-----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, Jd08Bu8lEwHlu74bOFZtvLcvaFRzK/liR6NKubTcJtdrZIgo9FUvuy/+eh43t2eI aIAqxGj3f6oYJCNXNJrgdA== 0000929624-97-000288.txt : 19970321 0000929624-97-000288.hdr.sgml : 19970321 ACCESSION NUMBER: 0000929624-97-000288 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970320 SROS: NYSE 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: 97559992 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, 1996 COMMISSION FILE NUMBER: 0-15882 ---------------- FIRST REPUBLIC BANCORP INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2964497 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) (IDENTIFICATION NO.) 388 MARKET STREET, 2ND FLOOR, 94111 SAN FRANCISCO, CA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 392-1400 ----------------
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 Debentures Due 2002 and 8 1/2% Subordinated Debentures Due 2008 Pacific Stock Exchange
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 $23.625 for such stock on March 3, 1997 was $198,553,000. The number of shares outstanding of the registrant's common stock, par value $.01 per share, as of March 3, 1997 was 8,925,980. DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant's Annual Report to Stockholders for the year ended December 31, 1996 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 April 30, 1997 (which has been filed with the Commission within 120 days of the registrant's last fiscal year end) are incorporated in Part III of this Form 10-K. The index to Exhibits appears on page 34. ================================================================================ PART I ITEM 1. BUSINESS GENERAL First Republic Bancorp Inc. ("First Republic" and with its subsidiary, the "Company") is a financial services holding company operating in California and Nevada. First Republic conducts its business primarily through a Nevada- chartered, FDIC-insured, thrift company subsidiary, First Republic Savings Bank (the "Bank"). The Company is engaged in originating real estate secured loans for retention in the portfolio of the Bank. In addition, the Company originates 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. The Bank'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 loan and deposit gathering activities are conducted in the San Francisco Bay Area, Los Angeles Area, and San Diego County, California and in Las Vegas, Nevada. 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 October 31, 1996, the Company completed the merger of its California thrift and loan subsidiary, First Republic Thrift & Loan, into First Republic Savings Bank, in order to achieve certain operational efficiencies. Additionally, the Company intends to pursue a change in the legal charter of its subsidiary 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 (demand deposit) checking accounts to additional customers. The Company is also considering the concurrent merger of the holding company into its 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. Certain statements in this Annual Report on Form 10-K and the Company's Management Discussion and Analysis incorporated by reference to the Annual Report to Stockholders include forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "safe harbor" created by those sections. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: competitive pressure in the banking and mortgage lending industry increases significantly; changes in the interest rate environment reduce margins; general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment; changes in business conditions, particularly in San Francisco and Los Angeles Counties and in the home mortgage lending industry; volatility of rate sensitive deposits; operational risks including data processing system failures or fraud; asset/liability matching risks and liquidity risks; and changes in the securities markets. See also "Certain Additional Business Risks" on page 14 herein and other risk factors discussed elsewhere in this Report. On February 28, 1997, the Company announced that a Notice of Redemption was sent to the holders of all bonds outstanding under the First Republic Bancorp Inc. 7 1/4% Convertible Subordinated Debentures Due 2002. The Notice of Redemption stated that on March 31, 1997, the redemption date, a redemption price of 103% of the par amount of the bonds plus accrued interest through March 30, 1997 will be paid to holders of bonds which 2 have not been previously converted. The conversion feature of these bonds expires at 5:00 P.M. New York time on March 31, 1997 and the conversion price is approximately $13.67. At December 31, 1996, there were $30.7 million of convertible subordinated debentures outstanding; however, as a result of additional conversions in 1997, the balance outstanding was $14.3 million at February 28, 1997. Although the Company expects that substantially all of the convertible subordinated debentures will convert to common stock, the Company is prepared to redeem any bonds presented for repayment. 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, 1996, the Company originated approximately $5.8 billion of loans, of which approximately $4.1 billion have been single family home loans; approximately $2.0 billion of loans have been sold to investors. The Company has emphasized the retention of adjustable rate mortgages ("ARMs") in its loan portfolio. At December 31, 1996, over 87% of the Company's loans were adjustable rate or were due within one year. If interest rates rise, payments on ARMs increase, which may be financially burdensome to some borrowers. Subject to market conditions, however, the Company's ARMs generally provide for a life cap that is 5% to 6% above the initial interest rate as well as periodic caps on the rates to which an ARM can increase from its initial interest rate, thereby protecting borrowers from unlimited interest rate increases. Also, the ARMs offered by the Company often carry fixed rates of interest during the initial 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, 1996, the amount of loans with the potential for negative amortization held by the Company was approximately 21% of total loans and the amount of loans which had actually experienced increases in principal balance since origination was approximately 4% of total loans. Of the Company's loans which have experienced an increase in principal since origination, the average increase was 1.5% 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/Chief Operating Officer, the Executive Vice President-Nevada, the Vice President/Chief Credit Officer and other officers and underwriting officers) reviews all loan applications and approves all loan originations. Certain larger loans are approved by the Bank's Director Loan Committee or the Bank's Board of Directors prior to funding. 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 75% of the Company's loans are secured by properties located within 25 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, when the loan-to-value ratio is greater than 65%, 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 3 knowledge of collateral values in the areas in which the Company operates. The Company's policy generally 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. 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. Since 1992, the Company has 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. At December 31, 1996, single family real estate secured loans, including home equity loans, represented $1,260,039,000 or 66% of the Company's loan portfolio. Approximately 62% of the Company's single family loans were in the San Francisco Bay Area, approximately 21% were in the Los Angeles area, approximately 3% were in San Diego County, and approximately 8% were in other areas of California. The Company's strategy includes lending 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, 1996, the average single family loan amount, excluding equity lines of credit, was approximately $607,000 and the approximate average loan- to-value ratio was 68%, using appraised values at the time of loan origination and current loan balances outstanding. Due to the Company's focus on upper-end home mortgage loans, the number of single family loans originated is limited (approximately 1,100 for 1996), allowing the loan officers and executive management to apply the Company's underwriting criteria and service 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, 1996, loans secured by multifamily properties totaled $320,715,000, or 17% of the Company's loan portfolio. The loans are predominantly on older buildings in the urban neighborhoods of San Francisco and Los Angeles and more recently constructed properties in Las Vegas. 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 5% were in other California areas and approximately 31% were in Clark County (Las Vegas). In the last six months of 1995 and throughout 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, 1996, the average multifamily mortgage loan size was approximately $1,005,000 and the approximate average loan-to-value ratio was 68%, using the most current appraised values and the current loan balances outstanding. 4 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 67% in the San Francisco Bay Area, approximately 12% in Los Angeles County, approximately 5% in other California areas and approximately 15% in Las Vegas. At December 31, 1996, 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, 1996, was $285,141,000, or 15% 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 1996, such loan originations were approximately $55,873,000 and approximately $54,076,000 of such loans were repaid, compared to approximately $86,300,000 of loan originations and $51,300,000 of such loans that were repaid in 1995. Generally, residential construction loans are short-term in nature and are repaid upon completion or ultimate sale of the properties. At December 31, 1996, the outstanding balance of the Company's Las Vegas construction loans was $19,033,000, or 1.0% 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 75% of consolidated equity, or $94,808,000, of total commitments on single family for sale tracts and a maximum outstanding balance of $5,000,000 at any time per development. Total outstanding single family for sale construction loans on 17 separate projects were $14,847,000 at December 31, 1996 with total additional committed loan amounts of $9,803,000. At December 31, 1996, the Company had loans to two separate borrowers on two separate multifamily properties under construction in Las Vegas with a balance outstanding of $1,340,000 and has issued permanent take-out commitments of up to $11,020,000 on these multifamily projects, conditioned upon the completion of construction, satisfactory occupancy and rental rates, and certain other requirements. The Company had loans to three separate borrowers on three separate commercial real estate projects under construction in Las Vegas with a balance outstanding of $2,846,000 and has issued permanent takeout commitments of up to $5,150,000 on two of these projects, conditioned upon the completion on of construction, satisfactory occupancy and debt service coverage, and certain other requirements. For Nevada construction loans, a voucher system is used for all disbursements. For each disbursement, an independent inspection service is utilized to export 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 the 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. Since 1991, the Company has purchased loans, including seasoned performing multifamily and commercial real estate loans. All such purchased loans meet the Company's normal underwriting standards, and are generally located in the Company's primary lending areas. 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 $8,208,000 in 1994 and $8,041,000 in 1995. Since 1989, the Bank has offered a home equity line of credit program, with loans secured by first or second deeds of trust on owner-occupied primary residences. Most of these lines are in a secured position behind a first 5 mortgage loan originated by the Bank. At December 31, 1996, the outstanding balance due under home equity lines of credit was $35,497,000 and the unused remaining balance was $55,675,000. 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, 1996, the Company had approximately 190 commercial business loans with an aggregate balance of $2,434,000, 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 $625,000 at December 31, 1996. The following table presents an analysis of the Company's loan portfolio at December 31, 1996 by property type and geographic location. The table does not include amounts which the Company is committed to lend but which are undisbursed.
