1989, Ms. Coulston was in charge of the loan servicing function for Atlantic Financial Savings. B.S., 1969, Oregon State University. EDWARD J. DOBRANSKI, 43, Vice President/Corporate Counsel. Previously Mr. Dobranski was Of Counsel at Jackson, Tufts, Cole & Black in San Francisco, specializing in banking, real estate and corporate law. B.A., 1972, Coe College-Iowa; J.D., 1975, Creighton University-Nebraska. DAVID B. LICHTMAN, 30, Vice President, Credit Administration. Since 1986, Mr. Lichtman has held positions in all phases of First Republic's lending operations. B.A., 1985, Vassar College; M.B.A., 1990, University of California-Berkeley. RICHARD M. COX-JOHNSON, 59, Director. Mr. Cox-Johnson is a director of Premier Consolidated Oilfields PLC. Graduate of Oxford University, 1955. KENNETH W. DOUGHERTY, 67, Director. 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. B.A., 1948, University of Pennsylvania. FRANK J. FAHRENKOPF, JR., 54, Director. Mr. Fahrenkopf is a partner in the Washington, D.C., law of firm of Hogan & Hartson. From 1983 to 1989, he was Chairman of the Republican National Committee. B.A. 1962, University of Nevada-Reno; L.L.B., 1965, University of California-Berkeley. L. MARTIN GIBBS, 56, Director. Mr. Gibbs is a partner with the New York law firm of Rogers & Wells, counsel to the Company. B.A., 1959, Brown University; J.D., 1962, Columbia University. JAMES F. JOY, 56, Director. Mr. Joy is Director--European Business Development-- CVC Capital Partners-Europe and a non-executive director of Sylvania Lighting International. B.S., 1959 and B.S.E.E., 1960, Trinity College; M.B.A, 1964, New York University. JOHN F. MANGAN, 57, Director. Mr. Mangan is an investor and was previously President of Prudential-Bache Capital Partners, Inc., and a Managing Director of Prudential-Bache Securities, Inc. He has been a director of Noel Group, Inc., New York, N.Y., and the Hulton-Deutsch Collection Ltd., London. B.A., 1959, University of Pennsylvania. BARRANT V. MERRILL, 63, Director. Mr. Merrill is the Managing Partner of Sun Valley Partners. Previously, he was General Partner of Dakota Partners and Chairman of Pershing & Co., Inc., a division of Donaldson, Lufkin & Jenrette. B.A., 1953, Cornell University. 43 QUARTERLY AND ADDITIONAL INFORMATION
Fully- Common Stock Total Net Provision Diluted Price Range(1) Interest Interest For Pretax Net Earnings ----------------- Income Income Losses Income Income Per Share(1) High Low - ---------- ----------- ----------- ---------- ---------- ---------- --------- ------ ------ 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 1992 1Q $22,335,000 $8,051,000 $1,734,000 $4,578,000 $2,686,000 $.39 $16.26 $14.14 2Q 24,028,000 9,250,000 1,929,000 5,456,000 3,270,000 .41 15.44 11.90 3Q 24,502,000 9,379,000 2,131,000 5,809,000 3,439,000 .43 14.97 11.31 4Q 24,698,000 9,907,000 1,989,000 3,962,000 2,367,000 .28 11.54 10.02 ========== =========== =========== ========== ========== ========== ========= ====== ======
(1) Per share amounts and prices per share have been adjusted to reflect the effect of the 3% stock dividends declared by the Company's Directors to stockholders of record on February 18, 1994 and February 25, 1993. First Republic Bancorp Inc. Common Stock is traded on the New York and Pacific Stock Exchanges under the symbol FRC. At December 31, 1993, there were approximately 200 stockholders of record, although the Company has been advised 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 thrift and loan holding company and 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 small commercial properties. From its inception in 1985 through December 31, 1993, the Company has originated $3.6 billion of loans, $1.5 billion of which have been sold in the secondary market to institutional investors. At December 31, 1993, the Company's loan portfolio consisted primarily of $1,246,379,000 of real estate secured loans, 87% of which were adjustable rate mortgages or mature within one year. The Company obtains funds from FDIC-insured deposit accounts, as well as from FHLB advances, the issuance of subordinated and convertible subordinated debentures, and equity financings. [BAR CHART] [BAR CHART] [BAR CHART] 44 FIRST REPUBLIC BANCORP INC. OFFICERS, DIRECTORS AND CORPORATE INFORMATION ROGER O. WALTHER R.M. COX-JOHNSON Common Stock listed on the FIRST REPUBLIC BANCORP INC. Chairman Director New York and Pacific Stock 388 Market Street Director, Premier Exchanges_Symbol FRC San Francisco, California 94111 JAMES H. HERBERT, II Consolidated Oilfields PLC (415) 392-1400 President and General Counsel: (800) 392-1400 (California) Chief Executive Officer KENNETH W. DOUGHERTY Rogers & Wells Director Director FIRST REPUBLIC THRIFT & LOAN Consultant Auditors: 101 Pine Street KATHERINE AUGUST KPMG PEAT MARWICK San Francisco, California 94111 Executive Vice President FRANK J. FAHRENKOPF, JR. (415) 392-1400 Director Director Registrars/Transfer Agents: (800) 392-1400 (California) Partner, Hogan & Hartson Common Stock- WILLIS H. NEWTON, JR. 1088 Stockton Street Senior Vice President and L. MARTIN GIBBS FIRST INTERSTATE San Francisco, California 94108 Chief Financial Officer Director BANK OF CALIFORNIA (415) 834-0888 Partner, Roger & Wells LINDA G. MOULDS Subordinated and 5628 Geary Boulevard Vice President, JAMES F. JOY Convertible Debentures- San Francisco, California 94121 Secretary and Controller Director (415) 751-3888 Director, CVC Capital U.S. TRUST COMPANY CHRISTINA L. COULSTON Partners-Europe OF CALIFORNIA OR 3928 Wilshire Boulevard Vice President, NATIONAL CITY BANK Los Angeles, California 90010 Loan Administration (213) 384-0777 JOHN F. MANGAN The Company's Annual (800) 777-9507 (So. California) EDWARD J. DOBRANSKI Director Stockholders' Meeting will Vice President, Investments be held on Wednesday, 9593 Wilshire Boulevard Corporate Counsel May 4, 1994 at 4pm Beverly Hills, California 90212 BARRANT V. MERRILL at the New York Yacht Club (310) 288-0777 DAVID B. LICHTMAN Director 37 West 44th Street, Vice President, Investments New York, New York 10036. 116 East Grand Avenue Credit Administration 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 FIRST REPUBLIC SAVINGS BANK 2510 South Maryland Parkway Las Vegas, Nevada 89109 (702) 792-2200
[LOGO OF FIRST REPUBLIC BANCORP INC.] FIRST REPUBLIC BANCORP INC. 388 MARKET STREET SAN FRANCISCO, CALIFORNIA 94111 EX-22 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 (formerly Silver State Thrift and Loan)--a Nevada state chartered industrial banking company 3.First Republic Mortgage, Inc.--a Nevada state chartered mortgage loan origination subsidiary. EX-23 6 CONSENT OF AUDITORS 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 25, 1994, relating to the Consolidated Balance Sheet of First Republic Bancorp Inc. and subsidiaries as of December 31, 1993 and 1992, 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, 1993, which report appears in the December 31, 1993 Annual Report of First Republic Bancorp Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1993. KPMG Peat Marwick San Francisco, California March 29, 1994 -----END PRIVACY-ENHANCED MESSAGE-----