-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q5pIpiCftxcBm5/bdvSR9RJYhItjY1Q1DlXYSVDCIm5rH2LwtQqJNBQuqvbZyQQQ EHBCcKttKptXS8aOQc7rOQ== 0000898430-96-000983.txt : 19960328 0000898430-96-000983.hdr.sgml : 19960328 ACCESSION NUMBER: 0000898430-96-000983 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960327 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST REPUBLIC BANCORP INC CENTRAL INDEX KEY: 0000770975 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 942964497 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09837 FILM NUMBER: 96538832 BUSINESS ADDRESS: STREET 1: 388 MARKET ST STREET 2: SEOND FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4153921400 10-K405 1 FORM 10-K405 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER: 0-15882 ---------------- FIRST REPUBLIC BANCORP INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2964497 (I.R.S. EMPLOYER (STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 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 ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE ON WHICH REGISTERED: Common Stock, $.01 par value New York Stock Exchange 7 1/4% Convertible Subordinated and Debentures Due 2002 Pacific Stock Exchange 8 1/2% Subordinated Debentures Due 2008 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by Check Mark Whether the Registrant (1) Has Filed All Reports Required to Be Filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 During the Preceding 12 Months (Or for Such Shorter Period That the Registrant Was Required to File Such Reports), and (2) Has Been Subject to Such Filing Requirements for the past 90 Days. Yes [X] No [_] Indicate by Check Mark If Disclosure of Delinquent Filers Pursuant to Item 405 of Regulation S-k Is Not Contained Herein, and Will Not Be Contained, to The Best of Registrant's Knowledge, in Definitive Proxy or Information Statements Incorporated by Reference in Part III of this Form 10-K or Any Amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non affiliates of the registrant, based on the closing price of $12.50 for such stock on March 22, 1996 was $85,724,000. The number of shares outstanding of the registrant's common stock, par value $.01 per share, as of March 22, 1996 was 7,348,748. DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant's Annual Report to Stockholders for the year ended December 31, 1995 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 30, 1996 (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 35. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL First Republic Bancorp Inc. ("First Republic" and with its subsidiaries, the "Company") is a financial services holding company operating in California and Nevada. First Republic conducts its business primarily through a California- chartered, FDIC-insured, thrift and loan subsidiary, First Republic Thrift & Loan ("First Thrift"), and also a Nevada-chartered, FDIC-insured, thrift and loan subsidiary, First Republic Savings Bank (together the "Thrifts") operating in Las Vegas, Nevada. The Company operates both as an originator of loans for its balance sheet and as a mortgage company, originating, holding or selling, and servicing mortgage loans. The Company is engaged in originating real estate secured loans for retention in the portfolios of the Thrifts. In addition, the Company operates as a mortgage banking company originating mortgage loans for sale to institutional investors in the secondary market. The Company also generates fee income by servicing mortgage loans for such institutional investors and other third parties. First Thrift's depository activities and advances from the Federal Home Loan Bank of San Francisco (the "FHLB") are its principal source of funds with loan principal repayments, sales of loans and capital contributions and advances from First Republic as supplemental sources. The Company's deposit gathering activities are conducted in the San Francisco Bay Area, Los Angeles Area, and San Diego County, California and in Las Vegas, and its lending activities are concentrated in the San Francisco, Los Angeles and Las Vegas areas. The San Francisco Bay Area, Los Angeles Area and San Diego County are among the wealthiest areas in California as measured by average housing costs and income per family. Las Vegas has been growing rapidly and has experienced significant inward migration as well as internal business growth. On December 10, 1993, First Republic acquired First Republic Savings Bank, when all of its outstanding common stock was acquired for a total purchase price of $1,414,000 in cash. As a result of this acquisition, accounted for as a purchase transaction, the Company has recorded goodwill of $87,000 net of amortization at December 31, 1995. 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. The Company is presently contemplating the merger of its two thrift and loan subsidiaries, First Thrift and First Republic Savings Bank, in order to achieve certain operational efficiencies. Additionally, the Company may in the future pursue a change in the legal charter of its subsidiaries from a thrift and loan charter to a commercial bank charter. Such a charter change would allow the Company to provide additional services, including traditional checking accounts, to its customers. The Company is also considering merging the holding company into the merged operating subsidiary, if such subsidiary is converted to a commercial bank. Each of these potential corporate reorganizations is subject to regulatory approval and the Company's review of various business considerations and federal and state laws; the holding company merger is also subject to stockholder approval. There can be no assurance that any of the foregoing contemplated reorganizations will be accomplished. 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 mortgage loans and to limit the origination of multifamily and commercial mortgage loans. A substantial portion of single family loans have been originated for sale in the secondary market, whereas historically a small percentage of apartment and commercial loans has been sold. From its inception in 1985 through December 31, 1995, the Company originated approximately $5.0 billion of loans, of which approximately $1.8 billion were sold to investors. 2 The Company has emphasized the retention of adjustable rate mortgages ("ARMs") in its loan portfolio. At December 31, 1995, over 88% of the Company's loans were adjustable rate or were due within one year. If interest rates rise, payments on ARMs increase, which may be financially burdensome to some borrowers. Subject to market conditions, however, the Company's ARMs generally provide for a life cap that is 5% to 6% above the initial interest rate as well as periodic caps on the rates to which an ARM can increase from its initial interest rate, thereby protecting borrowers from unlimited interest rate increases. Also, the ARMs offered by the Company often carry fixed rates of interest during the initial period of from one to twelve months which are below the rate determined by the index at the time of origination plus the contractual margin. Certain ARMs contain provisions for the negative amortization of principal in the event that the amount of interest and principal due is greater than the required monthly payment. Generally, the Company underwrites the ability of borrowers to make payments at a rate in excess of the fully accrued interest rate, which is well above the initial start rate on negative amortization loans. The amount of any shortfall is added to the principal balance of the loan to be repaid through future monthly payments, which could cause increases in the amount of principal owed by the borrower over that which was originally advanced. At December 31, 1995, the amount of loans with the potential for negative amortization held by the Company was approximately 15.6% of total loans and the amount of loans which had actually experienced increases in principal balance since origination was approximately 3.8% of total loans. Of the Companys loans which have experienced an increase in principal since origination, the average increase was 0.8% of the original principal balances. 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, which consists of the President, the Executive Vice President, the Vice President/Chief Credit Officer and other underwriting officers, 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, prior to loan closing. Approximately 80% of the Company's loans are secured by properties located within 20 miles of one of the Company's offices. The Company utilizes third-party appraisers for appraising the properties on which it makes loans. These appraisers are chosen from a small group of appraisers approved by the Company for specific types of properties and geographic areas. In the case of single family home loans in excess of $1,100,000, two appraisals are generally required and the Company utilizes the lower of the two appraised values for underwriting purposes. The Company's focus on loans secured by a limited number of property types located in specific geographic areas enables management to maintain a continually updated knowledge of collateral values in the areas in which the Company operates. The Company's policy generally is not to exceed an 80% loan-to-value ratio on single family loans without mortgage insurance. The Company applies stricter loan-to-value ratios as the size of the loan increases. Under the Company's policies, an appraisal is obtained on all multifamily and commercial loans and the loan-to-value ratios generally do not exceed 75% for multifamily and 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, credit administration personnel, 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 larger 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. 3 At December 31, 1995, single family real estate secured loans, including home equity loans, represented $1,003,792,000 or 60% of the Company's loan portfolio. Approximately 64% of these loans were in the San Francisco Bay Area, approximately 24% were in the Los Angeles area, and approximately 9% were in other areas of California. The Company's strategy has been to lend to borrowers who are successful professionals, business executives, or entrepreneurs and who are buying or refinancing homes in metropolitan communities. Many of the borrowers have high liquidity and substantial net worths, and are not first-time home buyers. Additionally, the Company offers specific loan programs for first time home buyers and borrowers with low- to moderate-incomes. The Company's single family loans are secured by single family detached homes, condominiums, cooperative apartments, and two-to-four unit properties. At December 31, 1995, the average single family loan amount, excluding equity lines of credit, was approximately $594,000 and the approximate average loan-to-value ratio was 66%, using appraised values at the time of loan origination and current loan balances outstanding. Due to the Company's focus on upper-end home mortgage loans, the number of single family loans originated is limited (approximately 720 for 1995), 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, 1995, loans secured by multifamily properties totaled $350,507,000, or 21% of the Company's loan portfolio. The loans are predominantly on older buildings in the urban neighborhoods of San Francisco and Los Angeles. Approximately 43% of the properties securing the Company's multifamily loans were in the San Francisco Bay Area, approximately 21% were in Los Angeles County, approximately 6% were in other California areas and approximately 30% were in Clark County (Las Vegas). In the last six months of 1995 and continuing into 1996, the Company has reduced the amount of new originations for loans secured by multifamily properties located in California. 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, 1995, the average multifamily mortgage loan size was approximately $1,050,000 and the approximate average loan-to-value ratio was 70%, using the most current appraised values and the current loan balances outstanding. The Company has engaged in commercial real estate lending from its formation in 1985; however, since 1992, in response to economic conditions, the Company has originated a limited amount of commercial real estate loans. The Company has made a limited amount of commercial real estate construction 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 72% in the San Francisco Bay Area, approximately 11% in Los Angeles County, approximately 4% in other California areas and approximately 13% in Las Vegas. At December 31, 1995, the average loan size was approximately $1,100,000 and the approximate average loan-to-value ratio was 60%, using the most current appraised values and the current balances outstanding. The total amount of such loans outstanding on December 31, 1995, was $286,824,000, or 17% of the Company's loan portfolio. Since May 1990, the Company has originated construction loans secured by single family for sale homes and multifamily residential properties and permanent mortgage loans primarily secured by multifamily and commercial real estate properties in the Las Vegas, Nevada vicinity. In 1995, such loan originations were approximately $86,300,000 and approximately $51,300,000 of such loans were repaid, compared to approximately $135,700,000 of loan originations and $97,900,000 of such loans that were repaid in 1994. Generally, residential construction loans are short-term in nature and are repaid upon completion or ultimate sale of the properties. At December 31, 1995, the outstanding balance of the Company's Las Vegas construction loans was $22,218,000, or 1.3% of total loans. Construction loans are made in Las Vegas by an experienced lending team. The Company's Board of Directors has approved a current limit of $81,195,000 of total commitments on 4 single family for sale tracts and a maximum outstanding balance of $3,500,000 at any time per development. Total outstanding single family for sale construction loans on 15 separate projects were $13,205,000 at December 31, 1995 with total additional committed loan amounts of $8,019,000. At December 31, 1995, the Company had loans to two separate borrowers on two separate multifamily properties under construction in Las Vegas totalling $5,200,000 and has issued permanent take-out commitments of up to $11,798,000 on these multifamily projects, conditioned upon the completion of construction, satisfactory occupancy and rental rates, and certain other requirements. The Company had loans to two separate borrowers on two separate commercial real estate projects under construction in Las Vegas totalling $3,813,000 and has issued permanent takeout commitments of up to $5,550,000 on these projects, conditioned upon the completion on of construction, satisfactory occupancy and debt service coverage, 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 loans, including seasoned performing multifamily and commercial real estate loans. Such loans meet the Company's normal underwriting standards, are generally located in the Company's primary lending areas, and may be purchased at a discount to their face value. Prior to the purchase of loans, management conducts a property visit and applies the Company's underwriting procedures as if a new loan were being originated. Total loans purchased by the Company, which were primarily single family real estate loans, were $5,447,000 in 1993, $8,208,000 in 1994, and $8,041,000 in 1995. 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, 1995, the outstanding balance due under home equity lines of credit was $26,572,000 and the unused remaining balance was $44,666,000. 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, 1995, the Company had approximately 78 commercial business loans with an aggregate balance of $3,663,000, 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 certificate of deposit balances. These loans totalled $727,000 at December 31, 1995. The following table presents an analysis of the Company's loan portfolio at December 31, 1995 by property type and geographic location. The table does not include amounts which the Company is committed to lend but which are undisbursed. 5
SAN FRANCISCO LOS ANGELES SAN DIEGO LAS VEGAS PERCENT BAY AREA COUNTY COUNTY NEVADA OTHER TOTAL BY TYPE ------------- ----------- --------- --------- ----- ------ ------- ($ IN MILLIONS) Property Type: Single family(1)....... $ 646 $238 $ 27 $ 9 $ 84 $1,004 60% Multifamily............ 150 75 -- 105 20 350 21% Commercial............. 206 31 1 37 12 287 17% Construction........... 4 2 -- 22 -- 28 2% Other.................. 5 5 3 -- -- 13 -- ------ ---- ----- ---- ---- ------ --- Total................. $1,011 $351 $ 31 $173 $116 $1,682 100% ====== ==== ===== ==== ==== ====== === Percent by location..... 60% 21% 2% 10% 7% 100%
- -------- (1) Includes equity lines of credit secured by single family residences and single family loans held for sale. MORTGAGE BANKING OPERATIONS In addition to originating loans for its own portfolio, the Company participates in secondary mortgage market activities by selling whole loans and participations in loans to FNMA and FHLMC and various institutional purchasers such as insurance companies, mortgage conduits and other financial institutions. Mortgage banking operations are conducted primarily by First Thrift. Secondary market sales allow the Company to make loans during periods when deposit flows decline, or are not otherwise available, and at times when customers prefer loans with long-term fixed interest rates which the Company does not choose to retain in its loan portfolio. The following table sets forth the amount of loans originated and purchased by the Company and the amount of loans sold to institutional investors in the secondary market.
YEAR ENDED DECEMBER 31, -------------------------- 1995 1994 1993 -------- -------- -------- (IN THOUSANDS) MORTGAGE BANKING ACTIVITY: Loans originated................................ $584,388 $784,486 $944,796 Loans purchased................................. 8,041 8,208 5,447 -------- -------- -------- Total loans originated and purchased........... $592,429 $792,694 $950,243 ======== ======== ======== Loans sold...................................... $ 99,232 $216,951 $425,475
The secondary market for mortgage-backed loans is comprised of institutional investors who purchase loans meeting certain underwriting specifications with respect to loan-to-value ratios, maturities and yields. Subject to market conditions, the Company tailors certain real estate loan programs to meet the specifications of particular institutional investors. The Company retains a portion of the loan origination fee (points) paid by the borrower and receives annual servicing fees as compensation for retaining responsibility for the servicing of all loans sold to institutional investors. See "--Loan Servicing." The sale of substantially all loans to institutional investors is nonrecourse to the Company. From its inception, through December 31, 1995, the Company has sold approximately $1.8 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 eight institutional investors in 1993, to eight institutional investors in 1994, and to six institutional investors in 1995. 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 6 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. Loans are classified as held for sale when the Company is waiting for purchase by an investor under a flow program or is negotiating for the sale of specific loans which meet selected criteria to a specific investor. Underwriting criteria established by investors in adjustable and fixed rate single family residential loans generally include the following: maturities of 15 to 30 years, a loan-to-value ratio no greater than 90% (which percentage generally decreases as the size of the loan increases and is limited to 80% unless there is mortgage insurance on the loan), the liquidity of the borrower's other assets and the borrower's ability to service the debt out of income. Interest rates on adjustable rate loans are adjusted semiannually or annually primarily on the basis of either the One-Year Treasury Constant Maturity Index or the Eleventh District Federal Home Loan Bank Board Cost of Funds Index. Some loans may be fixed for an initial period from 3 to 10 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 minimum 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 $804.9 million and $843.1 million at December 31, 1995 and 1994, 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 0.75% per annum on the declining principal balances of the loans. The average service fee collected by the Company was 0.37% for 1995, 0.36% for 1994 and 0.38% for 1993. 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, 1995 approximately 59% were adjustable rate mortgages. The weighted-average mortgage loan note rate of the Company's servicing portfolio at December 31, 1995 was 7.99% for ARMs and 7.58% 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. 7 At December 31, 1995, this asset (reported as "premium on sale of loans" and included in the Company's balance sheet as "Other Assets") was $449,000 as compared to $793,000 at December 31, 1994. "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 have been purchased since early 1991. 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 date of 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. By December 31, 1994, the carrying cost of the purchased servicing rights described above had been fully amortized. Amortization of the carrying value of premium on sale of loans and the carrying cost on purchased servicing rights totalled $358,000 in 1995, $687,000 in 1994, and $1,753,000 in 1993. A declining and relatively low interest rate environment existed for most of 1992 and 1993. When interest rates are low, the rate at which mortgage loans are prepaid tends to increase as borrowers refinance fixed rate loans to lower rates or convert from adjustable rate to fixed rate loans. Low rates also increase housing affordability, stimulating purchases by first time home buyers and trade up transactions by existing homeowners. The level and value of the Company's loan servicing portfolio, including purchased servicing rights, were adversely affected by the low mortgage interest rates of 1992 and 1993, leading to higher loan prepayments and lower income generated from the Company's loan servicing portfolio. This negative effect on the Company's income was offset somewhat by a rise in origination and servicing income attributable to new loan originations, which increased during those years. From 1991 to 1993, the Company closed its loan servicing hedge position, resulting in total gains of approximately $1,200,000 which were used by the Company to reduce the recorded value of its purchased servicing rights. In addition, the Company has amortized, as a reduction of servicing fee revenues, the cost of purchased servicing rights at a rate generally consistent with the actual repayment experience. With the increase in general market rates of interest, including the rates for fixed rate mortgage loans, which occurred throughout 1994, the Company experienced a lower volume of loan originations, loan sales, gain on sale of loans and repayments of loans serviced. As interest rates decreased in 1995 and the yield curve became very flat, the Company experienced an increase in the repayment of loans in its loan servicing portfolio which, coupled with a lower volume of new ARM originations and loan sales, resulted in a lower level of loans serviced at December 31, 1995 than at December 31, 1994. See "--Asset and Liability Management." The following table sets forth the dollar amounts of the Company's mortgage loan servicing portfolio at the dates indicated, the portion of the Company's loan servicing portfolio resulting from loan originations and purchases, respectively, and the carrying value as a percentage of loans serviced. Although the Company intends to maintain or increase the size of its servicing portfolio, such growth will depend on market conditions including the future level of loan originations, sales and prepayments.
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 -------- -------- -------- ($ IN THOUSANDS) Loan Servicing Portfolio: Loans originated by the Company and sold.... $758,538 $783,102 $724,251 Purchased mortgage servicing rights......... 46,318 60,042 90,202 -------- -------- -------- Total...................................... $804,856 $843,144 $814,453 ======== ======== ======== Premium on loans sold and cost of purchased servicing rights............................ $ 449 $ 793 $ 1,154 Premium on loans sold and cost of purchased servicing rights as a percentage of loans serviced........... 0.06% 0.09% 0.14%
8 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, 1995, the Company's investment portfolio included the following securities in the proportions listed: U.S. Government--18%; agency MBS--25%; and other MBS--49%. At December 31, 1995, the Company's investment portfolio totalled $140,913,000 (7.4% of total assets) as compared to $129,628,000 (7.6% of total assets) at December 31, 1994. The securities in the Company's investment portfolio at December 31, 1995 had contractual maturities generally ranging from eight to thirty years. The following table provides the remaining contractual principal maturities and yields (taxable-equivalent basis) of debt securities within the investment portfolio at December 31, 1995. The remaining contractual principal maturities for mortgage-backed securities were allocated assuming no prepayments. Expected remaining maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties. At December 31, 1995, there were no debt securities classified as available for sale or held to maturity owned by the Company with a contractual principal maturity of five years or less.
REMAINING CONTRACTUAL PRINCIPAL MATURITY -------------------------- AFTER 5 AFTER 10 WEIGHTED YEARS YEARS TOTAL AVERAGE ------------ ------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ------- -------- ------ ----- ------- ----- ($ IN THOUSANDS) Available for Sale Debt Securities: U.S. Government.......... $24,623 8.34% $1,277 8.24% $23,346 8.34% Agency MBS............... 34,573 6.68% -- -- 34,573 6.68% Other MBS................ 35,781 8.09% -- -- 35,781 8.09% ------- ----- ------ ----- ------- ----- Total Basis (Cost)...... $94,977 7.64% $1,277 8.24% $93,700 7.63% ======= ===== ====== ===== ======= ===== Estimated Fair Value...... $95,123 $1,299 $93,824 ======= ====== ======= Held to Maturity Debt Securities at Cost: Other MBS............... $33,974 7.29% $ -- -- % $33,974 7.29% ======= ===== ====== ===== ======= ===== Estimated Fair Value.... $33,455 =======
At December 31, 1995, the Company owned a portfolio of adjustable rate perpetual preferred stocks, which have no stated maturities and therefore are classified as available for sale; these securities, which are considered equity securities, had an original cost of $13,487,000 and a fair value of $11,816,000 at December 31, 1995. At December 31, 1995, all of the investment securities were adjustable, with rates which were generally subject to change monthly, quarterly or semiannually and varied according to several interest rate indices. Yields have been calculated by dividing the projected interest income at current interest rates, including discount or premium, by the carrying value. Most of the securities having maturities exceeding 10 years are adjustable U.S. Government guaranteed loan pools, agency MBS and other MBS which, as a class, have actual maturities substantially shorter than their contractual maturities. 9 The following summarizes by category the amortized cost and fair market value of investment securities which were classified as held for investment at December 31, 1993 prior to the effective date of SFAS No. 115:
AMORTIZED FAIR COST VALUE --------- ------- (IN THOUSANDS) Investment Securities: U.S. Government.......................................... $25,404 $26,135 Agency MBS............................................... 13,788 14,054 Other MBS................................................ 44,655 44,513 Corporate bonds and other................................ 361 361 ------- ------- Total................................................... $84,208 $85,063 ======= =======
FUNDING SOURCES The Thrifts obtain funds from depositors by offering money market or passbook accounts and term certificates of deposits. The Thrifts' accounts are federally insured by the FDIC up to the legal maximum. First Thrift has typically offered somewhat higher interest rates to its depositors than do most full service financial institutions. At the same time, it minimizes the cost of maintaining these accounts by not offering transaction accounts or high operating cost services such as full-service checking, safe deposit boxes, money orders, ATM access and other traditional retail services. This limited product operation results in substantial cost savings which exceed the differential interest rates paid. The Thrifts effect deposit withdrawals by issuing checks rather than disbursing cash, which minimizes operating costs associated with handling and storing cash, of which it does none. In addition, the Thrifts do not actively solicit deposit accounts of less than $5,000. The Thrifts advertise in local newspapers to attract deposits; and since 1988, First Thrift has performed a limited direct telephone solicitation of potential institutional depositors such as credit unions, small commercial banks, and pension plans. At December 31, 1995, no individual depositor or source of deposits represented 0.4% or more of First Thrift's deposits. Prior to mid-1992, First Thrift utilized certificates with a balance of $100,000 or more, generally having maturities in excess of six months, to fund a portion of its assets. Existing bank regulations define brokered deposits, jumbo certificates and borrowings with a maturity of less than one year as "volatile liabilities." Volatile liabilities are compared to cash, short-term investment and investments which mature within one year ("liquid assets") to calculate the volatile liability "dependency ratio," a measure of regulatory liquidity. The level of such liquid assets should generally be higher in comparison with volatile liabilities if a financial institution has large negotiable liabilities like checking accounts, substantial future lending or off-balance sheet commitments, or a history of significant asset growth. Since mid-1992, First Thrift has significantly altered its volatile liability dependency ratio by maintaining a reduced level of larger certificates and a higher level of cash and investments relative to its short- term borrowings. At December 31, 1995, First Thrift's cash and investments exceeded its volatile liabilities by $101,374,000. 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. During 1995, First Thrift accepted a small amount of brokered deposits; the total of all brokered deposits at December 31, 1995 was $591,000, representing 0.05% of total deposits. At December 31, 1995, First Thrift's time certificates $100,000 or more totalled $50,007,000 of which $37,249,000, or 74%, were from retail consumer depositors. At December 31, 1995, First Republic Savings Bank had time certificates over $100,000, totalling $1,439,000. For the Company, average maturity of all time certificates was approximately 8.5 months and the average certificate amount per depositor was approximately $32,000 at December 31, 1995. 10 The following table shows the maturity of the Thrifts' certificates of $100,000 or more at December 31, 1995.
FIRST REPUBLIC FIRST THRIFT SAVINGS BANK ------------ -------------- ($ IN THOUSANDS) Remaining maturity: Three months or less............................. $14,487 $ 502 Over three through six months................... 10,896 201 Over six through 12 months...................... 19,506 536 Over 12 months.................................. 5,118 200 ------- ------ Total............................................ $50,007 $1,439 ======= ====== Percent of total deposits........................ 4.63% 2.38%
First Thrift also utilizes term FHLB advances and, to a lesser extent, repurchase agreements, as funding sources. Since August 1990, the Company has utilized term FHLB advances as an alternative to deposit gathering to fund its assets. FHLB advances must be collateralized by the pledging of mortgage loans which are assets of First Thrift. At December 31, 1995, total FHLB advances outstanding were $570,530,000. Of this amount, $566,530,000, or 99%, had an original maturity of 10 years or longer. The remaining $4,000,000 is due in 1996. The longer-term advances provide the Company with a stable primarily adjustable rate funding source for assets with longer lives. See "--Asset and Liability Management." First Republic Savings Bank will apply for FHLB membership in 1996 and, if approved, it is expected that term adjustable rate advances will be used to fund a portion of its assets. The following table sets forth certain information with respect to the Company's short-term borrowings at the dates indicated.
DECEMBER 31, ------------------------- 1995 1994 1993 ------- ------- ------- ($ IN THOUSANDS) Short-Term Borrowings(1): FHLB advances-short-term........................ $ 4,000 $ -- $10,000 Repurchase agreements(2)........................ -- -- 12,380 ------- ------- ------- Total......................................... $ 4,000 $ -- $22,380 ======= ======= ======= Maximum amount outstanding at any month-end dur- ing period..................................... $13,522 $18,715 $22,380 Average amount outstanding during period........ 2,321 2,528 705 Average rate on short-term borrowings-in peri- od............................................. 6.02% 3.66% 3.45%
- -------- (1) The amounts shown at the dates indicated are not necessarily reflective of the Company's activity in short-term borrowings during the periods. (2) See Note 7 of Notes to Consolidated Financial Statements for a discussion of general terms relating to repurchase agreements. ASSET AND LIABILITY MANAGEMENT The Company seeks to manage its asset and liability portfolios to help reduce any adverse impact on its net interest income caused by fluctuating interest rates. To achieve this objective, the Company's strategy is to manage the rate sensitivity and maturity balance of its interest-earning assets and interest-bearing liabilities by emphasizing the origination and retention of adjustable interest rate or short-term fixed rate loans and the matching of adjustable rate asset repricings with short- and intermediate-term investment certificates and adjustable rate borrowings. The Company has established a program to obtain deposits by offering generally six month to five-year term investment certificates for the purpose of providing funds for adjustable rate mortgage loans with repricing periods of six months or more and for other matching term maturities. 11 The following table summarizes the differences between the Company's maturing or rate adjusting assets and liabilities at December 31, 1995. Generally, an excess of maturing or rate adjusting assets over maturing or rate adjusting liabilities during a given period will serve to enhance earnings in a rising rate environment and inhibit earnings when rates decline; this is the Company's position as of December 31, 1995 for the three months and less and the three to six months 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, 1995. ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY MATURING OR ADJUSTING DURING PERIODS SUBSEQUENT TO DECEMBER 31, 1995
NON- 3 MONTHS 3 TO 6 6 TO 12 1 TO 2 OVER INTEREST IMMEDIATE OR LESS MONTHS MONTHS YEARS 2 YEARS SENSITIVE TOTAL --------- ---------- -------- --------- -------- -------- --------- ---------- ($ IN THOUSANDS) Assets: Loans(1)................ $ -- $ 965,025 $519,786 $ 81,908 $ 13,275 $102,269 $ -- $1,682,263 Securities.............. -- 109,967 42,777 18,490 -- -- -- 171,234 Cash and short-term investments............ 15,918 15,000 -- 200 -- -- -- 31,118 Noninterest-earning assets, net............ -- -- -- -- -- -- 19,638 19,638 ------- ---------- -------- --------- -------- -------- --------- ---------- Total.................. $15,918 $1,089,992 $562,563 $ 100,598 $ 13,275 $102,269 $ 19,638 $1,904,253 ======= ========== ======== ========= ======== ======== ========= ========== Liabilities and Stockholders' Equity: Passbooks and MMA accounts(2)............ $ -- $ 152,817 $ 15,791 $ 7,986 $ 3,611 $ -- $ -- $ 180,205 Certificates of deposit: $100,000 or greater.... -- 14,989 11,097 20,042 2,319 2,999 -- 51,446 Less than $100,000..... -- 241,953 206,632 366,670 58,594 34,941 -- 908,790 FHLB advances-long term................... -- 292,530 190,000 10,000 -- 78,000 -- 570,530 Other short-term debt... -- -- -- -- -- -- -- -- Other liabilities....... -- -- -- -- -- -- 20,969 20,969 Subordinated debentures............. -- -- -- -- -- 64,053 -- 64,053 Stockholders' equity.... -- -- -- -- -- -- 108,260 108,260 ------- ---------- -------- --------- -------- -------- --------- ---------- Total.................. $ -- $ 702,289 $423,520 $ 404,698 $ 64,524 $179,993 $ 129,229 $1,904,253 ======= ========== ======== ========= ======== ======== ========= ========== Net repricing assets over (under) repricing liabilities equals primary GAP............ $15,918 $ 387,703 $139,043 $(304,100) $(51,249) $(77,724) $(109,591) Effect of interest rate swaps.................. -- -- 25,000 -- -- (25,000) -- ------- ---------- -------- --------- -------- -------- --------- Hedged GAP.............. $15,918 $ 387,703 $114,043 $(304,100) $(51,249) $(52,724) $(109,591) ======= ========== ======== ========= ======== ======== ========= Hedged GAP as a percentage of total assets................. 0.84% 20.36% 5.99% (15.97)% (2.69)% (2.76)% (5.76)% ======= ========== ======== ========= ======== ======== ========= Cumulative hedged GAP... $15,918 $ 403,621 $517,664 $ 213,564 $162,315 $109,591 $ -- ======= ========== ======== ========= ======== ======== ========= Cumulative hedged GAP as percentage of total assets................. 0.84% 21.20% 27.18% 11.22% 8.52% 5.76% 0.00% ======= ========== ======== ========= ======== ======== =========
- -------- (1) Adjustable rate loans consist principally of real estate secured loans with a maximum term of 30 years. Such loans are generally adjustable monthly, semiannually, or annually based upon changes in the FHLB 11th District Cost of Funds Index (COFI), the One Year Treasury Constant Maturity Index, or the Federal Reserve's Six Month CD Index, subject generally to a maximum increase of 2% annually and 5% over the lifetime of the loan. (2) Passbook and MMA account maturities and rate adjustments are allocated based upon management's experience of historical interest rate volatility and erosion rates. However, all passbook and MMA accounts are contractually subject to immediate withdrawal. 12 In evaluating the Company's exposure to interest rate risk, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or periods to reprice, they may react differently to changes in market interest rates. Additionally, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates on a short- term basis and over the life of the asset. The Company considers the anticipated effects of these various factors in implementing its interest rate risk management activities, including the utilization of interest rate caps. Additional information is provided under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Asset and Liability Management" on pages 40 and 41 of the Company's 1995 Annual Report to Stockholders and is incorporated by reference herein. FIRST REPUBLIC AND SUBSIDIARIES First Republic was incorporated in February 1985. First Republic, which owns all of the capital stock of First Thrift, and First Republic Savings Bank, provides executive management to each of its subsidiaries and formulates and directs the implementation of an integrated business strategy for the Company. In June 1985, First Republic purchased all of the outstanding capital stock of an inactive California-chartered thrift and loan company which had begun operations in California in 1953. Upon its acquisition by First Republic, the company was renamed First Republic Thrift & Loan. In December 1993, First Republic acquired in a purchase transaction all of the common stock in a Nevada state chartered thrift and loan. Upon approval by federal and state regulatory agencies, this institution was relocated to Las Vegas, Nevada in January 1994 and renamed First Republic Savings Bank. The purpose of this acquisition was to enable the Company to gather deposits in the Las Vegas, Nevada area and to continue its lending activities under a full service financial institution. In January 1994, the employees responsible for construction and income property lending were transferred to First Republic Savings Bank. In May 1990, First Republic established a wholly-owned mortgage originating subsidiary, First Republic Mortgage, Inc., which commenced operations from its office in Las Vegas. Until January 1994, First Republic Mortgage, Inc. originated construction loans for First Thrift on low- and moderate-income single family homes and multifamily units and originated permanent mortgage loans on low- and moderate-income multifamily units and on commercial real estate properties, all of which properties are located in and proximate to Las Vegas. In 1994, First Republic transferred all operations and employees of First Republic Mortgage Inc. to First Republic Savings Bank, and prior to December 31, 1994 First Republic Mortgage Inc. was dissolved. COMPETITION The Company faces strong competition both in the attraction of deposits and in the making of real estate secured loans. The Company competes for deposits and loans by advertising, by offering competitive interest rates and by seeking to provide a higher level of personal service than is generally offered by larger competitors. The Company does not have a significant market share of the deposit-taking or lending activities in the areas in which it conducts operations. Management believes that its most direct competition for deposits comes from savings and loan associations, other thrift and loan companies, commercial banks and credit unions. The Company's cost of funds fluctuates with market interest rates and also has been affected by higher rates being offered by certain institutions. During certain interest rate environments, additional significant competition for deposits may be expected to arise from corporate and governmental debt securities as well as money market mutual funds. The Company's competition in making loans comes principally from savings and loan associations, mortgage companies, commercial banks, other thrift and loan companies, and, to a lesser degree, credit unions 13 and insurance companies. Aggressive pricing policies of the Company's competitors on new ARM loans, especially during a declining period of mortgage loan originations such as experienced in 1994, has resulted in a decrease in the Company's mortgage loan origination volume and a decrease in the profitability of the Company's loan originations. During 1995, interest rates declined and the yield curve was very flat. As a result, the consumer demanded and many competing financial institutions offered intermediate fixed rate loans at very competitive prices. 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. The Company competes for loans principally through the quality of service it provides to borrowers, real estate brokers and loan agents, while maintaining competitive interest rates, loan fees and other loan terms. REGULATION The Thrifts are subject to regulation, supervision and examination under both federal and state law. First Thrift is subject to supervision and regulation by the Commissioner of Corporations of the State of California (the "California Commissioner") and, as a member institution, by the FDIC. First Republic Savings Bank is subject to supervision and regulation by the Commissioner, Financial Institutions Division, Department of Commerce, State of Nevada (the "Nevada Commissioner") and, as a member institution, by the FDIC. Neither First Republic, nor the Thrifts are regulated or supervised by the Office of Thrift Supervision, which regulates savings and loan institutions. First Republic is not directly regulated or supervised by the California Commissioner, the Nevada Commissioner, the FDIC, the Federal Reserve Board or any other bank regulatory authority, except with respect to the general regulatory and enforcement authority of the California Commissioner, the Nevada Commissioner and the FDIC over transactions and dealings between First Republic and the Thrifts, and except with respect to both the specific limitations regarding ownership of the capital stock of the parent company of any thrift and the specific limitations regarding the payment of dividends from the Thrifts discussed below. Future federal legislation could cause First Republic to become subject to direct federal regulatory oversight; however, the full impact of any such legislation and subsequent regulation cannot be predicted. CALIFORNIA LAW The thrift and loan business conducted by First Thrift is governed by the California Industrial Loan law and the rules and regulations of the California Commissioner which, among other things, regulate in certain limited circumstances the maximum interest rates payable on certain thrift deposits as well as the collateral requirements and maximum maturities of the various types of loans that are permitted to be made by California-chartered industrial loan companies, i.e., thrift and loan companies or thrifts. Subject to restrictions imposed by applicable California law, First Thrift is permitted to make secured and unsecured consumer and non-consumer loans. The maximum term for repayment of loans made by thrift and loan companies range up to 40 years and 30 days depending upon collateral and priority of secured position, except that loans with repayment terms in excess of 30 years and 30 days may not in the aggregate exceed 5% of total outstanding loans and obligations of the thrift. Although secured loans may generally be repayable in unequal periodic payments during their respective terms, consumer loans secured by real property with terms in excess of three years must be repayable in substantially equal periodic payments unless such loans are covered under the Garn-St. Germain Depository Institutions Act of 1982 which applies primarily to single family residential loans. Loans made to persons who reside outside California or who do not have a place of business in California are limited to a maximum 30% of a thrift and loan's portfolio; however, this limitation has ceased to apply to loans (i) made to purchase or refinance single family or multifamily residential property, (ii) that are saleable in the secondary market, evidenced by a commitment therefor, and (iii) that are owned by the thrift for 90 days or less. 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. 14 California law contains extensive requirements for the diversification of the loan portfolios of thrift and loan companies. A thrift and loan with outstanding customer deposits may not, among other things: (i) place more than 25% of its loans or other obligations in loans or obligations which are secured only partially, but not primarily, by real property; (ii) may not make any one loan secured primarily by improved real property that exceeds 20% of its paid-up and unimpaired capital stock and surplus not available for dividends; (iii) may not lend an amount in excess of 5% of its paid-up and unimpaired capital stock and surplus not available for dividends upon the security of the stock of any one corporation; (iv) may not make loans to, or hold the obligations of, any one person as primary obligor in an aggregate principal amount exceeding 20% of its paid-up and unimpaired capital stock and surplus not available for dividends; and (v) may have no more than 70% of its total assets in loans which have remaining terms to maturity in excess of seven years and are secured solely or primarily by real property. Loans and obligations are considered as having a term of less than seven years if either (1) they are guaranteed or insured by any federal or state agency, or (2) they are for the purchase or refinance of single family or multifamily residential property, salable to qualified institutional buyers as evidenced by irrevocable commitments, and owned by the thrift and loan for 90 days or less. At December 31, 1995, First Thrift satisfied all of these requirements. 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 customer deposits 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, 1995. Thrift and loan companies are not permitted to borrow, except by the sale of customer deposits, 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 customer deposits 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 Savings and the Real Estate Settlement Procedures Act. 15 The California Industrial Loan Law allows a thrift to increase its secondary capital by issuing interest-bearing capital notes in the form of subordinated notes and debentures, such as the capital notes issued by First Thrift to First Republic. Such notes are not deposits and are not insured by the FDIC or any other governmental agency, generally are required to have an initial maturity of at least seven years, and are subordinated to deposit holders, general creditors and secured creditors of the issuing thrift. NEVADA LAW The Nevada Thrift Companies Act ("Nevada Act") governs the licensing and regulations of Nevada thrift companies in much the manner the California Industrial Loan Law does for California thrift and loan companies. The Nevada Commissioner is charged with the supervision and regulation of First Republic Savings Bank ("FRSB"). The Nevada Commissioner approved the change of name from Silver State Thrift and Loan to FRSB concurrently with the approval of the acquisition of FRSB by the Company in 1993. Under the Nevada Act, there is no interest rate limitation on loans; however, any loan in excess of $50,000 must be secured by collateral having a market value of at least 115 percent of the amount due. The net amount of advance on loans secured by deposits may not exceed 90 percent of the amount of said deposit collateral. There are no terms or amortization restrictions on loans. FRSB is required to invest its funds as set forth in the Nevada Act and in investments which are legal investments for banks and savings associations subject to any limitation under federal law (See--"Federal Law"). Secured loans to one person as primary obligor may not exceed 25 percent of capital and surplus and, except as to limitations on loans to one borrower, loans secured by real or personal property, may be made to any person without regard to the location or nature of the collateral. Substantially as under the California Industrial Loan Law for California thrift and loan companies, the Nevada Act restricts transactions with officers, directors and shareholders as well as transactions with regard to holding, developing and carrying real property. In 1985, the Nevada Act was amended to require insurance for deposits. 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 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. 16 The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") , which substantially revised the regulatory framework and deposit insurance funding provisions of the Federal Deposit Insurance Corporation Act, was adopted in 1991 in response to financial institution failures. Under the regulatory framework of the Federal Deposit Insurance Act, as amended by FDICIA, the FDIC has adopted risk-based capital guidelines and leverage ratio requirements for financial institutions like the Thrifts whose deposits are insured by the FDIC and bank holding companies. The risk-based capital guidelines define capital for risk-based capital purposes and provide procedures for computing risk-weighted assets by assigning assets and off balance sheet items to broad risk categories. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as business loans. The guidelines also require financial institutions to achieve a minimum ratio of capital to risk-weighted assets. These guidelines provide a measure of capital adequacy and are intended to reflect the degree of risk associated with both on and off-balance sheet items, including residential loans sold with recourse, legally binding loan commitments and standby letters of credit. Under these regulations, financial institutions are required to maintain capital to support activities which in the past did not require capital. Unlike the Thrifts, at the present time First Republic is not directly regulated by any bank regulatory agency and is not subject to any minimum capital requirements. If First Republic were to become subject to direct federal regulatory oversight, there can be no assurance that First Republic's existing senior subordinated debentures would be considered as supplementary Tier 2 capital. In determining the capital level the Thrifts are required to maintain, the FDIC does not, in all respects, follow generally accepted accounting principles ("GAAP") and has special rules which have the effect of reducing the amount of capital it will recognize for purposes of determining the capital adequacy of the Thrifts. These rules are called Regulatory Accounting Principles ("RAP"). In December 1993, the federal banking agencies issued an interagency policy statement on the allowance for loan and lease losses which, among other things, establishes certain benchmark ratios of loan loss reserves to classified assets. Future changes in FDIC regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Thrifts to grow and could restrict the amount of profits, if any, available for the payment of dividends. A financial institution's risk-based capital ratio is calculated by dividing its qualifying capital by its risk-weighted assets. Since December 31, 1992, the FDIC has required a minimum ratio of qualifying total capital to risk- weighted assets of 8%, and off balance sheet items of 8%, and a minimum ratio of Tier 1 capital to risk-weighted assets and off balance sheet items of 4%. 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, 1995, the Tier 2 capital of First Thrift consisted of $10,000,000 of capital notes issued to First Republic and its allowance for loan losses. The following table presents the regulatory capital position of First Thrift and First Republic Savings Bank at December 31, 1995 under the risk-based capital guidelines: 17