SAN FRANCISCO LOS ANGELES SAN DIEGO LAS VEGAS, BAY AREA COUNTY COUNTY NEVADA OTHER TOTAL PERCENT ------------- ----------- --------- ---------- ----- ------ ------- ($ IN MILLIONS) Property Type: Single family(1)....... $ 786 $267 $40 $ 10 $157 $1,260 66% Multifamily............ 137 68 -- 100 16 321 17% Commercial............. 191 33 1 44 16 285 15% Construction........... 11 11 -- 19 3 44 2% Other.................. 5 3 2 1 2 13 --% ------ ---- --- ---- ---- ------ --- Total................ $1,130 $382 $43 $174 $194 $1,923 100% ====== ==== === ==== ==== ====== === Percent by location..... 59% 20% 2% 9% 10% 100%
- -------- (1) Includes equity lines of credit secured by single family residences. 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 the Bank. 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, -------------------------- 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) MORTGAGE BANKING ACTIVITY: Loans originated................................... $848,278 $584,388 $784,486 Loans purchased.................................... -- 8,041 8,208 -------- -------- -------- Total loans originated and purchased.............. $848,278 $592,429 $792,694 ======== ======== ======== Loans sold......................................... $172,769 $ 99,232 $216,951
6 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, 1996, the Company has sold approximately $2.0 billion of loans to investors, substantially all nonrecourse, and has retained the servicing on all such loans sold except for a limited amount of FHA/VA loans sold servicing released. The Company sold loans to eight institutional investors in 1994, to six institutional investors in 1995, and to nine institutional investors in 1996. The terms and conditions under which such sales are made depend upon, among other things, the specific requirements of each institutional investor, the type of loan, the interest rate environment and the Company's relationship with the institutional investor. The majority of the Company's sales of multifamily and commercial real estate loans have been made pursuant to individually negotiated whole loan or participation sales agreements for individual loans or for a package of such loans. In the case of single family residential loans, the Company obtains in advance formal commitments under which the investors are committed to purchase up to a specific dollar amount of whole loans over a specified period of time. The terms of the commitments vary with each institutional investor and generally range from two months to one year. The fees paid for such commitments also vary with each investor and by the length of such commitment. 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, the 12 Month Moving Average of the One-Year Treasury 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 1991 and prior years it purchased mortgage servicing rights on the open market. The Company's mortgage servicing portfolio was $799.5 million and $804.9 million at December 31, 1996 and 1995, 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 7 0.34% for 1996, 0.37% for 1995 and 0.36% for 1994. 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, 1996 approximately 56% were adjustable rate mortgages. The weighted-average mortgage loan note rate of the Company's servicing portfolio at December 31, 1996 was 7.74% for ARMs and 7.67% 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. Effective January 1, 1996, the Company adopted 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 is allocated between the loan and the servicing rights, based on their relative fair values. Fair value of the mortgage servicing rights is determined based on valuation techniques utilizing discounted cash flows incorporating assumptions that market participants would use. During 1996, the Company sold $172,769,000 of loans and recorded $1,495,000 as the value of the servicing rights on those loans. The recorded value of mortgage servicing rights is amortized over the period of estimated net servicing income. SFAS No. 122 also requires the assessment of all capitalized mortgage servicing rights for impairment based on current fair value of those rights. The carrying value of mortgage servicing rights is periodically measured based on the actual prepayment experience and market factors; writedowns and adjustments in the amortization rates are made when an impairment is indicated. For purposes of evaluating and measuring impairment, the Company stratifies mortgage servicing rights based on the type and interest rates of the underlying loans. Impairment is measured as the amount by which the mortgage servicing rights for a stratum exceed their fair value. At December 31, 1996, mortgage servicing rights of $1,397,000 are included in the Company's balance sheet as "Other Assets" as compared to $449,000 at December 31, 1995. Amortization of the carrying value of mortgage servicing rights totalled $548,000 in 1996, $358,000 in 1995, and $687,000 in 1994. When interest rates are low, the rate at which mortgage loans are repaid tends to increase as borrowers refinance fixed rate loans to lower rates or convert from adjustable rate to fixed rate loans. Low rates also increase housing affordability, stimulating purchases by first time home buyers and trade up transactions by existing homeowners. With the higher level of general market rates of interest, including the rates for fixed rate mortgage loans, which occurred throughout 1994, the Company experienced a reduced volume of loan originations, loan sales, gain on sale of loans and repayments of loans serviced as compared to 1993. As interest rates decreased in 1995 and the yield curve became very flat, the Company experienced an increase in the repayment of loans in its loan servicing portfolio which, coupled with a lower volume of new ARM originations and loan sales, resulted in a lower level of loans serviced at December 31, 1995 than at December 31, 1994. During 1996, new loan sales approximately equaled repayments of loans in the servicing portfolio. See "--Asset and Liability Management." 8 The following table sets forth the dollar amounts of the Company's mortgage loan servicing portfolio at the dates indicated, the portion of the Company's loan servicing portfolio resulting from loan originations and purchases, respectively, and the carrying value of mortgage servicing rights as a percentage of loans serviced. Although the Company intends to maintain or increase the size of its servicing portfolio, such growth will depend on market conditions including the future level of loan originations, sales and prepayments.
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- ($ IN THOUSANDS) Loan Servicing Portfolio: Loans originated by the Company and sold.... $761,604 $758,538 $783,102 Purchased mortgage servicing rights......... 37,896 46,318 60,042 -------- -------- -------- Total..................................... $799,500 $804,856 $843,144 ======== ======== ======== Mortgage servicing rights..................... $ 1,397 $ 449 $ 793 Mortgage servicing rights as a percentage of loans serviced............................... 01.7% 0.06% 0.09%
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, 1996, the Company's investment portfolio included the following securities in the proportions listed: U.S. Government--14%; agency MBS--19%; and other MBS--59%. At December 31, 1996, the Company's investment portfolio totalled $156,572,000 (7.3% of total assets) as compared to $140,913,000 (7.4% of total assets) at December 31, 1995. The securities in the Company's investment portfolio at December 31, 1996 had contractual maturities generally ranging from eight to thirty years. The following table provides the remaining contractual principal maturities and yields (taxable-equivalent basis) of debt securities within the investment portfolio at December 31, 1996. The remaining contractual principal maturities for mortgage-backed securities were allocated assuming no prepayments. Expected remaining maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties. At December 31, 1996, there were no debt securities classified as available for sale or held to maturity owned by the Company with a contractual principal maturity of five years or less.
REMAINING CONTRACTUAL PRINCIPAL MATURITY ------------------------------------------- WEIGHTED AFTER 5 YEARS AFTER 10 YEARS TOTAL AVERAGE -------------------- --------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ------- -------- ---------- --------- ----------- --------- ($ IN THOUSANDS) Available for Sale Debt Securities: U.S. Government........ $22,157 7.85% $11111,176 7.74% $ 20,981 7.86% Agency MBS............. 29,455 6.69% -- -- 29,455 6.69% Other MBS.............. 39,137 7.60% -- -- 39,137 7.60% ------- ---- ---------- -------- ----------- -------- Total Basis (Cost).. $90,749 7.37% $ 1,176 7.74% $ 89,573 7.36% ======= ==== ========== ======== =========== ======== Estimated Fair Value.... $91,083 $ 1,185 $ 89,898 ======= ========== =========== Held to Maturity Debt Securities at Cost: Other MBS............. $52,899 7.41% $ -- -- % $ 52,899 7.41% ======= ==== ========== ======== =========== ======== Estimated Fair Value.. $52,723 $ -- $ 52,723 ======= ========== ===========
9 At December 31, 1996, 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 $13,488,000, a fair value of $12,590,000, and a tax adjusted yield of 8.93% at December 31, 1996. At December 31, 1996, 85% 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. FUNDING SOURCES The Bank obtains funds from depositors by offering NOW checking, money market, or passbook accounts and term certificates of deposits. The Bank's accounts are federally insured by the FDIC up to the legal maximum. Prior to 1996, the Bank 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 high operating cost services such as full-service (demand deposit) checking, safe deposit boxes, money orders, ATM access and other traditional retail services. This limited product operation has resulted in substantial cost savings which have exceeded the differential interest rates paid. The Bank effects 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 Bank does not actively solicit certificate of deposit accounts of less than $5,000. The Bank advertises in local newspapers to attract deposits; and since 1988, the Bank has performed a limited direct telephone solicitation of potential institutional depositors such as credit unions, small commercial banks, and pension plans. At December 31, 1996, no individual depositor or source of deposits represented 0.2% or more of the Bank's deposits. Prior to mid-1992, the Bank utilized certificates of deposit 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, the Bank has significantly altered its volatile liability dependency ratio by maintaining a reduced level of larger certificates of deposit and a higher level of cash and investments relative to its short-term borrowings. At December 31, 1996, the Bank's cash and investments exceeded its volatile liabilities by $94,873,000. The Bank has adopted a policy to limit the acceptance of larger certificates of deposit. During 1996 and 1995, the Bank accepted a small amount of brokered deposits; the total of all brokered deposits at December 31, 1996 was $386,000, representing 0.03% of total deposits. At December 31, 1996, the Bank's certificates of deposit $100,000 or more totalled $84,946,000 of which $80,896,000, or 95%, were from retail consumer depositors. For the Bank, average remaining maturity of all certificates of deposit was approximately 9.1 months and the average certificate of deposit amount per account was approximately $31,000 at December 31, 1996. 10 The following table shows the maturity of the Bank's certificates of $100,000 or more at December 31, 1996.
($ IN THOUSANDS) Remaining maturity: Three months or less........................................ $18,994 Over three through six months.............................. 13,469 Over six through 12 months................................. 30,157 Over 12 months............................................. 22,326 ------- Total....................................................... $84,946 ======= Percent of total deposits................................... 6.28%
The Bank 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 the Bank. At December 31, 1996, total FHLB advances outstanding were $591,530,000. Of this amount, $566,530,000, or 96%, had an original maturity of 10 years or longer. The longer-term advances provide the Company with a stable primarily adjustable rate funding source for assets with longer lives. See "--Asset and Liability Management." The following table sets forth certain information with respect to the Company's short-term borrowings at the dates indicated.
