<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
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
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which registered:
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.
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<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
OTHER
SAN FRANCISCO LOS ANGELES CALIFORNIA LAS VEGAS PERCENT
BAY AREA COUNTY AREAS NEVADA OTHER TOTAL BY TYPE
------------- ----------- ---------- --------- ------ ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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(1) Includes equity lines of credit secured by single family residences and
single family loans held for sale.
4
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1993 1992 1991
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(IN THOUSANDS)
<S> <C> <C> <C>
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
</TABLE>
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
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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
<PAGE>
"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.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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%
</TABLE>
7
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991
------------------ ------------------ ------------------
CARRYING MARKET CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ======== ========
</TABLE>
- --------
(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:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
==== === ======= ====== ======= ======== ========= ====== ======= ====
</TABLE>
- --------
(1) Represents one nonaccruing asset.
8
<PAGE>
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
<PAGE>
The following table shows the maturity of the Thrifts' certificates of
$100,000 or more at December 31, 1993.
<TABLE>
<CAPTION>
FIRST REPUBLIC
FIRST THRIFT SAVINGS BANK
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1993 1992 1991
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
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%
</TABLE>
- --------
(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
<PAGE>
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
three months and less, six months and less and twelve months and less
categories in accordance with its current policy of having more assets than
liabilities reprice for these periods. Conversely, when maturing or rate
adjusting liabilities exceed maturing or rate adjusting assets during a given
period, a rising rate environment generally will inhibit earnings and
declining rates will serve to enhance earnings. The table illustrates
projected maturities or interest rate adjustments based upon the contractual
maturities or adjustment dates at December 31, 1993.
ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY MATURING OR ADJUSTING DURING
PERIODS SUBSEQUENT TO DECEMBER 31, 1993
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans(1)................ $ -- $383,777 $383,349 $362,851 $ 73,438 $ 52,643 $ -- $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 $475,037 $393,841 $387,709 $ 73,438 $ 52,643 $ 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 $ 55,439 $165,973 $161,811 $ (150,622) $ (143,471) $(107,833)
Effect of interest rate
swaps................... -- 20,000 45,000 -- (40,000) (25,000) --
------- -------- -------- -------- ---------- ---------- ---------
Hedged GAP.............. $18,703 $ 35,439 $120,973 $161,811 $ (110,622) $ (118,471) $(107,833)
======= ======== ======== ======== ========== ========== =========
Hedged GAP as a
percentage of total
assets................. 1.32% 2.50% 8.54% 11.42% (7.81)% (8.36)% (7.61)%
======= ======== ======== ======== ========== ========== =========
Cumulative hedged GAP... $18,703 $ 54,142 $175,115 $336,926 $ 226,304 $ 107,833 $ --
======= ======== ======== ======== ========== ========== =========
Cumulative hedged GAP as
percentage of total
assets................. 1.32% 3.82% 12.36% 23.77% 15.97% 7.61% 0.00%
======= ======== ======== ======== ========== ========== =========
</TABLE>
- --------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
The following table presents First Thrift's regulatory capital position at
December, 1993 under the risk-based capital guidelines:
<TABLE>
<CAPTION>
PERCENT OF
RISK-ADJUSTED
AMOUNT ASSETS
-------- -------------
(IN THOUSANDS)
<S> <C> <C>
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
========
</TABLE>
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:
<TABLE>
<CAPTION>
PERCENT
AMOUNT OF ASSETS
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
LEVERAGE RATIO:
Tier 1 capital....................................... $ 119,396 8.88%
Minimum requirement.................................. 53,782 4.00
----------
Excess............................................. $ 65,614
==========
Average total assets................................. $1,344,550
==========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1993 1992 1991
--------------------------- --------------------------- -------------------------
AVERAGE YIELDS/ AVERAGE YIELDS/ AVERAGE YIELDS/
BALANCE INTEREST RATES BALANCE INTEREST RATES BALANCE INTEREST RATES
---------- -------- ------- ---------- -------- ------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======= ======= =======
</TABLE>
- --------
(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
<PAGE>
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.
<TABLE>
<CAPTION>
1993 VS. 1992 1992 VS. 1991
----------------------- ------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ------- ------ ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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
====== ======= ====== ======= ======= ======
</TABLE>
Types of Loans
The following table sets forth by category the total loan portfolio of the
Company at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
========== ========== ======== ======== ========
</TABLE>
24
<PAGE>
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.
<TABLE>
<CAPTION>
AFTER ONE MORE THAN
WITHIN BUT WITHIN FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
-------- ---------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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
======= ====== ==== =======
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1993 1992 1991 1990 1989
------- ------- ------- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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)%
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======= ===== ======= ===== ======= ===== ====== ===== ====== =====
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
--------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<C> <S>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
AGE POSITION HELD WITH THE COMPANY
--- ------------------------------
<S> <C> <C>
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
</TABLE>
- --------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
PAGE OF
ANNUAL REPORT
-------------
<S> <C>
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
</TABLE>
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
<PAGE>
<TABLE>
<C> <S>
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)
</TABLE>
35
<PAGE>
<TABLE>
<C> <S>
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).
</TABLE>
36
<PAGE>
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/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
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/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
</TABLE>
38
<PAGE>
[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.''
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT YEAR END 1993 1992 1991 1990 1989
- ----------------------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
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
<CAPTION>
FOR THE YEAR 1993 1992 1991 1990 1989
- ----------------------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
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
- ----------------------------- -------------- -------------- -------------- -------------- --------------
</TABLE>
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 ]
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
Although we expect the level of loan delinquencies and REO to increase
4
<PAGE>
as problems related to this natural disaster are addressed and resolved, this
provision is intended to maintain the integrity of our reserve level.