FIRST REPUBLIC FIRST THRIFT SAVINGS BANK ------------------------ --------------------- PERCENT OF PERCENT OF RISK-ADJUSTED RISK-ADJUSTED AMOUNT ASSETS AMOUNT ASSETS ---------- ------------- ------- ------------- ($ IN THOUSANDS) RISK-BASED CAPITAL GUIDELINES: Tier 1 capital............ $ 127,362 10.55% $ 8,219 16.23% Minimum requirement....... 48,298 4.00% 2,026 4.00% ---------- ------- Excess................... $ 79,064 $ 6,193 ========== ======= Total capital............. 152,455 12.63% $ 8,852 17.48% Minimum requirement....... 96,596 8.00% 4,052 8.00% ---------- ------- Excess................... $ 55,859 $ 4,800 ========== ======= Risk-adjusted assets...... $1,207,463 $50,651 ========== =======
In addition to the risk-based guidelines, the FDIC requires maintenance of a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a financial institution rated in the highest of the five categories used for rating institutions such as the Thrifts, the minimum leverage ratio of Tier 1 capital to total assets is 3%. It is improbable, however, that a financial institution with a 3% leverage ratio would receive the highest rating since a strong capital position is a significant part of the regulatory rating. For all financial institutions not rated in the highest category, the minimum leverage ratio is at least 100 to 200 basis points above the 3% minimum. Thus, the effective minimum leverage ratio is at least 4% or 5%. In addition to these uniform risk-based capital guidelines and leverage ratios, the FDIC has the discretion to set individual minimum capital requirements for particular financial institutions at rates significantly above the minimum guidelines and ratios. The FDIC's regulations provide that a financial institution's minimum leverage ratio is determined by dividing its Tier 1 capital by its quarterly average total assets, less intangibles not includable in Tier 1 capital. The leverage ratio represents a minimum standard affecting the ability of financial institutions, including the Thrifts, to increase assets and liabilities without increasing capital proportionately. The following table presents the Thrifts' leverage ratios at December 31, 1995:
FIRST REPUBLIC FIRST THRIFT SAVINGS BANK ------------------------ --------------------- PERCENT OF PERCENT OF AMOUNT ASSETS AMOUNT ASSETS ---------- ------------- ------- ------------- ($ IN THOUSANDS) LEVERAGE RATIO: Tier 1 capital............ $ 127,362 7.22% $ 8,219 12.16% Minimum requirement....... 70,561 4.00% 2,704 4.00% ---------- ------- Excess................... $ 56,801 $ 5,515 ========== ======= Average total assets...... $1,764,013 $67,590 ========== =======
Implementation of the various provisions of FDICIA is subject to the adoption of regulations by the various regulatory agencies and to certain phase-in periods. The effect of FDICIA on the Company and the Thrifts cannot be determined until after the implementing regulations are adopted by the agencies. In addition, FDICIA requires the regulators to improve capital standards to take account of risks other than credit risk. In late 1994, the federal banking agencies, including the FDIC, published final regulations relating to capital standards and the risks arising from the concentration of credit and nontraditional activities. The final regulations did not include any quantitative assessment for these risks, but listed these items, as well as an institutions ability to manage these risks, as subjective factors that the regulators will consider in assessing an individual bank's overall capital adequacy. 18 On August 2, 1995 the federal banking agencies (excluding the Office of Thrift Supervision ("OTS")) published final regulations to take account of interest rate risk in calculating risk based capital. These final regulations constitute the first step of a two-step process for implementing the minimum capital standards for interest rate risk exposures. The first step consists of revising the capital standards of the banking agencies to explicitly include a bank's exposure to declines in the economic value of its capital due to changes in interest rates as a factor that the banking agencies will consider in evaluating a bank's capital adequacy. This final rule does not codify a measurement framework for assessing the level of a bank's interest rate risk exposure. The information and exposure estimates collected through a new proposed supervisory measurement process, described in the banking agencies' joint policy statement on interest rate risk, would be one quantitative factor used to determine the adequacy of an individual bank's capital for interest rate risk. The focus of that proposed process is on a bank's economic value exposure. Other quantitative factors include the bank's historical financial performance and its earnings exposure to interest rate movements. Examiners also will consider qualitative factors, including the adequacy of the bank's internal interest rate risk management. The banking agencies intend for this case-by-case approach for assessing a bank's capital adequacy for interest rate risk to be a transitional arrangement. The second step will consist of a proposed rule that would establish an explicit minimum capital charge for interest rate risk, based on the level of a bank's measured interest rate risk exposure. The banking agencies intend to implement this second step at some future date, after the banking agencies and the banking industry have gained more experience with the proposed supervisory measurement and assessment process. In addition, subject to certain exceptions, under federal law no person, acting directly or indirectly or through or in concert with one or more persons, may acquire control of any insured depository institution such as the Company, unless the FDIC has been given 60 days' prior written notice of the proposed acquisition and within that time period the FDIC has not issued a notice disapproving the proposed acquisition, or extended the period of time during which a disapproval may be issued. For purposes of these 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 regulation 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. 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. PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS FDICIA established several mechanisms to increase funds to protect deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90% of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions that are members of the BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. 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. 19 As required by FDICIA, the FDIC adopted a transitional risk-based assessment system for deposit insurance premiums which became effective January 1, 1993. On November 14, 1995 the Board of Directors of the FDIC adopted a resolution to reduce to a range of 0 to 27 basis points the assessment rates applicable to deposits assessable by the BIF for the semiannual assessment period beginning January 1, 1996. This reduction represents a downward adjustment of 4 basis points from the preceding BIF assessment rate schedule. On June 30, 1995 the BIF reserve ratio stood at nearly 1.29 percent. The new assessment schedule would retain the risk based characteristics of the current system. At the same time the Board adopted the new rate schedule, it also amended the FDIC's assessment regulations to permit the Board to make limited adjustments to the schedule without notice-and-comment rulemaking. Any such adjustments can be made as the board deems necessary to maintain the BIF reserve ration at the designated reserve ratio ("DRR") and can be accomplished by Board resolution. Under this provision, any such adjustment must not exceed an increase or decrease of 5 basis points and must be uniform across the rate schedule. The amount of an adjustment adopted by the Board is to be determined by the following considerations: (a) the amount of assessment revenue necessary to maintain the reserve ratio at the DRR and (b) the assessment schedule that would generate such amount of assessment revenue considering the risk profile of BIF members. In determining the relevant amount of assessment revenue, the Board is to consider BIF's expected operating expenses, case resolution expenditures and income, the effect of assessments on BIF members' earnings and capital, and any other factors the Board may deem appropriate. FDICIA required insured depository institutions to undergo a full-scope, on- site examination by their primary federal banking agency at least once every 12 months. A transition rule allowed for examination of certain well capitalized and well managed institutions every 18 months until December 31, 1993. In 1994, the exemption for smaller institutions, which allowed a substitution of an 18 month schedule for the 12 month examination schedule for qualified smaller institutions, was amended to increase the asset threshold from $100 million to $250 million. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate federal banking agency against each institution or affiliate as it deems necessary or appropriate. COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS Under the Community Reinvestment Act (the "CRA"), as implemented by FDIC regulations, a state non-member financial institution such as the Thrifts has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. Currently, the CRA does not establish specific lending requirements on programs for financial institutions nor does it limit an institutions discretion to develop the types of products and services that the institution believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examination of state non-member financial institutions, to assess the institutions record of meeting the credit needs of its community. In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. The CRA also requires all institutions to make public disclosure of their CRA ratings. In the most recent examination, First Thrift and First Republic Savings Bank each received a "satisfactory" rating from the FDIC for their community reinvestment activities under the guidelines established by the CRA. In May 1995, the federal banking agencies issued final regulations which change the manner in which they measure a financial institution's compliance with its CRA obligations. The final regulations adopt a performance-based evaluation system which bases CRA ratings on an institution's actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. For large institutions, such as the Thrifts, CRA ratings will be based on the revised regulations for examinations occurring after July 1, 1997. In March 1994, the Federal Interagency Task Force on Fair Lending issued a policy statement on discrimination in lending. The policy statement describes the three methods that federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment and evidence of disparate impact. 20 RECENTLY ENACTED LEGISLATION On September 29, 1994 the President signed into law the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA"). This legislation amended the Bank Holding Company Act, the National Bank Act and the Federal Deposit Insurance Act to provide for interstate banking and branching. Subject to certain deposit concentration limits, the legislation generally permits bank holding companies to acquire banks in any state, beginning September 29, 1995. Further, the IBBEA provides that beginning June 1, 1997 a bank may merge with a bank in another state so long as both states have not opted out of interstate branching by May 31, 1997. States may enact laws permitting interstate bank mergers and acquisitions before June 1, 1997. The appropriate federal banking agency may also approve the establishment by a bank of a de novo branch in another state in which the bank does not maintain a branch if a state expressly opts-in to de novo branching. Once a bank has established a de novo branch in a host state, it may establish or acquire additional branches any place in such state permitted to a bank located in that state. States may opt out of the interstate branching provisions of the IBBEA or opt in to allow interstate branching prior to June 1997 through legislative action. Banking organizations located in states which opt out of this portion of the IBBEA will not be able to branch interstate. The IBBEA will also permit subsidiaries of the same bank holding company to act as agents for one another in receiving and renewing deposits, closing and servicing loans, and accepting loan payments. The full effect of the IBBEA is not known at this time, in part because it is unknown how many states will opt in or opt out of the interstate branching provisions. Of those states that have considered and acted upon the state branching provisions of the IBBEA to date, the vast majority have opted in for early entry. The states of California and Nevada have both taken action to opt in under the IBBEA. On September 29, 1995 the Caldera, Weggeland, and Killea California Interstate Banking and Branching Act of 1995 became effective. This legislation was designed to implement important features of the IBBEA, to make changes required by the new interstate banking and branching schemes, and to repeal or modify provisions of the California Banking Law which are obsolete or impose undue regulatory burdens. The main features of this legislation are (a) out-of-state banks that wish to establish a California branch office to conduct core banking business must first acquire an existing 5 year old California bank or industrial loan company by merger or purchase; (b) California state-chartered banks will be empowered to conduct various authorized branch-like activities on an agency basis through affiliated and unaffiliated insured depository institutions in California and other states and (c) the California Commissioner and the Superintendent of Banks will be authorized to approve an interstate acquisition or merger which would result in a deposit concentration exceeding 30% if it is found that the transaction is consistent with public convenience and advantage. The legislation also contains extensive provisions governing intrastate and interstate (a) intra-industry sales, mergers and conversions between banks and between industrial loan companies and (b) inter-industry transactions involving banks, savings associations and industrial loan companies. Under the Nevada legislation passed in 1995 to implement the IBBEA, Nevada elected an early opt in of interstate mergers and acquisitions. The law provides that a Nevada institution in existence for at least 5 years may be acquired by an out of state entity. 21 On September 23, 1994, the President signed into law the Riegle Community Development and Regulatory Improvement Act of 1994. This legislation established a government corporation and authorized federal funds to be spent for projects in which a Community Development Financial Institution ("CDFI") is involved. The legislation permits a CDFI to form a community partnership with a bank or a holding company to pursue the development of a project for which federal funding is sought. The legislation also authorizes funds to be spent pursuant to the Bank Enterprise Act of 1991, to provide an incentive for bank and thrift investments in targeted activities within qualified distressed communities. Insured depository institutions may earn assessment credit by engaging in new lending in economically under-served areas. Further, the legislation amended various statutory reporting obligations and other rules impacting various paperwork requirements and examination cycles. PENDING LEGISLATION There is legislation currently pending in Congress which would reduce paperwork and additional regulatory burdens for depository institutions. This pending legislation would eliminate numerous regulatory requirements mandated by laws such as the Real Estate Settlement Procedures Act, the Truth in Savings Act, and the Truth in Lending Act. Further, under this pending legislation, the Community Reinvestment Act ("CRA") would be amended to preclude federal banking regulators from imposing additional burdens, record keeping or reporting requirements on financial institutions. The legislation also provides for self-certification of CRA compliance by certain "satisfactory" or "outstanding" financial institutions with assets of $250 million or less, subject to certain public notice requirements. Further, the legislation provides that examination ratings would become conclusive, obviating the need for an institution to have to reprove its performance in an application proceeding. Congress is also considering legislation to rebuild the undercapitalized Savings Association Insurance Fund ("SAIF"). One proposed plan would capitalize the fund with a one-time charge on SAIF-insured lenders and fiduciaries under the Comprehensive Environmental Response, Compensation and Liability Act, as well as other federal and state environmental protection laws. Similarly, pending California legislation would provide lenders and fiduciaries a clear "road map" of how they may deal with real property contaminated by toxics and avoid liability as an "owner" or "operator" under various state environmental laws. This is a measure which should benefit financial institutions of all sizes. Approval is expected during 1996. While the effect of such proposed legislation and regulatory reform on the business of the Thrifts cannot be accurately predicted at this time, it seems likely that a significant amount of consolidating in the banking industry will occur throughout the decade. LIMITATIONS ON DIVIDENDS Under California law, a California 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 California 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 22 maintained by a California thrift provides the basis for establishing the maximum amount that a California thrift may lend to one single borrower. Accordingly, a California 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, 1995, First Thrift could have paid additional dividends to First Republic aggregating approximately $17,400,000. 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 thrift being current on payments to holders of debt securities and payments of interest on deposits. The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions. FDICIA prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if, after such transaction, the institution would be undercapitalized. Regulators also have authority to prohibit a depository institution from engaging in business practices which are considered to be unsafe or unsound, possibly including payment of dividends or other payments under certain circumstances even if such payments are not expressly prohibited by statute. OTHER REGULATORY MATTERS FDICIA requires insured depository institutions to undergo a full-scope, on- site examination by their primary Federal banking agency at least once every 12 months. A transition rule allowed for examination of certain well capitalized and well managed institutions every 18 months until December 31, 1993. In 1994, the exemption for smaller institutions, which allowed a substitution of an 18 month schedule for the 12 month examination schedule for qualified smaller institutions, was amended to increase the asset threshold from $100 million to $250 million. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate Federal banking agency against each institution or affiliate as it deems necessary or appropriate. FDICIA 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, 1995. 23 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 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. 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. FDICIA also implemented certain specific restrictions on transactions and required federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts. In addition to the statutory limitations, FDICIA originally required the federal banking agencies to prescribe, by regulation, standards for all insured depository institutions for such things as classified loans and asset growth. The Riegle Community Development and Regulatory Improvement Act of 1994 amended FDICIA to (a) authorize the agencies to establish safety and soundness standards by regulations or by guideline for all 24 insured depository institutions; (b) give the agencies greater flexibility in prescribing asset quality and earnings standards and (c) eliminate the requirement that such standards apply to depository institution holding companies. On July 10, 1995 the federal banking agencies published Interagency Guidelines Establishing Standards for Safety and Soundness. By adopting the standards as guidelines, the agencies retained the authority to require an institution to submit to an acceptable compliance plan as well as the flexibility to pursue other more appropriate or effective courses of action given the specific circumstances and severity of an institutions noncompliance with one or more standards. In December 1992, the federal banking agencies issued final regulations prescribing uniform guidelines for real estate lending. The regulations, which became effective on March 19, 1993, required insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit secured by real estate. The federal banking agencies amended their regulations as of June 7, 1994, regarding the requirements for appraisals of "real estate related financial transactions" for federally regulated financial institutions. A federally related transaction is any real estate related financial transaction for which an appraisal is required. An appraisal must be conducted by either state certified or state licensed appraisers for all such transactions unless an exemption applies. The more common exceptions relate to (i) transactions valued at $250,000 or less; (ii) business loans valued at $1 million or less and not dependent upon real estate as the primary source of repayment; or (iii) transactions which are not secured by real estate. Appraisals performed in connection with federally related transactions must also comply with the agencies appraisal standards. EMPLOYEES As of December 31, 1995, 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 at pages 20 to 45 of the Companys 1995 Annual Report to Stockholders and is incorporated by reference herein. Average balances are determined on a daily basis. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND DIFFERENTIALS The following table presents for the years indicated the distribution of consolidated average assets, liabilities and stockholders' equity as well as the total dollar amounts of interest income from average interest-earning assets and the resultant yields, and the dollar amounts of interest expense and average interest-bearing liabilities, expressed both in dollars and in rates. Nonaccrual loans are included in the calculation of the average balances of loans and interest not accrued is excluded. The yield on short- term investments has been adjusted upward to reflect the effects of certain income thereon which is exempt from federal income tax, assuming an effective rate of 35% for all years. 25
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------- 1995 1994 1993 --------------------------- --------------------------- -------------------------- AVERAGE YIELDS/ AVERAGE YIELDS/ AVERAGE YIELD/ BALANCE INTEREST RATES BALANCE INTEREST RATES BALANCE INTEREST RATE ---------- -------- ------- ---------- -------- ------- ---------- -------- ------ ($ IN THOUSANDS) ASSETS: Interest-earning deposits with other institutions........... $ 1,404 $ 70 4.99% $ 600 $ 29 4.83% $ 646 $ 38 5.88% Short-term investments.. 18,463 1,179 6.39 32,875 1,532 4.66 46,977 1,590 3.38 Investment securities... 166,011 11,385 6.86 128,017 7,148 5.58 74,160 3,541 4.77 Loans................... 1,591,827 127,341 8.00 1,379,640 100,816 7.31 1,154,680 93,212 8.07 ---------- -------- ---------- ------- ---------- ------- Total interest-earning assets................ 1,777,705 139,975 7.87 1,541,132 109,525 7.11 1,276,463 98,381 7.71 -------- ------- ------- Noninterest-earning assets................. 18,474 14,249 11,609 ---------- ---------- ---------- Total average assets... $1,796,179 $1,555,381 $1,288,072 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY: Passbook and MMA accts.. $ 150,055 $ 7,473 4.98% $ 123,403 $ 4,445 3.60% $ 118,335 $ 3,803 3.21% Certificates of deposit................ 898,515 54,661 6.08 734,746 36,579 4.98 597,221 31,516 5.28 ---------- -------- ---------- ------- ---------- ------- Total deposits......... 1,048,570 62,134 5.93 858,149 41,024 4.78 715,556 35,319 4.94 Other borrowings........ 560,497 37,003 6.60 515,295 24,735 4.80 406,917 16,362 4.02 Subordinated debentures............. 64,116 5,777 9.01 62,975 5,676 9.01 57,088 5,237 9.17 ---------- -------- ---------- ------- ---------- ------- Total interest-bearing liabilities........... 1,673,183 104,914 6.27 1,436,419 71,435 4.97 1,179,561 56,918 4.83 -------- ------- ------- Noninterest-bearing liabilities............ 15,136 11,080 10,195 Stockholders' equity.... 107,860 107,882 98,316 ---------- ---------- ---------- Total average liabilities and stockholders' equity.. $1,796,179 $1,555,381 $1,288,072 ========== ========== ========== Net interest spread(1).. 1.60% 2.14% 2.88% Net interest income and net interest margin(2).............. $ 35,061 1.97% $38,090 2.47% $41,463 3.25% ======== ======= =======
- -------- (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. 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. 26
1995 VS. 1994 1994 VS. 1993 --------------------------- -------------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL ------- -------- -------- ------- -------- ------- (IN THOUSANDS) INCREASE (DECREASE) IN INTEREST INCOME: Interest-earning deposits with other institutions........... $ 40 $ 1 $ 41 $ (3) $ (6) $ (9) Short-term investments.. (857) 504 (353) (589) 531 (58) Investment securities... 2,384 1,853 4,237 2,894 713 3,607 Loans................... 16,420 10,105 26,525 17,070 (9,466) 7,604 ------- -------- -------- ------- -------- ------- Total increase (decrease)........... 17,987 12,463 30,450 19,372 (8,228) 11,144 ------- -------- -------- ------- -------- ------- INCREASE (DECREASE) IN INTEREST EXPENSE: Passbook and MMA accounts............... 1,102 1,926 3,028 167 475 642 Certificates of deposit................ 9,082 9,000 18,082 6,952 (1,889) 5,063 Other borrowings........ 2,357 9,911 12,268 4,832 3,541 8,373 Subordinated debentures............. 101 0 101 532 (93) 439 ------- -------- -------- ------- -------- ------- Total increase (decrease)........... 12,642 20,837 33,479 12,483 2,034 14,517 ------- -------- -------- ------- -------- ------- Increase (decrease) in net interest income.... $ 5,345 $ (8,374) $ (3,029) $ 6,889 $(10,262) $(3,373) ======= ======== ======== ======= ======== =======
TYPES OF LOANS The following table sets forth by category the total loan portfolio of the Company at the dates indicated:
DECEMBER 31, -------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- -------- (IN THOUSANDS) LOANS: Single family (1-4 units)................. $ 983,331 $ 820,078 $ 577,276 $ 375,757 $270,655 Multifamily (5+ units).. 350,507 367,750 387,757 405,399 325,075 Commercial real estate.. 286,824 249,119 229,914 204,611 209,121 Multifamily/commercial construction........... 9,013 10,658 5,707 19,574 19,717 Single family construction........... 19,349 14,227 14,512 14,703 6,912 Home equity credit lines.................. 26,572 28,137 31,213 35,255 23,755 ---------- ---------- ---------- ---------- -------- Real estate mortgages subtotal............. 1,675,596 1,489,969 1,246,379 1,055,299 855,235 Commercial business and other.................. 6,667 8,694 9,679 12,486 16,382 ---------- ---------- ---------- ---------- -------- Total loans........... 1,682,263 1,498,663 1,256,058 1,067,785 871,617 Unearned fee income..... (4,380) (6,816) (9,406) (12,621) (11,550) Reserve for possible losses................. (18,068) (14,355) (12,657) (12,686) (11,663) ---------- ---------- ---------- ---------- -------- Loans, net............ $1,659,815 $1,477,492 $1,233,995 $1,042,478 $848,404 ========== ========== ========== ========== ========
The following table shows the maturity distribution of the Company's real estate construction loans and commercial business loans outstanding as of December 31, 1995, which, based on remaining scheduled repayments of principal, were due within the periods indicated. All such loans are adjustable rate in nature
AFTER ONE WITHIN BUT WITHIN MORE THAN ONE YEAR FIVE YEARS FIVE YEARS TOTAL -------- ---------- ---------- ------- (IN THOUSANDS) MATURITY DISTRIBUTION: Real estate construction loans.......... $26,262 $2,100 $ -- $28,362 Commercial business loans............... 692 2,852 119 3,663 ------- ------ ---- ------- Total................................. $26,954 $4,952 $119 $32,025 ======= ====== ==== =======
27 ASSET QUALITY The Company places an asset on nonaccrual status when 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), or when management determines the ultimate collection of all contractually due principal or interest to be unlikely. Restructured loans where the Company grants payment or significant interest rate concessions are placed on nonaccrual status until collectibility improves and a satisfactory payment history is established, generally receipt of at least six consecutive payments. Real estate collateral obtained by the Company is referred to as "REO." Since the inception of operations in 1985 through December 31, 1995, the Company has originated approximately $5.0 billion of loans both for sale and retention in its loan portfolio, on which the Company has experienced approximately $34 million of losses. Such losses primarily resulted from the economic recession which affected the California economy commencing in late 1990 and continuing in parts of the state through 1995 and the Northridge earthquake which struck the Los Angeles area in January 1994. As a result of the Northridge earthquake, which affected primarily the Company's loans secured by multifamily properties in Los Angeles County, the Company has experienced increased loan delinquencies and REO, additional loan loss provisions and a higher level of modified and restructured loans. The Company's loss experience since inception represents an aggregate total of approximately 0.68% of loans originated in over ten years, although the Company's loss experience on single-family mortgage loans has been less than 0.06% of loans originated in this period. The Company's average annualized net chargeoff experience on its single family loans for the last three years was 0.02% of average single family loans. The Company has experienced a higher level of chargeoffs since 1991 in connection with the resolution of delinquent loans and sale of REO than in prior years. The ratio of the Company's net loan chargeoffs to average loans was 0.44% for 1993, 0.58% for 1994, and 0.69% for 1995. Additional information is provided under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Asset Quality and--Provisions for Losses and Reserve Activity" on pages 38 to 40 of the Company's 1995 Annual Report to stockholders, incorporated by reference herein. The following table presents nonaccruing loans and investments, REO, restructured performing loans and accruing single family loans more than 90 days past due at the dates indicated.
DECEMBER 31, ------------------------------------------- 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- ($ IN THOUSANDS) NONACCRUING ASSETS AND OTHER LOANS: Single family..................... $ -- $ -- $ -- $ -- $ -- Multifamily....................... 23,664 29,049 6,740 3,894 3,525 Commercial real estate............ 12,555 3,400 4,862 5,524 9,674 Other............................. 331 174 16 140 -- Real estate owned ("REO")......... 10,198 8,500 9,961 8,937 -- ------- ------- ------- ------- ------- Nonaccruing loans and REO....... 46,748 41,123 21,579 18,495 13,199 Nonaccruing investments........... -- -- 361 469 800 ------- ------- ------- ------- ------- Total nonaccruing assets........ 46,748 41,123 21,940 18,964 13,999 Restructured performing loans..... 12,795 17,489 6,342 3,366 3,366 ------- ------- ------- ------- ------- Total nonaccruing assets and restructured performing loans.. $59,543 $58,612 $28,282 $22,330 $17,365 ======= ======= ======= ======= ======= Accruing single family loans more than 90 days past due............ $ 3,747 $ 2,587 $ 1,390 $ 3,541 $ 2,880 ======= ======= ======= ======= ======= PERCENT OF TOTAL ASSETS: All nonaccruing assets............ 2.46% 2.41% 1.55% 1.54% 1.50% Nonaccruing assets and restructured performing loans.... 3.13% 3.43% 2.00% 1.81% 1.86%
28 The following table provides certain information with respect to the Company's reserve position and provisions for losses as well as chargeoff and recovery activity.
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- -------- ($ IN THOUSANDS) RESERVE FOR POSSIBLE LOSSES: Balance beginning of year................... $ 14,355 $ 12,657 $ 12,686 $ 11,663 $ 5,254 Provision charged to operations............. 14,765 9,720 4,806 8,062 6,241 Reserve from purchased loans.................. -- 34 200 466 2,240 Reserve of First Republic Savings Bank at acquisition......... -- -- 24 -- -- Chargeoffs on originated loans: Single family......... (14) (210) (209) (328) (259) Multifamily........... (9,314) (7,177) (3,367) (3,961) (706) Commercial real estate............... (2,163) (695) (1,547) (3,750) (1,001) Commercial business loans................ (48) (79) (76) (213) (186) Construction loans.... (353) -- -- -- -- Recoveries on originated loans: Single family......... 3 11 -- 50 -- Multifamily........... 765 119 -- 5 10 Commercial real estate............... 30 -- 92 654 -- Commercial business loans................ 54 15 43 12 4 Acquired loans: Chargeoffs............ (22) (47) -- -- (16) Recoveries............ 10 7 5 26 82 ---------- ---------- ---------- ---------- -------- Total chargeoffs, net of recoveries............. (11,052) (8,056) (5,059) (7,505) (2,072) ---------- ---------- ---------- ---------- -------- Balance end of year..... $ 18,068 $ 14,355 $ 12,657 $ 12,686 $ 11,663 ========== ========== ========== ========== ======== Average loans for the year................... $1,591,827 $1,379,640 $1,154,680 $1,008,783 $700,917 Total loans at year end.................... 1,682,263 1,498,663 1,256,058 1,067,785 871,617 Ratios of reserve to: Total loans........... 1.07% 0.96% 1.01% 1.19% 1.34% Nonaccruing loans..... 49% 44% 109% 133% 88% Nonaccruing loans and restructured performing loans..... 37% 29% 70% 98% 70% Net chargeoffs to average loans.......... 0.69% 0.58% 0.44% 0.74% 0.30%
29 The following table sets forth management's historical allocation of the reserve for possible losses by loan category and the percentage of loans in each category to total loans at the dates indicated:
DECEMBER 31, ------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ------------- ------------- ------------- ------------- ------------- RESERVE RESERVE RESERVE RESERVE RESERVE FOR % OF FOR % OF FOR % OF FOR % OF FOR % OF LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES LOANS ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ($ IN THOUSANDS) Loan Category: Single family........... $ 200 58.5% $ -- 54.7% $ -- 46.0% $ -- 35.2% $ -- 31.0% Multifamily............. 5,900 20.8 5,600 24.6 2,600 30.9 1,700 38.0 1,325 37.3 Commercial real estate.. 2,850 17.0 600 16.7 1,300 18.3 2,000 19.2 1,725 24.0 Multifamily construction........... -- 0.5 -- 0.6 -- 0.4 -- 1.8 -- 2.3 Single family construction........... -- 1.2 100 0.9 -- 1.1 -- 1.4 -- 0.8 Home equity credit lines.................. -- 1.6 -- 1.9 -- 2.5 -- 3.3 -- 2.7 Other loans............. 50 0.4 55 0.6 -- 0.8 100 1.1 200 1.9 Unallocated reserves.... 9,068 -- 8,000 -- 8,757 -- 8,886 -- 8,413 -- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- $18,068 100.0% $14,335 100.0% $12,657 100.0% $12,686 100.0% $11,663 100.0% ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
At December 31, 1995, management had allocated from its general reserves $5,900,000 to the multifamily loan category, $2,850,000 to the commercial real estate loan category, $200,000 to the single family category, and $50,000 to other loans, based upon management's estimate of the risk of loss inherent in its nonaccruing or other possible problem loans in those categories. The allocation of such reserve will change whenever management determines that the risk characteristics of its assets or specific assets have changed. The amount available for future chargeoffs that might occur within a particular category is not limited to the amount allocated to that category, since the allowance is a general reserve available for all loans in the Company's portfolio. In addition, the amounts so allocated by category may not be indicative of future chargeoff trends. Based predominately upon the Company's continuous review and grading process, the Company will determine appropriate levels of total reserves in response to its assessment of the potential risk of loss inherent in its loan portfolio. Management will provide additional reserves when the results of its problem loan assessment methodology or overall reserve adequacy test indicate additional reserves are required. The review of problem loans is an ongoing process, during which management may determine that additional chargeoffs are required or additional loans should be placed on nonaccrual status. Although substantially all nonaccrual loans and loans that were adversely affected by the earthquake have been reduced to their currently estimated collateral fair value (net of selling costs) at December 31, 1995, there can be no assurance that additional reserves or chargeoffs will not be required in the event that the properties securing the Company's existing problem loans fail to maintain their values or that new problem loans arise. FINANCIAL RATIOS The following table shows certain key financial ratios for the Company for the periods indicated.
YEAR ENDING DECEMBER 31, -------------------------------- 1995 1994 1993 1992 1991 ----- ----- ------ ------ ------ Key Financial Ratios: Return on average total assets............... 0.07% 0.47% 0.97% 1.06% 0.96% Return on average stockholders' equity....... 1.08% 6.77% 12.65% 14.10% 17.22% Average stockholders' equity as a percentage of average total assets..................... 6.00% 6.94% 7.63% 7.51% 5.55% General & administrative expenses as a percentage of average total assets.......... 1.07% 1.28% 1.33% 1.30% 1.44%
30 ITEM 2. PROPERTIES First Republic does not own any real property. In 1990, First Republic entered into a 10-year lease, with three 5-year options to extend, for headquarters space at 388 Market Street, mezzanine floor, in the San Francisco financial district. Management believes that the Company's current and planned facilities are adequate for its current level of operations. First Republic's subsidiaries lease offices at the following locations, with terms expiring at dates ranging from August 1997 to December 2002:
NAME ADDRESS ---- ------- First Thrift................. 101 Pine Street, San Francisco, CA 5628 Geary Boulevard, San Francisco, CA 1088 Stockton Street, San Francisco, CA 1809 Irving Street at 19th Avenue, San Francisco, CA 1099 Fourth Street, San Rafael, CA 3928 Wilshire Blvd., Los Angeles, CA 9593 Wilshire Blvd., Beverly Hills, CA 116 E. Grand Avenue, Escondido, CA 8347 La Mesa Blvd., La Mesa, CA 1110 Camino Del Mar, Del Mar, CA First Republic Savings Bank.. 2510 South Maryland Parkway, Las Vegas, NV
ITEM 3. LEGAL PROCEEDINGS There is no pending proceeding, other than ordinary routine litigation incidental to the Company's business, to which the Company is a party or to which any of its property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 1995. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS This information is incorporated by reference to page 48 of the Company's Annual Report to Stockholders for the year ended December 31, 1995. 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, 1995. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information is incorporated by reference to pages 36 through 45 of the Company's Annual Report to Stockholders for the year ended December 31, 1995. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This information is incorporated by reference to pages 20 through 35 and to page 48 of the Company's Annual Report to Stockholders for the year ended December 31, 1995. 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. 31 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the directors and executive officers of First Republic and certain pertinent information about them.