DECEMBER 31, ------------------------- 1996 1995 1994 ------- ------- ------- ($ IN THOUSANDS) Short-Term Borrowings(1): FHLB advances-short-term........................ $ -- $ 4,000 $ -- Repurchase agreements(2)........................ -- -- -- ------- ------- ------- Total......................................... $ -- $ 4,000 $ -- ======= ======= ======= Maximum amount outstanding at any month-end during period................................... $24,600 $30,000 $18,715 Average amount outstanding during period........ 5,402 5,249 2,528 Average rate on short-term borrowings-in period. 5.45% 6.22% 3.66%
- -------- (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 certificates of deposit 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. The following table summarizes the differences between the Company's maturing or rate adjusting assets and liabilities at December 31, 1996. Generally, an excess of maturing or rate adjusting assets over maturing or 11 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, 1996 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, 1996. ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY MATURING OR ADJUSTING DURING PERIODS SUBSEQUENT TO DECEMBER 31, 1996
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)................ $ -- $1,033,666 $558,455 $ 94,817 $ 28,174 $208,337 $ -- $1,923,449 Securities.............. -- 107,916 40,850 17,315 -- 23,140 -- 189,221 Cash and short-term investments............ 26,398 2,900 -- -- -- -- -- 29,298 Noninterest-earning assets, net............ -- -- -- -- -- -- 14,631 14,631 ------- ---------- -------- --------- --------- -------- --------- ---------- Total.................. $26,398 $1,144,482 $599,305 $ 112,132 $ 28,174 $231,477 $ 14,631 $2,156,599 ======= ========== ======== ========= ========= ======== ========= ========== Liabilities and Stockholders' Equity: Passbooks, MMA and NOW accounts(2)............ $ -- $ 251,664 $ 25,770 $ 11,474 $ 4,936 $ -- $ -- $ 293,844 Certificates of deposit: $100,000 or greater.... -- 18,994 13,469 30,157 18,317 4,009 -- 84,946 Less than $100,000..... -- 241,851 172,062 333,209 181,402 45,834 -- 974,358 FHLB advances-long term. -- 288,530 190,000 10,000 8,000 95,000 -- 591,530 Other short-term debt... -- -- -- -- -- -- -- -- Other liabilities....... -- -- -- -- -- -- 25,345 25,345 Subordinated debentures. -- -- -- -- -- 60,166 -- 60,166 Stockholders' equity.... -- -- -- -- -- -- 126,410 126,410 ------- ---------- -------- --------- --------- -------- --------- ---------- Total.................. $ -- $ 801,039 $401,301 $ 384,840 $ 212,655 $205,009 $ 151,755 $2,156,599 ======= ========== ======== ========= ========= ======== ========= ========== Net repricing assets over (under) repricing liabilities equals primary GAP............ $26,398 $ 343,443 $198,004 $(272,708) $(184,481) $ 26,468 $(137,124) Effect of interest rate swaps.................. -- -- 25,000 -- -- (25,000) -- ------- ---------- -------- --------- --------- -------- --------- Hedged GAP.............. $26,398 $ 343,443 $173,004 $(272,708) $(184,481) $ 51,468 $(137,124) ======= ========== ======== ========= ========= ======== ========= Hedged GAP as a percentage of total assets................. 1.22% 15.93% 8.02% (12.65)% (8.55)% 2.39% (6.36)% ======= ========== ======== ========= ========= ======== ========= Cumulative hedged GAP... $26,398 $ 369,841 $542,845 $ 270,137 $ 85,656 $137,124 $ -- ======= ========== ======== ========= ========= ======== ========= Cumulative hedged GAP as percentage of total assets................. 1.22% 17.15% 25.17% 12.53% 3.97% 6.36% 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, the Twelve Month Moving Average One Year Treasury 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 60 and 61 of the Company's 1996 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 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 an FDIC deposit insured financial institution. In January 1994, the employees responsible for construction and income property lending were transferred to First Republic Savings Bank. In October 1996, First Republic Thrift & Loan was merged into First Republic Savings Bank. Since this merger, the Company has continued to offer the same products and services from the same locations. The merger is expected to result in operating efficiencies and certain cost savings. 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 the Company and its subsidiaries 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 total 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 13 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 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 and most of 1996, 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. CERTAIN ADDITIONAL BUSINESS RISKS The Company's business, financial condition and operating results can be impacted by a number of factors, including but not limited to those set forth below, any one of which could cause the Company's actual results to vary materially from recent results or from the Company's anticipated future results. The loan portfolio of the Company is dependent on real estate. At December 31, 1996, real estate served as the principal source of collateral for substantially all of the Company's loan portfolio. A worsening of current economic conditions or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of the available-for-sale investment portfolio, as well as the Company's financial condition and results of operations in general and the market value for the Company's common stock. Acts of nature, including earthquakes and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact the Company's financial condition. The Company is subject to certain operations risks, including but not limited to, data processing system failures and errors and customer or employee fraud. The Company maintains a system of internal controls to mitigate against such occurrences and maintains insurance coverage for such risks, but should such an event occur that is not prevented or detected by the Company's internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on the Company's business, financial condition or results of operations. THE EFFECT OF GOVERNMENT POLICY ON BANKING The earnings and growth of the Bank are affected not only by local market area factors and general economic conditions, but also by government monetary and fiscal policies. For example, the Board of Governors of the Federal Reserve System ("FRB") influences the supply of money through its open market operations in U.S. Government securities and adjustments to the discount rates applicable to borrowings by depository institutions and others. Such actions influence the growth of loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of future changes in such policies on the business and earnings of the Bank cannot be predicted. Additionally, state and federal tax policies can impact banking organizations. Effective January 1, 1997, applicable California bank and corporation tax rates were reduced by 0.5% in order to keep California competitive with other western states. As a consequence of the extensive regulation of commercial banking activities in the United States, the business of the Company is particularly susceptible to being affected by the enactment of federal and state legislation which may have the effect of increasing or decreasing the cost of doing business, modifying 14 permissible activities or enhancing the competitive position of other financial institutions. Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of the Company. In response to various business failures in the savings and loan industry and in the banking industry, in December 1991, Congress enacted, and the President signed into law, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA substantially revised the bank regulatory framework and deposit insurance funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statutes. Implementation of the various provisions of FDICIA is subject to the adoption of regulations by the various regulatory agencies, the manner in which the regulatory agencies implement those regulations and certain phase-in periods. REGULATION The Bank is subject to regulation, supervision and examination under both federal and state law. The Bank is subject to supervision and regulation by the Commissioner, Department of Business and Industry, Financial Institutions Division, State of Nevada (the "Nevada Commissioner") and, as a member institution, by the FDIC. Neither First Republic, nor the Bank is 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 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 Nevada Commissioner and the FDIC over transactions and dealings between First Republic and the Bank, and except with respect to both the specific limitations regarding ownership of the capital stock of the parent of any thrift company and the specific limitations regarding the payment of dividends from the Bank 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. The Nevada Thrift Companies Act ("Nevada Act") allows a thrift company 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 the Bank 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. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), a bank holding company became able to acquire banks in states other than its home state beginning September 29, 1995 without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to or following the proposed acquisition, controls no more than 10% of the total amount of deposits of insured depository institutions in the United States and no more than 30% of such deposits in that state (or such lesser or greater amount set by state law). The Interstate Banking and Branching Act also authorizes banks (including the Bank) to merge across state lines, thereby creating interstate branches, beginning June 1, 1997. Under such legislation, each state has the opportunity to "opt out" of this provision, thereby prohibiting interstate branching in such states, or to "opt in" at an earlier time, thereby allowing interstate branching within that state prior to June 1, 1997. Furthermore, pursuant to such act, a bank is now able to open new branches in a state in which it does not already have banking operations, if the laws of such state permit such de novo branching. Both Nevada and California enacted legislation to "opt in" early to the Interstate Banking and Branching Act provisions regarding interstate branching. In California, an FDIC insured financial institution chartered in a state other than California is authorized to acquire by merging or purchase, at any time after effectiveness of the Calder, Weggeland, and Killea California Interstate Banking and Branching Act of 1995 ("IBBA"), a California bank or industrial loan company which is at least five (5) years old and thereby establish one or more California branch offices. Under 15 the Nevada legislation passed in 1995 to implement the IBBA, Nevada elected an early opt in of interstate mergers and acquisitions. The law provides that a Nevada depository institution in existence for at least 5 years may be acquired by an out of state entity. Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. NEVADA LAW The Nevada Act governs the licensing and regulations of Nevada thrift companies. The Nevada Commissioner is charged with the supervision and regulation of the Bank. The Nevada Commissioner approved the change of name from Silver State Thrift and Loan to the Bank concurrently with the approval of the acquisition of the Bank by First Republic in 1993. Under the Nevada Act, there is no interest rate limitation on loans; however, for certain types of secured loans the Nevada law imposes minimum collateral requirements. There are no terms or amortization restrictions on loans. FRSB is required to invest its funds as limited by the Nevada Act and in investments which are legal investments for banks subject to any limitation under federal law. 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. The Nevada Act restricts transactions with officers, directors and shareholders as well as transactions with regard to holding, developing and carrying real property. Under Nevada law, a thrift company 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 Nevada Commissioner. In addition, a thrift company 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. Under Nevada law, thrift companies are generally limited to investments which are legal investments for Nevada commercial banks. Generally, a thrift 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 company's paid in capital stock and surplus not available for dividends. The Bank is also governed by various state and federal consumer protection laws including Truth in Lending, Truth in Savings and the Real Estate Settlement Procedures Acts. By order of the Nevada Commissioner when the Bank was acquired by the Company, the Bank is not authorized to accept demand deposits. The total amount of deposits which the Bank 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 Bank's 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 16 operations of institutions to which it provides deposit insurance. The Bank is subject to the rules and regulations of the FDIC to the same extent as other financial institutions which are insured and regulated 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 Bank. This supervision and regulation is intended primarily for the protection of the depositors and to ensure services for the public's convenience and advantage. FDICIA substantially revised the regulatory framework and deposit insurance funding provisions of the Federal Deposit Insurance Corporation Act. 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 Bank, whose deposits are insured by the FDIC, and for 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 unsecured consumer and 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 Bank, 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 Bank is 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 Bank. 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 Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends. A financial institution's risk-based capital ratios are obtained by dividing its qualifying capital by its risk-adjusted assets and off balance sheet items. 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, other types of qualifying 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, other types of preferred stock not qualifying as Tier 1 capital, 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, 1996, the Tier 2 capital of the Bank consisted of $10,000,000 of capital notes issued to First Republic and its allowance for loan losses. Additional information is provided in Note 13 to the Company's Annual Report to stockholders, incorporated by reference herein. 17 The following table presents the regulatory capital position of First Republic and the Bank at December 31, 1996 under the risk-based capital guidelines:
FIRST REPUBLIC FIRST REPUBLIC BANCORP SAVINGS BANK --------------------- --------------------- PERCENT OF PERCENT OF RISK- RISK- ADJUSTED ADJUSTED AMOUNT ASSETS AMOUNT ASSETS ---------- ---------- ---------- ---------- ($ IN THOUSANDS) RISK-BASED CAPITAL GUIDELINES: Tier 1 capital............... $ 126,122 9.17% $ 150,347 11.02% Minimum requirement.......... 55,006 4.00% 54,558 4.00% ---------- ---------- Excess...................... $ 71,116 $ 95,789 ========== ========== Total capital................ 203,477 14.80% $ 177,397 13.01% Minimum requirement.......... 110,012 8.00% 109,115 8.00% ---------- ---------- Excess...................... $ 93,465 $ 68,282 ========== ========== Risk-adjusted assets......... $1,375,150 $1,363,942 ========== ==========
In addition to the risk-based guidelines, the FDIC requires maintenance of a minimum amount of Tier 1 capital to adjusted average total assets, referred to as the leverage capital ratio. For a financial institution rated in the highest of the five categories by regulators to rate for rating institutions such as the Bank, the minimum leverage ratio of Tier 1 capital to total assets is 3%. It is improbable, however, that a financial institution with a 3% leverage ratio would receive the highest rating since a strong capital position is a significant part of the regulatory rating. For all financial institutions not rated in the highest category, the minimum leverage ratio is at least 100 to 200 basis points above the 3% minimum. Thus, the effective minimum leverage ratio is at least 4% or 5%. In addition to these uniform risk-based capital guidelines and leverage ratios, the FDIC has the discretion to set individual minimum capital requirements for particular financial institutions at rates significantly above the minimum guidelines and ratios. The FDIC's regulations provide that a financial institution's minimum leverage ratio is determined by dividing its Tier 1 capital by its quarterly average total assets, less intangibles not includable in Tier 1 capital. The leverage ratio represents a minimum standard affecting the ability of financial institutions, including the Bank, to increase assets and liabilities without increasing capital proportionately. The following table presents the leverage ratios of First Republic and the Bank at December 31, 1996:
FIRST REPUBLIC FIRST REPUBLIC BANCORP SAVINGS BANK --------------------- --------------------- PERCENT OF PERCENT OF AMOUNT ASSETS AMOUNT ASSETS ---------- ---------- ---------- ---------- ($ IN THOUSANDS) LEVERAGE RATIO: Tier 1 capital.................. $ 126,122 5.90% $ 150,347 7.09% Minimum requirement............. 85,506 4.00% 84,822 4.00% ---------- ---------- Excess......................... $ 40,616 $ 65,525 ========== ========== Average total assets............ $2,137,092 $2,121,172 ========== ==========
The various provisions of FDICIA are implemented through the adoption of regulations by the various regulatory agencies and have been subject to certain phase-in periods. The FDIC has recently adopted final regulations which mandate that regulators take into consideration concentrations of credit risk and risks from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. The evaluation will be made as part of the 18 institution's regular safety and soundness examination. The FDIC also has recently adopted final regulations requiring regulators to consider interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in evaluation of a financial institution's capital adequacy. This final rule does not codify a measurement framework for assessing the level of a financial institution'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 financial institution's capital for interest rate risk. The focus of that proposed process is on a financial institution's economic value exposure. Other quantitative factors include the financial institution's historical financial performance and its earnings exposure to interest rate movements. Examiners also will consider qualitative factors, including the adequacy of the financial institution's internal interest rate risk management. The banking agencies intend for this case-by- case approach for assessing a financial institution'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 financial institution'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. SAFETY AND SOUNDNESS STANDARDS 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. In 1994 FDICIA was amended to (a) authorize the agencies to establish safety and soundness standards by regulation or by guideline for all 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 institution's noncompliance with one or more standards. 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 19 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 Bank continues 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 also administers the Savings Association Insurance Fund ("SAIF"), which insures deposits in thrift institutions. 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. 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. The new assessment schedule would retain the risk based characteristics of the current system. On November 26, 1996 the FDIC decided to continue in effect the current BIF assessment rate schedule. The FDIC may make limited adjustments to the above rate schedule not to exceed an increase or decrease of 5 basis points without public notice and comment rulemaking. The amount of an adjustment adopted by the Board of Directors of the FDIC is to be determined by the following considerations: (a) the amount of assessment revenue necessary to maintain the reserve ratio at the designated reserve ratio 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. In 1996 Congress enacted the Deposit Insurance Funds Act ("Funds Act") in order to raise the level of SAIF reserves and to reduce the possibility that bonds issued by the Financing Corporation ("FICO") would go into default. The FICO was a special purpose government corporation that issued $8.2 billion in bonds to recapitalize the Federal Savings and Loan Insurance Corporation. Interest on the FICO bonds was paid from the proceeds of assessment made on the deposits of SAIF members. Because of the almost $800 million needed to pay for the annual interest on the FICO bonds, the payments of SAIF members were not increasing the SAIF reserve to a sufficient level to allow the FDIC to reduce assessment rates (as had been done for BIF deposits), and SAIF members were employing certain strategies to either exit the system or transfer deposits to BIF coverage. 20 Pursuant to the Funds Act, the FDIC imposed a special one-time assessment on all institutions that held SAIF assessable deposits as of March 31, 1995 of an estimated 65.7 cents per $100 of SAIF assessable deposits. Certain discounts and exemptions for the assessment were available. For example, BIF-member banks that had acquired SAIF-insured deposits from thrifts were generally entitled to a 20% discount on the special assessment if the bank satisfied certain statutory thresholds (the bank's acquired SAIF deposits, as adjusted, must be less than half of its total domestic deposits). Furthermore, beginning January 1, 1997, all FDIC-insured institutions will be assessed to cover the interest payments due on FICO bonds. For calendar years 1997 through 1999, BIF members, such as First Republic Savings Bank, will pay one-fifth the rate SAIF members will pay, and beginning in 2000 both types of institutions will pay the same rate. BIF members will be required to pay a FICO assessment of approximately 1.3 basis points for the first semiannual FICO assessment in 1997. The Funds Act also authorized the FDIC to rebate assessments paid by BIF members if the BIF has reserves exceeding its designated reserve ratio of 1.25 percent of total estimated insured deposits. The adjusted BIF balance was $25.888 billion on June 30, 1996, a reserve ratio of 1.30 percent. The FDIC has expressed its view that the long-term needs of the BIF are a factor in setting the effective average BIF assessment rate, and that the FDIC is uncertain whether the current favorable conditions represent a long-term trend. COMMUNITY REINVESTMENT ACT Under the Community Reinvestment Act (the "CRA"), as implemented by FDIC regulations, a state non-member financial institution such as the Bank 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. 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, the Bank received a "satisfactory" rating from the FDIC for its 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 more than on the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. For large institutions, such as the Bank, CRA ratings will be based on the revised regulations for examinations occurring after July 1, 1997. RECENTLY ENACTED LEGISLATION During 1996, new federal legislation amended the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and the underground storage tank provisions of the Resource Conversation and Recovery Act ("RCRA") to provide lenders and fiduciaries with greater protections from environmental liability. The definition of "owner or operator" under CERCLA has been amended to exclude a lender who: (i) holds indicia of ownership in a property primarily to protect its security interest, but does not participate in the property's management or (ii) forecloses on a property, or, after foreclosure, sells, releases (in the case of a lease finance transaction), or liquidates the property, maintains business activities, winds up operations, undertakes a response under CERCLA, or takes measures to preserve, protect or prepare property prior to sale or disposition, so long as the lender did not participate in the property's management prior to sale. In order to preserve these protections, a lender who forecloses on property must seek to sell, re- lease, or otherwise divest itself of the property at the earliest 21 practicable, commercially reasonable time, and on reasonable terms. "Participation in management" is defined as actual participation in the management or operational affairs of the facility, not merely having the capacity to influence or the unexercised right to control operations. Similar changes have been made in RCRA. The California legislature adopted a similar bill to provide that, subject to numerous exceptions, a lender acting in the capacity of a lender shall not be liable under any state or local statute, regulation or ordinance, other than the California hazardous Waste Control Law, to undertake a cleanup, pay damages, penalizes or fines, or forfeit property as a result of the release of hazardous materials at or from the property. Under this bill a lender which had not participated in the management of the property prior to foreclosure may take actions similar to those set forth in the CERCLA and RCRA amendments without losing its immunity from a liability. The preserve that immunity, after foreclosure, the lender must take commercially reasonable steps to divest itself of the property in a reasonably expeditious manner. PENDING LEGISLATION There are a number of pending legislative proposals to reform the Glass- Steagall Act to allow affiliations between financial institutions and other firms engaged in "financial activities", including insurance companies and securities firms. Glass-Steagall reform will likely be affected by a bank insurance powers case decided during 1996 by the U.S. Supreme Court, which gives national banks greater opportunities to sell traditional insurance products, such as life, automobile, and property and casualty policies. In a similar recent case, the Court upheld a regulatory determination that national banks may sell annuities. Certain other pending legislative proposals include bills to free withdrawals from individual retirement accounts from penalties for first-time home purchases and other purposes and eliminate most Community Reinvestment Act reporting requirements. While the effect of such proposed legislation and regulatory reform on the business of financial institutions cannot be accurately predicted at this time, it seems likely that a significant amount of consolidation in the banking industry will continue to occur throughout the remainder of the decade. Pending Nevada legislation is expected to conform the Nevada statutes governing state chartered banks and thrift companies with general Nevada corporate law. LIMITATIONS ON DIVIDENDS 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. 22 OTHER REGULATORY MATTERS FDICIA requires insured depository institutions with the amount of total assets held by the Bank to undergo a full-scope, on-site examination by their primary Federal banking agency at least once every 12 months. 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, the Bank is "well capitalized" at December 31, 1996. 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. 23 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. The federal banking agencies issued final regulations prescribing uniform guidelines for real estate lending in 1992. The regulations 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, 1996, the Company had 163 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 38 to 55 of the Company's 1996 Annual Report to Stockholders and is incorporated by reference herein. Average balances are determined on a daily basis. 24 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.