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
<PAGE>
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
<PAGE>
[PHOTO APPEARS HERE]
7
<PAGE>
``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
<PAGE>
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
<PAGE>
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
<PAGE>
[PHOTOS APPEAR HERE]
11
<PAGE>
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
<PAGE>
``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
<PAGE>
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
<PAGE>
[PHOTOS APPEAR HERE]
15
<PAGE>
``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
<PAGE>
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
<PAGE>
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
<PAGE>
[PHOTOS APPEAR HERE]
19
<PAGE>
CONSOLIDATED BALANCE SHEET
December 31, 1993 and 1992
<TABLE>
<CAPTION>
ASSETS 1993 1992
--------------- ---------------
<S> <C> <C>
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
============== ==============
</TABLE>
See accompanying notes.
20
<PAGE>
CONSOLIDATED BALANCE SHEET
December 31, 1993 and 1992
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1993 1992
-------------- --------------
<S> <C> <C>
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.
</TABLE>
21
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
Years ended December 31, 1993, 1992 and 1991
<TABLE>
<CAPTION>
1993 1992 1991
----------- -------------- --------------
<S> <C> <C> <C>
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
=========== ============== ==============
</TABLE>
See accompanying notes.
22
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION> Capital in
Preferred Common excess of Retained
YEARS ENDED DECEMBER 31, 1991, 1992 and 1993 stock stock par value earnings
- --------------------------------------------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C>
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
============================================= ======= ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
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
- --------------------------------------------- -------------- -------------- --------- -------------
<S> <C> <C> <C> <C>
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
============================================= ========= =========== ========= ============
</TABLE>
See accompanying notes.
23
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOW
Years ended December 31, 1993, 1992 and 1991
<TABLE>
<CAPTION>
1993 1992 1991
-------------- -------------- --------------
<S> <C> <C> <C>
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
============= ============= =============
</TABLE>
See accompanying notes.
24
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1993 1992
------------------------ ------------------------
Carrying Market Carrying Market
Value Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
Carrying Market
Value Value
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
Proceeds, gross gains and gross losses from sales of investment securities for
each of the past three years were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- -----------
<S> <C> <C> <C>
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)
========== ========== ===========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
4. Prepaid Expenses and Other Assets
---------------------------------
At December 31, prepaid expenses and other assets consist of the following:
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1993 1992
------------------- -------------------
Advances maturing in Amount Rate Amount Rate
------------ ----- ------------ -----
<S> <C> <C> <C> <C>
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%
============ ==== ============ ====
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1993 1992
---------- -----------
<S> <C> <C>
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
========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1993 1992 1991
---------- ----------- ------------
<S> <C> <C> <C>
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
========== ========== ===========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1993 1992 1991
----- ----- ------
<S> <C> <C> <C>
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%
==== ==== ====
</TABLE>
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:
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
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
========== ==========
</TABLE>
The following is a summary of changes in deferred tax related accounts for 1992
and 1993 under SFAS No. 109:
<TABLE>
<CAPTION>
Deferred Valuation Deferred
Tax Asset Allowance Tax Liability Net Total
---------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
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
========== ========= =========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
Number Price
of Shares Per Share
---------- --------------
<S> <C> <C>
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
======= ==============
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
December 31, 1993 December 31, 1992
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
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
</TABLE>
17. First Republic Bancorp Inc.
---------------------------
<TABLE>
<CAPTION>
(Parent Company Only)
Condensed Balance Sheet
December 31, 1993 1992
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
32
<PAGE>
FIRST REPUBLIC BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Condensed Statement of Income
Year ended December 31, 1993 1992 1991
----------- ------------ -----------
<S> <C> <C> <C>
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
=========== ============ ===========
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
1993 1992 1991
- ---------------------------------- ----- ----- -----
<S> <C> <C> <C>
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%
================================== ===== ===== =====
</TABLE>
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
<PAGE>
The following table shows the Company's loan originations during the past two
years by property type and location:
<TABLE>
<CAPTION>
1993 1992
------------ ------------
(In $ millions) $ % $ %
- ------------------ ------ --- ------ ---
<S> <C> <C> <C> <C>
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%
================== ====== ==== ====== ====
</TABLE>
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.
<TABLE>
<CAPTION>
San Los Angeles
Francisco and Other Las Vegas,
(In $ thousands) Bay Area California Nevada Total
- ------------------ --------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
December 31, 1993 1992
- ----------------------------------- ----------- -----------
<S> <C> <C>
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%
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
0-6 7-12 1-5 Over Not Rate
(In $ millions) Months Months Years 5 Years Sensitive Total
- --------------------------------- ------ ------ ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
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% --
</TABLE>
38
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
QUARTERLY AND ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
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
- ---------- ----------- ----------- ---------- ---------- ---------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
========== =========== =========== ========== ========== ========== ========= ====== ======
</TABLE>
(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
<PAGE>
FIRST REPUBLIC BANCORP INC. OFFICERS, DIRECTORS AND CORPORATE INFORMATION
<TABLE>
<S> <C> <C> <C>
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
</TABLE>
<PAGE>
[LOGO OF FIRST REPUBLIC BANCORP INC.]
FIRST REPUBLIC BANCORP INC.
388 MARKET STREET
SAN FRANCISCO, CALIFORNIA 94111
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