AGE POSITION HELD WITH THE COMPANY --- ------------------------------ Roger O. Walther(1)(2)(3)....... 60 Chairman of the Board James H. Herbert, II(1).................. 51 President, Chief Executive Officer and Director Katherine August- deWilde(1)............. 48 Executive Vice President and Director Willis H. Newton, Jr.... 46 Senior Vice President and Chief Financial Officer Linda G. Moulds......... 45 Vice President, Secretary and Controller Edward J. Dobranski..... 45 Vice President, General Counsel David B. Lichtman....... 32 Vice President, Chief Credit Officer Krista A. Jacobsen...... 34 Vice President, Chief Investment Officer Richard M. Cox-Johnson.. 61 Director Kenneth W. Dougherty.... 69 Director Frank J. Fahrenkopf, Jr..................... 56 Director L. Martin Gibbs(2)...... 58 Director James F. Joy(2)......... 58 Director John F. Mangan.......... 59 Director Barrant V. Mer- rill(2)(3)............. 65 Director
- -------- (1) Member of the Executive Committee. (2) Member of the Compensation Committee. (3) Member of the Audit Committee. The directors of First Republic serve three-year terms. The terms are staggered to provide for the election of approximately one-third of the Board members each year. Each director (except Mr. Cox-Johnson who was elected in October 1986 and Ms. August-deWilde who was elected in April 1988) has served in such capacity since the inception of First Republic. Messrs. Walther and Herbert have served as officers of First Republic since its inception. Ms. August-deWilde has served as an officer since July 1985 and as a director since April 1988, while Ms. Moulds has served as an officer since June 1985. Mr. Newton became an officer of First Republic in August 1988, Mr. Dobranski became an officer of First Republic in June 1993, Mr. Lichtman became an officer of First Republic in January 1994 and Ms. Jacobsen became an officer of First Republic in July 1995. The backgrounds of the directors and executive officers of First Republic are as follows: Roger O. Walther is Chairman of the Board of Directors and a director of First Republic serving until 1997. Mr. Walther is Chairman and Chief Executive Officer of ELS Educational Services, Inc., the largest teacher of English as a second language in the United States. He is a director of Charles Schwab & Co., Inc. From 1980 to 1984, Mr. Walther served as Chairman of the Board of San Francisco Bancorp. He is a graduate of the United States Coast Guard Academy, B.S. 1958, and the Wharton School, University of Pennsylvania, M.B.A. 1961 and is a member of the Graduate Executive Board of the Wharton School. James H. Herbert, II is President, Chief Executive Officer and a director of First Republic, serving until 1997, and has held such positions since First Republic's inception in 1985. From 1980 to July 1985, Mr. Herbert was President, Chief Executive Officer and a director of San Francisco Bancorp, as well as Chairman of the Board of its operating subsidiaries in California, Utah and Nevada. He is a past president and currently a director of the California Association of Thrift and Loan Companies and is on the California Commissioner of Corporations' Industrial Loan Law Advisory Committee. He is a graduate of Babson College, B.S., 1966, and New York University, M.B.A., 1969. He is a member of The Babson Corporation. 32 Katherine August-deWilde is Executive Vice President and a director of First Republic serving until 1998. She joined the Company in June 1985 as Vice President and Chief Financial Officer. From 1982 to 1985, she was Senior Vice President and Chief Financial Officer at PMI Mortgage Insurance Co., a subsidiary of Sears/Allstate. She is a graduate of Goucher College, A.B., 1969, and Stanford University, M.B.A., 1975. Willis H. Newton, Jr. has been Senior Vice President and Chief Financial Officer of First Republic since August 1988. From 1985 to August 1988, he was Vice President and Controller of Homestead Financial Corporation. He is a graduate of Dartmouth College, B.A., 1971 and Stanford University, M.B.A., 1976. Mr. Newton is a Certified Public Accountant. Linda G. Moulds is Vice President, Secretary and Controller of First Republic, serving with the Company since inception. From 1980 to July 1985, Ms. Moulds was Secretary and Controller of San Francisco Bancorp and a director of First United. She is a graduate of Temple University B.S., 1971. Edward J. Dobranski joined the company in August 1992 as General Counsel and was appointed a Vice President in 1993. He also serves as the Company's Compliance Officer and Community Reinvestment Officer. From 1990 to 1992, Mr. Dobranski was Of Counsel at Jackson Cole & Black in San Francisco, specializing in banking, real estate and corporate law, and from 1987 to 1990 he was a partner in the San Francisco office of Rose Wachtell & Gilbert. Mr. Dobranski is a graduate of Coe College-Iowa, B.A. 1972 and Creighton University-Nebraska, J.D. 1975. David B. Lichtman was appointed Vice President, Chief Credit Officer, in January 1994. Mr. Lichtman served as a loan processor with First Thrift from 1986 to 1990, as a loan officer with First Republic Mortgage Inc. from 1990 through 1991, and as a credit officer with First Thrift from 1992 through December 1993. Mr. Lichtman is a graduate of Vassar College, B.A. 1985 and the University of California, Berkeley, M.B.A. 1990. Krista A. Jacobsen joined the Company in July 1995 as Vice President and Chief Investment Officer. Previously, from 1987 to 1994, she was Vice President and Portfolio Manager at Transamerica Investment Services. Ms. Jacobsen is a graduate of the University of California, Los Angeles, earning a B.A. and an M.A. in 1985. Richard M. Cox-Johnson is a director of First Republic serving until 1996. Mr. Cox-Johnson is a director of Premier Consolidated Oilfields PLC. He is a graduate of Oxford University 1955. Kenneth W. Dougherty is a director of First Republic serving until 1996. Mr. Dougherty is an investor and was previously President of Gill & Duffus International Inc. and Farr Man & Co. Inc., which are international commodity trading companies. He was a director of San Francisco Bancorp from 1982 to 1984. Mr. Dougherty is a graduate of the University of Pennsylvania, B.A. 1948. Frank J. Fahrenkopf, Jr., is a director of First Republic serving until 1996. Mr. Fahrenkopf is the President and CEO of the American Gaming Association. Previously, he was a partner in the law firm of Hogan & Hartson. From January 1983 until January 1989, he was Chairman of the Republican National Committee. Mr. Fahrenkopf is a graduate of the University of Nevada- Reno, B.A. 1962, and the University of California-Berkeley, L.L.B. 1965. L. Martin Gibbs is a director of First Republic serving until 1998. Mr. Gibbs is a partner in the law firm of Rogers & Wells, counsel to the Company. He is a graduate of Brown University, B.A. 1959 and Columbia University, J.D. 1962. James F. Joy is a director of First Republic serving until 1997. Mr. Joy is Director-European Business Development for CVC Capital Partners Europe Limited, and a non-executive director of Sylvania Lighting International. Formerly, he was Managing Director of Citicorp Venture Capital and Citicorp Corporate Finance from 1989 to 1993. He is a graduate of Trinity College, B.S. 1959, B.S.E.E. 1960 and New York University, M.B.A. 1964. 33 John F. Mangan is a director of First Republic serving until 1998. 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 1997. Mr. Merrill has been Managing Partner of Sun Valley Partners, a private investment company, since July 1982. From 1984 until January 1989, he was a general partner of Dakota Partners, a private investment partnership. From 1980 to 1984, Mr. Merrill was a director of San Francisco Bancorp. From 1978 until 1982, he was Chairman of Pershing & Co. Inc., a division of Donaldson, Lufkin & Jenrette. Mr. Merrill is a graduate of Cornell University, B.A. 1953. ITEM 11. EXECUTIVE COMPENSATION This information is incorporated by reference to the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is incorporated by reference to the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's fiscal year ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated by reference to the Company's definitive proxy statement under the caption "Executive Compensation" to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM (a) Financial Statements and Schedules. The following financial statements are contained in registrant's 1995 Annual Report to Stockholders and are incorporated in this Report on Form 10-K by this reference:
PAGE OF ANNUAL REPORT ------------- First Republic Bancorp Inc. At December 31, 1995 and 1994: Consolidated Balance Sheet................................... 20 Years ended December 31, 1995, 1994 and 1993: Consolidated Statement of Income............................. 22 Consolidated Statement of Stockholders' Equity............... 23 Consolidated Statement of Cash Flows......................... 24 Notes to Consolidated Financial Statements..................... 25 Report of Independent Auditors................................. 35
All schedules are omitted as not applicable. The Company filed a report dated October 20, 1995 on Form 8-K reporting the Company's earnings for the quarter and nine months ended September 30, 1995. 34 The Company filed a report dated January 25, 1996 on Form 8-K reporting the Company's earnings for the quarter and year ended December 31, 1995. (c) Exhibits NOTE: Exhibits marked with a plus sign (+) are incorporated by reference to the registrant's Registration Statement on Form S-1 (No. 33-4608); Exhibits marked with two plus signs (++) are incorporated by reference to the Registrant's Form 10-Q for the quarter ended September 30, 1987; Exhibits marked with three plus signs (+++) are incorporated by reference to the Registrant's Registration Statement on Form S-1 (No. 33-18963); Exhibits marked with a diamond (.) are incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1988; Exhibits marked with two diamonds (..) are incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1989; Exhibits marked with three diamonds (...) are incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1990; Exhibits marked with two asterisks (**) are incorporated by reference to Registrant's Registration Statement on Form S-2 (No. 33-40182); Exhibits marked with three asterisks (***) are incorporated by reference to Registrant's Registration Statement on Form S-2 (No. 33-42426); Exhibits marked with one pound sign (#) are incorporated by reference to Registrant's Registration Statement on Form S-2 (No. 33-43858); Exhibits marked with two pound signs (##) are incorporated by reference to the Registrant's Registration Statement on Form S-2 (No. 33-45435). Exhibits marked with three pound signs (###) are incorporated by reference to the Registrant's Registration Statement on Form S-2 (No. 33-54136). Exhibits marked with four pound signs (####) are incorporated by reference to Registrant's Form 10-K for the year ended December 31, 1992. Exhibits marked with one dagger sign (d) are incorporated by reference to the Registrant's Registration Statement on Form S-3 (No. 33-60958). Exhibits marked with two dagger signs (dd) are incorporated by reference to the Registrant's Registration Statement on Form S-3 (No. 33-66336). Each such Exhibit had the number in parentheses immediately following the description of the Exhibit herein.
3.1### Certificate of Incorporation, as amended. (3.1) 3.2+++ By-Laws as currently in effect. 4.1# Indenture dated as of September 1, 1991 between First Republic Bancorp Inc. and National City Bank of Minneapolis. (10.35) 4.2## Supplemental Indenture dated as of November 1, 1991 between First Republic Bancorp Inc. and National City Bank of Minneapolis. (10.35) 4.3### Indenture dated as of December 1, 1992 between First Republic Bancorp Inc. and U.S. Trust Company of California, N.A. (4.1) 4.4d Indenture dated as of May 15, 1993, between First Republic Bancorp Inc. and United States Trust Company of New York. (4.1) 4.5dd 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. 10.2+ 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-deWilde, and Linda G. Moulds. (10.22) 10.5++ Continuing Guarantee dated August 3, 1987 of the Registrant. (19.2) 10.6++ Pledge Agreement dated September 8, 1987 between Pacific Trust Company, as trustee for the First Republic Bancorp Inc. Employee Stock Ownership Plan and the Registrant. (19.6(b))
35 10.7+++ Key man life insurance policy on James H. Herbert, II. (10.33) 10.8. Employment offer of Willis H. Newton, Jr. (10.37) 10.9... 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) 10.10.. Lease Agreement dated January 5, 1990 between the Registrant and Honorway Investment Corporation. (10.45) 10.11... Agreement re: Executive Bonuses for 1990 and 1991. (10.51) 10.12*** 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) 10.13### 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) 10.14### Form of 1992 Performance-Based Contingent Stock Option Agreement. (10.35) 10.15 Form of 1995 Performance-Based Contingent Stock Option Agreement. 10.16#### 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 1995 Annual Report to Stockholders. 22.1 Subsidiaries of First Republic Bancorp Inc. 23.1 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule.
36 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. First Republic Bancorp Inc. /s/ Willis H. Newton, Jr. By: _________________________________ WILLIS H. NEWTON, JR. SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER March 20, 1996 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE --------- ----- ---- /s/ Roger O. Walther Chairman of the Board March 20, 1996 - ------------------------------------- (ROGER O. WALTHER) /s/ James H. Herbert, II President, Chief March 20, 1996 - ------------------------------------- Executive Officer and (JAMES H. HERBERT, II) Director /s/ Katherine August-deWilde Executive Vice March 20, 1996 - ------------------------------------- President and (KATHERINE AUGUST-DEWILDE) Director /s/ Willis H. Newton, Jr. Senior Vice President March 20, 1996 - ------------------------------------- and Chief Financial (WILLIS H. NEWTON, JR.) Officer (Principal Financial Officer) /s/ Linda G. Moulds Vice President, March 20, 1996 - ------------------------------------- Secretary and (LINDA G. MOULDS) Controller (Principal Accounting Officer) /s/ Richard M. Cox-Johnson Director March 15, 1996 - ------------------------------------- (RICHARD M. COX-JOHNSON)
37 SIGNATURE TITLE DATE --------- ----- ---- /s/ Kenneth W. Dougherty Director March 21, 1996 - ------------------------------------- (KENNETH W. DOUGHERTY) /s/ Frank J. Fahrenkopf, Jr. Director March 20, 1996 - ------------------------------------- (FRANK J. FAHRENKOPF, JR.) /s/ L. Martin Gibbs Director March 14, 1996 - ------------------------------------- (L. MARTIN GIBBS) /s/ James F. Joy Director March 14, 1996 - ------------------------------------- (JAMES F. JOY) /s/ John F. Mangan Director March 20, 1996 - ------------------------------------- (JOHN F. MANGAN) /s/ Barrant V. Merrill Director March 14, 1996 - ------------------------------------- (BARRANT V. MERRILL)
38
EXHIBIT NO. DESCRIPTION ----------- ----------- 11.1........... Statement of Computation of Earnings Per Share 12.1........... Statement of Computation of Ratios of Earnings to Fixed Charges 13.1........... 1995 Annual Report to Stockholders 22.1........... Subsidiaries of First Republic Bancorp Inc. 23.1........... Consent of KPMG Peat Marwick LLP 27............. Financial Data Schedule
39 EX-10.1 2 EMPLOYEE STOCK OWNERSHIP PLAN EXHIBIT 10.1 FIRST REPUBLIC BANCORP INC. --------------------------- EMPLOYEE STOCK OWNERSHIP PLAN ----------------------------- As Amended and Restated as of January 1, 1987 --------------------------------------------- TABLE OF CONTENTS -----------------
SECTION PAGE - ------- ---- 1. Nature of the Plan............................................. 1 ------------------ 2. Definitions.................................................... 2 ----------- 3. Eligibility and Participation.................................. 7 ----------------------------- 4. Employer Contributions......................................... 9 ---------------------- 5. Investment of Trust Assets..................................... 10 -------------------------- 6. Allocations to Participants' Accounts.......................... 13 ------------------------------------- 7. Allocation Limitations......................................... 18 ---------------------- 8. Voting Company Stock........................................... 20 -------------------- 9. Disclosure to Participants..................................... 20 -------------------------- 10. Vesting and Forfeitures........................................ 22 ----------------------- 11. Credited Service and Break in Service.......................... 24 ------------------------------------- 12. When Capital Accumulation Will Be Distributed.................. 25 --------------------------------------------- 13. In-Service Distributions....................................... 27 ------------------------ 14. How Capital Accumulation Will Be Distributed................... 30 -------------------------------------------- 15. Rights, Options and Restrictions on Company Stock.............. 32 ------------------------------------------------- 16. No Assignment of Benefits...................................... 32 ------------------------- 17. Administration................................................. 33 -------------- 18. Claims Procedure............................................... 37 ---------------- 19. Limitation on Participants' Rights............................. 38 ---------------------------------- 20. Future of the Plan............................................. 39 ------------------ 21. "Top-Heavy" Contingency Provisions............................. 40 ---------------------------------- 22. Governing Law.................................................. 41 ------------- 23. Execution...................................................... 42 ---------
FIRST REPUBLIC BANCORP INC. --------------------------- EMPLOYEE STOCK OWNERSHIP PLAN ----------------------------- As Amended and Restated as of January 1, 1987 --------------------------------------------- Section 1. Nature of the Plan. ------------------ The purpose of this Plan is to enable participating Employees to share in the growth and prosperity of First Republic Bancorp Inc. (the "Company") and to provide Participants with an opportunity to accumulate capital for their future economic security. The Plan is intended to do this without any deductions from Participants' paychecks and without requiring them to invest their personal savings. The primary purpose of the Plan is to enable Participants to acquire stock ownership interests in the Company. Therefore, the Trust established under the Plan is designed to invest primarily in Company Stock. The Plan is also designed to be available as a technique of corporate finance to the Company. Accordingly, it may be used to accomplish the following objectives: (a) To meet general financing requirements of the Company, including capital growth and transfers in the ownership of Company Stock; (b) To provide Participants with beneficial ownership of Company Stock, substantially in proportion to their relative Compensation, without requiring any cash outlay, any reduction in pay or other personal investment on the part of Participants; and (c) To receive loans (or other extensions of credit) to finance the acquisition of Company Stock ("Acquisition Loans"), with such loans to be repaid by Employer Contributions to the Trust and dividends received on such Company Stock. The Plan, originally adopted effective as of January 1, 1985, is hereby amended and restated as of January 1, 1987. The Plan is a stock bonus plan under Section 401(a) of the Internal Revenue Code (the "Code"). The Plan is also an employee stock ownership plan under Section 4975(e)(7) of the Code. All Trust Assets held under the Plan will be administered, distributed, forfeited and otherwise governed by the provisions of this Plan and the related Trust Agreement. The Plan is administered by an Administrative Committee for the exclusive benefit of Participants (and their Beneficiaries). Section 2. Definitions. ----------- In this Plan, whenever the context so indicates, the singular or plural number and the masculine, feminine or neuter gender shall be deemed to include the other, the terms "he," "his" and "him" shall refer to a Participant, and the capitalized terms shall have the following meanings: Account .................. One of two accounts maintained to record the interest of a Participant under the Plan. See Section 6. Acquisition Loan ......... A loan (or other extension of credit) used by the Trust to finance the acquisition of Company Stock, which loan may constitute an extension of credit to the Trust from a party in interest (as defined in ERISA). See Section 5(b). Affiliate ................ Any corporation which is a member of a controlled group of corporations (within the meaning of Section 414(b) of the Code) of which the Company is also a member. - 2 - Allocation Date .......... December 31st of each year (the last day of each Plan Year). Approved Absence ......... A leave of absence (without pay) granted to an Employee by his Employer under its established leave policy. See Section 3(c). Beneficiary .............. The person (or persons) entitled to receive any benefit under the Plan in the event of a Participant's death. See Section 14(b). Board of Directors ....... The Board of Directors of the Company. Break in Service ......... A Plan Year in which an Employee is not credited with more than 500 Hours of Service as a result of his termination of Service. See Section 11(b). Capital Accumulation ..... A Participant's vested, nonforfeitable interest in his Accounts under the Plan. Each Participant's Capital Accumulation shall be determined in accordance with the provisions of Section 10 and distributed as provided in Sections 12, 13 and 14. Code ..................... The Internal Revenue Code of 1986, as amended. Committee ................ The Administrative Committee appointed by the Board of Directors to administer the Plan. See Section 17. Company .................. First Republic Bancorp Inc., a Delaware corporation. Company Stock ............ Shares of voting common stock issued by the Company, which shares are "employer securities" under Section 409(1) of the Code. Company Stock Account .... The Account which reflects each Participant's interest in Company Stock held under the Plan. See Section 6. - 3 - Compensation ............. The total wages and other compensation paid to an Employee by the Company during the Plan Year and reported on the Employee's Wage and Tax Statement (Form W-2), plus the amounts excludable from the Employee's taxable income under Sections 125 and 402(g) of the Code, but excluding merit bonuses and any amount in excess of $200,000 (as adjusted pursuant to Section 401(a)(17) of the Code) or, after 1993, $150,000 (as adjusted pursuant to Section 401(a)(17) of the Code). For purposes of applying this dollar limit, the Compensation of a 5% owner or of a Highly Compensated Employee who is one of the ten most highly compensated Highly Compensated Employees shall be aggregated with the Compensation of his or her spouse and his or her lineal descendants who are under age 19. Credited Service ......... The number of Plan Years in which an Employee is credited with at least 1000 Hours of Service, including Service prior to January 1, 1987. See Section 11(a). Disability ............... A physical or mental condition of a total and permanent nature which, in the opinion of a physician approved by the Committee, will prevent an Employee from engaging in any substantial gainful employment with the Company or an Affiliate. "Disability" shall not include such a condition if it: (1) resulted from or consists of habitual drunkenness or addiction to narcotics, (2) was contracted, suffered or incurred while engaged in a felonious enterprise, (3) was intentionally self-inflicted, (4) arose out of service in the armed forces of any country, or (5) arose while absent on extended leave of absence (other than a vacation) or lay-off or while absent without leave. - 4 - Employee ................. Any common-law employee of an Employer. A leased employee, as described in Section 414(n) of the Code, is not an Employee for purposes of this Plan. Employer ................. The Company and any Affiliate which is designated as an Employer by the Board of Directors and which adopts the Plan for the benefit of its Employees. Employer Contributions ... Payments made to the Trust by an Employer. See Section 4. ERISA .................... The Employee Retirement Income Security Act of 1974, as amended. Financed Shares .......... Shares of Company Stock acquired by the Trust with the proceeds of an Acquisition Loan. Forfeiture ............... Any portion of a Participant's Accounts which does not become a part of his Capital Accumulation and which is forfeited under Section 10(b). 401(k) Plan .............. The First Republic Bancorp Inc. Cash or Deferred Plan, a profit sharing plan qualified under Section 401(a) of the Code that includes a cash or deferred arrangement under Section 401(k) of the Code. Highly Compensated Employee ................. An Employee who (1) is a 5% owner, (2) has Statutory Compensation in excess of $75,000, (3) has Statutory Compensation in excess of $50,000 and is in the top-paid 20% group of Employees, or (4) is an officer of the Company and has Statutory Compensation in excess of 50% of the dollar amount in effect under Section 415(b)(1)(A) of the Code for the Plan Year, as determined in accordance with Section 414(q) of the Code. The $75,000 and $50,000 amounts shall be adjusted after 1987 for increases in the cost of living - 5 - pursuant to Section 414(q)(1) of the Code. Hour of Service .......... Each hour of Service for which an Employee is credited under the Plan, as described in Section 3(d). Other Investments Account .................. The Account which reflects each Participant's interest under the Plan attributable to Trust Assets other than Company Stock. See Section 6. Participant .............. Any Employee or former Employee who has met the applicable eligibility requirements of Section 3 and who has not yet received a complete distribution of his Capital Accumulation. Plan ..................... The First Republic Bancorp Inc. Employee Stock Ownership Plan, which includes this Plan and the Trust Agreement. Plan Year ................ The 12-month period ending on each Allocation Date and coinciding with each calendar year, which is the taxable year of the Company. Retirement ............... Termination of Service on or after the later of (1) attaining age 65 or (2) the fifth anniversary of becoming a Participant. Service .................. Employment with the Company or with an Affiliate. Statutory Compensation ... The total remuneration paid to an Employee by an Employer during the Plan Year for personal services rendered to the Employer, excluding employer contributions to a plan of deferred compensation, amounts realized in connection with stock options and amounts which receive special tax benefits. For purposes of the definition of "Highly Compensated Employee," "Statutory Compensation" shall include reductions in salary contributed to the 401(k) Plan for the Plan Year. - 6 - Statutory Dollar Amount .. For any Plan Year, $30,000, as may be increased pursuant to Section 415(c)(1)(A) of the Code. Trust .................... The First Republic Bancorp Inc. Employee Stock Ownership Trust, created by the Trust Agreement entered into between the Company and the Trustee. Trust Agreement .......... The Agreement between the Company and the Trustee establishing the Trust and specifying the duties of the Trustee. Trust Assets ............. The Company Stock (and other as sets) held in the Trust for the benefit of Participants. See Section 5. Trustee ................... The Trustee (and any successor Trustee) appointed by the Board of Directors to hold the Trust Assets. Section 3. Eligibility and Participation. ----------------------------- (a) Each full-time Employee shall become a Participant in the Plan on the first day of the first pay period coinciding with or next following the date on which he completes six months of Service. Each part-time Employee shall become a Participant in the Plan on the first day of the first pay period coinciding with or next following the date on which he completes 1000 Hours of Service. An Employee whose terms of Service are covered by a collective bargaining agreement shall not be eligible to participate in the Plan unless the terms of such agreement specifically provide for participation in the Plan. (b) A Participant is entitled to share in the allocation of Employer Contributions and Forfeitures under Section 6(a) for - 7 - each Plan Year in which he is credited with at least 1000 Hours of Service and in which he is an eligible Employee on the Allocation Date. A Participant is also entitled to share in the allocation of Employer Contributions and Forfeitures for the Plan Year of his Retirement, Disability or death if he is credited with at least 1000 Hours of Service for that Plan Year (even if he is not an Employee on the Allocation Date). (c) A former Participant who is reemployed by an Employer shall become a Participant as of the date of his reemployment. An Employee who is on an Approved Absence shall not become a Participant until the end of his Approved Absence, but a Participant who is on an Approved Absence shall continue as a Participant during the period of his Approved Absence. (d) Hours of Service - For purposes of determining the Hours of Service to ---------------- be credited to an Employee under the Plan, the following rules shall be applied: (1) Hours of Service shall include each hour of Service for which an Employee is paid (or entitled to payment) for the performance of duties; each hour of Service for which an Employee is paid (or entitled to payment) for a period during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or paid leave of absence; and each additional hour of Service for which back pay is either awarded or agreed to (irrespective of mitigation of damages); provided, however, that not more than 501 Hours of Service shall be credited for a single continuous period during which an Employee does not perform any duties. (2) The crediting of Hours of Service shall be determined in accordance with the rules set forth in paragraphs (b) and (c) of Section 2530.200b-2 of the regulations prescribed by the Department of - 8 - Labor, which rules shall be consistently applied with respect to all Employees within the same job classification. (3) Hours of Service shall not be credited to an Employee for a period during which no duties are performed if payment is made or due under a plan maintained solely for the purpose of complying with applicable worker's compensation, unemployment compensation or disability insurance laws, and Hours of Service shall not be credited on account of any payment made or due an Employee solely in reimbursement of medical or medically-related expenses. (4) An Employee compensated on an hourly basis shall be credited for each Hour of Service as described above. A salaried Employee shall be credited with 95 Hours of Service for each semi-monthly payroll period in which he completes at least one Hour of Service. Section 4. Employer Contributions. ---------------------- (a) Employer Contributions shall be paid to the Trustee for each Plan Year in such amounts (or under such formula) as may be determined by the Board of Directors; provided, however, that Employer Contributions shall not be made for any Plan Year in amounts which can be allocated to no Participant's Accounts by reason of the allocation limitation described in Section 7(a) or in amounts which are not deductible under Section 404(a) of the Code. (b) Employer Contributions for each Plan Year shall be paid to the Trustee not later than the due date (including extensions) for filing the Company's Federal income tax return for that Plan Year. Employer Contributions may be paid in cash and/or in shares of Company Stock, as determined by the Board of Directors; provided, however, that the Board of Directors may determine that - 9 - Employer Contributions may be paid as provided in Section 5(c) with notice to the Committee and the Trustee. (c) Any Employer Contributions which are not deductible under Section 404(a) of the Code may be returned to the Employer by the Trustee (upon the direction of the Committee) within one year after the deduction is disallowed or after it is determined that the deduction is not available. In the event that Employer Contributions are paid to the Trust by reason of a mistake of fact, such Employer Contributions may be returned to the Employer by the Trustee (upon the direction of the Committee) within one year after the payment to the Trust. (d) No Participant shall be required or permitted to make contributions to the Trust. Section 5. Investment of Trust Assets. -------------------------- (a) In General - Trust Assets will be invested by the Trustee primarily ---------- (or exclusively) in Company Stock in accordance with directions from the Committee. Employer Contributions (and other Trust Assets) may be used to acquire shares of Company Stock from any Company shareholder or from the Company. The Trustee may also invest Trust Assets in such other prudent investments as the Committee deems to be desirable for the Trust, or Trust Assets may be held temporarily in cash. All purchases of Company Stock by the Trustee shall be made only as directed by the Committee and only at prices which do not exceed fair market value. The Committee may direct the Trustee to invest and hold up to 100% of the Trust Assets in Company Stock. - 10 - (b) Acquisition Loans - The Committee may direct the Trustee to incur ----------------- Acquisition Loans from time to time to finance the acquisition of Company Stock (Financed Shares) or to repay a prior Acquisition Loan. An installment obligation incurred in connection with the purchase of Company Stock shall be treated as an Acquisition Loan. An Acquisition Loan shall be for a specific term, shall bear a reasonable rate of interest and shall not be payable on demand except in the event of default. An Acquisition Loan may be secured by a pledge of the Financed Shares so acquired (or acquired with the proceeds of a prior Acquisition Loan which is being refinanced). No other Trust Assets may be pledged as collateral for an Acquisition Loan, and no lender shall have recourse against Trust Assets other than any Financed Shares remaining subject to pledge. Any pledge of Financed Shares must provide for the release of the shares so pledged as payments on the Acquisition Loan are made by the Trustee and such Financed Shares are allocated to Participants' Company Stock Accounts under Section 6. If the lender is a party in interest (as defined in ERISA), the Acquisition Loan must provide for a transfer of Trust Assets to the lender on default only upon and to the extent of the failure of the Trust to meet the payment schedule of the Acquisition Loan. (c) Acquisition Loan Payments - Payments of principal and/or interest on ------------------------- any Acquisition Loan shall be made by the Trustee (as directed by the Committee) only from Employer Contributions paid in cash to enable the Trust to repay such Acquisition Loan, from earnings attributable to such Employer Contribu- - 11 - tions and from any cash dividends received by the Trust on the Financed Shares (whether allocated or unallocated) purchased with the proceeds of such Acquisition Loan; and the payments made with respect to an Acquisition Loan for a Plan Year must not exceed the sum of such Employer Contributions, earnings and dividends for that Plan Year (and prior Plan Years), less the amount of such payments for prior Plan Years. If the Company is the lender with respect to an Acquisition Loan, Employer Contributions may be paid in the form of forgiveness of indebtedness under the Acquisition Loan. If the Company is not the lender with respect to an Acquisition Loan, the Company may elect to make payments on the Acquisition Loan directly to the lender and to treat such payments as Employer Contributions. (d) Sales of Company Stock - Subject to the approval of the Board of ---------------------- Directors, the Committee may direct the Trustee to sell shares of Company Stock to any person (including the Company) through open-market or privately negotiated transactions; provided, that any such sale must be made at a price not less than fair market value as of the date of the sale; provided, further that any such sale shall comply with all applicable Federal and state securities laws. Notwithstanding the provisions of Section 5(c), the Committee may direct the Trustee to apply the proceeds from the sale of unallocated Financed Shares to repay the Acquisition Loan (incurred to finance the purchase of such Financed Shares) in the event of the sale of the Company or the termination of the Plan or if the Plan ceases to be an employee stock ownership plan under Section 4975(e)(7) of the Code. If - 12 - the Trustee is unable to make payments of principal and/or interest on an Acquisition Loan when due, the Committee may direct the Trustee to either sell (with the approval of the Board of Directors) any Financed Shares that have not yet been allocated to Participants' Company Stock Accounts or to obtain a new Acquisition Loan in an amount sufficient to make such payments. Any decision by the Committee to direct the Trustee to sell Company Stock under this Section 5(d) must comply with the fiduciary duties applicable under Section 404(a)(1) of ERISA. Section 6. Allocations to Participants' Accounts. ------------------------------------- A Company Stock Account and an Other Investments Account shall be maintained to reflect the interest of each Participant under the Plan. Company Stock Account - The Company Stock Account maintained for each --------------------- Participant will be credited annually with his allocable share of Company Stock (including fractional shares) purchased and paid for by the Trust or contributed in kind to the Trust as an Employer Contribution, with any Forfeitures of Company Stock and with any stock dividends on Company Stock allocated to his Company Stock Account. Other Investments Account - The Other Investments Account maintained for ------------------------- each Participant will be credited annually with his allocable share of Employer Contributions that are not in the form of Company Stock, with any Forfeitures from Other Investments Accounts, with any cash dividends on Company Stock allocated to his Company Stock Account (other than currently distrib- - 13 - uted dividends) and any net income (or loss) of the Trust. Such Account will be debited for the Participant's share of any cash payments made by the Trustee for the acquisition of Company Stock or for the payment of any principal and/or interest on an Acquisition Loan. The allocations to Participants' Accounts for each Plan Year will be made as follows: (a) Employer Contributions and Forfeitures - Employer Contributions under -------------------------------------- Section 4(a) and Forfeitures under Section 10(b) for each Plan Year will be allocated as of the Allocation Date among the Accounts of Participants so entitled under Section 3(b) in the ratio that the Compensation of each such Participant bears to the total Compensation of all such Participants, subject to the allocation limitations described in Section 7. For this purpose, any Compensation paid prior to the date an Employee becomes a Participant shall be disregarded. (b) Financed Shares - Any Financed Shares acquired by the Trust shall --------------- initially be credited to a "Loan Suspense Account" and will be allocated to the Company Stock Accounts of Participants only as payments on the Acquisition Loan are made by the Trustee. The number of Financed Shares to be released from the Loan Suspense Account for allocation to Participants' Company Stock Accounts for each Plan Year shall be determined by the Committee (as of each Allocation Date) as follows: (1) General Rule - The number of Financed Shares held in the Loan ------------ Suspense Account immediately before the release for - 14 - the current Plan Year shall be multiplied by a fraction. The numerator of the fraction shall be the amount of principal and/or interest paid on the Acquisition Loan for that Plan Year. The denominator of the fraction shall be the sum of the numerator plus the total payments of principal and interest on that Acquisition Loan projected to be paid for all future Plan Years. For this purpose, the interest to be paid in future years is to be computed by using the interest rate in effect as of the current Allocation Date. (2) Special Rule - The Committee may elect (as to each Acquisition ------------ Loan) or the provisions of the Acquisition Loan may provide for the release of Financed Shares from the Loan Suspense Account based solely on the ratio that the payments of principal for each Plan Year bear to the total principal amount of the Acquisition Loan. This method may be used only to the extent that: (A) the Acquisition Loan provides for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for ten years; (B) interest included in any payment on the Acquisition Loan is disregarded only to the extent that it would be determined to be interest under standard loan amortization tables; and (C) the entire duration of the Acquisition Loan repayment period does not exceed ten years, even in the event of a renewal, extension or refinancing of the Acquisition Loan. In each Plan Year in which Trust Assets are applied to make payments on an Acquisition Loan, the Financed Shares released from the Loan Suspense Account in accordance with the provisions - 15 - of this Section 6(b) shall be allocated among the Company Stock Accounts of Participants in the manner determined by the Committee based upon the source of funds (Employer Contributions, earnings attributable to such Employer Contributions and cash dividends on Financed Shares allocated to Participants' Company Stock Accounts or cash dividends on Financed Shares credited to the Loan Suspense Account) used to make the payments on the Acquisition Loan. If cash dividends on Financed Shares allocated to a Participant's Company Stock Account are used to make payments on an Acquisition Loan, Financed Shares (representing that portion of such payments and whose fair market value is at least equal to the amount of such dividends) released from the Loan Suspense Account shall be allocated to that Participant's company Stock Account. (c) Net Income (or Loss) of the Trust - The net income (or loss) of the --------------------------------- Trust for each Plan Year will be determined as of the Allocation Date. Prior to the allocation of Employer Contributions and Forfeitures for the Plan Year, each Participant's share of any net income (or loss) will be allocated to his Other Investments Account in the ratio that the total balances of both his Accounts on the preceding Allocation Date (reduced by any distribution of Capital Accumulation during the Plan Year) bears to the sum of such Account balances for all Participants as of that date. The net income (or loss) of the Trust includes the increase (or decrease) in the fair market value of Trust Assets (other than Company Stock), interest income, dividends and other income and gains (or losses) attributable to Trust Assets (other - 16 - than any dividends on allocated Company Stock) since the preceding Allocation Date, reduced by any expenses charged to the Trust Assets for that Plan Year. The determination of the net income (or loss) of the Trust shall not take into account any interest paid by the Trust under an Acquisition Loan. (d) Dividends on Company Stock - Any cash dividends received on shares of -------------------------- Company Stock allocated to Participants' Company Stock Accounts will be allocated to the respective Other Investments Accounts of such Participants. Any cash dividends received on unallocated shares of Company Stock (including any Financed Shares credited to the Loan Suspense Account) shall be included in the computation of the net income (or loss) of the Trust. Any stock dividends received on Company Stock shall be credited to the Accounts (including the Loan Suspense Account) to which such Company Stock was allocated. Any cash dividends which are currently distributed to Participants (or their Beneficiaries) under Section 13(a) shall not be credited to their Other Investments Accounts. (e) Accounting for Allocations - The Committee shall establish accounting -------------------------- procedures for the purpose of making the allocations to Participants' Accounts provided for in this Section 6. The Committee shall maintain adequate records of the aggregate cost basis of Company Stock allocated to each Participant's Company Stock Account. The Committee shall also keep separate records of Financed Shares and of Employer Contributions (and any earnings thereon) made for the purpose of enabling the Trust to repay any Acquisition Loan. From time to time, the Committee may - 17 - modify the accounting procedures for the purposes of achieving equitable and nondiscriminatory allocations among the Accounts of Participants in accordance with the general concepts of the Plan, the provisions of this Section 6 and the requirements of the Code and ERISA. Section 7. Allocation Limitations. ---------------------- (a) Limitation on Annual Additions - The Annual Additions for each Plan ------------------------------ Year with respect to any Participant may not exceed the lesser of: (1) 25% of his Statutory Compensation; or (2) the Statutory Dollar Amount. For this purpose, "Annual Additions" shall be the total of the Employer Contributions and Forfeitures (including any income attributable to Forfeitures) allocated to the Accounts of a Participant for the Plan Year, except as provided in Section 7(c), plus the sum of (i) the reductions in salary contributed on his behalf to the 401(k) Plan for the Plan Year; (ii) any employer contributions allocated to him under the 401(k) Plan for the Plan Year; and (iii) any voluntary after-tax contributions made by him to the 401(k) Plan for the Plan Year. In determining such Annual Additions, Forfeitures of Company Stock shall be included at the fair market value as of the Allocation Date. If the aggregate amount that would be allocated to the Accounts of a Participant in the absence of this limitation would exceed the amount set forth in this limitation, his Annual Addi- - 18 - tions under the 401(k) Plan shall be reduced in accordance with the terms thereof, prior to any reduction in the amounts allocated to his Accounts under this Plan. Any Forfeitures which can be allocated to no Participant's Accounts by reason of this limitation shall be credited to a "Forfeiture Suspense Account" and allocated as Forfeitures under Section 6(a) for the next succeeding Plan Year (prior to the allocation of Employer Contributions for such succeeding Plan Year). (b) Special Acquisition Loan Rules - Any Employer Contributions which are ------------------------------ used by the Trust (not later than the due date, including extensions, for filing the Company's Federal income tax return for that Plan Year) to pay interest on an Acquisition Loan, and any Financed Shares which are allocated as Forfeitures, shall not be included as Annual Additions under Section 7(a); provided, however, that the provisions of this Section 7(c) shall be applicable only if not more than one-third of the Employer Contributions applied to pay principal and/or interest on an Acquisition Loan are allocated to Participants who are Highly Compensated Employees; and the Committee shall reallocate such Employer Contributions to the extent it deems it to be appropriate to satisfy this special rule. The Annual Additions under Section 7(a) with respect to Financed Shares released from the Loan Suspense Account (by reason of Employer Contributions used for payments on an Acquisition Loan) and allocated to Participants' Company Stock Accounts shall be the lesser of (A) the amount of such Employer Contributions (as determined after application of the preceding para- - 19 - graph); or (B) the fair market value of Company Stock as of the Allocation Date. Annual Additions shall not include any allocation attributable to any proceeds from the sale of Financed Shares by the Trust or to appreciation (realized or unrealized) in the fair market value of Company Stock. Section 8. Voting Company Stock. -------------------- Shares of Company Stock in the Trust shall be voted by the Trustee in accordance with the provisions of this Section 8. Each Participant (or Beneficiary) will be entitled to direct the Trustee as to the manner in which shares of Company Stock then allocated to his Company Stock Account will be voted. Each Participant (or Beneficiary) who is so entitled shall be provided with the proxy statement and other materials provided to Company shareholders in connection with each shareholder meeting, together with a form upon which voting directions may be given to the Trustee. Any allocated Company Stock with respect to which voting directions are not given shall not be voted, and shares of Company Stock held by the Trust which are not then allocated to Participants' Company Stock Accounts shall be voted in the manner determined by the Committee. Section 9. Disclosure to Participants. -------------------------- (a) Summary Plan Description - Each Participant shall be furnished with ------------------------ the summary plan description of the Plan required by Sections 102(a)(1) and 104(b)(1) of ERISA. Such summary plan - 20 - description shall be updated from time to time as required under ERISA and Department of Labor regulations thereunder. (b) Summary Annual Report - Within nine months after each Allocation Date, --------------------- each Participant shall be furnished with the summary annual report of the Plan required by Section 104(b)(3) of ERISA, in the form prescribed in regulations of the Department of Labor. (c) Annual Statement - Following each Allocation Date, each Participant ---------------- shall be furnished with a statement reflecting the following information: (1) The balances (if any) in his Accounts as of the beginning of the Plan Year. (2) The amount of Employer Contributions and Forfeitures allocated to his Accounts for that Plan Year. (3) The adjustments to his Accounts to reflect his share of dividends (if any) on Company Stock and any net income (or loss) of the Trust for that Plan Year. (4) The new balances in his Accounts, including the number of shares of Company Stock allocated to his Company Stock Account and the fair market value as of that Allocation Date. (5) His number of years of Credited Service and his vested percentage in his Account balances (under Sections 10 and 11) as of that Allocation Date. (d) Additional Disclosure - The Company shall make available for --------------------- examination by any Participant copies of the Plan, the Trust Agreement and the latest annual report of the Plan filed (on Form 5500) with the Internal Revenue Service. Upon written request of any Participant, the Company shall furnish copies of - 21 - such documents and may make a reasonable charge to cover the cost of furnishing such copies, as provided in regulations of the Department of Labor. Section 10. Vesting and Forfeitures. ----------------------- (a) Vesting - ------- (1) A Participant's interest in his Accounts shall become 100% vested and nonforfeitable without regard to his Credited Service if he (A) is employed by the Company or an Affiliate on or after the later of his 65th birthday or the fifth anniversary of the date he became a Participant, (I) attainment of age 65, or (II) his fifth anniversary of Plan participation, (B) incurs a Disability while employed by the Company or an Affiliate, or (C) dies while employed by the Company or an Affiliate. (2) Except as otherwise provided in Section 10(a)(1), the interest of each Participant in his Accounts shall become vested and nonforfeitable in accordance with the following schedule:
Credited Service Nonforfeitable Under Section 11 Percentage ---------------- -------------- Less than One Year 0% One Year 20% Two Years 40% Three Years 60% Four Years 80% Five Years or More 100%
- 22 - (b) Forfeitures - Any portion of the final balances in a Participant's ----------- Accounts which is not vested (and does not become part of his Capital Accumulation) will become a Forfeiture as of the Allocation Date coinciding with or next following his termination of Service. Forfeitures shall first be charged against a Participant's Other Investments Account, with any balance charged against his Company Stock Account (at fair market value). Financed Shares shall be forfeited only after other shares of Company Stock have been forfeited. All Forfeitures will be reallocated to the Accounts of remaining Participants, as provided in Section 6(a), as of the Allocation Date coinciding with or next following the Participant's termination of Service. (c) Restoration of Forfeited Amounts - If a Participant is reemployed -------------------------------- prior to the occurrence of a five-consecutive-year Break in Service, the portion of his Accounts (attributable to the prior period of Service) that was forfeited shall be restored as if there had been no Forfeiture. Such restoration shall be made out of Forfeitures occurring in the Plan Year of reemployment (prior to allocation under Section 6(a)). To the extent such Forfeitures are not sufficient, the Employer shall make a special contribution to the Participant's restored Accounts. Any amount so restored to a Participant shall not constitute an Annual Addition under Section 7(a). (d) Vesting Upon Reemployment - If a Participant who is not 100% vested ------------------------- receives a distribution of his Capital Accumulation prior to the occurrence of a five-consecutive-year Break in Service and he is reemployed prior to the occurrence of such a Break - 23 - in Service, the portion of his Accounts which was not vested (including any restored Accounts) shall be maintained separately until he becomes 100% vested. His vested and nonforfeitable percentage in such separate Accounts upon his subsequent termination of Service shall be equal to: X-Y ------ 100%-Y For purposes of applying this formula, X is the vested percentage at the time of the subsequent termination, and Y is the vested percentage at the time of the prior termination. Section 11. Credited Service and Break in Service. ------------------------------------- (a) Credited Service - An Employee's Credited Service shall be the number ---------------- of Plan Years in which he is credited with at least 1000 Hours of Service. Credited Service shall include such Service prior to January 1, 1987, and such Service with the Company or any Affiliate (but only while the Affiliate is an Affiliate). (b) Break in Service - A one-year Break in Service shall occur in a Plan ---------------- Year in which an Employee is not credited with more than 500 Hours of Service as a result of his termination of Service. A five-consecutive-year Break in Service shall be five consecutive one-year Breaks in Service. An Approved Absence shall not constitute a Break in Service. For purposes of determining whether a Break in Service has occurred, if an Employee begins a maternity/paternity absence - 24 - described in Section 411(a)(6)(E)(i) of the Code, or an unpaid leave under the Family and Medical Leave Act of 1993, the computation of his Hours of Service shall include the Hours of Service that would have been credited if he had not been so absent (or eight Hours of Service for each normal work day of such absence if the actual Hours of Service cannot be determined). An Employee shall be credited for such Hours of Service (up to a maximum of 501 Hours of Service) in the Plan Year in which such absence begins (if such crediting will prevent him from incurring a Break in Service in such Plan Year) or in the next following Plan Year. Section 12. When Capital Accumulation Will Be Distributed. --------------------------------------------- (a) Except as otherwise provided in Sections 12(c) and 13(b) and (c), a Participant's Capital Accumulation will be distributed in a single lump sum following his termination of Service, but only at the time and in the manner determined by the Committee. A Participant's Capital Accumulation will normally be distributed as soon as practicable following his termination of Service. If the value of a Participant's Capital Accumulation exceeds (or has ever exceeded) $3,500, his Capital Accumulation may not be distributed to him before he attains age 65 without his consent. (b) In the event of a Participant's Retirement, Disability or death, distribution of his Capital Accumulation shall occur no later than the Allocation Date of the Plan Year following the Plan Year in which his Retirement, Disability or death occurs. If a Participant's Service terminates for any other reason, - 25 - distribution of his Capital Accumulation shall occur no later than the Allocation Date of the sixth Plan Year following the Plan Year in which his Service terminates. (c) Distribution of a Participant's Capital Accumulation shall occur not later than 60 days after the Allocation Date coinciding with or next following his 65th birthday (or his termination of Service, if later). The distribution of the Capital Accumulation of any Participant who attains age 70 1/2 in a Plan Year must occur not later than April 1st of the next Plan Year (even if he has not terminated Service) and must be made in accordance with the regulations under Section 401(a)(9) of the Code, including Section 1.401(a)(9)-2; provided, however, that for years prior to 1989, such distribution need be made only if the Participant is a "5% owner" of Company Stock (as defined in Section 416(i)(1)(B)(i) of the Code). If the amount of a Participant's Capital Accumulation cannot be determined (by the Committee) by the date on which a distribution is to occur, or if the Participant cannot be located, distribution of his Capital Accumulation shall occur within 60 days after the date on which his Capital Accumulation can be determined or after the date on which the Committee locates the Participant. (d) If any part of a Participant's Capital Accumulation is retained in the Trust after his Service ends, his Accounts will continue to be treated as described in Section 6. However, except as otherwise provided in Section 3(b), such Accounts shall not be credited with any additional Employer Contributions and Forfeitures. - 26 - Section 13. In-Service Distributions. ------------------------ (a) Cash Dividends - If so determined by the Board of Directors, any cash -------------- dividends received by the Trustee on Company Stock allocated to the Company Stock Accounts of Participants may be paid currently (or within 90 days after the end of the Plan Year in which the dividends are paid to the Trust) in cash by the Trustee to such Participants (or their Beneficiaries) on a non- discriminatory basis, or the Company may pay such dividends directly to Participants (or Beneficiaries). Such distribution (if any) of cash dividends may be limited to Participants who are still Employees, may be limited to dividends on shares of Company Stock which are then vested or may be applicable to cash dividends on all shares allocated to Participants' Company Stock Accounts. (b) Withdrawals After Normal Retirement - If a Participant remains an ----------------------------------- Employee after the later of his 65th birthday or the tenth anniversary of the date he became a Participant, he may elect to have his entire Capital Accumulation distributed to him in a single lump sum in accordance with rules and procedures established by the Committee. (c) Withdrawals Prior to Normal Retirement - Effective as of January 1, -------------------------------------- 1996, a Participant who has attained age 55 and completed at least ten Years of Participation in the Plan shall be entitled to elect to "diversify" a portion of his Company Stock Account. An election to "diversify" must be made on the prescribed form and filed with the Committee within the 90-day period immediately following the close of a Plan Year in the - 27 - Election Period. For purposes of this Section 13(c), "Years of Participation" includes only those Plan Years in which the Participant is entitled to receive an allocation of Employer Contributions or Forfeitures under Section 3(b), and the "Election Period" means the period of six consecutive Plan Years beginning with the Plan Year in which the Participant first becomes eligible to make an election. For each of the first five Plan Years in the Election Period, the Participant may elect to withdraw an amount which does not exceed 25% of the number of shares of Company Stock allocated to his Company Stock Account since the inception of the Plan, less all shares with respect to which amounts have previously been withdrawn under this Section 13(c). In the case of the sixth Plan Year in the Election Period, the Participant may elect to withdraw an amount which does not exceed 50% of the number of shares of Company Stock allocated to his Company Stock Account since the inception of the Plan, less all shares with respect to which amounts have previously been withdrawn under this Section 13(c). No withdrawal election shall be permitted if the balance in a Participant's Company Stock Account as of the Allocation Date of the first Plan Year in the Election Period has a fair market value of $500 or less, unless and until the balance in his Company Stock Account as of a subsequent Allocation Date in the election Period exceeds $500. Any distribution under this Section 13(c) shall occur within 90 days after the 90-day period in which the election may be made and shall be subject to the provisions of Section 14(c). - 28 - (d) Other In-Service Withdrawals - At any time after a Participant ---------------------------- completes 60 months of participation in the Plan, he may elect to have all or any portion of the Company Stock in his Company Stock Account (determined as of the prior Allocation Date) distributed to him. If an Employee has been a Participant for less than 60 months, he may elect to have all or any portion of the Company Stock in his Company Stock Account which has been allocated to his Company Stock Account for at least three years distributed to him; and the Company Stock which has been allocated to his Company Stock Account for less than three years may be distributed to him if he has incurred a financial hardship. The Committee shall determine whether a Participant has incurred a financial hardship, and a hardship distribution shall be limited to amounts needed to pay those expenses set forth in Section 11(b)(1)-(4) of the 401(k) Plan. A Participant who requests a hardship distribution must withdraw the shares available under this Section 13(d) prior to receiving a hardship distribution under the 401(k) Plan. All distributions under this Section 13(d) shall be limited to the vested portion of the Participant's Company Stock Account. A Participant may request such a distribution no more than twice in any Plan Year; and all requests must be made in writing on forms prescribed by the Committee. Distributions shall be made only in whole shares of Company Stock, and any distribution shall be deemed to consist first of shares of Company Stock that have been allocated to the Participant's Account for more than six - 29 - months. All distributions shall be subject to such administrative rules and procedures as may be established by the Committee. Section 14. How Capital Accumulation Will Be Distributed. -------------------------------------------- (a) The Trustee will make distributions from the Trust only as directed by the Committee. Distribution of a Participant's Capital Accumulation will be made in whole shares of Company Stock (with the value of any fractional share paid in cash). (b) Distribution of a Participant's Capital Accumulation will be made to the Participant if living, and if not, to his Beneficiary. In the event of a Participant's death, his Beneficiary shall be his surviving spouse, or if none, his estate. A Participant (with the notarized written consent of his spouse, if any, acknowledging the effect of the consent) may designate a different Beneficiary or Beneficiaries from time to time by filing a written designation with the Committee. A deceased Participant's entire Capital Accumulation shall be distributed to his Beneficiary within five years after his death. (c) The Company shall furnish the recipient of a distribution with the tax consequences explanation required by Section 402(f) of the Code and shall comply with the withholding requirements of Section 3405 of the Code and of any applicable state law with respect to distributions from the Trust (other than any dividend distributions under Section 13(a)). If the Committee so elects for a Plan Year, distributions to Participants may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the regulations under the Code is - 30 - given; provided that no such distribution to a Participant shall be made unless (1) the Participant is informed that he has the right for a period of at least 30 days after receiving the notice to consider whether or not to consent to a distribution (or a particular distribution option), and (2) the Participant affirmatively elects to receive a distribution after receiving the notice. (d) If a distribution of a Participant's Accounts occurs after December 31, 1992, and is neither one of a series of annual installments over a period of ten years (or more) nor the minimum amount required to be distributed pursuant to the second sentence of Section 12(c) (an "eligible rollover distribution"), the Committee shall notify the Participant (or any spouse or former spouse who is his alternate payee under a "qualified domestic relations order" (as defined in Section 414(p) of the Code)) of his right to elect to have the "eligible rollover distribution" paid directly to an "eligible retirement plan" (within the meaning of Section 401(a)(31) of the Code) that is an individual retirement account described in Section 408(a) of the Code or an individual retirement annuity described in Section 408(b) of the Code, a qualified trust described in Section 401(a) of the Code or a qualified annuity plan described in Section 403(a) of the Code that accepts "eligible rollover distributions." If such an "eligible rollover distribution" is to be made to the Participant's surviving spouse, the Committee shall notify the surviving spouse of his right to elect to have the distribution paid directly to an "eligible retirement plan" that is an individual - 31 - retirement account described in Section 408(a) of the Code or an individual retirement annuity described in Section 408(b) of the Code. Any election under this Section 14(d) shall be made and effected in accordance with such rules and procedures as may be established from time to time by the Committee in order to comply with Section 401(a)(31) of the Code. Section 15. Rights, Options and Restrictions on Company Stock. ------------------------------------------------- It is expected that all shares of Company Stock distributed by the Trustee will be readily tradable on an established market; provided, however, that shares of Company Stock held or distributed by the Trustee to an "affiliate" (under Federal securities laws) may include such legend restrictions on transferability as the Company may reasonably require in order to assure compliance with applicable Federal and state securities laws. Except as otherwise provided in this Section 15, no shares of Company Stock held or distributed by the Trustee may be subject to a put, call or other option, or buy-sell or similar arrangement. The provisions of this Section 15 shall continue to be applicable to Company Stock even if the Plan ceases to be an employee stock ownership plan under Section 4975(e)(7) of the Code. Section 16. No Assignment of Benefits. ------------------------- A Participant's Capital Accumulation may not be anticipated, assigned (either at law or in equity), alienated or subject to attachment, garnishment, levy, execution or other legal or equit- - 32 - able process, except in accordance with a "qualified domestic relations order" (as defined in Section 414(p) of the Code). Section 17. Administration. -------------- (a) Administrative Committee - The Plan will be administered by an ------------------------ Administrative Committee composed of one or more individuals appointed by the Board of Directors to serve at its pleasure and without compensation. The members of the Committee shall be the named fiduciaries with authority to control and manage the operation and administration of the Plan. Members of the Committee need not be Employees or Participants. Any Committee member may resign by giving notice, in writing, to the Board of Directors. (b) Committee Action - Committee action will be by vote of a majority of ---------------- the members at a meeting or in writing without a meeting. A Committee member who is a Participant shall not vote on any question relating specifically to himself unless he is the sole member of the Committee. The Committee shall choose from its members a Chairman and a Secretary. The Chairman or the Secretary of the Committee shall be authorized to execute any certificate or other written direction on behalf of the Committee. The Secretary shall keep a record of the Committee's proceedings and of all dates, records and documents pertaining to the administration of the Plan. (c) Powers and Duties of the Committee - The Committee shall have all ---------------------------------- powers necessary to enable it to administer the - 33 - Plan and the Trust Agreement in accordance with their provisions, including without limitation the following: (1) resolving all questions relating to the eligibility of Employees to become Participants; (2) determining the appropriate allocations to Participants' Accounts pursuant to Section 6; (3) determining the amount of benefits payable to a Participant (or Beneficiary), and the time and manner in which such benefits are to be paid; (4) authorizing and directing all disbursements of Trust Assets by the Trustee; (5) establishing procedures in accordance with Section 414(p) of the Code to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders; (6) engaging any administrative, legal, accounting, clerical or other services that it may deem appropriate; (7) construing and interpreting the Plan and the Trust Agreement and adopting rules for administration of the Plan that are consistent with the terms of the Plan documents and of ERISA and the Code; (8) compiling and maintaining all records it determines to be necessary, appropriate or convenient in connection with the administration of the Plan; and (9) reviewing the performance of the Trustee with respect to the Trustee's administrative duties, responsibilities and obligations under the Plan and Trust Agreement. The Committee shall be responsible for directing the Trustee as to the investment of Trust Assets. The Committee may delegate to the Trustee the responsibility for investing Trust Assets other than Company Stock. The Committee shall establish a funding policy and method for directing the Trustee to acquire Compa- - 34 - ny Stock (and for otherwise investing the Trust Assets) in a manner that is consistent with the objectives of the Plan and the requirements of ERISA. The Committee shall perform its duties under the Plan and the Trust Agreement solely in the interests of the Participants (and their Beneficiaries). Any discretion granted to the Committee under any of the provisions of the Plan or the Trust Agreement shall be exercised only in accordance with rules and policies established by the Committee which shall be applicable on a nondiscriminatory basis. The Committee shall have sole and exclusive discretionary authority to construe and interpret the terms of the Plan and Trust. All decisions and interpretations of the Committee under this Section 17 shall be conclusive and binding upon all persons with an interest in the Plan and shall be given the greatest deference permitted by law. (d) Expenses - All expenses of administering the Plan and Trust shall be -------- charged to and paid out of the Trust Assets. The Company may, however, pay all or any portion of such expenses directly, and payment of expenses by the Company shall not be deemed to be Employer Contributions. (e) Information to be Submitted to the Committee - To enable the Committee -------------------------------------------- to perform its functions, the Company shall supply full and timely information to the Committee on all matters as the Committee may require, and shall maintain such other records as the Committee may determine are necessary or appropriate in order to determine the benefits due or which may become due to Participants (or Beneficiaries) under the Plan. - 35 - (f) Delegation of Fiduciary Responsibility - The Committee from time to -------------------------------------- time may allocate to one or more of its members and/or may delegate to any other persons or organizations any of its rights, powers, duties and responsibilities with respect to the operation and administration of the Plan that are permitted to be so delegated under ERISA; provided, however, that responsibility for investment of the Trust Assets may not be allocated or delegated other than as provided in Section 17(c). Any such allocation or delegation shall be made in writing, shall be reviewed periodically by the Committee and shall be terminable upon such notice as the Committee in its discretion deems reasonable and proper under the circumstances. (g) Bonding, Insurance and Indemnity - To the extent required under -------------------------------- Section 412 of ERISA, the Company shall secure fidelity bonding for the fiduciaries of the Plan. The Company (in its discretion) or the Trustee (as directed by the Committee) may obtain a policy or policies of insurance for the Committee (and other fiduciaries of the Plan) to cover liability or loss occurring by reason of the act or omission of a fiduciary. If such insurance is purchased with Trust Assets, the policy must permit recourse by the insurer against the fiduciary in the case of a breach of a fiduciary obligation by such fiduciary. The Company shall indemnify each member of the Committee (to the extent permitted by law) against any personal liability or expense resulting from his service on the Committee, except such liability or expense as may result from his own willful misconduct. - 36 - (h) Notices, Statements and Reports - The Company shall be the "Plan ------------------------------- Administrator" (as defined in Section 3(16)(A) of ERISA and Section 414(g) of the Code) for purposes of the reporting and disclosure requirements of ERISA and the Code. The Committee shall assist the Company, as requested, in complying with such reporting and disclosure requirements. The Committee shall be the designated agent of the Plan for the service of legal process. Section 18. Claims Procedure. ---------------- A Participant (or Beneficiary) who does not receive a distribution of benefits to which he believes he is entitled may present a claim to the Committee. The claim for benefits must be in writing and addressed to the Committee or to the Company. If the claim for benefits is denied, the Committee shall notify the Participant (or Beneficiary) in writing within 90 days after the Committee initially received the benefit claim. Any notice of a denial of benefits shall advise the Participant (or Beneficiary) of the basis for the denial, any additional material or information necessary for the Participant (or Beneficiary) to perfect his claim and the steps which the Participant (or Beneficiary) must take to have his claim for benefits reviewed. Each Participant (or Beneficiary) whose claim for benefits has been denied may file a written request for a review of his claim by the Committee. The request for review must be filed by the Participant (or Beneficiary) within 60 days after he receives the written notice denying his claim. The decision of the Com- - 37 - mittee will be made within 60 days after receipt of a request for review and shall be communicated in writing to the claimant. Such written notice shall set forth the basis for the Committee's decision. If there are special circumstances (such as the need to hold a hearing) which require an extension of time for completing the review, the Committee's decision shall be rendered not later than 120 days after receipt of a request for review. All decisions and interpretations of the Committee under this Section 18 shall be conclusive and binding upon all persons with an interest in the Plan and shall be given the greatest deference permitted by law. Section 19. Limitation on Participants' Rights. ---------------------------------- A Participant's Capital Accumulation will be based only on his vested interest in his Accounts and will be paid only from the Trust Assets. An Employer, the Committee or the Trustee shall not have any duty or liability to furnish the Trust with any funds, securities or other assets, except as expressly provided in the Plan. The adoption and maintenance of the Plan shall not be deemed to constitute a contract of employment or otherwise between an Employer and any Employee, or to be a consideration for, or an inducement or condition of, any employment. Nothing contained in this Plan shall be deemed to give an Employee the right to be retained in the Service of an Employer or to interfere with the right of an Employer to discharge, with or without cause, any Employee at any time. - 38 - Section 20. Future of the Plan. ------------------ The Company reserves the right to amend or terminate the Plan (in whole or in part) and the Trust Agreement at any time, by action of the Board of Directors. Neither amendment nor termination of the Plan shall retroactively reduce the vested rights of Participants or permit any part of the Trust Assets to be diverted to or used for any purpose other than for the exclusive benefit of the Participants (and their Beneficiaries). The Company specifically reserves the right to amend the Plan and the Trust Agreement retroactively in order to satisfy any applicable requirements of the Code and ERISA. The Company further reserves the right to terminate the Plan in the event of a determination by the Internal Revenue Service (after a timely Application for Determination is filed by the Company) that the Plan initially fails to satisfy the applicable requirements of Sections 401(a) and 4975(e)(7) of the Code. In that event, all Trust Assets shall (upon written direction of the Company) be returned to the Employers, and the Plan shall terminate. If the Plan is terminated (or partially terminated), participation of Participants affected by the termination will end. If Employer Contributions are not replaced by contributions to a comparable plan which meets the requirements of Section 401(a) of the Code, the Accounts of Employees affected by the termination will become nonforfeitable as of the date of termination. A complete discontinuance of Employer Contributions shall be deemed to be a termination of the Plan for this purpose. After termination - 39 - of the Plan, the Trust will be maintained until the Capital Accumulations of all Participants have been distributed. Capital Accumulations may be distributed following termination of the Plan or distributions may be deferred as provided in Section 12, as the Company shall determine. In the event of the merger or consolidation of this Plan with another plan, or the transfer of Trust Assets (or liabilities) to another plan, the Account balances of each Participant immediately after such merger, consolidation or transfer must be at least as great as immediately before such merger, consolidation or transfer (as if the Plan had then terminated). Section 21. "Top-Heavy" Contingency Provisions. ---------------------------------- (a) The provisions of this Section 21 are included in the Plan pursuant to Section 401(a) (10)(B)(ii) of the Code and shall become applicable only if the Plan becomes a "top-heavy plan" under Section 416(g) of the Code for any Plan Year. (b) The determination as to whether the Plan becomes "top-heavy" for any Plan Year shall be made as of the Allocation Date of the immediately preceding Plan Year by considering the Plan together with the 401(k) Plan. The Plan (and the 401(k) Plan) shall be "top-heavy" only if the total of the account balances under the Plan and the 401(k) Plan for "key employees" as of the determination date exceeds 60% of the total of the account balances for all Participants. For such purpose, account balances shall be computed and adjusted pursuant to Section 416(g) of the Code. "Key employees" shall be certain Participants (who are - 40 - officers or shareholders of an Employer) and Beneficiaries described in Section 416(i)(1) or (5) of the Code; and in determining "key employees," the term "annual compensation" in Section 416(i)(l)(A) of the Code shall mean Statutory Compensation. (c) For any Plan Year in which the Plan is "top-heavy," each Participant who is an Employee on the Allocation Date (and who is not a "key employee") shall receive a minimum allocation of Employer Contributions and Forfeitures which is equal to the lesser of: (1) 3% of his Statutory Compensation; or (2) the same percentage of his Statutory Compensation as the allocation to the "key employee" for whom the percentage is the highest for that Plan Year. For this purpose, the allocation to the "key employee" shall include the reductions in salary contributed on his behalf to the 401(k) Plan for that Plan Year and any employer contributions allocated to him under the 401(k) Plan for that Plan Year. (d) For any Plan Year in which the Plan is "top-heavy," Statutory Compensation of each Employee for purposes of the Plan shall not take into account any amount in excess of $200,000 (as adjusted pursuant to Section 401(a)(17) of the Code) or, after 1993, $150,000 (as adjusted pursuant to Section 401(a)(17) of the Code). Section 22. Governing Law. ------------- The provisions of this Plan and the Trust Agreement shall be construed, administered and enforced in accordance with the laws - 41 - of the State of California, to the extent such laws are not superseded by ERISA. Section 23. Execution. --------- To record the adoption of this amendment and restatement of the Plan, the Company has caused this document to be executed on this 18th day of October, ---- ------- 1995. - FIRST REPUBLIC BANCORP INC. By /s/ James H. Herbert, II ------------------------------- President By /s/ Willis H. Newton, Jr. ------------------------------- Senior V.P. and Asst. Secretary - 42 - EX-10.15 3 1995 PERFORMANCE-BASED CONTG. SOP EXHIBIT 10.15 OPTION NO._____________________ ________________________________________________________________________________ THIS OPTION AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF AND ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN ARE NOT REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968, AS AMENDED, OR THE SECURITIES LAWS OF ANY JURISDICTION, BY REASON OF SPECIFIC EXEMPTIONS THEREIN RELATING TO THE LIMITED AVAILABILITY OF THE OFFERING AND MAY ONLY BE SOLD OR OFFERED FOR SALE BY AN INVESTOR IF SUBSEQUENTLY REGISTERED UNDER THE SECURITIES ACT AND THE CALIFORNIA CORPORATE SECURITIES LAW OR OTHER APPLICABLE STATE SECURITIES LAWS OR IF REGISTRATION OR QUALIFICATION UNDER SUCH ACTS IS NOT REQUIRED. THE HOLDER OF THIS OPTION AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF ARE SUBJECT TO THE RESTRICTIONS HEREIN SET FORTH. VOID AFTER 5:00 PM, SAN FRANCISCO TIME, ON DECEMBER 31, 2005. ________________________________________________________________________________ FORM OF CONTINGENT OPTION to SUBSCRIBE FOR AND PURCHASE COMMON STOCK of FIRST REPUBLIC BANCORP INC. ________________________ FIRST REPUBLIC BANCORP INC., a Delaware corporation (the "Company") HEREBY GRANTS, subject to the provisions and upon the terms and conditions herein set forth including without limitation the vesting and other contingencies set forth in Section 1 hereof, to Name --------------------- (the "Optionholder") the right to subscribe for the purchase from the Company, at the price of $13.125 PER SHARE, ------- as such price may be adjusted from time to time as provided herein (the "Exercise Price"), from and after 9:00 AM San Francisco time on December 31, 1995 and to and including the earlier of (i) 5:00 PM San Francisco, California time on December 31, 2005 or (ii) the occurrence of any of the events set forth in Section 8 hereof (the "Expiration Time"), up to Number of Shares SHARES ---------------- of the Company's Common Stock, par value $0.01 per share (the "Common Stock"), as such number of shares may be adjusted from time to time (the "Option Shares"). 1. Exercise Right Contingent Upon Vesting of Options and Limit on Aggregate ------------------------------------------------------------------------ Issuances. --------- (a) The Optionholder's right to subscribe for the purchase of the Option Shares from the Company at any particular time shall be limited to the number of Option Shares as to which the Optionholder's Option has vested in accordance with the provisions of this Section 1 at that time. The Optionholder shall have no right to subscribe for the purchase from the Company of any of the Option Shares as to which the Optionholder's Option has not yet been vested in accordance with the provisions of this Section 1 unless and until such time as the Optionholder's Option as to such Option Shares shall have vested. The Optionholder's Option shall vest as to a number of the Option Shares calculated in accordance with the following formula: (i) Upon the date of grant of this Option -- this Option shall vest as to 20.0% of the total number of Option Shares set forth on the cover page of this Option; (ii) If the tangible book value of the Company at December 31, 1996 is less than $16.384 per share, no additional Option Shares shall vest except as provided in Section 1(a)(iii) and (iv) and Section 1(b) below. On February 15, 1997, if the tangible book value of the Company at December 31, 1996 was equal to or more than $16.384 per share -- this Option shall vest as to a percentage of the total number of Option Shares set forth on the cover page of this Option obtained as follows: 2 . subtract $14.760 from the Company's tangible book value per share at December 31, 1996; . divide the remainder by $5.426 to achieve the "1996 percentage"; . multiply the result by 0.8. (iii) If the tangible book value of the Company at December 31, 1997 is less than $18.186 per share, no additional Option Shares shall vest except as provided in Section 1(a)(iv) and Section 1(b) below. On February 15, 1998, if the tangible book value of the Company at December 31, 1997 was equal to or more than $18.186 per share -- this Option shall vest as to a percentage of the total number of Option Shares set forth on the cover page of this Option obtained as follows: . subtract $14.760 from the Company's tangible book value per share at December 31, 1997; . divide the remainder by $5.426 to achieve the "1997 percentage"; . subtract from the resulting percentage the "1996 percentage" used to calculate the number of Option Shares, if any, previously vested pursuant to clause (ii) above. . multiply the result by 0.8. (iv) If the tangible book value of the Company at December 31, 1998 is less than $20.186 per share, no additional Option Shares shall vest except as provided in Section 1(b) below. On February 15, 1999, if the tangible book value 3 of the Company at December 31, 1998 was equal to or more than $20.186 per share -- this Option shall vest as to a percentage of the total number of Option Shares set forth on the cover page of this Option obtained as follows: . subtract $14.76 from the Company's tangible book value per share at December 31, 1998; . divide the remainder by $5.426 to achieve the "1998 percentage"; . subtract from the resulting percentage the sum of "1996 and/or 1997 percentage" used to calculate the number of Option Shares, if any, previously vested pursuant to clauses (ii) and (iii) above. . multiply the result by 0.8. For purposes of illustration, examples of the foregoing calculations are set forth on Annex A hereto. The maximum number of Option Shares that may vest hereunder shall not exceed the number set forth on the cover page of this Option. Notwithstanding the foregoing, no Option Shares shall vest on a February 15 vesting date or thereafter if the Optionholder's employment with the Company terminated during the immediately preceding calendar year (A) due to death or disability (as defined in Section 8(b)), unless the Optionholder was an employee of the Company for at least six months of such calendar year in which case Option Shares shall vest in accordance with the foregoing provisions of this Section 1 or (B) due to termination for cause (as defined in Section 8(c)) or voluntary resignation. 