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------------- 1996 1995 1994 --------------------------- --------------------------- --------------------------- AVERAGE YIELDS/ AVERAGE YIELDS/ AVERAGE YIELDS/ BALANCE INTEREST RATES BALANCE INTEREST RATES BALANCE INTEREST RATES ---------- -------- ------- ---------- -------- ------- ---------- -------- ------- ($ IN THOUSANDS) ASSETS: Interest-earning deposits with other institutions........... $ 1,784 $ 79 4.43% $ 1,404 $ 70 4.99% $ 600 $ 29 4.83% Short-term investments.. 19,472 1,115 5.63 18,463 1,179 6.30 32,875 1,532 4.60 Investment securities... 186,611 13,367 7.16 166,011 11,385 6.86 128,017 7,148 5.58 Loans................... 1,818,100 145,474 8.00 1,591,827 127,341 8.00 1,379,640 100,816 7.31 ---------- ------- ---------- ------- ---------- ------- Total interest-earning assets................ 2,025,967 160,035 7.90 1,777,705 139,975 7.87 1,541,132 109,525 7.11 ------- ------- ------- Noninterest-earning assets................. 19,955 18,474 14,249 ---------- ---------- ---------- Total average assets... $2,045,922 $1,796,179 $1,555,381 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY: Passbook, MMA and NOW accts.................. $ 243,203 $11,775 4.84% $ 150,055 $ 7,473 4.98% $ 123,403 $ 4,445 3.60% Certificates of deposit. 1,011,859 60,250 5.95 898,515 54,661 6.08 734,746 36,579 4.98 ---------- ------- ---------- ------- ---------- ------- Total deposits.......... 1,255,062 72,025 5.74 1,048,570 62,134 5.93 858,149 41,024 4.78 Other borrowings........ 592,606 35,292 5.96 560,497 37,003 6.60 515,295 24,735 4.80 Subordinated debentures. 63,710 5,717 8.97 64,116 5,777 9.01 62,975 5,676 9.01 ---------- ------- ---------- ------- ---------- ------- Total interest-bearing liabilities........... 1,911,378 113,034 5.91 1,673,183 104,914 6.27 1,436,419 71,435 4.97 ------- ------- ------- Noninterest-bearing liabilities............ 19,394 15,136 11,080 Stockholders' equity.... 115,150 107,860 107,882 ---------- ---------- ---------- Total average liabilities and stockholders' equity.. $2,045,922 $1,796,179 $1,555,381 ========== ========== ========== Net interest spread (1). 1.98% 1.60% 2.13% Net interest income and net interest margin (2).................... $47,001 2.32% $35,061 1.97% $38,090 2.47% ======= ======= =======
- ------- (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. 25
1996 VS. 1995 1995 VS. 1994 ----------------------- ------------------------ VOLUME RATE TOTAL VOLUME RATE TOTAL ------ ------ ------- ------ ------- ------- (IN THOUSANDS) INCREASE (DECREASE) IN INTEREST INCOME: Interest-earning deposits with other institutions..... $ 18 $ (9) $ 9 $ 40 $ 1 $ 41 Short-term investments...... 62 (126) (64) (848) 495 (353) Investment securities....... 1,465 517 1,982 2,384 1,853 4,237 Loans....................... 18,133 -- 18,133 16,420 10,105 26,525 ------ ------ ------- ------ ------- ------- Total increase (decrease). 19,678 382 20,060 17,996 12.454 30,450 ------ ------ ------- ------ ------- ------- INCREASE (DECREASE) IN INTEREST EXPENSE: Passbook, MMA and NOW accounts.................... 4,521 (219) 4,302 1,102 1,926 3,028 Certificates of deposit..... 6,779 (1,190) 5,589 9,082 9,000 18,082 Other borrowings............ 2,037 (3,748) (1,711) 2,357 9,911 12,268 Subordinated debentures..... (36) (24) (60) 101 -- 101 ------ ------ ------- ------ ------- ------- Total increase (decrease). 13,301 (5,181) 8,120 12,642 20,837 33,479 ------ ------ ------- ------ ------- ------- Increase (decrease) in net interest income............ $6,377 $5,563 $11,940 $5,354 $(8,383) $(3,029) ====== ====== ======= ====== ======= =======
TYPES OF LOANS The following table sets forth by category the total loan portfolio of the Company at the dates indicated:
DECEMBER 31, ---------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) LOANS: Single family (1-4 units).................. $1,231,230 $ 983,331 $ 820,078 $ 577,276 $ 375,757 Multifamily (5+ units).. 320,715 350,507 367,750 387,757 405,399 Commercial real estate.. 285,141 286,824 249,119 229,914 204,611 Multifamily/commercial construction............ 7,347 9,013 10,658 5,707 19,574 Single family construction............ 36,686 19,349 14,227 14,512 14,703 Home equity credit lines................... 35,497 26,572 28,137 31,213 35,255 ---------- ---------- ---------- ---------- ---------- Real estate mortgages subtotal............. 1,916,616 1,675,596 1,489,969 1,246,379 1,055,299 Commercial business and other................... 6,833 6,667 8,694 9,679 12,486 ---------- ---------- ---------- ---------- ---------- Total loans........... 1,923,449 1,682,263 1,498,663 1,256,058 1,067,785 Unearned fee income..... (3,116) (4,380) (6,816) (9,406) (12,621) Reserve for possible losses.................. (17,520) (18,068) (14,355) (12,657) (12,686) ---------- ---------- ---------- ---------- ---------- Loans, net............ $1,902,813 $1,659,815 $1,477,492 $1,233,995 $1,042,478 ========== ========== ========== ========== ==========
The following table shows the maturity distribution of the Company's real estate construction and commercial business loans outstanding as of December 31, 1996, 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.......... $34,156 $ 9,877 $-- $44,033 Commercial business loans............... 213 2,221 -- 2,434 ------- ------- ---- ------- Total................................ $34,369 $12,098 $-- $46,467 ======= ======= ==== =======
26 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, 1996, the Company has originated approximately $5.8 billion of loans both for sale and retention in its loan portfolio, on which the Company has experienced approximately $40.5 million of losses. Such losses primarily resulted from the economic recession which affected the California economy commencing in late 1990 and continuing in parts of the state through 1995 and the Northridge earthquake which struck the Los Angeles area in January 1994. As a result of the Northridge earthquake, which affected primarily the Company's loans secured by multifamily properties in Los Angeles County, the Company experienced until late 1996 increased loan delinquencies and REO, additional loan loss provisions and a higher level of modified and restructured loans. The Company's loss experience since inception on single-family mortgage loans has been 0.06% of loans originated in over eleven years. The Company's average annualized net chargeoff experience on its single family loans for the last three years was less than 0.02% of average single family loans. The Company has experienced a higher level of chargeoffs in the past three years in connection with the resolution of delinquent loans and sale of REO than in prior years. The ratio of the Company's net loan chargeoffs to average loans was 0.35% for 1996, 0.69% for 1995, and 0.58% for 1994. Additional information is provided under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Asset Quality and--Provisions for Losses and Reserve Activity" on pages 58 to 60 of the Company's 1996 Annual Report to stockholders, incorporated by reference herein. The following table presents nonaccruing loans and investments, REO, restructured performing loans and accruing single family loans more than 90 days past due at the dates indicated.