4 For purposes of this Option, tangible book value per share shall be equal to the Company's Total Stockholders' Equity as set forth on the Company's audited financial statements at December 31 minus goodwill as defined in ----- accordance with generally accepted accounting principles divided by the sum of ---------- the number of the Company's shares of common stock outstanding at December 31. In the event that at any December 31 for which a calculation of tangible book value per share is being made the Company has issued and outstanding shares of any equity security having a liquidation preference that is senior to the Company's common stock, then in making such calculation the aggregate liquidation preference amount of all shares of such equity securities outstanding at that December 31 date shall be deducted from the Company's Total Stockholders' Equity. At December 31, 1995, the date of grant for the Option Shares, the Company has issued and outstanding $34,500,000 of convertible subordinated debentures (the "Convertible Issue"). The Convertible Issue pays interest at 7.25%, carries a conversion price of approximately $13.67 and is convertible into 2,524,210 shares of common stock. The conversion of the Convertible Issue will dilute, or reduce the Company's tangible book value per share. If the Convertible Issue is converted prior to December 31, 1998, then the annual minimum objective or target amounts for tangible book value per share related to the Option Shares will be adjusted to eliminate the effect of such conversion. At December 31, 1995, the proforma dilutive effect of the Convertible Issue on tangible book value per share is approximately 5 $0.46, resulting in an adjusted, proforma tangible book value per share of $14.30 as if the Convertible Issue were converted. In this example, the annual targeted amounts for the Option Shares, reflecting an 11% growth rate, would be $15.873 at December 31, 1996, $17.619 at December 31, 1997 and $19.557 at December 31, 1998. (b) Notwithstanding the provisions of Section 1(a) hereof, at any time during the term of this Option all of the remaining unvested Option Shares set forth on the cover page of this Option shall automatically vest upon the happening of any of the following events: (i) the earlier of the date that the Board of Directors of the Company approves a plan or agreement of merger or consolidation providing for the merger of the Company with or into any other corporation or the date that the Company enters into a binding agreement of merger or consolidation with any other corporation; (ii) the earlier of the date that the Board of Directors of the Company approves, or the date that the Company enters into a binding agreement providing for, the sale, lease, exchange, pledge, or other disposition of all or substantially all of the assets of the Company; (iii) the date that the Board of Directors of the Company adopts any plan or proposal for the liquidation or dissolution of the Company; or 6 (iv) the earlier of the date on which any person or group acquires 25% or more of the Company's issued and outstanding common stock or the date upon which any person or group commences, or announces an intention to commence, an offer for 25% or more of the Company's issued and outstanding common stock. (c) Notwithstanding any provisions of this Option to the contrary, the rights represented by this Option may not be exercised, and the Company shall not be obligated to issue shares hereunder, if (and to the extent that) the aggregate number of shares of common stock issued by the Company during that calendar year pursuant to the exercise of stock options granted to officers, directors or key employees of the Company under plans or arrangements adopted without stockholders' approval, when added to the number of shares that the Optionholder has requested be issued hereunder, would represent 5% or more of the Company's then issued and outstanding common stock (including the shares that the Optionholder has requested be issued pursuant to exercise of this Option); provided, however, that nothing in this Section 1(c) shall prohibit the -------- ------- exercise of this Option subsequently in the same calendar year or in subsequent calendar years if at the time of exercise the 5% limit would not be exceeded; and provided, further, that nothing in this Section 1(c) shall prohibit the -------- ------- exercise of this Option if the foregoing provision ceases to be necessary in order to comply with the rules and regulations of the national securities exchange on which the Company's common stock is then listed and traded. 7 2. Duration and Exercise of Option; Issuance of Option Shares. ---------------------------------------------------------- The rights represented by this Option may be exercised by the Optionholder of record, in whole, or from time to time in part, during normal business hours on any day, other than a Saturday or Sunday, on which national banks are authorized to do business in the City of San Francisco but not later than the Expiration Time by (i) presentation of this Option, (ii) delivery of an exercise form substantially in the form annexed hereto (the "Exercise Form") duly executed by the Optionholder of record and specifying the number of Option Shares to be purchased, to the Company at the principal office of the Company (or such other office or agency of the Company as it may designate by notice to the Optionholder at the address of such Optionholder appearing on the books of the Company); or (iii) delivery of payment to the Company in cash or by certified or official bank check, of the Exercise Price for the number of Option Shares specified in the Exercise Form. Such Option Shares shall be deemed by the Company to be issued to the Optionholder as the record holder of such Option Shares as of the close of business on the date on which this Option shall have been surrendered and payment made for the Option Shares as aforesaid. All Option Shares which are issued upon the exercise of the rights represented by this Option shall, upon issuance, be validly issued, fully paid and nonassessable and free from all taxes, liens, security interests, charges and other encumbrances with respect to the issue thereof other than taxes in respect of any transfer occurring contemporaneously with such issue. 8 Certificates for the Option Shares specified in the Exercise Form shall be delivered to the Optionholder as promptly as practicable, and in any event within 10 business days, thereafter. The Company shall deliver to the Optionholder one stock certificate representing the number of Option Shares specified in the Exercise Form or such other number of stock certificates as may reasonably be specified by the Optionholder and shall be issued in the name of the Optionholder. No adjustments or payments shall be made on or in respect of Option Shares issuable on the exercise of this Option for any cash dividends paid or payable to holders of record of Common Stock prior to the date as of which the Optionholder shall be deemed to be the record holder of such Option Shares. If this Option is not exercised prior to the Expiration Time, this Option shall cease to be exercisable and shall become void without the need for any notice or action on the part of the Company or any other person. 3. Payment of Taxes. ---------------- (a) The issuance of certificates for Option Shares shall be made without charge to the Optionholder for any stock transfer or other issuance tax in respect thereto; provided, however, that the Optionholder shall be required to -------- ------- pay any and all taxes which may be payable in respect to any transfer involved in the issuance and delivery of any certificates for Option Shares in a name other than that of the then Optionholder as reflected upon the books of the Company. (b) Following any exercise of the Option granted hereunder, the Company shall pay to the Optionholder an amount equal to the 9 tax benefit available to the Company as a result of the tax deduction allowed to the Company pursuant to Section 83(h) or 162 of the Internal Revenue Code of 1986, as amended, (the "Code"). The Company shall make such payment if and when the Company becomes entitled to such tax deduction. For purposes of this Section 3, the tax benefit available to the Company shall be computed using the highest marginal tax rate under the Code and under the applicable State tax law then in effect for general business corporations, regardless of the actual tax rate then in effect for the Company. The Company may withhold from the amount due to the Optionholder an appropriate amount of Federal, State and local taxes. 4. Adjustment of Exercise Price and Number of Option Shares. -------------------------------------------------------- Adjustments may be made in the number and kind of Option Shares issuable upon the exercise of this Option, in the "target amounts" for tangible book value for the Company per share set forth herein and in the Exercise Price of this Option in the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering or any other change in the corporate structure or shares of the Company and, in the event of any such change, the aggregate number and kind of Option Shares shall be appropriately adjusted. Adjustments under this Section 4 shall be made by the Board of Directors of the Company, whose determination as to the adjustments to be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of Common Stock shall be issued pursuant to this Option on account of any such adjustment. The 10 Company shall, from time to time, take all such action as may be required to assure that the par value per share of the Option Shares is at all times equal to or less than the then effective Exercise Price. If an adjustment in the number of Option Shares creates fractional shares, upon any exercise hereof, the Company shall pay to the Optionholder an amount in cash equal to such fraction multiplied by the Current Market Price for a day that includes the day upon which the exercise is made. For the purposes of this section, "Current Market Price" shall mean (i) the closing market price of Common Stock on the last preceding day, if such Common Stock is listed on a national securities exchange; (ii) the average of the bid and asked prices on the last preceding day, if such Common Stock is traded over-the-counter; or (iii) if not so listed or traded, such per share price as the Board of Directors shall determine, but in no event less than the book value per share of the Company on the last preceding month end. 5. Transfer Restriction and Legend. ------------------------------- This Option, (i) shall not be assignable or subject to any encumbrance, pledge or charge of any nature, whether by operation of law or otherwise, (ii) shall not be subject to execution, attachment or similar process and (iii) shall not be transferable, other than by will or the laws of descent and distribution, and this Option and all rights under this Option shall be exercisable during the Optionholder's lifetime only by him/her or by his/her guardian or legal representative. 11 Neither this Option nor securities issued upon the exercise thereof may be in any manner transferred or disposed of, in whole or in part, except in compliance with applicable United States federal and state securities laws. This Option and any interest or participation therein are granted solely for the account of the Optionholder for investment and may not be held with a view to or for sale or distribution of the Option or any interest or participation therein on any portion thereof and not with any intention of selling, offering to sell, or otherwise disposing of or distributing this Option or any interest or participation therein or any portion thereof. 6. Reservation and Listing of Shares, Etc. -------------------------------------- During the period within which this Option may be exercised, the Company shall at all times have authorized and reserved, and keep available free from preemptive rights, a sufficient number of shares of Common Stock to provide for the exercise of this Option, and shall at its expense use its best efforts to procure such listing thereof (subject to official notice of issuance) as then may be required on all stock exchanges on which the Common Stock is then listed. 7. Ownership of Option; Maintenance of Record of Exercise; Loss or Destruction --------------------------------------------------------------------------- of Option. --------- (a) The Company may deem and treat the person in whose name this Option is registered on the books of the Company designated for such registry as the holder and owner hereof (notwithstanding any notations of ownership or writing hereon) for 12 all purposes and shall not be affected by any notice to the contrary. (b) The Company shall maintain a record of all prior exercises, the number of shares acquired upon all prior exercises, the number of shares vested in the Optionholder pursuant to the provisions hereof and a balance of the number of Option Shares covered by this Option. The Optionholder shall have the right, during normal business hours of the Company and upon delivery of at least five (5) days' prior notice to the Company, to review such record. (c) Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Option, and, in the case of loss, theft or destruction, of such bond or indemnification as the Company may reasonably require, and, in case of such mutilation, upon surrender and cancellation of this Option, the Company will execute and deliver a new Option of like tenor. 8. Termination of Option. --------------------- This Option shall terminate on the earlier of 5:00 PM San Francisco, California time on December 31, 2005 or (a) If the Optionholder shall die while an employee of the Company, or within six (6) months after termination of such service, this Option may be exercised by his/her executor or administrator or the person or persons to whom his/her rights under the Option are transferred by will or by the laws of descent and distribution within, but only within, the period of twelve months next succeeding the date of his/her death and then only as and to 13 the extent that the Optionholder was entitled to exercise the Option on the day next succeeding the day he/she died, or (b) If an Optionholder's service as an employee to the Company terminates by reason of Disability, the Optionholder may exercise this Option on, or any time within the twelve months next succeeding, the date of such termination by Disability and then only as and to the extent that the Optionholder was entitled to exercise the Option on the day he/she terminated his/her service as an employee of the Company by reason of Disability. Disability shall mean inability of an individual to perform the services normally rendered by such individual due to any physical or mental impairment that can be expected either to persist for a continuous period of twelve months or more or to result in death, as determined by the Board of Directors of the Company on the basis of appropriate medical advice, or (c) If an Optionholder is terminated as an employee for cause, this Option shall automatically expire on the date 20 business days following the date of termination for cause. For this purpose, an Optionholder shall be considered terminated upon receipt of written notice of termination. If an Optionholder is not available for service of notice, then an Optionholder shall be considered terminated upon posting by registered mail of such notice. For purposes of this Option, termination for cause shall be determined by the Board of Directors of the Company in its sole discretion and shall include termination for malfeasance or gross malfeasance in the performance of duties or conviction for illegal activity in connection therewith or any conduct significantly 14 detrimental to the interests of the Company, and in any event, a determination of the Board of Directors of the Company with respect thereto shall be final, binding and conclusive, or (d) If the Optionholder voluntarily resigns as an employee of the Company, this Option shall automatically expire six months after the date of such termination. For this purpose, the date of termination shall be considered the date written notice of resignation is given by the Optionholder to the Company. 9. Survival of Option. ------------------ This Option shall survive the death of the Optionholder only to the extent provided in Section 8(a) herein. During the time this Option is held by the Optionholder's estate, the Option may be registered in the name of such estate or of the executor of such estate for the benefit of the estate. 10. Binding Effects; Benefits. ------------------------- So long as this Option is outstanding and exercisable, this Option shall inure to the benefit of and shall be binding upon the Company, its successors and assigns. Nothing in this Option, expressed or implied, is intended to or shall confer on any person other than the Company, any rights, obligations or liabilities under or by reason of this Option. The Optionholder shall have no rights with respect to this Option or the Option Shares except as expressly set forth in this Option. These rights can be enforced by the Optionholders and holders of Option Shares, or their respective heirs or legal representatives. The Optionholder shall not, solely by virtue of this Option, be entitled to any rights of a stockholder of the Company, either at law or in equity. 15 11. Amendments and Waivers. ---------------------- This Option may be modified or amended by the Board of Directors of the Company; provided that, no modification or amendment shall adversely affect the rights of the Optionholder. The waiver of any nonperformance or noncompliance with this Option shall only apply to the particular nonperformance or noncompliance and shall constitute a modification of this Option. 12. Section and Other Headings. -------------------------- The section and other headings contained in this Option are for reference purposes only and shall not be deemed to be a part of this Option or to affect the meaning or interpretation of this Option. 13. Notices. ------- All demands, requests, notices and other communications required or permitted to be given under this Option shall be in writing and shall be deemed to have been duly given, except as provided in Section 1, if delivered personally or three days after having been mailed by United States certified or registered first class mail, postage prepaid, to the parties hereto at the following addresses or at such other address as any party hereto shall hereafter specify by notice to the other party hereto: (a) if to the Company, addressed to: President First Republic Bancorp Inc. 388 Market Street San Francisco, CA 94111 (b) if to any Optionholder, at that person's address as it appears on the books of the Company. 16 14. Governing Law. ------------- This Option shall be governed by and construed in accordance with the laws of the State of California applicable to instruments made and obligations to be performed in such state. IN WITNESS WHEREOF, the Company has caused this Option to be signed by its duly authorized officer. FIRST REPUBLIC BANCORP INC. By: __________________________________ President Date: ________________________________ 17 EXERCISE FORM (To be executed upon exercise of this Option) The undersigned, the record holder of this Option, hereby irrevocably elects to exercise the right, represented by this Option, to purchase _________ ____________ of the Option Shares and herewith tenders payment for such Option Shares to the order of FIRST REPUBLIC BANCORP INC. in the amount of $ __________ in accordance with the terms of this Option. The undersigned represents and warrants that, if the Option Shares have not been registered under the Securities Act of 1933, as amended, the Option Shares are being purchased solely for the undersigned's own account for investment and not with a view to or for sale or distribution of the Option Shares or any portion thereof and not with any present intention of selling, offering to sell or otherwise disposing of or distributing the Option Shares or any portion thereof. The undersigned also represents and warrants that, if the Option Shares have not been registered under the Securities Act of 1933, as amended, the entire legal and beneficial interest of the Option Shares purchased hereby are being purchased for and will be held for the account of the undersigned and neither in whole or in part for any other person. The undersigned acknowledges that each certificate for Option Shares initially issued upon exercise of this Option, unless at the time of exercise such Option Shares are registered under the Securities Act of 1933, as amended (the "Securities Act"), shall bear the following legend: 18 THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE NOT REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968, AS AMENDED, OR THE SECURITIES LAWS OF ANY JURISDICTION, BY REASON OF SPECIFIC EXEMPTIONS THEREIN RELATING TO THE LIMITED AVAILABILITY OF THE OFFERING AND MAY ONLY BE SOLD OR OFFERED FOR SALE BY AN INVESTOR IF SUBSEQUENTLY REGISTERED UNDER THE SECURITIES ACT AND THE CALIFORNIA CORPORATE SECURITIES LAW OR OTHER APPLICABLE STATE SECURITIES LAWS OR IF REGISTRATION OR QUALIFICATION UNDER SUCH ACTS IS NOT REQUIRED. or such other legend as required by the Board of Directors. Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued upon completion of a public distribution pursuant to a registration statement under the Securities Act of the securities represented thereby) shall also bear the above legend unless legal counsel as shall be reasonably approved by the Company renders a written legal opinion to the Company that the securities represented thereby need no longer be subject to such restrictions. The undersigned also acknowledges that the Company may place a "stop transfer" notification on the stock records of the Company. The undersigned warrants that, upon the reasonable request of the Company, the undersigned will deliver such certificates, instruments and documents as may be required by the Company. _____________________________________ Optionholder 19 Page 1 of 3 ANNEX A ------- SAMPLE VESTING CALCULATIONS AT TARGET AMOUNTS --------------------------- The following sample vesting calculations are presented for purposes of illustration, based upon the actual December 31, 1995 tangible book value per share of $14.76
Aggregate Increase in Tangible Book Increase in Tangible Value as a Book Value From Prior Number of Aggregate Percentage of Year as a Percentage Option Shares Increase in the Total Three- of the Total Three- Vested Per Tangible Book Tangible Book Year Targeted Year Targeted Percentage of Option 1,000 Option Value Per Share Value Increase Increase Shares Vested Shares Granted - -------------------------------------------------------------------------------------------------------------------------- Actual at 12/31/95 (Vested at date of $14.76 grant) 20.0% 200 Target 12/31/96 $16.384 1.624 29.9% 29.9% 29.9% x 0.8 = 23.9% 239 Target 12/31/97 $18.186 1.802 63.1% 63.1 - 29.9 = 33.2% 33.2% x 0.8 = 26.6% 266 Target 12/31/98 $20.186 2.000 100.0% 100% - 63.1 = 36.9% 36.9% x 0.8 = 29.5% 295 ----- ----- --- Total $5.426 100% 100% 1,000 ====== ==== ==== =====
- ----------------- Percentages are rounded. Page 2 of 3 ANNEX A SAMPLE VESTING CALCULATIONS TARGETS MISSED ---------------------------
Target Actual Percentage Number of Option Tangible Tangible Book of Option Shares Vested Book Value Value Per Shares Per 1,000 Option Per Share Share Calculation Vested Shares Granted - ----------------------------------------------------------------------------------------------------------------- 20.0%* 200 12/31/96 16.384 16.500 16.500 - 14.760 x 0.8 = 25.6% 25.6% 256 --------------- 5.426 12/31/97 18.186 18.000 N/A 0% 0 12/31/98 20.186 20.000 N/A 0% 0 ----- --- Total 45.6% 456 ===== ===
- --------------------- * 20% vested at date of grant. Page 3 of 3 ANNEX A ------- SAMPLE VESTING CALCULATIONS TARGETS EXCEEDED ---------------------------
Target Actual Number of Option Tangible Tangible Book Percentage of Shares Vested Book Value Value Per Option Shares Per 1,000 Option Per Share Share Calculation Vested Shares Granted - ---------------------------------------------------------------------------------------------------------------------------------- 20.0%* 200 12/31/96 16.384 16.80 16.80 - 14.76 x 0.8 = 30.0% 30.0% 300 ------------- 5.426 12/31/97 18.186 20.00 20.00 - 14.76 x 0.8 = 77.3% ------------- 5.426 77.3 - 30.0 = 47.3% 473 ----- --- Subtotal 97.3% 973 12/31/98 20.186 23.00 (All remaining shares) 2.7% 27 Total 100% 1,000 ==== =====
EX-11.1 4 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1 FIRST REPUBLIC BANCORP INC. STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
Year Ended December 31, ---------------------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- Primary: Net Income............................................ $1,170,000 $7,303,000 $12,439,000 $11,762,000 $7,505,000 Less: Dividends on Series B Preferred Stock(1)....... - - - - (340,000) ---------- ---------- ----------- ----------- ---------- Net income available to common stock.................. 1,170,000 7,303,000 12,439,000 11,762,000 7,165,000 Effect of convertible subordinated debentures, net of taxes(2).......................... 1,594,000 1,597,000 1,599,000 94,000 - ---------- ---------- ----------- ----------- ---------- Adjusted net income for fully-diluted calculation..... $2,764,000 $8,900,000 $14,038,000 $11,856,000 $7,505,000 ========== ========== =========== =========== ========== Wtd. avg. shares outstanding, excluding treasury shares...................................... 7,797,100 7,743,965 7,716,086 7,340,523 3,998,403 Wtd. avg. shares issuable from Preferred Stock, Series A...................................... - - - - 260,725 Wtd. avg. shares issuable from Preferred Stock, Series C...................................... - - - - 32,854 Effect of stock options exercised during period....... 6,051 15,275 7,472 33,667 7,718 Wtd. avg. shares of dilutive stock options using average stock price under treasury stock method...... 225,923 298,340 284,512 284,017 169,676 Wtd. avg. shares of stock purchased by employees...... 4,986 5,624 2,746 - - Wtd. avg. shares of treasury stock.................... (444,835) (92,371 (141) - - ---------- ---------- ---------- ----------- ---------- Adjusted shares outstanding-primary................... 7,589,225 7,970,833 8,010,675 7,691,061 4,466,932 ========== ========== ========== =========== ========== Net income per share-primary.......................... $0.15 $0.92 $1.55 $1.53 $1.60 ===== ===== ===== ===== ===== Fully-Diluted: Adjusted shares-primary, from above................... 7,589,225 7,970,833 8,010,675 7,691,061 4,466,932 Wtd. avg. shares issuable upon conversion of convertible subordinated debentures(2)............... 2,524,210 2,524,210 2,524,210 134,637 - Additional wtd. avg. shares of dilutive stock options using end of period stock price under the treasury stock method............................ 12,661 4,904 32,915 67,864 8,296 Additional wtd. avg. shares issuable from conversion of Preferred Stock, Series B(1)...................... - - - - 562,703 ---------- ---------- ---------- ---------- ---------- Adjusted shares outstanding-fully-diluted............. 10,126,096 10,499,947 10,567,800 7,832,484 5,077,931 ========== ========== ========== ========== ========== Net income per share-fully-diluted.................... $0.15(3) $0.85 $1.33 $1.51 $1.48 ===== ===== ===== ===== =====
- ----------- Per share amounts and numbers of shares have been adjusted to reflect the effect of two 3% stock dividends declared by the Company's Board of Directors to stockholders of record on February 25, 1993 and February 18, 1994. (1) Not applicable after 1991. The Series B Preferred Stock was outstanding from May 30, 1990 to November 13, 1991. (2) Due to the issuance of convertible subordinated debentures in December 1992, the fully-diluted calculation includes the number of shares which would be outstanding if all such debentures were converted and adjusts reported net income for the effect of interest expense on the debentures, net of taxes. (3) For 1995, the convertible subordinated debentures are antidilutive and, accordingly, the results of the primary EPS calculation is reported for fully diluted EPS. EX-12.1 5 RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 FIRST REPUBLIC BANCORP INC. RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31. ------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ----------- ----------- ---------- ($ in thousands) Income before income taxes............ $1,856 $12,238 $21,399 $19,805 $12,546 ========== ========== =========== =========== ========== Add fixed charges, excluding interest on thrift accounts: Total interest on debentures and other borrowings............ $42,780 $30,411 $21,599 $19,340 $13,156 ========== ========== =========== =========== ========== Ratio of earnings to fixed charges excluding interest on thrift accounts............................. 1.04 1.40 1.99 2.02 1.95 Including interest on thrift accounts: Interest on thrift accounts...... 62,133 41,024 35,318 39,636 42,681 ---------- ---------- ----------- ----------- ---------- Total fixed charges including interest on thrift accounts..... $104,913 $71,435 $56,917 $58,976 $55,837 ========== ========== =========== =========== ========== Ratio of earnings to fixed charges including interest on thrift accounts............................. 1.02 1.17 1.38 1.34 1.23
EX-13.1 6 1995 ANNUAL REPORT TO STOCKHOLDERS FIRST REPUBLIC BANCORP [LOGO OF FIRST REPUBLIC BANCORP, INC.] 1995 Annual Report 1 FINANCIAL HIGHLIGHTS (in thousands, except per share amounts)
At Year End 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ---------- Total Assets $ 1,904,253 $ 1,707,319 $ 1,417,193 $ 1,232,517 $ 932,065 Cash and Investments 202,352 190,773 146,513 158,306 62,107 Loans, Net 1,659,815 1,477,492 1,233,995 1,042,478 848,404 Customer Deposits 1,140,441 948,833 751,671 698,772 605,765 FHLB Advances 570,530 570,530 468,530 373,530 214,970 Subordinated Debentures 64,053 64,177 60,957 55,050 33,322 Stockholders' Equity 108,260 107,286 104,946 92,125 59,312 Loans Serviced for Others 804,856 843,144 814,453 781,564 794,893 Tangible Book Value Per Share $14.76 $14.40 $13.58 $11.94 $9.59 For the Year 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ---------- Total Interest Income $ 139,594 $ 109,365 $ 98,347 $ 95,563 $ 82,583 Net Interest Income 34,681 37,930 41,430 36,587 26,746 Net Income $ 1,170 $ 7,303 $ 12,439 $ 11,762 $ 7,505 Average Fully Diluted Shares Outstanding 10,126 10,500 10,568 7,832 5,078 Fully Diluted Earnings Per Share $0.15 $0.85 $1.33 $1.51 $1.48
NET INCOME TOTAL ASSETS TOTAL CAPITAL (dollars in millions) (dollars in millions) (dollars in millions) 1991 - 7.5 1991 - 932 1991 - 104 1992 - 11.8 1992 - 1,233 1992 - 160 1993 - 12.4 1993 - 1,417 1993 - 179 1994 - 7.3 1994 - 1,707 1994 - 186 1995 - 1.2 1995 - 1,904 1995 - 190 - -------------------------------------------------------------------------------- A TEN YEAR PERSPECTIVE IN THE PAST DECADE, FIRST REPUBLIC HAS ACHIEVED MANY MILESTONE'S SOME OF OUR HIGHLIGHTS AND ACCOMPLISHMENTS ARE LISTED INSIDE. - -------------------------------------------------------------------------------- First Republic Bancorp: A TEN YEAR PERSPECTIVE 1985 Initial Capital $8.4 million . First Republic opens in San Francisco, specializing in real estate lending, with a focus on larger home loans . Approved as "seller servicer" with Fannie Mae . Purchases San Diego-based El Camino Thrift & Loan . Achieves profitability in first year of operation . Loans serviced-$30 million . Ending assets-$64 million - -------------------------------------------------------------------------------- 1986 . Completes initial public offering of common stock . Begins trading on Nasdaq . 1986 Tax Reform Act is passed; home financing is favored by continued interest deductions for personal residences . Deposits are insured by the FDIC . Approved as seller servicer with Freddie Mac, the Federal Housing Administration and additional private investors - -------------------------------------------------------------------------------- 1987 . Achieves recognition as premier large home lender in San Francisco Bay area . Begins lending in Los Angeles area . Increases total capital by 50% through sale of common stock and subordinated debentures - -------------------------------------------------------------------------------- 1988 . Opens first deposit branch in Los Angeles . Exceeds all applicable, newly adopted risk-based capital adequacy standards . Stock listed on the American and Pacific Stock Exchanges - -------------------------------------------------------------------------------- 1989 . Introduces two new products: FirstLineTM - an equity line of credit up to $2,000,000 and the Customer Choice Loan . Northern california earth-quake causes some loan portfolio damage. Company office relocated quickly . Cited by customer focus groups as provider of Top quality loan and deposit services - -------------------------------------------------------------------------------- 1990 . Accepted as the first voluntary member of the Federal Home Loan Bank of San Francisco . Begins lending in Las Vegas, Nevada; 15,800 housing units are constructed or financed in this market by the end of 1995 . Moves into new headquarters at 388 Market Street, San Francisco - -------------------------------------------------------------------------------- 1991 . Merges its two subsidiaries into a single, efficient entity; First Republic Thrift & Loan becomes California's largest . Completes three successful public equity and debt offerings to finance future growth . Total employees exceed 100; Average assets per employee are $8.3 million - -------------------------------------------------------------------------------- 1992 . listed on the New York Stock Exchange . Opens new lending and savings branch in Beverly Hills . Converts to new data processing system to enhance customer service and handle future growth - -------------------------------------------------------------------------------- 1993 . Loan originations exceed $945 million . Net income reaches $12.4 million, or $1.33 per fully diluted share . Opens two new urban branches in the Richmond and Chinatown districts to serve San Francisco neighborhoods - -------------------------------------------------------------------------------- 1994 . First Republic Savings Bank opens to provide full lending and FDIC-insured savings in the Las Vegas area . Introduces Saturday hours at several branches and check writing money market accounts for added customer convenience . Northridge earthquake strikes Los Angeles area, on January 17th, causing property damage and having a significant adverse impact on the Company's multifamily loan portfolio . Video teleconferencing installed for internal purposes; expands to realtor network - -------------------------------------------------------------------------------- 1995 . Repeat and referred customers represent 75% of loan originations . Opens branches in San Rafael and on Irving Street in San Francisco to further expand deposit franchise . Introduces ATM services . Develops and launches the Prestige Home Index,TM which tracks high-end home values Quarterly in San Francisco, Los Angeles, and San Diego markets . Loans serviced-$805 million . Assets per employee-$12.6 million . Current capital-$190 million . Ending assets-$1.9 billion - -------------------------------------------------------------------------------- First Republic Bancorp - -------------------------------------------------------------------------------- CORPORATE PROFILE First Republic is a leading banking and mortgage banking institution with growing operations in four major urban markets--San Francisco, Los Angeles and San Diego, California and Las Vegas, Nevada. We are financially strong, customer service-oriented and narrowly focused on our core lending and savings businesses. We continue to believe that the critical measure of our success is the high number of satisfied, repeat customers whom we are privileged to serve. First Republic's customers benefit substantially from: . A strong capital position of 15% risk-based capital, which is 188% of regulatory guidelines. . Professional, personal customer service with expanding products and locations. . Experienced, high quality, long-term personnel. . Specialized and flexible product lines. . Competitive terms and rates. . Operating efficiencies. [FDIC LOGO APPEARS HERE] [NEW YORK STOCK EXCHANGE LOGO APPEARS HERE] [FEDERAL HOME LOAN BANK LOGO APPEARS HERE] 1 First Republic Bancorp - -------------------------------------------------------------------------------- To Our Shareholders [PHOTO APPEARS HERE] James H. Herbert, II (left) and Roger O. Walther This past year was the most difficult in First Republic's history. The continuing recession in California, the lingering effects of the 1994 Northridge earthquake on our multifamily loan portfolio in Los Angeles, and the delayed effects of rapidly rising interest rates provided us with many challenges in 1995. Despite this difficult environment, First Republic was profitable for the year, with net income of $1.2 million. Our FDIC-insured subsidiary, First Republic Thrift and Loan, California's largest thrift and loan, achieved its 29th consecutive year of profitability. We begin 1996 hopeful that most of the impact of the earthquake is behind us and are encouraged by the recent decline in interest rates, which has resulted in improving margins. The California recession appears to be over and a potentially significant recovery has begun. 1995 OPERATING RESULTS In a difficult operating environment, First Republic's results in 1995 reflect our continuing commitment to conservative financial management and careful growth. The following are among the highlights of the past year: . Total assets increased 12% to $1.9 billion. . Deposits grew by 20% in 1995 to total $1.14 billion, reflecting the strong and steady growth of our consumer savings franchise. . Tangible book value per share rose to $14.76 at year-end. This represents a compounded growth rate of 13.9% after taxes per year over the past five years, which compares well with the 13.3% per annum pre-tax return of the S&P 500 Index over the same period. . Assets per full-time employee at year-end 1995 were $12.6 million, a 6% improvement in this measure of our efficiency over 1994. 2 First Republic Bancorp - -------------------------------------------------------------------------------- "SINGLE FAMILY HOME LOANS, PRIMARILY ADJUSTABLE RATE, HAVE GROWN TO 60% OF TOTAL LOANS, UP FROM 31% FOUR YEARS AGO." . Our FDIC-insured Nevada subsidiary, First Republic Savings Bank, continued to be highly successful and profitable. . Two new deposit branches were opened successfully: in San Rafael, Marin County, and in San Francisco at 19th Avenue and Irving Street. . General and administrative expenses as a percentage of average assets declined over 16% to 1.07% in 1995. Our operating efficiency ratio was 49%. . Single family residential loans have grown to 60% of total loans, up from 31% four years ago. CAPITAL STRENGTH We continue to believe that being well-capitalized is essential to the long-term success of our enterprise. This was proven to be true again in 1995. At December 31, 1995, our total capital was a solid 15.0% of risk - -adjusted assets, or 188% of regulatory requirements. Because of this strong capital position, we have remained profitable, even through adversity, and have been able to continue to pursue new opportunities. CONTINUING IMPACT OF NORTHRIDGE EARTHQUAKE During 1995, First Republic continued to feel the effects of the 1994 Northridge earthquake in Los Angeles--the worst natural disaster in U.S. history--with direct costs to the Company of nearly $7.7 million for the year. Without these losses, and adding a conservative rate of interest on affected loans, 1995 net income would have been approximately $7.3 million. Similar to 1994, 100% of our earthquake-related losses were on loans secured by apartment buildings in low-to-moderate income census tracts in Los Angeles County. Of these losses, more than 72% involved already seismically reinforced masonry buildings. It is worth noting that the Company has incurred no earthquake-related losses in our portfolio of single family or commercial property loans in the Los Angeles area. 3 First Republic Bancorp - -------------------------------------------------------------------------------- "WE CONTINUED TO EXPAND OUR DEPOSIT FRAN- CHISE DURING 1995, OPENING NEW BRANCHES AND INCREASING OVERALL DEPOSITS BY 20%." For 1996, we believe that the Northridge earthquake will have only a modest negative impact on our results. ASSET QUALITY AND RESERVES During the past year, we worked hard to maintain a low level of nonearning assets in the face of the difficulties in Los Angeles. As a result, nonaccruing loans and real estate owned equaled a relatively modest 2.46% of total assets at year-end. In the fourth quarter, $19 million of these nonearning assets made payments at an annualized rate of 7.30%. During 1995, we successfully sold 20 buildings that we had foreclosed upon at prices that, overall, exceeded their carrying basis by 6%. Our balance sheet continues to be increasingly conservative. Single family home loans have grown from 31% of our loan portfolio at December 31, 1991 to over 60% at December 31, 1995. Over 85% of our loan growth during 1995 was represented by single family home loans and we expect this trend to continue. GROWING DEPOSIT FRANCHISE We continued to expand our deposit franchise during 1995, opening two new branches and increasing overall deposits by 20%. Today we have eleven retail branches in four dynamic and diverse metropolitan areas--San Francisco, Los Angeles, San Diego and Las Vegas. Typically, First Republic branches are modest in size (approximately 1,200 square feet), extremely well located, and staffed by two professionals. Most of our new retail branches maintain Saturday hours and provide personal, face-to-face, private banking- style customer service. Excluding branches that have been open for less than one year, we had an average of $124 million of deposits per branch at year-end. During 1995, we focused on increasing deposits in passbook and money market checking accounts. The amount of these accounts increased by 30%, to 15.8% of all deposit accounts at the end of 1995. In 1996, we intend to build upon this trend and to add at least two more retail branches. 4 First Republic Bancorp - -------------------------------------------------------------------------------- FHLB ADVANCES The Company uses longer term, adjustable rate borrowings from the Federal Home Loan Bank for the purpose of match funding its treasury-based ARM loans and a modest amount of interim fixed rate loans. At December 31, 1995, these borrowings had a weighted average remaining maturity of ten years, an average interest rate of 6.16%, and an average repricing term of ten months. LOOKING FORWARD We are cautiously optimistic about 1996 and believe it may be a significantly better year than 1995. Having experienced an increase in single family loan volume in the second half of 1995, we entered the new year with a relatively strong loan backlog. We believe this reflects the strengthening California economy--particularly in Northern California--and declining interest rates, which stimulate both home purchases and refinancing activity. An improved California economy coupled with moderated interest rates should result in lower delinquencies throughout the year. In last year's annual report, we noted that we expected 1995 to be a difficult year and listed as our objectives to strengthen our consumer franchise, improve our branch network and enhance the profitability of our Las Vegas-based First Republic Savings Bank operation. It was a difficult year, but we achieved our goals. We have established the following priorities for 1996: 1) to regain our positive earnings momentum; 2) to expand our deposit franchise and reduce our cost of funds; 3) to reduce our expense ratio to 1% of average assets or lower for the year; and 4) under new interstate banking legislation, to merge our two thrift and loan subsidiaries. We appreciate the continuing confidence and support of our customers, stockholders, and the entire 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 February 19, 1996 - -------------------------------------------------------------------------------- TOTAL DEPOSITS (dollars in millions) 1991 - 606 1992 - 699 1993 - 752 1994 - 949 1995 - 1,140 TANGIBLE BOOK VALUE PER SHARE (in dollars) 1991 - 9.59 1992 - 11.94 1993 - 13.58 1994 - 14.40 1995 - 14.76 A 13.9% per annum rate of growth for the past five years. 5 First Republic Bancorp - -------------------------------------------------------------------------------- STRENGTH & RELIABILITY [PHOTO OF MALE AND FEMALE CUSTOMERS AT LOS ANGELES MEMORIAL COLISEUM APPEARS HERE] 6 First Republic Bancorp - -------------------------------------------------------------------------------- "FOR MORE THAN FIVE YEARS, WE'VE DEPENDED ON FIRST REPUBLIC FOR FRIENDLY SERVICE, STABILITY AND COMPETITIVE RATES. WE'VE EVEN RECOMMENDED THEM TO OTHER MEMBERS OF OUR FAMILY WHO NOW BANK WITH THEM AS WELL." /s/ Fred Arnold /s/ Madeleine Arnold Fred and Madeleine Arnold, Savings Customers [PHOTO OF CHECK AND PEN] Fred and Madeleine Arnold are Certified Master U.S.A. Track and Field Officials. They are pictured at the site of the 1984 Olympics in Los Angeles, where Mr. Arnold served as Head Pole Vault Official. [FDIC LOGO APPEARS HERE] RISK-ADJUSTED CAPITAL RATIOS Required - 8% First Republic Bancorp - 15% When it comes to savings, First Republic provides what serious savers want most--capital security and peace of mind. We safeguard our customers' assets with a strong capital foundation and prudent financial management. Today, First Republic has $1.9 billion in assets, total capital and reserves of over $190 million, and a ratio of capital to risk-adjusted assets of 15.0%--nearly double the required level. This ratio is an important barometer of our financial stability and our primary subsidiary is ranked among California's strongest financial institutions. Our savings customers have also come to expect our customer-friendly service, consistently competitive rates and growing branch network. On this foundation of security and proven performance, we are continuing to build long- term customer relationships. 7 FIRST REPUBLIC BANCORP - -------------------------------------------------------------------------------- SERVICE & CONVENIENCE "GIVING HELPFUL SERVICE AND ADVICE IN AN UNHURRIED MANNER IS AS MUCH A PART OF OUR [PHOTO OF BRANCH MANAGER JOB AS PROVIDING COMPETITIVE RATES. AND CUSTOMER APPEARS HERE] KNOWING OUR CUSTOMERS BY NAME IS A POINT OF PRIDE FOR US." Susan Hart (left), Branch Manager, San Rafael, with Customer Mary Stone In 1995, we opened two branches to serve our growing savings customer base in San Francisco and Marin Counties. "OUR BRANCHES BRING US CLOSER TO OUR CUSTOMERS. WE GET TO KNOW THEM AND THE NEIGHBORHOODS WE SERVE, AND WE WORK HARD TO BECOME PART OF THE COMMUNITY." [PHOTO OF EXTERIOR OF 19TH AND IRVING STREET Deborah Strother, Branch Manager, 19th BRANCH APPEARS HERE] and Irving Street, san francisco 8 First Republic Bancorp - -------------------------------------------------------------------------------- [LOGO FIRST REPUBLIC - CALIFORNIA'S LARGEST] [PHOTO OF CUSTOMERS AND EMPLOYEE APPEARS HERE] First Republic customers are more to us than just names or numbers --they're recognizable faces. Ron and Geraldine Evans are pictured here "face to face" "FLEXIBLE, RELIABLE AND PERSONAL-- with Las Vegas savings account officer THAT DESCRIBES OUR SERVICE FROM Kathleen Clark. FIRST REPUBLIC. FOR BOTH LOANS ON HOMES WE BUILD AND CD'S FOR OUR PERSONAL SAVINGS, FIRST REPUBLIC HAS CONSISTENTLY PERFORMED FOR US." /s/ Ron Evans /s/ Geraldine Evans Ron and Geraldine Evans, President and Vice President of Pacific Southwest Development At First Republic, "thanks a billion" is far more than a slogan that marked our exceeding $1 billion dollars in deposits--it captures the customer-first attitude that we strive to deliver in every customer contact. As we've grown, we've worked hard to maintain the highly personal approach to banking that sets First Republic apart from other institutions. At the same time, we've kept pace with the evolving needs of our customers by introducing new products and services. Last year, we introduced an ATM card that enables our Advantage Account holders to access cash anytime, anywhere. Internet users can access our Home Page on the World Wide Web(http://www.firstrepublic.com). It's all part of our ongoing effort to make banking with us as easy as possible. We've also continued to expand our savings branch network, bringing the personal service and convenience of First Republic closer to more existing and prospective customers. In 1995, we opened two new offices and now have eleven branches in our metropolitan markets. 9 First Republic Bancorp - -------------------------------------------------------------------------------- HOME LENDING: OUR CORE BUSINESS [PHOTO OF LOAN CUSTOMERS TRACY AUSTIN AND SCOTT HOLT OUTSIDE THEIR HOME APPEARS HERE] 10 First Republic Bancorp - -------------------------------------------------------------------------------- "THE BANKERS AT FIRST REPUBLIC KEPT THEIR EYES ON THE BALL. THEY TOOK CARE OF ALL THE DETAILS, WERE ATTENTIVE TO OUR NEEDS, AND PRODUCED QUICKLY AND ON TIME. THAT'S MY DEFINITION OF REAL PROFESSIONALS." /s/ Tracy Austin Professional Tennis Champion Tracy Austin with her husband Scott Holt at their home [PHOTO OF HOUSE KEYS AND KEY HOLDER APPEARS HERE] Our goal at First Republic is to make sure that getting a home mortgage is an easy and efficient process. [LOGO EQUAL HOUSING LENDER] Our core business today--as it was at the time of our founding--is making home loans. While we offer a broad array of loan products, including flexible loans for first time home buyers, we are best known for our expertise in financing larger properties. By carefully concentrating these lending activities in the California metropolitan areas of San Francisco, Los Angeles and San Diego, First Republic has established a position of leadership and a reputation for outstanding service. We offer a wide range of fixed and adjustable rate loans, in all interest rate environments. Reflecting our commitment to meeting borrowers' needs, we also offer custom-tailored products, such as bridge loans, blended mortgages and our FirstLine (TM) home equity line of credit up to $2 million. We combine this breadth of product with an experienced, professional team that has an average tenure of more than twelve years in the home lending business. The result is in-depth expertise, quick decisions, and attentive, personalized service. 11 First Republic Bancorp - -------------------------------------------------------------------------------- SERVING OUR CUSTOMERS "IN OUR BUSINESS, THERE IS NO SUBSTITUTE FOR A FACE-TO-FACE MEETING. WITH VIDEO TELECONFERENCING, FIRST REPUBLIC HAS MADE [PHOTO OF REALTOR SHIRLEY BAILEY MEETING EASY, WHETHER IT'S MIDWEEK OR AND CUSTOMER ON VIDEO CONFERENCE SATURDAY MORNING." WITH FIRST REPUBLIC LOAN OFFICER (SHOWN ON COMPUTER SCREEN) /s/ Shirley Bailey APPEARS HERE] Shirley Bailey, Realtor, Seville Properties With our new teleconferencing system, Shirley Bailey (left) and her client meet on-line with First Republic senior loan officer, Susan Mulvey (pictured on screen). "QUALITY BORROWERS NEED QUALITY LENDERS. I HAVE SOPHISTICATED CLIENTS WHO DEPEND ON ME TO REFER THEM TO A LENDER WHO CAN PROVIDE A [PHOTO OF REALTOR OUTSIDE FULL LOAN COMMITMENT QUICKLY, EFFICIENTLY PRESTIGE HOME APPEARS HERE] AND DISCREETLY; FIRST REPUBLIC QUALIFIES." /s/ Valerie Fitzgerald Valerie Fitzgerald, Realtor, Jon Douglas Properties 12 First Republic Bancorp - -------------------------------------------------------------------------------- At First Republic, we strive to make the home loan process as smooth and worry- free as possible. We work closely with both borrowers and their realtors, who play a vital role in every real estate transaction. To deliver superior service to real estate professionals, we are available where and when they need us. For example, our video teleconferencing system connects realtors directly to First Republic, enabling customers to meet face-to-face with our loan officers and loan approval executives in their offices or their homes. The result is personalized, efficient service and the responsive decision-making that both borrowers and realtors demand. Serving our customers also means being flexible, responding when other lenders sometimes won't--such as financing home renovations, seismic upgrades or new construction. LOANS ORIGINATED (dollar in millions) 1991 - 445 1992 - 626 1993 - 945 1994 - 784 1995 - 584 Reviewing construction plans are (from left to right) Jane Bryk, First Republic construction loan officer, Dean Dovolis, Architect, and Steven Stroub, President, Stroub Construction. "WITH AN ALL-IN-ONE RESIDENTIAL CONSTRUCTION AND PERMANENT LOAN FROM FIRST REPUBLIC, MY CLIENTS WERE ABLE TO [PHOTO OF HOME UNDER FOCUS THEIR ATTENTION ON THE DESIGN AND CONSTRUCTION APPEARS HERE] BUILDING OF THEIR NEW HOME." /s/ DEAN DOVOLIS Dean Dovolis, Architect, Dovolis Johnson & Ruggieri, Inc. 13 First Republic Bancorp - -------------------------------------------------------------------------------- KNOWING HOME VALUES Our Prestige Home Index (TM) tracks the values of homes worth $1 million and up in the San Francisco and Los Angeles markets, and $750,000 and up in the San [PHOTO OF SAN FRANCISCO Diego market. This quarterly analysis of VICTORIAN HOMES APPEARS HERE] the changing values of a portfolio of homes, carefully selected by First Republic, is produced by Case Shiller Weiss, Inc. and is available to First Republic customers. FIRST REPUBLIC FIRST REPUBLIC FIRST REPUBLIC PRESTIGE HOME INDEX(TM) PRESTIGE HOME INDEX(TM) PRESTIGE HOME INDEX(TM) LOS ANGELES AREA SAN FRANCISCO BAY SAN DIEGO AREA [GRAPH APPEARS HERE] [GRAPH APPEARS HERE] [GRAPH APPEARS HERE] NOTE: A copy of these three graphs on the First Republic Prestige Home Index may be obtained by writing the company. 14. First Republic Bancorp - -------------------------------------------------------------------------------- Home loan customers, such as Robert Jones of Hillsborough, rely on First Republic's [PHOTO OF LOAN CUSTOMER knowledge, experience and professionalism ROBERT JONES WITH STUFFED to get the job done. ANIMALS WHICH HE MAKES APPEARS HERE] "IT'S HARD TO TAKE LIFE TOO SERIOUSLY AFTER SELLING TEDDY BEARS FOR 25 YEARS. BUT WHEN I NEEDED TO GET SERIOUS ABOUT A MORTGAGE, I TURNED TO FIRST REPUBLIC." /s/ Robert Jones Robert Jones, President, Plush Sales, Inc. A cornerstone of First Republic's approach to home lending is knowing the markets we serve, including local economic conditions, home values and other key trends. Over more than a decade, we have developed a knowledge base that enables our loan officers to accurately assess property values and contributes to the rapid decision-making for which we are known. To better serve high-end home owners and buyers, we have created the First Republic Prestige Home Index (TM), which tracks the value of a selected group of homes from 1985 to the present. The Index provides a useful benchmark for home buyers, sellers, borrowers and realtors. As the only statistical model customized to measure changes in luxury home values in our urban markets, the Prestige Home Index (TM) underscores our position as a leading residential expert and lender. 15 First Republic Bancorp - -------------------------------------------------------------------------------- FINANCING A WIDE RANGE OF HOMES "MY LOFT IS MORE THAN A HOME TO ME; IT'S WHERE I MAKE MY LIVING. FIRST REPUBLIC'S [PHOTO OF MUSICIAN AND LOAN FINANCIAL SUPPORT HELPED ME CREATE ONE OF CUSTOMER JAMES GARDINER IN THE FINEST DIGITAL RECORDING STUDIOS IN HIS LOFT APPEARS HERE] THE BAY AREA." /s/ James Gardiner James Gardiner, President, Pajama recording studio "I'M EXTREMELY GRATEFUL TO FIRST REPUBLIC FOR BELIEVING IN ME. BECAUSE OF THEIR TRUST, I WAS ABLE TO BUY MY [PHOTO OF LOAN CUSTOMER AND SMALL CONDOMINIUM, EVEN THOUGH THE PASTRY CHEF LORRIANN RAJI SOME BUILDING HAD LOW OWNER OCCUPANCY." WITH OF HER CREATIONS APPEARS HERE] /s/ Lorriann Raji Lorriann Raji, Head Pastry Chef, Mark Hopkins Hotel 16 First Republic Bancorp - ------------------------------------------------------------------------------- Whether a first home, a dream home or a retirement home, First Republic helps make home ownership a reality for a broad spectrum of customers. We have established a strong track record in financing low-to-moderate income housing, a source of pride for all of us at First Republic. To best serve this market, we recognize the uniqueness of urban lending. With condominiums, cooperatives, live/work spaces, lofts and other configurations becoming as common as more traditional housing, city homes are often different from homes elsewhere. Within our lending standards, we are flexible and innovative in meeting what are often the special needs of our customers to serve the broadest spectrum of potential home buyers. RESIDENTIAL LOAN PROFILE (by housing units) Low to moderate income census tracts - 51% All other census tracts - 49% "MONTHS OF SEARCHING FOR OUR FIRST HOME GAVE US THE TIME TO BUILD GOOD RAPPORT WITH FIRST REPUBLIC. THIS TURNED OUT TO BE INVALUABLE WHEN WE FINALLY FOUND THE RIGHT HOME AND WANTED A QUICK CLOSE." [PHOTO OF JENSEN FAMILY, LOAN /s/ Courtney Jensen CUSTOMERS, IN FRONT OF NEW HOME /s/ Stephen Jensen ON MOVE-IN DAY APPEARS HERE] Courtney and Stephen Jensen with their one year-old son Jacob With First Republic's home loan expertise and service, moving day arrives more quickly and with fewer uncertainties. 17 First Republic Bancorp - -------------------------------------------------------------------------------- OUR COMMUNITY FOCUS At the Thoreau Center during construction are from left to right: Valerie Merlone, [PHOTO OF THOREAU CENTER DURING First Republic Senior Loan Officer; CONSTRUCTION APPEARS HERE] Robert Chandler, General Manager of the Presidio Project, National Park Service; Tom Sargent, Partner, Equity Community Builders; and Drummond Pike, President, The Tides Foundation. "WE ARE GRATEFUL TO FIRST REPUBLIC FOR THEIR CREATIVE ROLE IN MAKING OUR PRESIDIO PROJECT A MODEL FOR [THIS FOLLOWING LETTER PARTNERSHIPS BETWEEN THE PUBLIC AND APPEARS HERE] PRIVATE SECTORS." /s/ TOM SARGENT Tom Sargent, partner, Equity Community Builders United States Department of the Interior NATIONAL PARK SERVICE Golden Gate National Recreation Area Fort Mason, San Francisco, California 94123 IN REPLY REFER TO: January 16, 1996 Mr. James H. Herbert, II, President First Republic Thrift & Loan 388 Market Street San Francisco, CA 94111 Dear Mr. Herbert: On behalf of the National Park Service, let me be one of the first to congratulate you and Fist Republic for your crucial role in launching the Tides Foundation Thoreau Center for Sustainability at the Presidio of San Francisco. With the leadership of First Republic, the Thoreau Center is a milestone in the evolution of the Presidio into a working model of historic preservation, sustainable development, and fiscal responsibility, while providing exciting opportunities for visitors and organizations to explore many of the important issues of the day. The Park Service has always placed a high priority on encouraging private-sector investment to help protect park resources. The financial involvement of First Republic is an important first step which demonstrates that the Park Service and visionary tenants such as the Tides Foundation can work in partnership with lending institutions to help reduce the burden on the federal treasury by privately financing capital improvements, maintaining park buildings to high standards, and contributing programs which support park purposes. I look forward to seeing you at the grand opening in a few months. Sincerely, /s/ Robert S. Chandler Robert S. Chandler General Manager, Presidio Project First Republic Bancorp - -------------------------------------------------------------------------------- Pictured here (left to right) are: James H. Herbert, II, First Republic President and CEO; Jaynell Grayson, Babson College [PHOTO OF PERSONS DESCRIBED student; Joseph Mahoney, Director, AT RIGHT APPEARS HERE] Babson/NFTE Partnership; and Duane Moyer, Northern California Divisional Director of the National Foundation for Teaching Entrepreneurship. "WITH ITS EXCEPTIONAL ENTREPRENEURSHIP PROGRAM, BABSON WAS MY NUMBER ONE CHOICE FOR COLLEGE. THANKS TO FIRST REPUBLIC, I WILL GET THE EDUCATION I NEED TO PURSUE MY GOALS." /s/ Jaynell Grayson Jaynell Grayson, Founder "Food From The Hood," Los Angeles, Ca., Babson College Student And First Republic Scholar Giving back to our communities is a central part of our mission. Our commitment to civic responsibility takes many forms: financing primary schools, providing scholarships and supporting organizations that help others. One recent example is First Republic's pioneering role in the transition of the Presidio of San Francisco from a military base to a self-sustaining national park. Specifically, we created the mechanism to provide a $3.2 million construction and permanent loan to renovate four landmark buildings in the Presidio. The rehabilitated complex, the Thoreau Center, will become a showcase for energy conservation and provide offices for several non-profit organizations and foundations. We are also extremely proud of our First Republic Scholars Program, which provides scholarships to outstanding young people in our markets. As part of this program, Jaynell Grayson is a freshman at Babson College. An excellent student and successful entrepreneur, Ms. Grayson founded the award-winning food products company, "Food from the Hood" while still at Crenshaw High School in South Central Los Angeles. 19 First Republic Bancorp - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET
December 31, 1995 1994 -------------- -------------- ASSETS Cash $ 15,918,000 $ 16,920,000 Federal funds sold and short-term investments 15,000,000 15,500,000 Interest bearing deposits at other financial institutions 200,000 198,000 Investment securities (Note 2): At fair value 106,939,000 11,750,000 At cost (estimated fair value $33,455,000 and $115,448,000 at December 31, 1995 and 1994, respectively) 33,974,000 117,878,000 -------------- -------------- 140,913,000 129,628,000 Federal Home Loan Bank stock, at cost 30,321,000 28,527,000 -------------- -------------- 202,352,000 190,773,000 Loans (Note 3): Single family (1-4 units) mortgages 977,220,000 815,010,000 Multifamily (5+ units) mortgages 350,507,000 367,750,000 Commercial real estate mortgages 286,824,000 249,119,000 Commercial business loans 3,663,000 5,621,000 Multifamily/commercial construction 9,013,000 10,658,000 Single family construction 19,349,000 14,227,000 Equity lines of credit 26,572,000 28,137,000 Leases, contracts and other 933,000 975,000 Loans held for sale 8,182,000 7,166,000 -------------- -------------- 1,682,263,000 1,498,663,000 Less: Unearned loan fee income (4,380,000) (6,816,000) Reserve for possible losses (18,068,000) (14,355,000) -------------- -------------- Net loans 1,659,815,000 1,477,492,000 Interest receivable 12,582,000 10,172,000 Prepaid expenses and other assets (Note 4) 15,126,000 16,282,000 Other real estate owned 10,198,000 8,500,000 Premises, equipment and leasehold improvements, net of accumulated depreciation of $6,033,000 and $5,009,000 at December 31, 1995 and 1994, respectively 4,180,000 4,100,000 -------------- -------------- Total Assets $1,904,253,000 $1,707,319,000 ============== ==============
See accompanying notes. 20 FIRST REPUBLIC BANCORP - --------------------------------------------------------------------------------
December 31, 1995 1994 -------------- -------------- LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Customer deposits (Note 5): Passbook and MMA accounts $ 180,205,000 $ 138,726,000 Investment certificates 960,236,000 810,107,000 -------------- -------------- Total customer deposits 1,140,441,000 948,833,000 Interest payable 14,813,000 12,332,000 Custodial receipts on loans serviced for others 1,086,000 96,000 Other liabilities 5,070,000 3,415,000 Federal Home Loan Bank advances (Notes 3 and 6) 570,530,000 570,530,000 Other borrowings (Note 7) - 650,000 -------------- -------------- Total senior liabilities 1,731,940,000 1,535,856,000 Senior subordinated debentures (Note 8) 9,974,000 9,978,000 Subordinated debentures (Note 9) 19,579,000 19,699,000 Convertible subordinated debentures (Note 10) 34,500,000 34,500,000 -------------- -------------- Total liabilities 1,795,993,000 1,600,033,000 Commitments (Note 14) Stockholders' equity (Note 13 and 15): Common stock, $.01 par value; 20,000,000 shares authorized, 7,816,400 and 7,797,100 shares issued, and 7,330,400 and 7,444,703 outstanding at December 31, 1995 and 1994, respectively 78,000 78,000 Capital in excess of par value 74,919,000 74,745,000 Retained earnings 40,608,000 39,438,000 Deferred compensation - ESOP - (650,000) Treasury stock, at cost; 486,000 shares and 352,397 shares at December 31, 1995 and 1994, respectively (5,763,000) (4,315,000) Net unrealized loss on available for sale securities (Note 2) (1,582,000) (2,010,000) -------------- -------------- Total stockholders' equity 108,260,000 107,286,000 -------------- -------------- Total Liabilities and Stockholders' Equity $1,904,253,000 $1,707,319,000 ============== ==============
21 First Republic Bancorp - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31, 1995 1994 1993 ------------ ------------ ----------- Interest income: Interest on real estate and other loans $127,341,000 $100,816,000 $93,212,000 Interest on investments 12,253,000 8,549,000 5,135,000 ------------ ------------ ----------- Total interest income 139,594,000 109,365,000 98,347,000 ------------ ------------ ----------- Interest expense: Interest on customer deposits 62,133,000 41,024,000 35,318,000 Interest on FHLB advances and borrowings 37,003,000 24,736,000 16,362,000 Interest on debentures 5,777,000 5,675,000 5,237,000 ------------ ------------ ----------- Total interest expense 104,913,000 71,435,000 56,917,000 ------------ ------------ ----------- Net interest income 34,681,000 37,930,000 41,430,000 Provision for losses 14,765,000 9,720,000 4,806,000 ------------ ------------ ----------- Net interest income after provision for losses 19,916,000 28,210,000 36,624,000 ------------ ------------ ----------- Non-interest income: Servicing fees, net 2,675,000 2,330,000 1,233,000 Loan and related fees 1,289,000 1,915,000 1,937,000 Gain (loss) on sale of loans (67,000) 430,000 2,250,000 Gain on sale of investment securities 130,000 - - Other income 272,000 458,000 2,000 ------------ ------------ ----------- Total non-interest income 4,299,000 5,133,000 5,422,000 ------------ ------------ ----------- Non-interest expense: Salaries and related benefits 7,542,000 7,175,000 5,393,000 Occupancy 2,749,000 2,501,000 1,872,000 Advertising 1,500,000 1,863,000 1,340,000 Professional fees 613,000 542,000 542,000 FDIC insurance premiums 1,264,000 1,809,000 1,816,000 REO costs and losses 3,163,000 1,202,000 3,477,000 Other general and administrative 5,528,000 6,013,000 6,207,000 ------------ ------------ ----------- Total non-interest expense 22,359,000 21,105,000 20,647,000 ------------ ------------ ----------- Income before income taxes 1,856,000 12,238,000 21,399,000 Provision for income taxes (Note 12) 686,000 4,935,000 8,960,000 ------------ ------------ ----------- Net income $ 1,170,000 $ 7,303,000 $12,439,000 ============ ============ =========== Primary earnings per share $ 0.15 $ 0.92 $ 1.55 ============ ============ =========== Fully diluted earnings per share $ 0.15 $ 0.85 $ 1.33 ============ ============ =========== Weighted average fully-diluted shares outstanding 10,126,096 10,499,947 10,567,800 ============ ============ ===========
See accompanying notes. 22 First Republic Bancorp - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Net unrealized Deferred loss on Total Capital in compen- available stock- Years Ended December 31, Common excess of Retained sation- for sale Treasury holders' 1993, 1994 and 1995 stock par value earnings ESOP securities stock equity ------- ------------ ----------- ----------- ----------- ----------- ------------ Balance at January 1, 1993 $78,000 $ 67,919,000 $25,803,000 $(1,675,000) $ - $ - $ 92,125,000 Deferred compensation--ESOP 475,000 475,000 Effect of stock dividend 2,946,000 (2,946,000) - Exercise of options on 21,028 shares of common stock 177,000 177,000 Issuance of 6,856 shares of common stock 81,000 81,000 Purchase of 25,750 shares of treasury stock (351,000) (351,000) Net income 12,439,000 12,439,000 ------- ------------ ----------- ----------- ----------- ----------- ------------ Balance at December 31, 1993 78,000 71,123,000 35,296,000 (1,200,000) - (351,000) 104,946,000 Deferred compensation--ESOP 550,000 550,000 Unrealized loss on securities in available for sale category (2,010,000) (2,010,000) Effect of stock dividend 3,159,000 (3,161,000) (2,000) Exercise of options on 40,378 shares of common stock 321,000 321,000 Issuance of 12,181 shares of common stock 142,000 142,000 Purchase of 326,647 shares of treasury stock (3,964,000) (3,964,000) Net income 7,303,000 7,303,000 ------- ------------ ----------- ----------- ----------- ----------- ------------ Balance at December 31, 1994 78,000 74,745,000 39,438,000 (650,000) (2,010,000) (4,315,000) 107,286,000 Deferred compensation--ESOP 650,000 650,000 Net unrealized gain on securities in available for sale category 338,000 338,000 Net unrealized gain on securities transferred to available for sale category 90,000 90,000 Exercise of options on 11,452 shares of common stock 93,000 93,000 Issuance of 7,843 shares of common stock 81,000 81,000 Purchase of 133,603 shares of treasury stock (1,448,000) (1,448,000) Net income 1,170,000 1,170,000 ------- ------------ ----------- ----------- ----------- ----------- ------------ Balance at December 31, 1995 $78,000 $ 74,919,000 $40,608,000 $ - $(1,582,000) $(5,763,000) $108,260,000 ======= ============ =========== =========== =========== =========== ============
See accompanying notes. 23 First Republic Bancorp - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, 1995 1994 1993 ------------- ------------ ------------- Operating Activities Net Income $ 1,170,000 $ 7,303,000 $ 12,439,000 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for losses 14,765,000 9,720,000 4,806,000 Provision for depreciation and amortization 4,085,000 2,687,000 1,892,000 Amortization of loan fees (3,791,000) (4,371,000) (4,688,000) Amortization of loan servicing rights 358,000 687,000 1,753,000 Amortization of investment securities discounts (44,000) (12,000) (1,000) Amortization of investment securities premiums 248,000 230,000 125,000 Loans originated for sale (100,130,000) (82,173,000) (361,498,000) Loans sold into commitments 99,232,000 85,543,000 339,653,000 (Increase) decrease in deferred taxes (3,023,000) 1,338,000 655,000 Net losses on investment securities 11,000 - - Net (gains) losses on sale of loans 67,000 (430,000) (2,250,000) Increase in interest receivable (3,869,000) (3,201,000) (384,000) Increase in interest payable 2,481,000 4,227,000 273,000 (Increase) decrease in other assets 2,764,000 (2,855,000) (5,802,000) Increase (decrease) in other liabilities 2,587,000 (7,233,000) 5,216,000 ------------- ------------ ------------- Net Cash Provided (Used) By Operating Activities 16,911,000 11,460,000 (7,811,000) Investing Activities Loans originated (484,258,000) (702,313,000) (583,298,000) Loans purchased (8,041,000) (8,208,000) (5,447,000) Other loans sold - 131,408,000 85,822,000 Principal payments on loans 275,288,000 306,496,000 305,594,000 Purchase of investment securities (21,039,000) (49,037,000) (44,230,000) Sales of investment securities 276,000 - - Repayments of investment securities 12,772,000 10,176,000 5,814,000 Net decrease in short-term investments 10,000 394,000 979,000 Additions to fixed assets (1,151,000) (1,359,000) (1,660,000) Net proceeds from sale of REO (Note 1) 17,520,000 8,116,000 18,629,000 ------------- ------------ ------------- Net Cash Used by Investing Activities (208,623,000) (304,327,000) (217,797,000) Financing Activities Net increase in passbook and MMA accounts 41,479,000 21,565,000 6,072,000 Issuance of investment certificates 416,602,000 395,684,000 308,860,000 Repayments of investment certificates (266,473,000) (220,087,000) (262,033,000) Increase (decrease) in long-term FHLB advances (4,000,000) 112,000,000 85,000,000 Repayments of long-term borrowings (650,000) (550,000) (475,000) Net increase (decrease) in short-term borrowings 4,000,000 (22,380,000) 22,380,000 Decrease in deferred compensation ESOP 650,000 550,000 475,000 Issuance of subordinated debentures - 3,245,000 16,476,000 Repayment of subordinated debentures (124,000) (25,000) (10,569,000) Sale of common stock 81,000 142,000 81,000 Proceeds from common stock options exercised 93,000 321,000 177,000 Purchase of treasury stock (1,448,000) (3,964,000) (351,000) ------------- ------------ ------------- Net Cash Provided by Financing Activities 190,210,000 286,501,000 166,093,000 Decrease in Cash and Cash Equivalents (1,502,000) (6,366,000) (59,515,000) Cash and Cash Equivalents at Beginning of Year 32,420,000 38,786,000 98,301,000 ------------- ------------ ------------- Cash and Cash Equivalents at End of Year $ 30,918,000 $ 32,420,000 $38,786,000 ============= ============ =============
See accompanying notes. 24 First Republic Bancorp - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995 and 1994 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation and organization The consolidated financial statements of First Republic Bancorp Inc. ("First Republic") include its subsidiaries, First Republic Thrift & Loan ("First Thrift") and First Republic Savings Bank. 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 1994 and 1993 financial statements in order for them to conform with the 1995 presentation. Nature of operations The Company emphasizes real estate secured lending and mortgage banking operations that are targeted primarily toward loans secured by single family residences and, to a lesser extent, by existing multifamily and commercial properties. The Company primarily retains adjustable rate mortgages ("ARMs") in its loan portfolio. The Company originates mortgage loans for sale to institutional investors in the secondary market and also generates fee income by servicing such mortgage loans. The Company's lending and deposit gathering activities are conducted in the San Francisco Bay Area, the Los Angeles Area, and San Diego County, California and in the Las Vegas, Nevada area. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recognition of income on loans Interest income from real estate and business loans is recognized in the month earned. Interest income is not recorded on loans when they become more than 90 days delinquent, except for single family loans which are well secured and in the process of collection, or at such earlier time as management determines that the collectibility of such interest is unlikely. For nonaccrual and impaired loans, interest income may be recorded when cash is received, provided that the Company's recorded investment in such loans is deemed collectible. 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 can be reasonably anticipated based upon specific conditions at the time. Management considers a number of factors, including past loss experience, the Company's underwrit-ing policies, the results of the Company's ongoing loan grading process, the amount of past due and nonperforming loans, observations of auditors, legal requirements, recommendations or requirements of regulatory authorities, current and expected economic conditions and other factors. The reserve is reviewed and adjusted quarterly. It is the Company's policy to charge off balances that are deemed uncollectible. As a result of the Northridge earthquake which struck the Los Angeles area in January 1994, the Company has provided additional reserves during 1994 and 1995, related to the damage or lingering adverse economic impact on properties securing certain of the Company's loans. Chargeoffs related to such earthquake impacted loans were $7,590,000 in 1995 and $6,133,000 in 1994. Effective January 1,1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118 (collectively referred to as SFAS No. 114). 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 recording a chargeoff or creating a valuation allowance, with a corresponding charge to the provision for losses. Investment securities Effective January 1, 1994, the Company adopted SFAS No. 115 "Accounting For Certain Investments in Debt and Equity Securities" which addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. SFAS No. 115 establishes classification of investments into three categories: (i) debt securities that the entity has the positive intent and ability to hold to maturity are classified as "held to maturity" and reported at amortized cost; (ii) debt securities that are held for current resale are classified as trading securities and reported at fair value, with unrealized gains and losses included in operations; and (iii) debt securities not classified as either securities held to maturity or trading securities and equity securities are classified as securities available for sale, and reported at fair value, with unrealized gains and losses excluded from operations and reported as a separate component of stockholders' equity. 25 First Republic Bancorp - -------------------------------------------------------------------------------- In November 1995, the Financial Accounting Standards Board ("FASB") issued a special report on SFAS No. 115 that allowed companies a one-time opportunity prior to December 31, 1995 to reassess appropriateness of the classifications of all securities held and to account for any reclassifications at fair value. Investment securities classified as held to maturity are recorded at historical cost, adjusted for amortization of premium and accretion of discount, where appropriate. Realized and unrealized gains and losses on investment securities are computed based on the cost basis of securities specifically identified. At December 31, 1995 and 1994, no trading securities were owned and during 1995 and 1994 the Company did not buy or sell any trading securities. 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 real estate of $10,198,000 at December 31, 1995 and $8,500,000 at December 31, 1994. Loans in the amount of $25,707,000 in 1995 and $10,186,000 in 1994 were transferred to other real estate owned. Additionally, subsequent loans to facilitate the sale of other real estate owned were $14,926,000 and $7,091,000 in 1995 and 1994, respectively. Premises, equipment and leasehold improvements Premises, equipment and leasehold improvements are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the assets which range from three to ten years or the term of the lease, whichever is shorter. Mortgage banking activities The Company sells loans and participating interests in loans on a non-recourse basis to generate servicing income and to provide funds for additional lending. Loans sold includes loans originated into investor commitments with the sale approved prior to origination. Gains and losses are recognized at the time of sale by comparing sales price with carrying value. A premium results when the interest rate on the loan, adjusted for a normal service fee, exceeds the pass through yield to the buyer. Premiums are calculated as the present value of excess service fees expected to be collected in future periods and are amortized over the estimated life of the loans, based on market factors. Purchased mortgage loan servicing rights represent the cost of acquiring the rights to service mortgage loans, which cost is amortized over the estimated life of the loans based on the interest method. The carrying value of purchased mortgage servicing rights and premium on loans sold is periodically measured based on actual prepayment experience compared to projected prepayments; writedowns and adjustments in the amortization rates are made when an impairment is indicated. Loan servicing fees are recorded as income when received and are presented net of the cost of amortizing premium on sale of loans or purchased mortgage loan servicing rights. The amount of loans being serviced for others was $804,856,000 and $843,144,000 at December 31, 1995 and 1994, 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. In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights, an Amendment of FASB Statement No. 65." SFAS No. 122 requires that the rights to service mortgage loans for others be recognized as a separate asset, however those servicing rights are acquired. The total cost of originating or purchasing mortgage loans should be allocated between the loan and the servicing rights based on their relative fair values. The statement also requires the assessment of all capitalized mortgage servicing rights for impairment to be based on current fair value of those rights. The Company will implement SFAS No. 122 effective January 1, 1996. The impact of SFAS No. 122 on the Company's financial position is expected to be immaterial and the impact of SFAS No. 122 on the Company's results of operations will be to change the timing of reported earnings. Derivative financial instruments: interest rate cap and swap agreements The Company uses interest rate cap agreements and interest rate swap agreements, known as derivative financial instruments, for interest rate risk protection or liability matching. Interest rate cap agreements are purchased primarily to reduce the Company's exposure to rising interest rates which would increase the cost of liabilities above the maximum yield which could be earned on certain adjustable rate mortgages and investments. Costs are amortized to interest expense using the straight-line method over the life of interest rate cap agreements, and benefits are recognized when realized. The unamortized cost of interest rate cap agreements is included in other assets. Interest rate swap agreements match asset yields with liability costs by converting the cost of specific Federal Home Loan Bank advances from a fixed rate to a variable rate, with the term of each swap agreement matched to the maturity of the underlying advance. The differential to be paid or received is accrued as an adjustment to interest expense as interest rates change. The related receivable from counterparties is included in interest receivable. The fair values of interest rate swap agreements are not recognized in 26 First Republic Bancorp - -------------------------------------------------------------------------------- the financial statements. The Company is an end-user of derivative financial instruments and does not conduct trading activities for derivatives. The Company follows SFAS No. 119 "Disclosures about Derivative Financial Instruments and Fair Value on Financial Instruments" and the various required disclosures regarding derivative activities are in Notes 6 and 11. Income taxes First Republic and its subsidiaries file a consolidated federal income tax return and a combined state tax return. The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes". Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and then a valuation allowance is established to reduce that deferred tax asset if it is "more likely than not" that the related tax benefits will not be realized. 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 original maturity dates of less than ninety days. The Company paid interest of approximately $102,432,000 in 1995, $67,208,000 in 1994, and $56,644,000 in 1993. Additionally, the Company paid income taxes of $1,220,000, $6,620,000, and $8,324,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Earnings per share Primary earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding, plus the effect, when dilutive, of stock options. Shares repurchased by the Company are deducted from shares outstanding for EPS calculations. The calculation of fully diluted EPS adds back to the Company's reported net income the effect of interest expense on convertible subordinated debentures, net of taxes, and increases the number of shares outstanding as if the debentures were converted into common stock. For the year 1995 and the second quarter of 1995, such convertible debentures were antidilutive and the results of the primary EPS calculation for those periods became the fully diluted EPS amounts. 2 Investment Securities Under SFAS No. 115, the Company's investment securities, including mortgage backed securities ("MBS"), are classified as held to maturity or available for sale at December 31, 1995 and 1994.
Estimated Estimated Estimated Amortized Unrealized Unrealized Fair (In $ thousands) Cost Gross Gains Gross Losses Value --------- ----------- ------------ --------- December 31, 1995 Held to Maturity Securities at Cost: Other MBS $ 33,974 $ 163 $ (682) $ 33,455 ========= =========== ============ ========= Available for Sale Securities at Fair Value: U.S. Government $ 24,623 $ 596 $ (211) $ 25,008 Agency MBS 34,573 527 (64) 35,036 Other MBS 35,781 221 (923) 35,079 --------- ----------- ------------ --------- Debt Securities 94,977 1,344 (1,198) 95,123 Equity Securities 13,487 0 (1,671) 11,816 --------- ----------- ------------ --------- Total $ 108,464 $ 1,344 $ (2,869) $ 106,939 ========= =========== ============ ========= December 31, 1994 Held to Maturity Securities at Cost: U.S. Government $ 25,431 $ 311 $ (249) $ 25,493 Agency MBS 26,876 9 (627) 26,258 Other MBS 65,404 20 (1,894) 63,530 Other 167 - - 167 --------- ----------- ------------ --------- Total $ 117,878 $ 340 $ (2,770) $ 115,448 ========= =========== ============ ========= Available for Sale Securities at Fair Value: Equity Securities $ 13,760 $ - $ (2,010) $ 11,750 ========= =========== ============ =========
In December 1995, the Company transferred certain U.S. Government, Agency MBS and other MBS debt securities from the held to maturity category to the available for sale category. The total of debt securities transferred was $94,977,000 at amortized cost and $95,123,000 at estimated fair value. Available for sale equity securities consist of a portfolio of adjustable rate perpetual preferred stocks, which have no stated maturities and therefore are classified as available for sale; because such securities are equity securities and generate capital gains or losses for tax purposes, the amount of unrealized losses on these securities which is recorded as a reduction in stockholders' equity has not been reduced for the effect of taxes. At December 31, 1995, all of the Company's investment securities carried interest rates which adjust annually or more frequently; the weighted average yield earned was 7.29% for held to maturity investments, 7.63% for available for sale debt securities, and 8.66% for available for sale equity securities, on a tax equivalent basis. At December 31, 1995, the fair value of Agency MBS included $25,330,000 of securities converted from Company originated loans. 27 First Republic Bancorp - -------------------------------------------------------------------------------- Market values are determined by current quotation, or analysis of estimated future cash flows. The following table summarizes the Company's carrying value and estimated fair value by maturity of debt securities owned at December 31, 1995 classified as available for sale and held to maturity.