DECEMBER 31, ------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- ($ IN THOUSANDS) NONACCRUING ASSETS AND OTHER LOANS: Single family..................... $ -- $ -- $ -- $ -- $ -- Multifamily....................... 18,402 23,664 29,049 6,740 3,894 Commercial real estate............ 5,783 12,555 3,400 4,862 5,524 Other............................. 69 331 174 16 140 Real estate owned ("REO")......... 4,313 10,198 8,500 9,961 8,937 ------- ------- ------- ------- ------- Nonaccruing loans and REO....... 28,567 46,748 41,123 21,579 18,495 Nonaccruing investments........... -- -- -- 361 469 ------- ------- ------- ------- ------- Total nonaccruing assets........ 28,567 46,748 41,123 21,940 18,964 Restructured performing loans..... 7,220 12,795 17,489 6,342 3,366 ------- ------- ------- ------- ------- Total nonaccruing assets and restructured performing loans.. $35,787 $59,543 $58,612 $28,282 $22,330 ======= ======= ======= ======= ======= Accruing single family loans more than 90 days past due............ $ 4,565 $ 3,747 $ 2,587 $ 1,390 $ 3,541 ======= ======= ======= ======= ======= PERCENT OF TOTAL ASSETS: All nonaccruing assets............ 1.32% 2.46% 2.41% 1.55% 1.54% Nonaccruing assets and restructured performing loans..... 1.66% 3.13% 3.43% 2.00% 1.81%
27 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, ---------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- ($ IN THOUSANDS) RESERVE FOR POSSIBLE LOSSES: Balance beginning of year................... $ 18,068 $ 14,355 $ 12,657 $ 12,686 $ 11,663 Provision charged to operations.............. 5,838 14,765 9,720 4,806 8,062 Reserve from purchased loans................... -- -- 34 200 466 Reserve of First Republic Savings Bank at acquisition......... -- -- -- 24 -- Chargeoffs on originated loans: Single family.......... (302) (14) (210) (209) (328) Multifamily............ (6,548) (9,314) (7,177) (3,367) (3,961) Commercial real estate. (705) (2,163) (695) (1,547) (3,750) Commercial business loans................. (21) (48) (79) (76) (213) Construction loans..... -- (353) -- -- -- Recoveries on originated loans: Single family.......... -- 3 11 -- 50 Multifamily............ 287 765 119 -- 5 Commercial real estate. 855 30 -- 92 654 Commercial business loans................. 46 54 15 43 12 Acquired loans: Chargeoffs............. -- (22) (47) -- -- Recoveries............. 2 10 7 5 26 ---------- ---------- ---------- ---------- ---------- Total chargeoffs, net of recoveries............. (6,386) (11,052) (8,056) (5,059) (7,505) ---------- ---------- ---------- ---------- ---------- Balance end of year..... $ 17,520 $ 18,068 $ 14,355 $ 12,657 $ 12,686 ========== ========== ========== ========== ========== Average loans for the year................... $1,818,100 $1,591,827 $1,379,640 $1,154,680 $1,008,783 Total loans at year end. 1,923,449 1,682,263 1,498,663 1,256,058 1,067,785 Ratios of reserve to: Total loans............ 0.91% 1.07% 0.96% 1.01% 1.19% Nonaccruing loans...... 72% 49% 44% 109% 133% Nonaccruing loans and restructured performing loans...... 56% 37% 29% 70% 98% Net chargeoffs to average loans.......... 0.35% 0.69% 0.58% 0.44% 0.74%
The following table sets forth management's historical allocation of the reserve for possible losses by loan category and the percentage of loans in each category to total loans at the dates indicated:
DECEMBER 31, ------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------- ------------- ------------- ------------- ------------- RESERVE RESERVE RESERVE RESERVE RESERVE FOR % OF FOR % OF FOR % OF FOR % OF FOR % OF LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES LOANS LOANS LOANS ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ($ IN THOUSANDS) Loan Category: Single family........... $ 200 64.0% $ 200 58.5% $ -- 54.7% $ -- 46.0% $ -- 35.2% Multifamily............. 4,200 16.7 5,900 20.8 5,600 24.6 2,600 30.9 1,700 38.0 Commercial real estate.. 1,100 14.8 2,850 17.0 600 16.7 1,300 18.3 2,000 19.2 Multifamily construc- tion................... -- 0.4 -- 0.5 -- 0.6 -- 0.4 -- 1.8 Single family construc- tion................... -- 1.9 -- 1.2 100 0.9 -- 1.1 -- 1.4 Home equity credit lines.................. -- 1.8 -- 1.6 -- 1.9 -- 2.5 -- 3.3 Other loans............. 20 0.4 50 0.4 55 0.6 -- 0.8 100 1.1 Unallocated reserves.... 12,000 -- 9,068 -- 8,000 -- 8,757 -- 8,886 -- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- $17,520 100.0% $18,068 100.0% $14,335 100.0% $12,657 100.0% $12,686 100.0% ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
28 At December 31, 1996, management had allocated from its general reserves $4,200,000 to the multifamily loan category, $1,100,000 to the commercial real estate loan category, $200,000 to the single family category, and $20,000 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 services 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, 1996, 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, ------------------------------- 1996 1995 1994 1993 1992 ----- ---- ---- ----- ----- KEY FINANCIAL RATIOS: Return on average total assets................ 0.61% 0.07% 0.47% 0.97% 1.06% Return on average stockholders' equity........ 10.86% 1.08% 6.77% 12.65% 14.10% Average stockholders' equity as a percentage of average total assets......................... 5.63% 6.00% 6.94% 7.63% 7.51% General & administrative expenses as a percentage of average total assets...................... 1.17% 1.07% 1.28% 1.33% 1.30%
29 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 subsidiary, First Republic Savings Bank, leases offices at the following locations, with terms expiring at dates ranging from August 1998 to August 2007, although certain of the leases contain options to extend beyond these dates.
NAME ADDRESS ---- ------- First Republic Savings Bank........... 101 Pine Street, San Francisco, CA 5628 Geary Boulevard, San Francisco, CA 1088 Stockton Street, San Francisco, CA 1809 Irving at 19th, San Francisco, CA 1099 Fourth Street, San Rafael, CA 1111 South El Camino Real, San Mateo, 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 2510 South Maryland Parkway, Las Vegas, NV 6700 West Charleston Blvd., 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, 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS This information is incorporated by reference to page 68 of the Company's Annual Report to Stockholders for the year ended December 31, 1996. 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, 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information is incorporated by reference to pages 56 through 65 of the Company's Annual Report to Stockholders for the year ended December 31, 1996. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This information is incorporated by reference to pages 38 through 55 and to page 68 of the Company's Annual Report to Stockholders for the year ended December 31, 1996. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES There have been no changes in or disagreements with Accountants. 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the directors and executive officers of First Republic and certain pertinent information about them.
AGE POSITION HELD WITH THE COMPANY --- ------------------------------ Roger O. Walther(1)(3)...... 61 Chariman of the Board James H. Herbert, II(1)..... 52 President, Chief Executive Officer and Director Katherine August-deWilde(1). 49 Executive Vice President, Chief Operating Officer and Director Willis H. Newton, Jr. ...... 47 Senior Vice President and Chief Financial Officer Edward J. Dobranski......... 46 Senior Vice President, Secretary and General Counsel David B. Lichtman........... 33 Vice President, Chief Credit Officer Richard M. Cox-Johnson(2)... 62 Director Kenneth W. Dougherty........ 70 Director Frank J. Fahrenkopf, Jr. ... 57 Director L. Martin Gibbs............. 59 Director James F. Joy(2)............. 59 Director John F. Mangan.............. 60 Director Barrant V. Merrill(1)(2).... 66 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. Mr. Newton became an officer of First Republic in August 1988, Mr. Dobranski became an officer of First Republic in June 1993, and Mr. Lichtman became an officer of First Republic in January 1994. 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 graduate of Babson College, B.S., 1966, and New York University, M.B.A., 1969. He is a member of The Babson Corporation. Katherine August-deWilde is Executive Vice President, Chief Operating Officer 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 Corporation. She is a graduate of Goucher College, A.B., 1969, and Stanford University, M.B.A., 1975. 31 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. Edward J. Dobranski joined the company in August 1992 as General Counsel, was appointed a Vice President in 1993, and was appointed Senior Vice President and Secretary in 1997. He also serves as the Company's Compliance Officer and Community Reinvestment Officer. From 1990 to 1992, Mr. Dobranski was Of Counsel at Jackson, Tufts, Cole & Black in San Francisco, specializing in banking, real estate and corporate law. 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 the Company from 1986 to 1990, as a loan officer with First Republic Mortgage Inc. from 1990 through 1991, and as a credit officer with First Thrift from 1992 through December 1993. Mr. Lichtman is a graduate of Vassar College, B.A. 1985 and the University of California, Berkeley, M.B.A. 1990. Richard M. Cox-Johnson is a director of First Republic serving until 1999. 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 1999. 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 1999. 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. 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.). 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. 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 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. 32 ITEM 11. EXECUTIVE COMPENSATION This information is incorporated by reference to the Company's definitive proxy statement which has been 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 which has been 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" which has been 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 1996 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, 1996 and 1995: Consolidated Balance Sheet................................... 38 Years ended December 31, 1996, 1995 and 1994: Consolidated Statement of Income............................. 40 Consolidated Statement of Stockholders' Equity............... 41 Consolidated Statement of Cash Flows......................... 42 Notes to Consolidated Financial Statements..................... 43 Report of Independent Auditors................................. 55
All schedules are omitted as not applicable. (b) Reports on Form 8-K. The Company filed a report dated October 18, 1996 on Form 8-K reporting the Company's earnings for the quarter and nine months ended September 30, 1996. The Company filed a report dated January 29, 1997 on Form 8-K reporting the Company's earnings for the quarter and year ended December 31, 1996. The Company filed a report dated February 18, 1997 on Form 8-K reporting its engagement of an investment banking firm to consider strategic alternatives. The Company filed a report dated February 28, 1997 on Form 8-K reporting its announcement of the redemption of its convertible subordinated debentures due 2002. 33 (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 (u) are incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1988. Exhibits marked with two diamonds (uu) are incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1989. Exhibits marked with three diamonds (uuu) are incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1990. Exhibits marked with one asterisk (*) are incorporated by reference to Registrant's Registration Statement on Form S-2 (No. 33-42426). Exhibits marked with one pound sign (#) are incorporated by reference to Registrant's Registration Statement on Form S-2 (No. 33-43858). Exhibits marked with two pound signs (##) are incorporated by reference to the Registrant's Registration Statement on Form S-2 (No. 33-45435). Exhibits marked with three pound signs (###) are incorporated by reference to the Registrant's Registration Statement on Form S-2 (No. 33-54136). Exhibits marked with four pound signs (####) are incorporated by reference to Registrant's Form 10-K for the year ended December 31, 1992. Exhibits marked with one dagger sign (+) are incorporated by reference to the Registrant's Registration Statement on Form S-3 (No. 33-60958). Exhibits marked with two dagger signs (++) are incorporated by reference to the Registrant's Registration Statement on Form S-3 (No. 33-66336). Exhibits marked with three dagger signs (+++) are incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1995. Exhibits marked with four dagger signs (++++) are incorporated by reference to the Registrant's Notice and Proxy Statement with Appendices thereto as filed on March 17, 1997. Each such Exhibit had the number in parentheses immediately following the description of the Exhibit herein. 3.1### Certificate of Incorporation, as amended. (3.1) 3.2+++ By-Laws as currently in effect. 4.1# Indenture dated as of September 1, 1991 between First Republic Bancorp Inc. and National City Bank of Minneapolis. (10.35) 4.2## Supplemental Indenture dated as of November 1, 1991 between First Republic Bancorp Inc. and National City Bank of Minneapolis. (10.35) 4.3### Indenture dated as of December 1, 1992 between First Republic Bancorp Inc. and U.S. Trust Company of California, N.A. (4.1) 4.4+ Indenture dated as of May 15, 1993, between First Republic Bancorp Inc. and United States Trust Company of New York. (4.1) 4.5++ Indenture dated as of August 4, 1993, between First Republic Bancorp Inc. and United States Trust Company of New York. (4.1) 10.1+++ Employee Stock Ownership Plan. (10.1) 10.2+ Employee Stock Ownership Trust. (10.16) 10.3** 1985 Stock Option Plan. (10.3) Employment offers of James H. Herbert, II, and Katherine August- 10.4+ deWilde.(10.22) 10.5++ Continuing Guarantee dated August 3, 1987 of the Registrant. (19.2) Pledge Agreement dated September 8, 1987 between Pacific Trust Company, as trustee for the First Republic Bancorp Inc. Employee 10.6++ Stock Ownership Plan and the Registrant. (19.6(b)) 10.7+++ Key man life insurance policy on James H. Herbert, II. (10.33) 10.8u Employment offer of Willis H. Newton, Jr. (10.37) 10.9uuu 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)
34 10.10uu Lease Agreement dated January 5, 1990 between the Registrant and Honorway Investment Corporation. (10.45) 10.11* Advances and Security Agreement dated as of June 24, 1991 between the Federal Home Loan Bank of San Francisco ("FHLB") and First Republic Savings Bank. (10.29) 10.12### 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) 10.13### Form of 1992 Performance-Based Contingent Stock Option Agreement. (10.35) 10.14+++ Form of 1995 Performance-Based Contingent Stock Option Agreement.(10.15) 10.15#### Employee Stock Purchase Plan. (10.23) 10.16++++ Amended and Restated Employee Stock Option Plan (Exhibit A) 10.17++++ 1997 Restricted Stock Plan (Exhibit B) 10.18 Form of Change in Control Severance Benefits Plan Agreement 10.19 Form of Change in Control Retention Bonus and Insurance Benefits Plan Agreement 11.1 Statement of Computation of Earnings Per Share. 12.1 Statement of Computation of Ratios of Earnings to Fixed Charges. 13.1 1996 Annual Report to Stockholders. 21.1 Subsidiaries of First Republic Bancorp Inc. 23.1 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule.