Carrying Estimated Value Fair Value ------------ ------------ Due in one year or less $ - $ - Due after one year through five years - - Due after five years through ten years 1,277,000 1,299,000 Due after ten years 23,346,000 23,709,000 ------------ ------------ 24,623,000 25,008,000 MBS - available for sale 70,354,000 70,115,000 MBS - held to maturity 33,974,000 33,455,000 ------------ ------------ $128,951,000 $128,578,000 ============ ============
During 1995, 1994 and 1993, the Company did not sell any debt securities. In 1995, proceeds from the sale of equity securities were $276,000, resulting in gross losses of $11,000, and proceeds collected on a previously written off debt security resulted in a gain of $141,000. 3 Loans Real estate loans are secured by real property and mature over periods primarily ranging up to thirty years. At December 31, 1995, loans of $812,185,000 are pledged as collateral for FHLB advances. The Company restructures loans, generally because of borrower's financial difficulties, by granting concessions to reduce the interest rate, to waive or defer payments or, in some cases, to reduce the principal balance of the loan. Nonaccrual loans and restructured loans, together with the related interest income information, are summarized as follows:
At or for the year ended December 31, 1995 1994 ----------- ----------- Nonaccrual loans: Balance at year-end $36,550,000 $32,623,000 Interest foregone 1,605,000 1,646,000 Restructured loans: Balance at year-end 12,795,000 17,489,000 (Net of nonaccrual loans) Actual interest income recognized 736,000 813,000 Pro forma interest income under original terms $ 1,170,000 $ 1,313,000
Loans that are partially charged off and loans that have been modified in troubled debt restructurings which result in more than four monthly payments being deferred, capitalized or waived are reported as nonaccrual loans until at least six consecutive payments are received and the loan meets the Company's other criteria for returning to accrual or performing restructured status. An analysis of the changes in the reserve for possible losses for the past three years follows:
1995 1994 1993 ----------- ----------- ----------- Balance at beginning of year $14,355,000 $12,657,000 $12,686,000 Provision charged to operations 14,765,000 9,720,000 4,806,000 Reserve from purchased loans - 34,000 200,000 Reserve of First Republic Savings Bank at acquisition - - 24,000 Chargeoffs on originated loans: Single family (14,000) (210,000) (209,000) Multifamily (9,314,000) (7,177,000) (3,367,000) Commercial real estate (2,163,000) (695,000) (1,547,000) Commercial business loans (48,000) (79,000) (76,000) Construction loans (353,000) - - Recoveries on originated loans: Single family 3,000 11,000 - Multifamily 765,000 119,000 - Commercial real estate 30,000 - 92,000 Commercial business loans 54,000 15,000 43,000 Acquired loans, net (12,000) (40,000) 5,000 ----------- ----------- ----------- Balance at end of year $18,068,000 $14,355,000 $12,657,000 =========== =========== ===========
Effective January 1, 1995, the Company adopted SFAS No. 114, which addresses the accounting treatment of certain impaired loans. The Company makes an assessment of impairment when and while loans are on nonaccrual or when the loans are restructured. The Company's loans are primarily real estate secured; therefore the Company primarily bases the measurement of impaired loans on the fair value of the collateral, reduced by costs to sell. If the measurement of the impaired loan is less than the recorded investment in the loan, the Company recognizes impairment by partial loan chargeoff or by creating or adjusting an existing allocation of the allowance for losses. The following table shows the recorded investment in impaired loans and any related SFAS No. 114 allowance for losses at December 31, 1995. An impaired loan has a specific amount of the Company's allowance for losses assigned to it whenever the collateral's fair value, net of selling costs, is less than the Company's recorded investment in the loan, after amounts charged off to reserves are deducted. Generally, impaired loans not requiring an allowance under SFAS No. 114 have already 28 First Republic Bancorp - -------------------------------------------------------------------------------- been written down or have a net collateral fair value which exceeds the loan balance.
Related Recorded SFAS No. 114 Investment in Allowance Impaired Loans for Losses -------------- ------------ Impaired loans requiring a SFAS No. 114 allowance: Single Family $ - $ - Multifamily 931,000 210,000 Commercial Real Estate 1,161,000 270,000 Other 360,000 54,000 -------------- ------------ $ 2,452,000 $ 534,000 -------------- ------------ Impaired loans not requiring a SFAS No. 114 allowance: Single Family - Multifamily 33,312,000 Commercial Real Estate 13,581,000 -------------- 46,893,000 -------------- Total $49,345,000 ==============
The loans with a recorded investment of $46,893,000, reported as impaired loans not requiring a SFAS No. 114 allowance, have been reduced to their collateral fair value, net of selling costs, by $10,011,000 of specific chargeoffs to the Company's reserves. At December 31, 1995, the Company has designated $316,000 of its reserves to protect against contingent liabilities on certain of these loans, while the ultimate amount of payment, if any, is being contested. Total interest income recognized on loans designated as impaired for the year ended December 31, 1995 was $1,570,000, all of which was recorded using the cash received method. The average recorded investment in impaired loans was approximately $48,000,000 for 1995. 4 PREPAID EXPENSES AND OTHER ASSETS At December 31, prepaid expenses and other assets consist of the following:
1995 1994 ----------- ----------- Debt issuance costs, net $ 4,720,000 $ 5,301,000 Interest rate cap agreements, net 3,822,000 5,918,000 Prepaid expenses 1,506,000 1,948,000 Purchased servicing rights and premium on loans sold, net 449,000 793,000 Other assets 4,629,000 2,322,000 ----------- ----------- $15,126,000 $16,282,000 =========== ===========
Debt issuance costs are amortized over the life of the issue on a straight line basis which approximates a level yield method. 5 Customer Deposits Passbook and money market accounts, which have no contractual maturity, pay interest at rates ranging from 2.3% to 5.5% per annum and 2.3% to 4.9% per annum at December 31, 1995 and 1994, respectively, compounded daily. Investment certificates have maturities primarily ranging from 91 days to 60 months and bear interest at varying rates based on money market conditions, generally ranging from 4.3% to 8.3% and from 3.5% to 9.0% at December 31, 1995 and 1994, 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, 1995, based on the amount of thrift certificates outstanding, First Thrift was required to maintain shareholder's equity of approximately $54,000,000, compared with actual shareholder's equity of $127,415,000. First Thrift and First Republic Savings Bank are members of the FDIC's Bank Insurance Fund ("BIF") and their thrift accounts are insured by the FDIC up to $100,000 each per insured depositor. At December 31, 1995, investment certificates with a balance of $100,000 or more totalled $50,007,000 for First Thrift and $1,439,000 for First Republic Savings Bank. 6 Federal Home Loan Bank Advances First Thrift is a voluntary member of the Federal Home Loan Bank of San Francisco ("FHLB"). First Thrift was approved for $726,000,000 of FHLB advances at December 31, 1995. First Thrift is required to own FHLB stock equal to 5% of the FHLB advances outstanding and owned $30,321,000 of FHLB stock at December 31, 1995. FHLB stock is recorded at cost, is redeemable at par and is pledged as collateral for FHLB advances. FHLB advances are primarily adjustable rate in nature, including the effect of interest rate swap agreements, and consist of the following at December 31:
1995 1994 ------------------ ------------------- Advances maturing in Amount Rate Amount Rate ------------ ---- ------------ ---- One year or less $ 4,000,000 6.90% $ 44,000,000 6.68% 1 to 2 years - - - - 2 to 5 years - - - - After five years 566,530,000 6.16 526,530,000 5.90 $570,530,000 6.17% $570,530,000 5.96%
29 First Republic Bancorp - -------------------------------------------------------------------------------- The stated interest rates include the effect of interest rate swap agreements with a total notional principal amount of $25,000,000 at December 31,1995 which mature in 2001 and $65,000,000 at December 31, 1994. Under the Company's interest swap agreements, a fixed rate which is equal to the fixed rate paid on FHLB advances is received and the Company pays a rate which varies semiannually with market rates of interest. During 1995, the Company did not enter into any new interest rate swap agreements, $40,000,000 of interest rate swap agreements matured, and $1,027,000 under outstanding interest rate swap agreements was recorded as a reduction in interest expense on borrowings. The Company is exposed to loss if the swap counterparties fail to perform; however, the Company does not anticipate such nonperformance. The Company does not obtain collateral under its interest rate swap agreements but monitors the credit standing of its swap counterparties; at December 31, 1995, all remaining interest rate swap agreements were with the FHLB and the Company had not separately pledged any collateral. 7 OTHER BORROWINGS At December 31, 1994, other borrowings included borrowings of the Company's Employee Stock Ownership Plan Trust from an unaffiliated commercial bank totalling $650,000. These borrowings, which were paid off in 1995, were guaranteed by First Republic and had interest rates which varied with the prime rate (see Note 15). The Company maintains accounts with certain primary securities dealers and, since February 1988, has entered into repurchase agreements to borrow short-term funds with investment securities as collateral. These borrowings bear interest at rates which vary with market conditions. For 1995, borrowings under repurchase agreements averaged $2,321,000 and the maximum amount outstanding at any month-end was $13,522,000. There were no significant borrowings of this type in 1994. 8 SENIOR SUBORDINATED DEBENTURES Senior subordinated debentures are due September 30, 2003 and bear interest ranging from 10% to 11% (weighted average rate of 10.6%). The senior subordinated debentures pay interest monthly. The Company may be required to redeem the senior subordinated debentures early only upon death of the holder. 9 SUBORDINATED DEBENTURES The Company's subordinated debentures consist of two issues, with outstanding amounts as follows at December 31: 1995 1994 ----------- ----------- Debentures maturing May 15, 2008, with semiannual interest payments at 8.5% $12,972,000 $12,993,000 Debentures maturing January 15, 2009, with quarterly interest payments at: --8.0% until maturity 5,070,000 5,440,000 --8.0% until reset 1,537,000 1,266,000 ----------- ----------- $19,579,000 $19,699,000 =========== =========== The reset debentures pay interest at an initial rate of 8.0% with the interest rate subject to two adjustments in July 1999 and July 2004, at which time the rate paid will reset at a rate between 6.0% and 10.0% depending on market conditions. 10 CONVERTIBLE SUBORDINATED DEBENTURES In December 1992, the Company issued in a public offering $34,500,000 of convertible subordinated debentures maturing December 1, 2002. The debentures pay interest semi-annually at a 71/4% rate, are convertible into 2,524,210 shares of common stock at approximately $13.67 per share, and are redeemable after December 1, 1995 at a price of 103.5%, with the redemption premium declining at 0.50% per year ratable to par at maturity. 11 INTEREST RATE CAPS In connection with its asset and liability management policies, First Thrift purchases interest rate cap contracts primarily as a protection against interest rates rising above the maximum rates on its adjustable rate loans. At December 31, 1995, the aggregate notional amount of interest rate cap contracts was $1,145,000,000, which mature in periods ranging from January 1996 through September 2000. At December 31, 1994, the notional amount of interest rate cap contracts owned by First Thrift was $1,260,000,000 and during 1995 there were purchases of $50,000,000 and maturities of $165,000,000. The terms and amount of interest rate caps maintained by the Company is based on management's expectations about future interest rates and the level of maximum interest rates inherent in the Company's loans. Under the terms of the cap contracts, each 30 First Republic Bancorp - -------------------------------------------------------------------------------- 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 12.5% 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. At December 31, 1995 and 1994, First Republic Savings Bank owned $10,000,000 of 10% LIBOR interest rate caps. The Company evaluates the credit worthiness of its counterparties under interest rate cap contracts and has established an approved limit for each institution. The Company is exposed to market risk to the extent its counterparties are unable to perform; however, the Company does not expect such nonperformance. The amortization of interest rate cap costs increased interest expense by $1,688,000 in 1995, $1,210,000 in 1994, and $850,000 in 1993. Additionally, at December 31, 1995, First Thrift owned certain shorter-term interest rate cap contracts purchased in 1994 as protection against increases in interest rates during 1995 and 1996. Monthly repricing caps in the notional principal amount of $150,000,000 carry a strike rate which increases from 6.75% to 8.92% over the period from April 1995 to maturity in July 1996 and $50,000,000 of interest rate caps carry a strike rate of 8% until maturity in December 1996. 12 INCOME TAXES The annual provision for income taxes consists of the following: 1995 1994 1993 ---------- ---------- ---------- Federal taxes: Current $2,957,000 $2,761,000 $6,047,000 Deferred (2,383,000) 771,000 456,000 ---------- ---------- ---------- 574,000 3,532,000 6,503,000 ---------- ---------- ---------- State taxes: Current 752,000 836,000 2,258,000 Deferred (640,000) 567,000 199,000 ---------- ---------- ---------- 112,000 1,403,000 2,457,000 ---------- ---------- ---------- Total $ 686,000 $4,935,000 $8,960,000 ========== ========== ========== The effective income tax rate differs from the federal statutory rate due to the following for the past three years: 1995 1994 1993 ----- ----- ----- Expected statutory rate 35.0% 35.0% 35.0% State taxes, net of federal benefits 4.0 7.5 7.5 Change in valuation allowance -- -- 0.9 Other, net (2.0) (2.2) (1.5) ----- ----- ----- Effective tax rate 37.0% 40.3% 41.9% ===== ===== ===== 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: 1995 1994 ----- ----- Deferred tax assets: Bad debt deduction $5,693,000 $4,351,000 Deferred franchise tax 363,000 445,000 Deferred income and other 10,000 279,000 ---------- ---------- Total gross deferred tax assets 6,066,000 5,075,000 Less valuation allowance (421,000) (421,000) ---------- ---------- Deferred tax assets 5,645,000 4,654,000 ---------- ---------- Deferred tax liabilities: Loan fee income 2,068,000 3,616,000 FHLB stock dividend income 269,000 274,000 Prepaid FDIC premiums -- 456,000 Depreciation, amortization and other 11,000 34,000 Tax on net unrealized gain on available for sale securities 57,000 -- ---------- ---------- Total gross deferred tax liabilities 2,405,000 4,380,000 ---------- ---------- Net deferred tax asset $3,240,000 $ 274,000 ========== ========== The net deferred tax asset represents recoverable taxes and is included in other assets. 13 STOCKHOLDERS' EQUITY In May 1993, the Company's Board of Directors authorized the repurchase of up to 206,000 shares of the Company's common stock and this authorized level was increased to 406,000 in October 1994 and subsequently increased to 656,000 in March 1995. Shares purchased were 25,750 in 1993, 326,647 in 1994 and 133,603 in 1995, bringing the total shares held as treasury stock to 486,000 with a total cost of $5,763,000 at December 31, 1995. 31 First Republic Bancorp - -------------------------------------------------------------------------------- The Company maintains stock option plans for employees and directors. The grant of stock options under these plans can result in accounting as either compensatory or noncompensatory options. Under First Republic's 1985 Stock Option Plan (the "Plan") at December 31, 1995, there were remaining options on 633,577 shares of common stock reserved for issuance and options on 620,052 shares had been granted, all of which were exercisable. The Company's stock options expire ten years from the date granted and transactions under the Plan are summarized as follows: Number Price of Shares Per Share --------- --------- Balance, January 1, 1993 617,584 $6.74 - $15.55 Options Granted 66,624 12.34 - 14.96 Options Exercised (21,028) 6.74 - 12.62 Options Canceled (4,423) 11.78 - 14.26 -------- --------------- Balance, December 31, 1993 658,757 $6.74 - $15.55 Options Granted 17,800 10.00 - 14.75 Options Exercised (40,444) 6.74 - 12.62 Options Canceled (15,315) 11.78 - 14.85 -------- --------------- Balance, December 31, 1994 620,798 $6.74 - $15.55 Options Granted 19,580 10.75 - 14.33 Options Exercised (6,148) 6.74 - 12.68 Options Canceled (14,178) 9.43 - 15.21 -------- --------------- Balance, December 31, 1995 620,052 $6.74 - $15.55 ======= =============== Additionally, the outside directors of the Company and its subsidiaries hold stock options which are not in the Plan for a total of 321,416 shares of common stock which were issued since August 1989, at prices ranging from $6.74 to $16.02. Executive officers hold additional stock options for 74,262 shares of common stock granted in October 1991 at $12.73. In 1992, the Company's Board of Directors authorized options on 477,405 shares of common stock not in the Plan at an exercise price of $14.84 per share; 20% of such options vested 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. As of December 31, 1995, shares totalling 366,159, or approximately 77% of such options, were vested and the balance remains unvested. In May 1995, the Company's stockholders approved the grant of options on 350,000 shares of common stock not in the Plan to executive officers and other employees. On December 31, 1995, 342,500 of the options were granted, at the closing market price of $13.13. At the date of grant, 20% of such options vested, with the remainder contingent upon the achievement of specified annual increases in the tangible book value per share of the Company's common stock. A former and a current officer have exercised 83,545 options in exchange for notes payable to the Company totalling $704,000 and bearing interest at a 7.8% average rate. After stockholder approval, the Company established an Employee Stock Purchase Plan which provides for the purchase of up to 424,360 shares of common stock by eligible employees. Common stock sold to employees under this plan, were 7,843 shares in 1995, 12,181 shares in 1994 and 6,856 shares in 1993, resulting in net proceeds to the Company of $81,000, $142,000 and $81,000, respectively. The Company's ability to pay cash dividends on its common stock is restricted to approximately $2,886,000 at December 31, 1995 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. For 1995, First Republic received or was due dividends of $800,000 from First Thrift and $258,000 from First Republic Savings Bank. At December 31, 1995 certain regulatory requirements limit the amount of dividends that First Thrift and First Republic Savings Bank may pay to First Republic to approximately $17,400,000 and $1,250,000, respectively. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 applies to all transactions in which an entity acquires goods or services by issuing equity instruments such as common stock, except for employee stock ownership plans. SFAS No. 123 establishes a new method of accounting for stock-based compensation arrangements with employees which is fair value based. The Statement encourages (but does not require) employers to adopt the new method in place of the provisions of Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. Companies may continue to apply the accounting provisions of APB 25 in determining net income; however, they must apply the disclosure requirements of SFAS No. 123. If the Company were to adopt the fair value based method of SFAS No. 123, a higher compensation cost would result for fixed stock option plans and a different compensation cost would result for the Company's contingent or variable stock option plans. The recognition provisions and disclosure requirements of SFAS No. 123 are effective January 1, 1996. The Company has elected to continue to use its current practice under APB 25. 32 First Republc Bancorp - ------------------------------------------------------------------------------- 14 COMMITMENTS At December 31, 1995, the Company had conditional commitments to originate loans of $23,631,000 and to disburse additional funds on existing loans and lines of credit of $75,606,000. 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, 1995 are as follows: 1996 - $1,684,000; 1997 - $1,567,000; 1998 -$1,330,000; 1999 - $1,074,000; 2000 - $847,000; thereafter $385,000. Rent and related occupancy expense was $1,742,000 in 1995, $1,398,000 in 1994 and $1,132,000 in 1993. 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 1995, 1994 and 1993 were approximately $352,000, $324,000 and $280,000, respectively. The Company established an Employee Stock Ownership Plan ("ESOP") in 1985 which enables eligible employees to own Common Stock of First Republic. The ESOP Trust has borrowed funds to purchase shares of Common Stock at the market price at the time of purchase. The Company has guaranteed these borrowings and makes contributions to the Trust, in amounts required to make principal and interest payments. As the debt is repaid, the Common Stock is allocated to the accounts of the ESOP's participants, with vesting over a period of five years. The Company made contributions of $683,000, $615,000 and $558,000 to the ESOP in 1995, 1994 and 1993, respectively, of which $33,000, $65,000 and $83,000 represents interest expense. Compensation expense is recognized using the shares allocated method. The number of shares allocated by the ESOP were 67,154 in 1995, 60,549 in 1994, and 53,617 in 1993. At December 31, 1995, the ESOP holds 347,352 shares allocated to participants and there were no unallocated shares. Since inception, the Company has not offered any other employee benefit plans and, at December 31, 1995, has no requirement to accrue additional expenses for any pension or other post-employment benefits. Generally, employees are eligible to participate in the Company's 401k and ESOP plans after six months of full time employment and in the Employee Stock Purchase Plan after one year. 16 FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No 107, Disclosures About Fair Value of Financial Instruments, requires that the Company disclose the fair value of financial instruments for which it is practicable to estimate that value. Although management uses its best judgement in assessing fair value, there are inherent weaknesses in any estimates that are made at a discrete point in time based on relevant market data, information about the financial instruments, and other factors. Estimates of fair value of instruments without quoted market prices are subjective in nature and involve various assumptions and estimates that are matters of judgement. Changes in the assumptions used could significantly affect these estimates. Fair values have not been adjusted to reflect changes in market conditions subsequent to December 31, 1995 and 1994; therefore estimates presented herein are not necessarily indicative of amounts which could be realized in a current transaction. The estimated fair values presented neither include nor give effect to the values associated with the Company's existing customer relationships, lending and deposit branch networks, or certain tax implications related to the realization of unrealized gains or losses. Also, under SFAS No. 107, the fair value of money market and passbook accounts is equal to the carrying amount because these liabilities have no stated maturity; under such approach, the benefit that results from the lower cost funding provided by such liabilities, as compared to alternative sources of funding, is excluded. Methods and assumptions used to estimate the fair value of each major classification of financial instruments were: Cash, short-term investments and deposits: Current carrying amounts approximate estimated fair value. Investment securities: For securities held to maturity and carried at amortized cost, as well as available for sale securities, current market prices or quotations were used to determine fair value. FHLB stock: FHLB stock has no trading market, is required as part of membership, and is redeemable at par; therefore, its fair value is presented at cost. Loans receivable: The carrying amount of loans is net of unearned fee income and the reserve for possible losses. To estimate fair value of the Company's loans, primarily adjustable rate 33 First Republic Bancorp - -------------------------------------------------------------------------------- real estate secured mortgages, each loan collateral type is segmented into categories based on fixed or adjustable interest rate terms (index, margin, current rate and time to next adjustment), maturity, estimated credit risk, and accrual status. The fair value of single family, multifamily and commercial mortgages is based primarily upon prices of loans with similar terms obtained by or quoted to the Company, adjusted for differences in loan characteristics and market conditions. The fair value of other loans is estimated using quoted prices and by comparing the contractual cash flows and the current interest rates at which similar loans would be made to borrowers with similar credit ratings. Assumptions regarding liquidity risk and credit risk are judgmentally determined using available internal and market information. The fair value of nonaccruing loans and certain other loans is further adjusted with an additional risk factor reflecting the individual characteristics of the loans, including delinquency status and the results of the Company's internal loan grading process. Mortgage servicing rights: The fair value of excess servicing rights related to loans originated and sold by the Company is based on estimates of current market values for similar loans with comparable terms, with no value attributed to past due loans. Deposit liabilities: The fair value of deposits with a stated maturity is based on the discounted value of contractual cash flows, using a discount rate based on rates currently offered for deposits of similar remaining maturities. The intangible value of long-term relationships with depositors is not taken into account in estimating the fair values disclosed. FHLB advances: The Company's FHLB advances consist primarily of long-term adjustable rate borrowings. Using current terms quoted by the FHLB to the Company, the estimated fair value is based on the discounted value of contractual cash flows for the remaining maturity, and includes approximately $112,000 for the fair value of $37.4 million of interest rate cap agreements with the FHLB imbedded in these advances. Debentures: The fair value is based on current market prices for traded issues. Commitments to extend credit: The majority of the Company's commitments to extend credit carry current market interest rates if converted to loans. Because these commitments are generally unassignable by either the Company or the borrower, they only have value to the Company and the borrower. The estimated fair value approximates the recorded deferred fee amounts and is excluded from the table. Derivative financial instruments: The fair value of interest rate cap and swap agreements generally reflects the estimated amounts that the Company would receive or pay, based upon dealer quotes, to terminate such agreements at the reporting date. December 31, 1995 December 31, 1994 ----------------- ----------------- Carrying Fair Carrying Fair (In $ thousands) Amount Value Amount Value -------- ----- -------- ------ Assets: Cash $ 31,118 $ 31,118 $ 32,618 $ 32,618 Investments 140,913 140,394 129,628 127,199 FHLB stock 30,321 30,321 28,527 28,527 Loans, net 1,659,815 1,678,839 1,477,492 1,462,192 Servicing rights 449 7,203 793 8,650 Liabilities: Deposits 1,140,441 1,144,397 948,833 943,770 Borrowings 570,530 564,791 571,180 568,956 Subordinated debentures 29,553 28,497 29,677 26,504 Convertible debentures 34,500 36,398 34,500 32,258 Off-balance sheet: Interest rate caps 3,822 1,572 5,918 10,935 Interest rate swaps -- 3,295 -- 1,195 17 FIRST REPUBLIC BANCORP INC. (Parent Company Only) Condensed Balance Sheet December 31, 1995 1994 ---- ---- Assets Cash and investments $ 5,706,000 $ 10,240,000 Loans, net 335,000 1,669,000 Investment in subsidiaries 145,246,000 140,766,000 Advance to subsidiaries 374,000 214,000 Other assets 21,531,000 20,710,000 ------------ ------------ $173,192,000 $173,599,000 ============ ============ Liabilities and Stockholders' Equity Accounts payable and accrued liabilities $ 879,000 $ 1,486,000 Other borrowings -- 650,000 Subordinated debentures 29,553,000 29,677,000 Convertible subordinated debentures 34,500,000 34,500,000 ----------- ------------ 64,932,000 66,313,000 ----------- ------------ Stockholders' equity 108,260,000 107,286,000 ------------ ------------ $173,192,000 $173,599,000 ============ ============ 34 First Republic Bancorp - -------------------------------------------------------------------------------- Condensed Statement of Income Year Ended December 31, 1995 1994 1993 ---- ---- ---- Interest income $ 474,000 $ 286,000 $ 758,000 Interest expense 5,809,000 5,742,000 5,321,000 Dividends from subsidiaries 982,000 2,500,000 1,963,000 Other income 3,501,000 5,031,000 4,931,000 General and administrative expense 2,031,000 1,979,000 4,278,000 ---------- ---------- ----------- Operating income (loss) (2,883,000) 96,000 (1,947,000) Equity in undistributed earnings of subsidiaries 4,053,000 7,207,000 14,386,000 ---------- ---------- ----------- Net income $1,170,000 $7,303,000 $12,439,000 ========== ========== =========== Condensed Statement of Cash Flows Year Ended December 31, 1995 1994 1993 ---- ---- ---- Operating Activities: Net Income $1,170,000 $7,303,000 $12,439,000 Adjustments to net cash from operating activities: Provision for losses -- -- (33,000) Gain on sale of servicing -- (703,000) -- Increase in other assets (820,000) (1,631,000) (6,751,000) Increase (decrease) in other liabilities (607,000) 575,000 416,000 Equity in undistributed earnings of subs. (4,053,000) (7,207,000) (14,386,000) ---------- ---------- ----------- Net Cash Used (4,310,000) (1,663,000) (8,315,000) Investment Activities: Loans originated -- (1,358,000) (6,303,000) Loans sold or repaid 1,334,000 1,640,000 10,616,000 Servicing sold -- 738,000 -- Capital from (into) subs. -- 4,413,000 (5,157,000) Advances to subs., net (160,000) 816,000 (812,000) ---------- ---------- ----------- Net Cash Provided (Used) 1,174,000 6,249,000 (1,656,000) Financing Activities: Net decrease in other borrowings (650,000) (550,000) (475,000) Net decrease in def. Comp.-ESOP 650,000 550,000 475,000 Issuance of subordinated debentures, net (124,000) 3,220,000 5,907,000 Sale of stock 174,000 463,000 258,000 Purchase of treasury stock (1,448,000) (3,964,000) (351,000) ---------- ---------- ----------- Net Cash Provided (Used) (1,398,000) (281,000) 5,814,000 Increase (decrease) in Cash (4,534,000 4,305,000 (4,157,000) Cash at start of year 10,240,000 5,935,000 10,092,000 ---------- ---------- ----------- Cash at end of year $ 5,706,000 $10,240,000 $ 5,935,000 =========== =========== =========== INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders First Republic Bancorp Inc.: We have audited the accompanying consolidated balance sheet of First Republic Bancorp Inc. and subsidiaries as of December 31, 1995 and 1994 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, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion of these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Republic Bancorp Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP San Francisco, California January 25, 1996 35 First Republic Bancorp - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company derives its income from three principal areas of business: (1) net interest income, which is the difference between the interest income the Company receives on interest-bearing portfolio loans and investments and the interest expense it pays on interest-bearing liabilities such as customer deposits and borrowings; (2) mortgage banking operations involving the origination and sale of real estate secured loans; and (3) servicing fee income which results from the ongoing servicing of such loans for investors. 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 1995, First Republic's earnings were adversely impacted by the lingering effects of the January 1994 Northridge earthquake and the significant increase in interest rates in the prior year, which resulted in higher provision for losses, lower net interest income and nonearning assets. Loan origination volume decreased to $584,388,000 in 1995 compared to $784,486,000 in 1994, primarily due to lower volume of adjustable rate home loan originations and lower refinancings of home loans. Total assets increased to $1,904,253,000 at December 31, 1995 from $1,707,319,000 at December 31, 1994, as the Company expanded its single family mortgage loans to $1,003,792,000, or 60% of the total loan portfolio. During 1995, total deposits increased $191,608,000, or 20%, in part due to the result of adding two new deposit locations. INTEREST INCOME AND EXPENSE Interest income on loans rose to $127,341,000 in 1995 from $100,816,000 in 1994 and $93,212,000 in 1993, primarily due to increased average loan balances outstanding for each year. The Company's adjustable rate mortgage loans earn interest at rates which depend on loan terms and market interest rates. The Company's loans earned an average rate of 8.00% for 1995 compared to 7.31% in 1994 and 8.07% in 1993. The average yield on the Company's loans was lower in 1994 for a number of reasons, including low market rates and competitive conditions during the prior year. In 1993, the Company added single family home loans with low initial introductory rates and other loans were repaid or repriced downwards, as market rates declined. In 1995, the average yield on loans gradually increased resulting from periodic interest rate changes which are generally limited in frequency and amount for mortgages. For 1995, the average balance on the Company's loans was $1,591,827,000, compared to $1,379,640,000 and $1,154,680,000 for 1994 and 1993, respectively. Loans totalled $1,682,263,000 at December 31, 1995. Interest income on short-term cash, investment securities and FHLB stock increased to $12,253,000 in 1995 from $8,549,000 in 1994 and $5,135,000 in 1993, as a result of increased average balances earning higher rates. The average rates earned on these assets, adjusted for the effect of tax-exempt securities, were 6.80% in 1995 compared to 5.39% in 1994 and 4.24% in 1993. During 1995, the interest rates earned on these assets increased due to asset repricings, increased earnings on FHLB stock and higher average market rates. At December 31, 1995, the book value of cash, short-term investments, investment securities and FHLB stock was $202,352,000 compared to $190,773,000 at December 31, 1994. Total interest expense increased to $104,913,000 in 1995 compared to $71,435,000 in 1994 and $56,917,000 in 1993. Total interest expense consists of three components of interest expense: interest expense on deposits, interest expense on FHLB advances and other borrowings, and interest expense on debentures. Interest expense on deposits, comprised of money market and passbook accounts and investment certificates, was $62,133,000 in 1995 compared to $41,024,000 in 1994 and $35,318,000 in 1993. The Company's outstanding deposits have grown to $1,140,441,000 at December 31, 1995 from $948,833,000 at December 31, 1994 and $751,671,000 at December 31, 1993. This deposit growth is attributable to increased deposit-gathering activities and the opening of additional branches. The Company's average cost of deposits increased to 5.93% for 1995 from 4.78% for 1994 and 4.94% in 1993. The general increase in market interest rates in 1994 contributed to the higher average cost of deposits for 1995. The Company's new branches have allowed additional deposits to be raised in existing markets at competitive terms, although rapidly rising interest rates and extensive competition for new deposits affected the cost of incremental deposit funds from mid 1994 into early 1995. At December 31, 1995, the weighted average rate paid by the Company on its deposits was 5.88%, compared to 5.16% at December 31, 1994. First Republic Thrift & Loan ("First Thrift") became the first voluntary member of the San Francisco FHLB in 1990 and began to utilize FHLB advances as a cost effective alternative source of funds for asset growth. The Company's total outstanding FHLB advances were $570,530,000 at both December 31, 1995 and 1994. Until 1994, the average cost of FHLB advances was lower than the total costs of deposits, in part because market rates of interest were declining and because such advances require no deposit insurance premiums. Also, operational overhead costs are less for FHLB advances than those associated with deposits. Throughout 1994 and the first quarter of 1995, the cost of FHLB advances increased more rapidly than the cost of the Company's deposits, due to rapidly rising short- term interest rates. The Company's advances have interest rates 36 First Republic Bancorp - -------------------------------------------------------------------------------- which generally adjust semiannually and to a lesser extent annually, with repricing points spread throughout the year. Since there are no limitations on the amount that the interest rate on FHLB advances may increase, at each repricing point the cost of an FHLB advance fully reflects market rates. Advances from the FHLB must be collateralized by the pledging of mortgage loans which are assets of First Thrift and, although First Thrift may substitute other loans for such pledged loans, First Thrift is restricted in its ability to sell or otherwise pledge these loans without substituting collateral or prepaying a portion of the FHLB advances. At December 31, 1995, First Thrift had an approved borrowing capacity with the FHLB of $726,000,000, approximately 40% of its total assets. The Company expects that the interest rate paid on FHLB advances will continue to fluctuate quickly with changes in market rates and will continue to emphasize retail deposits to fund a significant percentage of future asset growth. Interest expense on FHLB advances and other borrowings was $37,003,000 in 1995 as compared with $24,736,000 in 1994 and $16,362,000 in 1993. The average cost of these liabilities increased to 6.60% in 1995 and 4.80% in 1994 as compared to 4.02% in 1993, primarily due to higher average market interest rates. At December 31, 1995 and 1994, the weighted average rate paid on the Company's long-term FHLB advances was 6.16% and 5.96%, respectively. Interest expense on debentures includes interest payments and amortization of debt issuance costs on the Company's term capital-related subordinated and convertible subordinated instruments. The average cost of these liabilities was 9.01% in 1995, 9.01% in 1994 and 9.17% in 1993. At December 31, 1995 and 1994, the weighted average rate paid on outstanding debentures was 8.10% at each date. 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, 1995, the Company owned a portfolio of interest rate cap agreements with a net cost of $3,822,000. The Company purchases interest rate cap agreements to reduce its exposure to rising interest rates, as more fully discussed under the caption "Asset and Liability Management." These costs are amortized over the lives of the agreements, resulting in expenses of $1,688,000 in 1995, $1,210,000 in 1994 and $850,000 in 1993. These costs added approximately 0.10% to the overall rate paid on liabilities in 1995, 0.08% in 1994, and 0.07% in 1993. NET INTEREST INCOME Net interest income constitutes the principal source of income for the Company. The Company's net interest income was $34,681,000 in 1995 and $37,930,000 in 1994, a decrease from $41,430,000 in 1993. The decrease in net interest income for 1995 and 1994 resulted primarily from rapidly increasing market rates of interest which resulted in the average cost on FHLB advances increasing more rapidly than the average yield on loans. The Company's net interest spread decreased to 1.60% in 1995 and 2.14% in 1994 from 2.88% in 1993. 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. 1995 1994 1993 ---- ---- ---- Cash and investments 6.80% 5.39% 4.24% Loans 8.00% 7.31% 8.07% ----- ----- ----- All interest-earning assets 7.87% 7.11% 7.71% ----- ----- ----- Deposits 5.93% 4.78% 4.94% Borrowings 6.60% 4.80% 4.02% Debentures 9.01% 9.01% 9.17% ----- ----- ----- All interest-bearing liabilities 6.27% 4.97% 4.83% ----- ----- ----- Net interest spread 1.60% 2.14% 2.88% ===== ===== ===== Net interest margin 1.97% 2.47% 3.25% ===== ===== ===== Interest-earning assets as % of interest-bearing liabilities 106% 107% 108% ==== ==== ==== PROFILE OF LENDING ACTIVITIES The Company's current strategy is to emphasize the origination of loans secured by single family residences and to limit the origination of multifamily and commercial real estate mortgage loans. At December 31, 1995, 93% of loans on the Company's balance sheet were adjustable rate or were due within one year. As a mortgage banker and a portfolio lender, some single family loans, including substantially all long-term 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, 1995, the Company has originated approximately $5.0 billion of loans, of which approximately $1.8 billion have been sold to investors. The Company's loan originations totalled $584,388,000 in 1995, $784,486,000 in 1994, and $944,796,000 in 1993. The level of loan originations in 1993 and early 1994 reflected increased single family lending as a result of the relatively lower rates of interest available to borrowers. As interest rates increased throughout 1994, refinance activity of home loans into long-term, fixed rate mortgages declined to a low level for most of 1994 and 1995. With the lower rates and relatively flat yield curve during the last six months of 1995, single family ARM lending declined. Management expects that loan origination volume for 1996 may exceed the 1995 level, based on the current level of interest rates. 37 First Republic Bancorp - -------------------------------------------------------------------------------- The Company focuses on originating a limited number of loans by property type, location and borrower. The Company's loans are of sufficient average size to justify executive management's involvement in most transactions. Approximately 80% of the Company's loans are secured by properties located within 20 miles of one of the Company's offices. The following table shows the Company's loan originations during the past two years by property type and location: 1995 1994 ---- ---- (In $ millions) $ % $ % -------- ---- ------ --- Single Family: San Francisco $ 291.4 50% $434.2 56% Los Angeles 105.0 18 155.8 20 San Diego 16.1 3 1.4 -- Las Vegas 0.5 -- 7.7 1 -------- ----- ------ --- 413.0 71 599.1 77 -------- ----- ------ --- Income Property: San Francisco 53.6 9 50.0 6 Los Angeles 10.2 2 6.0 1 Las Vegas 35.7 6 50.1 6 -------- ----- ------ --- 99.5 17 106.1 13 -------- ----- ------ --- Construction 69.4 12 76.8 10 Other 2.6 -- 2.5 -- -------- ----- ------ --- Total $584.5 100% $784.5 100% -------- ----- ------ --- The Company has approved a limited group of third-party appraisers for appraising all of the properties on which it makes loans and requires two appraisals for single family loans in excess of $1,100,000. The Company's policy is to seldom exceed an 80% loan-to-value ratio on single family loans without mortgage insurance. Loan-to-value ratios decline as the size of the loan increases. At origination, the Company generally does not exceed 75% loan-to- value ratios for multifamily loans and 70% loan-to-value ratios for commercial real estate loans. The Company's collection policies are highly focused both with respect to its portfolio loans and loans serviced for others. The Company has policies requiring rapid notification of delinquency and the prompt initiation of collection actions. At December 31, 1995, 60% of the Company's loans are secured by properties located in the San Francisco Bay Area, 21% in Los Angeles County, 2% in San Diego County and 10% in the Las Vegas, Nevada area. By property type, single family mortgage loans, including home equity lines of credit, aggregated $1,003,792,000 and accounted for 60% of the Company's total loans, while multifamily loans were $350,507,000 or 21% and loans secured by commercial real estate were $286,824,000 or 17%. During 1995, the Company's continued emphasis on single family mortgage lending resulted in an increase in the dollar amount and proportion of its loans secured by single family homes. Since December 31, 1993, an amount equal to 100% of all net loan growth is represented by growth in single family home loans. The following table presents an analysis of the Company's loan portfolio at December 31, 1995 by property type and major geographic location. San Los Francisco Angeles Las Vegas, Total (In $ millions) Bay Area County Nevada Other $ % --------- ------- --------- ----- ------ ------ Single family $ 646 $238 $ 9 $111 $1,004 60% Multifamily 150 75 105 20 350 21% Commercial 206 31 37 13 287 17% Construction 4 2 22 -- 28 2% Other 5 5 -- 3 13 --% ------ ---- ---- ---- ------ ---- Total $1,011 $351 $173 $147 $1,682 100% ====== ==== ==== ==== ====== ==== Percent by location 60% 21% 10% 9% 100% ASSET QUALITY The Company places an asset on nonaccrual status when any installment of principal or interest is more than 90 days past due (except for single family loans which are well secured and in the process of collection), or when management determines the ultimate collection of all contractually due principal or interest to be unlikely. Restructured loans where the Company grants payment or significant interest rate concessions are placed on nonaccrual status until collectibility improves and a satisfactory payment history is established, generally receipt of at least six consecutive payments. On January 17, 1994, the Northridge earthquake struck the Los Angeles area, causing significant damage to the freeway system and real estate throughout the area. The Company's loans secured by low to moderate income multifamily properties were primarily affected by this event, either by direct property damage, loss of tenants, or economic difficulties resulting from lower rental revenues. First Republic has worked with borrowers to assist them, including applying for disaster relief funds and modifying the terms of loans. Such loan modifications generally have deferred the timing of payments, reduced the rate of interest collected or, in some cases, the Company lowered the principal balance. During 1994 and continuing throughout 1995, the Company has experienced increased loan delinquencies, REO foreclosures, and additional loan loss provisions as a result of the lingering effects of this natural disaster. 38 First Republic Bancorp - -------------------------------------------------------------------------------- Also, the Company has experienced an increased level of nonaccrual and restructured loans during the past three years, due to the effects of the recessionary conditions in California on a portion of the Company's borrowers. The recession reduced the ability of some of the Company's income property borrowers to perform under the terms of their loan agreements and the value of some of the properties securing the Company's loans. The Company's policy is to attempt to resolve problem assets quickly, including the aggressive pursuit of foreclosure or other workout procedures. It has been the Company's general policy to sell such problem assets when acquired as rapidly as possible at prices available in the prevailing market. For certain properties acquired as a result of the Northridge earthquake, the Company has made repairs and engaged management companies to reach stabilized levels of occupancy prior to asset disposition. The following table presents the dollar amount of nonaccruing loans, REO, restructured performing loans, and accruing single family loans over 90 days past due, as well as the ratio to total assets at the end of the last two years. December 31, 1995 1994 ---- ---- Nonaccruing loans $36,550,000 $32,623,000 Real estate owned 10,198,000 8,500,000 ----------- ----------- Total nonaccruing assets 46,748,000 41,123,000 Restructured performing loans 12,795,000 17,489,000 ----------- ----------- Nonaccruing and restructured assets $59,543,000 $58,612,000 =========== =========== Accruing single family loans over 90 days past due $ 3,747,000 $ 2,587,000 =========== =========== Percent of Total Assets: All nonaccruing assets 2.46% 2.41% Nonaccruing and restructured assets 3.13% 3.43% At December 31, 1995, nonaccruing loans included $20,431,000 of loans adversely affected by the earthquake; at such date, nonaccruing loans and REO had declined 9% from the level at June 30, 1995 as a result of REO sales, loan workouts, and writedowns. Restructured performing loans are primarily secured by properties adversely affected by the Northridge earthquake and were paying at a weighted average rate of 6.1% at December 31, 1995. The future level of nonaccruing assets depends upon the timing of the sale of existing and future REO properties and the performance of borrowers under modified loan terms. At December 31, 1995, the REO balance of $10,198,000 includes seven properties, five of which were acquired after September 30, 1995. Since late 1992, the Company has owned an 800 acre parcel of land in the San Francisco Bay Area and during 1995 the Company reduced the carrying value of this asset by $1,093,000, which was recorded as an additional REO expense in the income statement. Single family loans more than 90 days past due are classified as accruing as long as these assets are well secured and in the process of collection. PROVISIONS FOR LOSSES AND RESERVE ACTIVITY At loan origination, 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. The Company has experienced a relatively low level of losses on its single family loans in each of its geographic market areas. The Company's average annualized net chargeoff experience for single family loans for the last three years was 0.02%. As of December 31, 1995, the Company has not experienced any losses on its permanent loan portfolio secured by real estate located in the Las Vegas market. Collectively, these two categories represented 68% of the Company's total loans at December 31, 1995. Chargeoffs and losses on loans and REO are related primarily to income property loans originated by the Company prior to mid-1992 and have increased above historical levels in 1995 and 1994 due to effects of the Los Angeles earthquake and the difficult economic conditions in the Company's California markets in recent years, particularly in the Los Angeles area. Net chargeoffs to the reserve for losses, were $11,052,000 in 1995, $8,056,000 in 1994, and $5,059,000 in 1993. During 1995 and 1994, chargeoffs of $7,590,000 and $6,133,000, or 64% and 75%, respectively, of total chargeoffs for each year, related to loans adversely affected by the Northridge earthquake. During 1995, net chargeoffs were $11,000 for single family, $8,549,000 for multifamily, $2,133,000 for commercial real estate and $353,000 for construction loans. The Company's reserve for possible losses is maintained at a level estimated by management to be adequate to provide for losses that can be reasonably anticipated based upon specific conditions at the time as determined by management, including past loss experience, the results of the Company's ongoing loan grading process, the amount of past due and nonperforming loans, observations of auditors, legal requirements, recommendations or requirements of regulatory authorities, current and expected economic conditions and other factors. Many of these factors are essentially judgmental and may not be reduced to a mathematical formula. 39 First Republic Bancorp - ------------------------------------------------------------------------------ As a percentage of the Company's recorded investment in nonaccruing loans after previous writedowns, the reserve for possible losses was 49% at December 31, 1995 and 44% at December 31, 1994. Management's continuing evaluation of the loan portfolio, including the level of single family home loans, and assessment of economic conditions will dictate future reserve levels. The adequacy of the Company's total reserves is reviewed quarterly. Management closely monitors all past due and restructured loans in assessing the adequacy of its total reserves. In addition, the Company follows procedures for reviewing and grading all of the larger income property loans in its portfolio on a periodic basis. Based predominately upon that continuous review and grading process, the Company will determine appropriate levels of total reserves in response to its assessment of the potential risk of loss inherent in its loan portfolio. Management will provide additional reserves when the results of its problem loan assessment methodology or overall reserve adequacy test indicate additional reserves are required. The review of problem loans is an ongoing process, during which management may determine that additional chargeoffs are required or additional loans should be placed on nonaccrual status. Although substantially all nonaccrual loans and loans that were adversely affected by the earthquake have been reduced to their currently estimated collateral fair value (net of selling costs) at December 31, 1995, there can be no assurance that additional reserves or chargeoffs will not be required in the event that the properties securing the Company's existing problem loans fail to maintain their values or that new problem loans arise. ASSET AND LIABILITY MANAGEMENT Management seeks to manage its asset and liability portfolios to help reduce any adverse impact on its net interest income caused by fluctuating interest rates. To achieve this objective, the Company emphasizes the origination of adjustable rate or short-term fixed rate loans and the matching of adjustable rate asset repricings with short- and intermediate-term investment certificates and adjustable rate borrowings. At the end of 1993, the Company maintained a positive 21% one year cumulative gap in anticipation of the possibility of rising interest rates, which occurred in 1994. The Company continued to seek opportunities to extend the repricing terms of deposit liabilities during 1994, even though the yield curve was very steep, and short-term interest rates were well below rates for 18 months or longer. In 1995, the yield curve flattened and market rates of interest declined. At December 31, 1995, approximately 94% of the Company's interest-earning assets and 88% of interest-bearing liabilities will reprice within the next year and the Company's one-year cumulative GAP was reduced to positive 11.2%. Despite the Company's positive repricing position during 1995, the Company's net interest margin decreased in the first and second quarters of 1995, but has increased gradually in the third and fourth quarters of 1995. Important factors include the cost of the Company's FHLB advances, mortgage loan repricings being subject to interim limitations upon repricing, most restructured loans paying subsidized rates, the Company's strategy to increase its home loans which carry lower margins, and until recently, marginal liability costs presently exceeding the yield which can be earned initially on new home loans. If interest rates remain near the current level and actual loan repayment rates are similar to projected repayment rates, the Company's most recent interest rate risk model indicates that further improvement in the Company's net interest margin is expected for the first quarter of 1996. Since 1986, the Company has entered into interest rate cap transactions primarily as a protection against interest rates rising above the maximum rates which can be earned on its adjustable rate loans. Under the terms of these transactions, which have been entered into with nine unrelated commercial or investment banking institutions, the Company generally will be reimbursed quarterly for increases in three-month LIBOR for any quarter during the terms of the applicable transaction in which such rate, known as the strike rate, exceeds a rate ranging from 9% to 12.5%. The Company monitors the maximum rates, or life caps, on its loans as the loan portfolio changes due to loan originations and repayments. Generally, interest rate cap agreements are purchased with original terms of 3 years to 7 years and have strike rates which are 1% to 2% below the level of life caps on loans being originated at the time. The amount and terms of interest rate caps purchased depends on the Company's assessment of future interest rates, economic conditions and trends, and the general position in the interest rate cycle, as well as the current and expected composition of the loan portfolio. 40 First Republic Bancorp - -------------------------------------------------------------------------------- At December 31, 1995, the Company held an aggregate notional principal amount of approximately $1.2 billion as compared to $1.3 billion at December 31, 1994. During 1995, the Company purchased $50 million of 3 year interest rate caps with a 9% strike rate. During 1994, the company purchased $345 million of interest rate caps which had strike rates of 9% or 9.5% (weighted average of 9.1%) and original terms of 3 to 5 years and $200 million of shorter term interest rate caps with lower strike rates. The Company has entered into interest rate swap agreements in the notional principal amount of $25 million related to specific long-term FHLB advances which bear a fixed rate of interest. The Company receives a fixed rate of interest under the swap agreements and pays a variable rate of interest to its swap counterparties, with the net differential paid on a periodic basis. During 1995, the Company did not enter into any new interest rate swap agreements and $40.0 million of such agreements matured. The Company collected $1,027,000 for 1995, $2,376,000 for 1994, and $2,709,000 for 1993 from its swap counterparties which was recorded as a reduction of interest expense on borrowings. The weighted average rates paid for FHLB advances include the effect of interest rate swaps. The Company's asset and liability management policies have a direct effect on the fair value of its financial instruments, which are presented on pages 33 and 34 of this annual report. Because interest rates generally rose throughout 1994 and declined throughout 1995, current market rates at the end of each year varied significantly from those in effect at the time the Company took steps to manage its interest rate risk, match its asset and liability repricings and establish terms for loan and deposit products. Therefore, the Company's assets and liabilities have an estimated "fair value" at December 31, 1995 and 1994, which differs from their carrying amount. At December 31, 1995, the Company's adjustable rate loans and investments, in general, have a fair value above their carrying amount due to the decrease in market rates of interest during 1995. As the interest rates on these adjustable assets reprice, the Company expects that the fair values of its assets may decrease, relative to their carrying values. Other factors affecting the Company's estimates of fair value include the conditions in the secondary market for single family mortgages, and the credit risk and liquidity risk assumptions used in these calculations. Summary information regarding the Company's asset and liability repricing at December 31, 1995 is as follows:
0-6 7-12 1-5 Over Not Rate (In $ millions) Months Months Years 5 Years Sensitive Total ------ ------ ----- ------- --------- ----- Cash and investments $ 183.7 $ 18.7 $ -- $ -- $ -- $ 202.4 Loans 1,484.8 81.9 55.9 59.7 -- 1,682.3 Other assets -- -- -- -- 19.6 19.6 ------- ------- -------- ------- -------- --------- Total Assets 1,668.5 100.6 55.9 59.7 19.6 1,904.3 ------- ------- -------- ------- -------- --------- Deposits 643.3 394.7 102.2 .2 -- 1,140.4 FHLB advances and borrowings 482.5 10.0 30.5 47.5 -- 570.5 Debentures -- -- 1.6 62.5 -- 64.1 Other -- -- -- -- 21.0 21.0 Equity -- -- -- -- 108.3 108.3 ------- ------- -------- ------- -------- --------- Total liabilities and equity 1,125.8 404.7 134.3 110.2 129.3 $1,904.3 Effect of interest rate swaps -- ========= pay variable rates 25.0 -- -- (25.0) -- ------- ------- -------- ------- -------- Repricing gap-positive (negative) $ 517.7 $(304.1) $(78.4) $(25.5) $(109.7) ======= ======= ======== ======= ======== Cumulative Repricing Gap: Dollar amount $ 517.7 $ 213.6 $135.2 $109.7 -- Percent of total assets 27.2% 11.2% 7.1% 5.8% --
41 First Republic Bancorp - -------------------------------------------------------------------------------- NON-INTEREST INCOME For 1995, service fee revenue, net of amortization costs on the Company's premium on sale of loans and purchased mortgage servicing rights, was $2,675,000 compared to $2,330,000 for 1994 and $1,233,000 for 1993. During the first six months of 1994 and all of 1993, the Company experienced a high level of repayments on loans in its servicing portfolio and maintained at a high level its amortization of purchased servicing rights, until such assets were fully written off, and its premium on sale of loans. In the last six months of 1995, the Company experienced an increased level of prepayment activity, particularly with respect to treasury indexed ARM loans. Total loans serviced were $804,856,000 at December 31, 1995, with an average portfolio of $823,965,000 for 1995, $849,652,000 for 1994, and $789,071,000 for 1993. 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 0.25% to 0.75% and averaged 0.37% for 1995, 0.36% for 1994 and 0.38% for 1993. Loan and related fee income was $1,289,000 in 1995, $1,915,000 in 1994 and $1,937,000 in 1993. 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 $99,232,000 in 1995, $216,951,000 in 1994, and $425,475,000 in 1993. From mid-1994 and throughout 1995, the level of loan sales has been modest. In 1994, approximately 88% of the Company's loan sales occurred in the first six months of the year. The level of loans sold in the first six months of 1994 and 1993 was a result of higher single family lending volume, lower interest rates which created more customer demand for fixed rate loans, and the demand for loans in the secondary market. The focus of the Company's mortgage banking activities is to enter into formal commitments and informal agreements with institutional investors to originate on a direct flow basis single family mortgages which are priced and underwritten to conform to previously agreed upon criteria prior to loan funding and are delivered to the investor shortly after funding. Loans sold under these relationships vary with market conditions and represented 100% of the total sold in 1995, 39% in 1994 and 80% in 1993. The Company has also identified secondary market sources which desire adjustable rate loans of the type the Company originates primarily for its portfolio. The Company sold $131,408,000 and $85,822,000 of adjustable rate loans to these investors in 1994 and 1993, respectively, in part to limit the amount of the Company's annual mortgage loan growth. During 1994, one pool of adjustable rate mortgage loans was sold from the Company's loan portfolio to reduce interest rate risk because such loans were unlikely to respond satisfactorily to an expected increase in interest rates, due to historically low introductory interest rates and annual interest rate adjustments; a total of $67,300,000 of loans were sold, resulting in a loss of $471,000. The amount of loans which are sold is dependent upon conditions in both the mortgage origination and secondary loan sales markets and the level of gains or losses on sale of loans fluctuates with the amount of loans sold and market conditions. The Company computes a gain or loss at the time of sale by comparing sales price with carrying value. A premium results when the 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 net losses of $67,000 in 1995, compared to net gains of $430,000 in 1994 and $2,250,000 in 1993. Loan sales volume was lower in 1995 and 1994 as compared to 1993 and the average price for fixed rate loans sold decreased from 1993 to a lower level for 1994. The net loss on the Company's 1995 loan sales included $13,000 of capitalized premium. The Company did not anticipate that the level of gains on loan sales that were recorded in 1993 and the first half of 1994 would be maintained in 1995. Over the past three years, the Company has expanded its investment portfolio of primarily adjustable rate debt securities. There were no sales of debt securities in 1995, 1994 or 1993. Purchases over the past three years related primarily to U.S. Government guaranteed investments which adjust with the prime rate, agency adjustable rate mortgage backed securities, or other mortgage backed securities rated "A" or better. As of December 31, 1995, 92% of the Company's investments were U.S. Government, agency or other mortgage backed securities and 100% were adjustable, repricing annually or more frequently. 42 First Republic Bancorp - -------------------------------------------------------------------------------- During 1994, First Thrift purchased investments in four adjustable rate, perpetual preferred stocks with an aggregate cost of $13,760,000. Under SFAS No. 115, these investments are equity securities and are classified as available for sale, with unrealized gains and losses recorded as an adjustment to the Company's stockholders' equity. The market value of these preferred stocks declined by $2,010,000 from the date of acquisition until December 31, 1994, and the Company recorded an unrealized loss of this amount as a reduction in stockholders' equity. During 1995, $272,000 of these preferred stock were sold generating a realized loss of $11,000 and price increases resulted in the unrealized loss being reduced to $1,671,000 at December 31, 1995. Because these investments receive capital gain and loss treatment under tax rules, the unrealized loss has not been reduced by the effect of any potential tax benefits. NON-INTEREST EXPENSE Non-interest expense consists of salary, occupancy and other expenses related to developing and maintaining the operations of the Company. These expenses were $22,359,000 in 1995, $21,105,000 in 1994 and $20,647,000 in 1993. The Company has capitalized general and administrative costs related to loan originations totalling $3,920,000 in 1995, $5,654,000 in 1994, and $6,788,000 in 1993; 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 $4,380,000 at December 31, 1995, $6,816,000 at December 31, 1994 and $9,406,000 at December 31, 1993. During 1995 and 1994, the Company originated more single family "no points" loans, resulting in a decrease in unearned fees net of costs at December 31, 1995 and 1994. Salaries and related benefits is the largest component of non-interest expense and includes the cost of benefit plans, health insurance and payroll taxes, which have increased in each of the past three years. As a result of lower loan origination volume in 1995 as compared to 1994 and in 1994 as compared to 1993, both salary expense and capitalized costs related to loan origination activity declined. Before capitalized costs, 1995 salary expense decreased 11% versus 1994, compared to a 1994 salary expense increase of 5% over 1993. In 1995, there was a 12% increase in total assets without a significant change in average employees. In 1994, there was a 20% increase in total assets and a 12% increase in average employees. Occupancy costs were $2,749,000 in 1995 and $2,501,000 in 1994, compared to $1,872,000 in 1993. The increase for 1995 and 1994 is related to having five additional deposit branches in San Francisco and Las Vegas, as well as expanded facilities in San Francisco and Beverly Hills since mid-1993. Advertising expense was $1,500,000 in 1995 compared to $1,863,000 in 1994 and $1,340,000 in 1993. Newspaper ads are placed primarily to support retail deposit gathering and, in 1994 and 1993, there were increased promotional and advertising costs associated with the Company's new loan originations. Deposit- related advertising expense as a percentage of average deposits was 0.07% in 1995, 0.12% in 1994 and 0.08% in 1993. The future amount of these expenses may increase as the Company emphasizes deposits as a funding source and opens new deposit branches primarily in its existing market areas. 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 $613,000 for 1995, $542,000 for 1994 and $542,000 for 1993. The results of operating REO properties after foreclosure, as well as changes in the value and the gain or loss upon sale of REO properties held for more than 90 days, are charged directly to the income statement. In 1994, losses on certain loans adversely affected by the Northridge earthquake and subsequently becoming REO were charged to that portion of the Company's reserves established for this specific natural disaster. As a result of the Company's resolution of problem assets, costs and losses related to REO, which is presented as a separate line item in the income statement, were $3,163,000 in 1995, $1,202,000 in 1994, and $3,477,000 in 1993. This expense category included gains or recoveries on the sale of non-earthquake affected REO of $161,000 in 1994, compared to net writedowns or losses of $785,000 in 1995 and $1,993,000 in 1993; expenses for taxes, insurance, maintenance and other operating expenses, net of income, of $1,593,000 in 1995, $957,000 in 1994 and $1,255,000 in 1993; and collection costs of $785,000 in 1995, $406,000 in 1994 and $229,000 in 1993. The future level of these expenses depends primarily upon the amount of the Company's nonearning loans that become REO. The cost of FDIC insurance varies with the level of deposits as well as the rates assessed and was $1,264,000 in 1995, com- 43 First Repulbic Bancorp - ------------------------------------------------------------------------------ - -ared to $1,809,000 in 1994 and $1,816,000 in 1993. In 1995 the Company had higher average deposits; however the insurance premium rate charged to members of the Bank Insurance Fund ("BIF") was significantly reduced in mid-1995 and will be lower for all of 1996 under current regulations. Other general and administrative expenses were $5,528,000 in 1995 and $6,013,000 in 1994 compared to $6,207,000 in 1993. These costs include defeasance costs recorded on the early redemption of the Company's senior subordinated debentures of $1,132,000 in 1993. Other expenses in this category were liability insurance costs and expenses resulting from the origination of single family loans on which processing fees or points were not collected. Also included in this category is data processing, communications, travel and other operating costs which vary in proportion with the number of locations, transaction volume and inflation. A financial institution's operating efficiency may be measured by comparing its ratio of operational expenses to the sum of net interest income and recurring non-interest income. For 1995, the Company's operating efficiency ratio was 50%, compared to 47% for 1994 and 38% for 1993, with the increase in this ratio resulting primarily from the lower level of net interest income in 1995 and 1994. 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 declined to 1.07% in 1995 from 1.28% in 1994 and 1.33% in 1993. The Company believes that it operates at a relatively high level of efficiency by most measures used for financial institutions. PROVISION FOR INCOME TAXES The provision for income taxes varies due to the amount and timing of income for financial statement and tax purposes, the availability of tax benefits and the rates charged by federal and state authorities. The 1995 provision for income taxes of $686,000 represents an effective tax rate of 37.0%, compared to $4,935,000 or 40.3% for 1994, and $8,960,000 or 41.9% for 1993. The provision for income taxes in 1995 and 1994 decreased primarily as a result of the decrease in the Company's income before taxes, as well as the availability of certain California tax credits and income earned in Nevada which does not assess state taxes. LIQUIDITY Liquidity refers to the ability to maintain a cash flow adequate to fund operations and to meet present and future financial obligations of the Company either through the sale or maturity of existing assets or by the acquisition of funds through liability management. The Company maintains a portion of its assets in a diversified portfolio of marketable investment securities, including U.S. Government agency and mortgage-backed instruments, from which funds could be promptly generated. At December 31, 1995, the investment securities portfolio of $140,913,000 and cash plus short-term investments of $31,118,000 amounted to over 9% of total assets. Additionally, the Company had available unused FHLB advances of approximately $155,000,000. Management believes that the sources of available liquidity are adequate to meet all reasonably foreseeable short-term and long-term demands. The Company's loan and investment portfolio is repayable in monthly installments over terms ranging primarily from six months to thirty years; however, market experience is that many longer-term real estate mortgage loans and investments are likely to prepay prior to their final maturity. The Company's deposits generally mature over shorter periods than its assets, requiring the Company to renew deposits or raise new liabilities at current interest rates. The Company's asset/liability management program attempts to achieve a matching of the pricing characteristics of variable rate assets with the timing of liability maturities and pricings. At December 31, 1995, 89% of the Company's interest-earning assets possess the ability to reprice within six months. As part 44 First Republic Bancorp - -------------------------------------------------------------------------------- of a long-term strategy, having assets on which the interest rate adjusts frequently allows the Company more flexibility in setting rates required to obtain deposits and other liabilities. As shown in the Company's Consolidated Statement of Cash Flows, the source of funds to finance the $584,388,000 of loans originated in 1995 was diversified and included loan principal repayments of $275,288,000, the sale of $99,232,000 of loans and a net increase in deposits of $191,608,000. In 1994 and 1993, the Company's loan origination activities and asset growth were financed by a similar combination of loan principal repayments, loan sales and deposit increases, as well as increases in FHLB advances. In each of the past three years, First Republic has generated funds from the sale of debentures or common stock. First Republic used funds of $3,964,000 to repurchase 326,647 shares of common stock on the open market in 1994 and $1,448,000 to repurchase 133,603 shares in 1995. CAPITAL RESOURCES At December 31, 1995, the Company's capital, consisting of stockholders' equity, long-term debentures and reserves, was $190,381,000, or 10% of total assets. At the present time, 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 1995 total risk-based capital ratio would be 8.0%, as compared to the Company's actual ratio of 15.0% at December 31, 1995, as calculated by management. First Republic has used the proceeds of the issuance of common stock and debentures to, in part, provide capital to its thrift and loan subsidiaries, First Thrift and First Republic Savings Bank. First Republic is a legal entity separate and distinct from its subsidiaries and is dependent upon its own operations and dividends from its subsidiaries as the source of cash to service and ultimately repay its outstanding debt. At December 31, 1995, First Republic has invested $10,000,000 in First Thrift as interest-bearing capital notes, with interest and principal payments which generally correspond to the payment terms of First Republic's subordinated debentures. At December 31, 1995, First Republic had $29,553,000 of long-term subordinated debentures outstanding with maturities ranging from 2003 to 2009 and $34,500,000 of convertible subordinated debentures maturing in 2002. First Republic has issued its subordinated debentures in amounts, and with scheduled maturity dates and early redemption provisions, that First Republic believes will allow it to repay all of its subordinated debentures in accordance with their respective terms. At December 31, 1995, First Republic had stockholders' equity of $108,260,000 and its investment was $136,906,000 in First Thrift and $8,340,000 in First Republic Savings Bank. First Republic received dividends of $800,000 for 1995, $2,500,000 for 1994 and $1,963,000 for 1993 from First Thrift. These dividends represented approximately 25% in 1995, 26% in 1994 and 12% in 1993 of the earnings of First Thrift for such periods. Additionally, First Republic received interest payments from First Thrift of $1,054,000 in 1995, $1,540,000 in 1994 and $1,554,000 in 1993; during 1994, $5,000,000 of capital notes were repaid by First Thrift. For 1995, First Republic Savings Bank declared dividends of $258,000 to First Republic, which represented 17% of that Company's earnings. The ability of First Republic to receive future dividends depends upon the operating results of and government regulations applicable to its subsidiaries. First Republic's ability to meet its reasonably foreseeable obligations, including the payment of debt service on its debentures, is dependent upon cash flow from its own operations, the receipt of interest payments on capital notes issued to First Thrift and the continued receipt of dividends from First Thrift and First Republic Savings Bank. 45 First Republic Bancorp - -------------------------------------------------------------------------------- DIRECTORS AND CORPORATE OFFICERS [PHOTO OF DIRECTORS APPEARS HERE] The Directors of First Republic Bancorp are pictured at the Pacific Stock Exchange in San Francisco. Front row, from left to right: James H. Herbert, II, Roger O. Walther, and Katherine August-deWilde. Background left to right: John F. Mangan, Frank J. Fahrenkopf, Jr., Kenneth W. Dougherty, Barrant V. Merrill, L. Martin Gibbs, James F. Joy, Richard M. Cox-Johnson. Roger O. Walther, 60, 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, 51, 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 member of the Babson Corporation. 46 First Republic Bancorp - -------------------------------------------------------------------------------- KATHERINE AUGUST-DEWILDE, 48, Executive Vice President and Director. Previously, Ms. August-deWilde 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., 46, 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. LINDA G. MOULDS, 45, 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. EDWARD J. DOBRANSKI, 45, Vice President, General 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, 32, Vice President, Chief Credit Officer. 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. KRISTA A. JACOBSEN, 33, Vice President and Chief Investment Officer. Ms. Jacobsen joined First Republic in July 1995. Previously, she was V.P. and Portfolio Manager at Transamerica Investment Services. B.A. and M.A., 1985, University of California, Los Angeles. RICHARD M. COX-JOHNSON, 61, Director. Mr. Cox-Johnson is a director of Premier Consolidated Oilfields PLC. Graduate of Oxford University, 1955. KENNETH W. DOUGHERTY, 69, 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., 56, Director. Mr. Fahrenkopf is the President and CEO of the American Gaming Association. Previously, he was a partner in the Washington, D.C. law firm of Hogan & Hartson. From 1983 to 1989, Mr. Fahrenkopf 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, 58, 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, 58, Director. Mr. Joy is Director-European Business Development for CVC Capital Partners Europe Limited 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, 59, 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, 65, 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. 47 First Republic Bancorp QUARTERLY AND ADDITIONAL INFORMATION
Fully Common Stock Total Net Provision Pretax Net Diluted Price Range Interest Interest For Income Income Earnings ----------------- Income Income Losses (Loss) (Loss) Per Share High Low ----------- ----------- ----------- ----------- ----------- --------- ------- ------ 1995 1Q $31,956,000 $ 8,216,000 $ 1,465,000 $ 2,335,000 $ 1,384,000 $ .18 $ 11.38 $ 9.88 2Q 34,260,000 7,650,000 8,750,000 (5,359,000) (3,140,000) (.41) 13.50 11.13 3Q 36,090,000 8,881,000 2,500,000 2,205,000 1,321,000 .17 14.13 12.38 4Q 37,288,000 9,934,000 2,050,000 2,675,000 1,605,000 .20 13.25 11.00 1994 1Q $24,933,000 $10,050,000 $ 5,005,000 $ 1,141,000 $ 660,000 $ .08 $ 16.38 $13.59 2Q 26,168,000 9,650,000 675,000 4,397,000 2,529,000 .28 15.75 12.88 3Q 28,124,000 9,270,000 1,502,000 4,298,000 2,552,000 .28 15.50 13.00 4Q 30,140,000 8,960,000 2,538,000 2,402,000 1,562,000 .19 13.38 10.00
First Republic Bancorp Inc. Common Stock is traded on the New York and Pacific Stock Exchanges under the symbol FRC. At December 31, 1995, there were approximately 200 stockholders of record, although the Company believes that its shares are held beneficially by over 2,000 stockholders. First Republic Bancorp Inc. is a financial services company operating principally in California and Nevada as a holding company for two FDIC-insured, state chartered industrial bank subsidiaries. The Company functions as a direct lender as well as a mortgage banking company, originating, holding or selling and servicing mortgage loans. The Company 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, to a lesser extent, by existing multifamily and commercial properties. From its inception in 1985 through December 31,1995, the Company has originated $5.0 billion of loans, $1.8 billion of which have been sold in the secondary market to institutional investors. At December 31, 1995, the Company's loan portfolio of $1.7 billion consisted primarily of real estate secured loans, 93% of which were adjustable rate mortgages or mature within one year. The Company obtains funds primarily from FDIC-insured deposit accounts and FHLB advances, as well as the issuance of subordinated and convertible subordinated debentures, and equity financings. TREND IN GENERAL AVERAGE ASSETS AND ADMINSTRATIVE PER EMPLOYEE EXPENSES (dollars in millions) (% of average assets) 1991 - 8.3 1991 - 1.44 1992 - 9.6 1992 - 1.30 1993 - 9.8 1993 - 1.33 1994 - 10.5 1994 - 1.28 1995 - 12.3 1995 - 1.07 48 OFFICERS, DIRECTORS AND CORPORATE INFORMATION OFFICERS Roger O. Walther Chairman, Board of Directors James H. Herbert, II President and Chief Executive Officer Director Katherine August-deWilde Executive Vice President, Director Willis H. Newton, Jr. Senior Vice President and Chief Financial Officer Linda G. Moulds Vice President, Secretary and Controller Edward J. Dobranski Vice President, General Counsel David B. Lichtman Vice President, Chief Credit Officer Krista A. Jacobsen Vice President, Chief Investment Officer Directors R.M. Cox Johnson Director Director, Premier Consolidated Oilfields PLC Kenneth W. Dougherty Director Consultant Frank J. Fahrenkopf, Jr. Director President, American Gaming Association L. Martin Gibbs Director Partner, Rogers & Wells James F. Joy Director, European Business Development for CVC Capital Partners Europe Limited John F. Mangan Director Investments Barrant V. Merrill Director Investments STOCK EXCHANGES Common Stock listed on the New York and Pacific Stock Exchanges - Symbol FRC GENERAL COUNSEL Rogers & Wells AUDITORS KPMG Peat Marwick LLP REGISTRARS/ TRANSFER AGENT: Common Stock' First Interstate Bank Of California Subordinated and Convertible Debentures' U.S. Trust Company of California or National City Bank ANNUAL MEETING The Company's Annual Stockholders' Meeting will be held on Thursday, May 30, 1996 at 10:00 am at The Bankers Club, 555 California Street, San Francisco, CA 94104. CORPORATE OFFICE First Republic Bancorp Inc. 388 Market Street San Francisco, California 94111 (415) 392-1400 (800) 392-1400 BRANCH LOCATIONS First Republic Thrift & Loan 101 Pine Street San Francisco, California 94111 (415) 392-1400 (800) 392-1400 1088 Stockton Street San Francisco, California 94108 (415) 834-0888 5628 Geary Boulevard San Francisco, California 94121 (415) 751-3888 1809 Irving at 19th Avenue San Francisco, California 94122 (415) 664-0888 1099 Fourth Street San Rafael, California 94901 (415) 485-3888 3928 Wilshire Boulevard Los Angeles, California 90010 (213) 384-0777 (800) 777-9507 9593 Wilshire Boulevard Beverly Hills, California 90212 (310) 288-0777 (800) 311-0777 116 East Grand Avenue Escondido, California 92025 (619) 740-7000 1110 Camino Del Mar Del Mar, California 92014 (619) 755-5600 (800) 221-9333 8347 La Mesa Boulevard La Mesa, California 91941 (619) 462-6700 First Republic Savings Bank 2510 South Maryland Parkway Las Vegas, Nevada 89109 (702) 792-2200 [LOGO OF FIRST REPUBLIC BANCORP, INC.] First Republic Bancorp 388 Market Street San Francisco, California 94111 (415) 392-1400 EX-22.1 7 SUBSIDIARIES EXHIBIT 22.1 SUBSIDIARIES OF FIRST REPUBLIC BANCORP INC First Republic Bancorp Inc. has the following wholly-owned subsidiaries as of this date: 1. First Republic Thrift & Loan-a California state chartered industrial banking company. 2. First Republic Savings Bank-a Nevada state chartered industrial banking company. EX-23.1 8 CONSENT OF KPMG EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors First Republic Bancorp Inc.: We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-65806) pertaining to the First Republic Bancorp Inc. 1985 Stock Option Plan and in the Registration Statement (Form S-8 No. 33-58978) pertaining to the First Republic Bancorp Inc. Employee Stock Purchase Plan of our report dated January 25, 1996, relating to the Consolidated Balance Sheet of First Republic Bancorp Inc. and subsidiaries as of December 31, 1995 and 1994, 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, 1995, which report appears in the December 31, 1995 Annual Report of First Republic Bancorp Inc. incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1995. KPMG Peat Marwick LLP San Francisco, California March 22, 1996 EX-27.1 9 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1995 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. REGISTRANT IS NOT A BANK HOLDING COMPANY OR A SAVINGS AND LOAN HOLDING COMPANY. 1,000 YEAR DEC-31-1995 DEC-31-1995 15,918 200 15,000 0 106,939 64,295 63,776 1,682,263 18,068 1,904,253 1,140,441 4,000 19,699 630,583 0 0 74,997 33,263 1,904,253 127,341 12,253 0 139,594 62,133 104,913 34,681 14,765 130 13,461 1,856 1,856 0 0 1,170 0.15 0.15 1.97 36,550 3,747 12,795 5,000 14,355 11,914 862 18,068 18,068 0 9,068
EX-27.2 10 FINANCIAL DATA SCHEDULE
9 REGISTRANT IS NOT A BANK OR SAVINGS AND LOAN HOLDING COMPANY. 0000770975 FIRST REPUBLIC BANCORP INC. 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 14,238 0 9,000 0 12,585 158,989 158,121 1,626,464 17,454 1,842,464 1,097,932 30,000 17,050 590,760 0 0 74,972 32,153 1,842,464 93,211 9,095 0 102,306 45,052 77,559 24,747 12,715 141 9,201 (819) (819) 0 0 (435) (0.06) (0.06) 1.90 38,147 2,899 16,008 0 14,355 10,144 528 17,454 550 0 16,904
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