35 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 12, 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 12, 1997 (ROGER O. WALTHER) /s/ James H. Herbert, II President, Chief - ------------------------------------- Executive Officer and March 12, 1997 (JAMES H. HERBERT, II) Director /s/ Katherine August-deWilde Executive Vice - ------------------------------------- President, Chief March 12, 1997 (KATHERINE AUGUST-DEWILDE) Operating Operating Officer and Director /s/ Willis H. Newton, Jr. Senior Vice President - ------------------------------------- and Chief Financial March 12, 1997 (WILLIS H. NEWTON, JR.) Officer (Principal Financial Officer) /s/ Ignacios Alferos, Jr. Vice President, and - ------------------------------------- Controller (Principal March 12, 1997 (IGNACIO ALFEROS, JR.) Accounting Officer) /s/ Richard M. Cox-Johnson - ------------------------------------- Director March 12, 1997 (RICHARD M. COX-JOHNSON) 36 SIGNATURE TITLE DATE /s/ Kenneth W. Dougherty - ------------------------------------- Director March 12, 1997 (KENNETH W. DOUGHERTY) /s/ Frank J. Fahrenkopf, Jr. - ------------------------------------- Director March 12, 1997 (FRANK J. FAHRENKOPF, JR.) /s/ L. Martin Gibbs - ------------------------------------- Director March 12, 1997 (L. MARTIN GIBBS) /s/ James F. Joy - ------------------------------------- Director March 12, 1997 (JAMES F. JOY) /s/ John F. Mangan - ------------------------------------- Director March 12, 1997 (JOHN F. MANGAN) /s/ Barrant V. Merrill - ------------------------------------- Director March 12, 1997 (BARRANT V. MERRILL) 37
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.18............................ Form of Change in Control Severance Benefits Plan Agreement 10.19............................ Form of Change in Control Retention Bonus and Insurance Benefits Plan Agreement 11.1............................. Statement of Computation of Earnings Per Share. 12.1............................. Statement of Computation of Ratios of Earnings to Fixed Charges. 13.1............................. 1996 Annual Report to Stockholders. 21.1............................. Subsidiaries of First Republic Bancorp Inc. 23.1............................. Consent of KPMG Peat Marwick LLP. 27............................... Financial Data Schedule.
38 EX-10.18 2 CHANGE IN CONTROL. SEVERANCE BENEFITS PLAN EXHIBIT 10.18 CHANGE IN CONTROL SEVERANCE BENEFITS PLAN AGREEMENT Effective as of the 5th day of February, 1997 ("Effective Date") FIRST REPUBLIC SAVINGS BANK, a Nevada corporation (the "COMPANY"), and its parent, FIRST REPUBLIC BANCORP INC., a Delaware corporation (the "HOLDING COMPANY"), hereby create this CHANGE IN CONTROL SEVERANCE BENEFITS PLAN AGREEMENT (the "Plan Agreement"). This Plan Agreement is intended to provide Company and Holding Company employees (each, an "Employee") with the compensation and benefits described herein upon the occurrence of specific events. Certain capitalized terms used in this Plan Agreement are defined in Article 6. Reference herein to the rights and obligations of the Company with respect to its Employees shall also be deemed to be the rights and obligations of the Holding Company with respect to its Employees. The Company hereby agrees for the benefit of each Employee as follows: ARTICLE 1 EMPLOYMENT BY THE COMPANY 1.1 Each Employee shall be eligible for the benefits herein set forth on the Effective Date (if such Employee is employed by the Company on that date), or on the date upon which a person subsequently is employed by the Company during the term of this Plan Agreement. 1.2 This Plan Agreement shall remain in full force and effect for the two year period specified in Article 7; provided, however, that the rights and obligations contained in Articles 2 through 7 shall survive any termination for the longer of (i) two (2) years from the Effective Date of the Plan Agreement or (ii) twenty-four (24) months following a Change in Control (as hereinafter defined) or such later period as may be required so that all benefits to which Employee is entitled under this Plan Agreement are paid or otherwise provided to Employee. 1.3 The Company wishes to set forth the compensation and benefits which Employee shall be entitled to receive in the event that there is a Change in Control or Employee's employment with the Company terminates following a Change in Control under the circumstances described in Article 2 of this Plan Agreement. 1.4 The duties and obligations of the Company to Employee under this Plan Agreement shall be in consideration for Employee's services to the Company, Employee's continued employment with the Company, and Employee's execution of the general waiver and release described in Section 3.2 1 ARTICLE 2 SEVERANCE BENEFITS 2.1 ENTITLEMENT TO SEVERANCE BENEFITS. Upon the occurrence of the events herein described, or if Employee's employment terminates due to a Covered Termination, the Company shall pay Employee the compensation and benefits described in this Article 2. Payment of any benefits described in this Article 2 shall be subject to the restrictions and limitations set forth in Article 3. 2.2 LUMP SUM SEVERANCE PAYMENT. Within forty-five (45) days following a Covered Termination, Employee shall receive a lump sum payment determined by the Employee's Total Compensation multiplied by the appropriate factor or formula applied from the table attached as Exhibit A (which factor or formula --------- shall be based upon the Employee's title or grade within the Company), as well as any additional payment (if applicable) pursuant to Section 4.2 hereof. This lump sum payment shall be called the Employee's "Severance Benefit." If the Employee's Covered Termination occurs on or before the expiration of twelve (12) months from the occurrence of a Change in Control, the Employee shall be entitled to receive 100% of his or her Severance Benefit. If the Employee's Covered Termination occurs after the expiration of twelve (12) months from the occurrence of a Change in Control, the Employee shall not be entitled to receive a Severance Benefit hereunder. 2.3 DEATH OF AN EMPLOYEE. If an Employee dies after becoming eligible to receive the payment of the severance benefit described herein, but before such severance benefit is paid to the Employee, such severance benefit shall be paid to the Employee's surviving spouse or, if there is no surviving spouse, to the Employee's estate. 2.4 STOCK OPTIONS AND STOCK. All stock options held by the Employee with respect to Holding Company stock that are unvested at the time of a Change in Control shall become fully vested and exercisable upon a Change in Control (regardless of whether a Covered Termination occurs) and all Holding Company stock held by the Employee that is subject to vesting restrictions at the time of a Change in Control shall become fully vested upon a Change in Control (regardless of whether a Covered Termination occurs). 2.5 SPLIT DOLLAR INSURANCE. For Employees who receive from the Company the Equitable split dollar life insurance plan benefit ("Split Dollar Plan"), automatically upon the occurrence of a Change in Control (and regardless of whether a Covered Termination occurs), all then existing loans from the Company to the Employee pursuant to the Split Dollar Plan will be deemed to be paid in full and the promissory note(s) executed by the Employee in connection with such Split Dollar Plan will be deemed satisfied and said promissory note(s), together with any collateral assignment(s) pledged by the Employee in connection therewith, will be of no further force and effect. Upon a Change in Control, the Company will promptly take such action as is necessary to extinguish the promissory note(s) and collateral assignment(s). 2 2.6 TAX-QUALIFIED RETIREMENT PLANS. Upon the occurrence of a Change in Control (and regardless of whether a Covered Termination occurs), the Employee's benefits under the First Republic 401(k) and Employee Stock Ownership Plans shall become fully vested (to the extent not already fully vested). 2.7 WELFARE BENEFITS. Following a Covered Termination, Employee and his or her covered dependents will be eligible to continue their Welfare Benefit coverage under any Welfare Benefit plan or program maintained by the Company only to the extent provided under the terms and conditions of such Welfare Benefit plan or program. Except for the foregoing, no continuation of Welfare Benefits shall be provided under this Plan Agreement, except to the extent continuation of health insurance coverage is required under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). This Section 2.7 is not intended to affect, nor does it affect, the rights of Employee, or Employee ' s covered dependents, under any applicable law with respect to health insurance continuation coverage. 2.8 MITIGATION. Except as otherwise specifically provided herein, Employee shall not be required to mitigate damages or the amount of any payment provided under this Plan Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Plan Agreement be reduced by any compensation earned by Employee as a result of employment by another employer or by retirement benefits received after the date of the Covered Termination, or otherwise. 2.9 BASIS OF PAYMENTS. All benefits under this Plan Agreement shall be paid by the Company. This Plan Agreement shall be unfunded, and benefits hereunder shall be paid only from the general assets of the Company. ARTICLE 3 LIMITATIONS AND CONDITIONS ON BENEFITS 3.1 WITHHOLDING OF TAXES. The Company shall withhold appropriate federal, state or local income and employment taxes from any payments hereunder. 3.2 EMPLOYEE PLAN AGREEMENT AND RELEASE PRIOR TO RECEIPT OF BENEFITS. Upon the occurrence of a Covered Termination, and prior to the receipt of any benefits under this Plan Agreement on account of the occurrence of a Covered Termination, Employee shall, as of the date of a Covered Termination, execute an employee agreement and release substantially in the form attached hereto as Exhibit B. Such employee agreement and release shall specifically relate to all - --------- of Employee's rights and claims in existence at the time of such execution. In the event Employee does not execute such employee agreement and release within the time period specified in such employee agreement and release or if Employee revokes such employee agreement and release within the revocation period provided in such employee agreement and release, no benefits shall be payable under this Plan Agreement to Employee. In addition, anything contained in Article 2 to the contrary notwithstanding, no payment of benefits under this Plan Agreement shall be made until such revocation period shall have expired. 3.3 LIMITS IMPOSED BY APPLICABLE BANKING LAW. Notwithstanding any other provision to the contrary, the Company shall not be obligated under this Plan Agreement to pay any Severance Benefit to the 3 extent that such payment would violate any prohibition or limitation on termination payments under any applicable federal or state statute, rule or regulation promulgated, or effective order issued, by any federal or state regulatory agency having jurisdiction over the Company. Without limiting the foregoing, the Company acknowledges that the Federal Deposit Insurance Corporation (the "FDIC") has issued a regulation that prohibits payment of the Severance Benefit under certain circumstances, unless such payments were approved by the FDIC and any other applicable regulator. ARTICLE 4 OTHER RIGHTS AND BENEFITS 4.1 NONEXCLUSIVITY. Nothing in the Plan Agreement shall prevent or limit Employee's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices provided by the Company and for which Employee may otherwise qualify, nor, except as specifically provided herein, shall anything herein limit or otherwise affect such rights as Employee may have under any stock option or other agreements with the Company. Except as otherwise expressly provided herein, amounts which are vested benefits or which Employee is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the date of a Covered Termination shall be payable in accordance with such plan, policy, practice or program. 4.2 PARACHUTE PAYMENTS. If any amount payable to or other benefit receivable by an Employee pursuant to this Plan Agreement constitutes a Parachute Payment as defined in Section 280G of the Internal Revenue Code (a "Parachute Payment"), alone or when added to any other amount payable or paid to or other benefit receivable or received by the Employee which is deemed to constitute a Parachute Payment (whether or not under an existing plan, arrangement or other agreement), and would result in the imposition on the Employee of an excise tax under Section 4999 of the Internal Revenue Code (the "Excise Tax"), then, in addition to any other benefits to which the Employee is entitled under this Plan Agreement, the Employee shall be promptly paid by the Company an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including any excise taxes, income taxes (determined using the highest possible applicable federal, state and local marginal tax rates) and interest or penalties with respect to such taxes) imposed on the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed on all Parachute Payments. Determinations under this Section 4.2 shall be made by the Chief Financial Officer of the Company in conjunction with the Company's independent auditors (which auditors served in such capacity immediately prior to the Change in Control). All fees and expenses of the independent auditor shall be borne solely by the Company. ARTICLE 5 NON-ALIENATION OF BENEFITS No benefit hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to so subject a benefit hereunder shall be void. 4 ARTICLE 6 DEFINITIONS For purposes of the Plan Agreement, the following terms shall have the meanings set forth below: 6.1 "AGREEMENT" OR "PLAN AGREEMENT" means this Change in Control Severance Benefits Plan Agreement. 6.2 "ANNUAL BASE SALARY" means the amount of compensation provided by the Company to Employee as base salary if the Employee is an exempt, salaried employee according to the Company's personnel records. Such amount shall be determined by annualizing the highest base rate_in effect for Employee at any time immediately prior to, on, or after the date of the Change in Control, exclusive of any bonus or other incentive cash compensation, income from any stock options or other stock awards, supplemental deferred compensation contributions made by the Company, pension or profit sharing contributions or distributions (except as provided below), insurance payments or proceeds, fringe benefits, or other form of additional compensation, but specifically including any amounts withheld from base salary to provide benefits pursuant to Section 125 or 401(k) of the Internal Revenue Code or pursuant to any other plan or program of deferred compensation with respect to elective deferrals of compensation otherwise payable currently. 6.3 "BONUS" means the Employee's bonus compensation received for the calendar year immediately preceding the Change in Control. For purposes of determining a bonus compensation for the preceding calendar year, the bonus compensation shall be attributable to the year in which the bonus was earned, even though all or part of the bonus may have been actually paid to the Employee in the subsequent year. 6.4 "CHANGE IN CONTROL" means the consummation of any of the following transactions during the term of this Plan Agreement: (a) the Company or Holding Company merges or consolidates with any other corporation, other than a merger or consolidation which would result in beneficial owners of the total voting power in the election of directors represented by the voting securities ("Voting Securities") of the Company or Holding Company (as the case may be) outstanding immediately prior thereto continuing to beneficially own securities representing (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total Voting Securities of the Company or Holding Company, or of such surviving entity, outstanding immediately after such merger or consolidation; (b) the Company or Holding Company liquidates or dissolves, or sells, leases, exchanges or otherwise transfers or disposes of all or substantially all of the Company's assets; (c) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than (A) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or Holding Company, (B) a corporation owned directly or indirectly by the shareholders of Holding Company in substantially the same proportions as their beneficial ownership of stock 5 in Holding Company, or (C) Holding Company (with respect to its ownership of the stock of the Company), is or becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of the securities of the Company or Holding Company representing fifty percent (50%) or more of the Voting Securities; or (d) (A) (1) the shareholders of the Company or the Holding Company, approve a merger or consolidation of the Company or Holding Company with any other corporation, other than a merger or consolidation which would result in beneficial owners of Voting Securities of the Company or Holding Company (as the case may be) outstanding immediately prior thereto continuing to beneficially own securities representing (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than seventy-five percent (75%) of the total Voting Securities of the Company or Holding Company, or of such surviving entity, outstanding immediately after such merger or consolidation, or (2) any person (as such term is used in Sections 13(d) or 14(d) of the Exchange Act), other than (a) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or Holding Company, (b) a corporation owned directly or indirectly by the shareholders of Holding Company in substantially the same proportions as their ownership of stock in Holding Company, or (c) Holding Company (with respect to Holding Company's ownership of the stock of the Company), is or becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of the securities of the Company or Holding Company representing 25% or more of the Voting Securities of such corporation, and (B) within twelve (12) months of the occurrence of such event, a change in the composition of the Board of Directors of the Company or Holding Company occurs as a result of which sixty percent (60%) or fewer of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company and of the Holding Company as of the date hereof; (B) are elected, or nominated for election, to the Board of Directors of the Company and of the Holding Company with the affirmative votes of at least a majority of the directors of the Company or Holding Company who are Incumbent Directors described in (A) above at the time of such election or nomination; or (C) are elected, or nominated for election, to the Board of Directors of the Company or the Holding Company with the affirmative votes of at least a majority of the directors of the Company or Holding Company who are Incumbent Directors described in (A) or (B) above at the time of such election or nomination. Notwithstanding the foregoing, "Incumbent Directors" shall not include an individual whose election or nomination to the Board of Directors of the Company or Holding Company occurs in order to provide representation for a person or group of related persons who have initiated or encouraged an actual or threatened proxy contest relating to the election of directors of the Company or Holding Company. 6.5 "COMPANY" means First Republic Savings Bank, a Nevada corporation, and any successor thereto. 6 6.6 "CONSTRUCTIVE TERMINATION" means that the Employee voluntarily terminates his or her employment after any of the following are undertaken without his or her express written consent: (a) the material, involuntary reduction in Employee's responsibilities, authorities or functions as an employee of the Company as in effect immediately prior to a Change in Control, except in connection with the termination of Employee's employment for death, disability, retirement or any listed exclusion from the definition of Involuntary Termination; (b) a reduction in Employee's Annual Base Salary or Weekly Wage, whichever is applicable, by more than 10%; (c) a substantive, material adverse change in the manner in which Employee's bonus is established or determined; or (d) a relocation of Employee to a location more than thirty-five (35) miles from the location at which Employee performed Employee's duties prior to a Change in Control, except for required travel by Employee on the Company's business to an extent substantially consistent with Employee's business travel obligations at the time of a Change in Control. 6.7 "COVERED TERMINATION" means an Involuntary Termination or a Constructive Termination within twelve (12) months following a Change in Control. No other event shall be a Covered Termination for purposes of this Plan Agreement. For example, if Employee's employment terminates, but not due to an Involuntary Termination or a Constructive Termination within twelve (12) months following a Change in Control, or for any reason prior to a Change in Control, or after twelve (12) months or more following a Change in Control, then the termination of employment will not be a Covered Termination and Employee will not be entitled to receive any payments or benefits under Article 2 which are payable with respect to a Covered Termination. 6.8 "EMPLOYEE" means a person employed as a common law employee with the Company or Holding Company on the date of a Change in Control. For purposes of this Plan Agreement, "Employee" excludes a person in any of the following categories immediately prior to a Change in Control: (a) person whom the Company or Holding Company treats as an independent contractor; (b) an individual serving the Company or Holding Company through an agency, payroll service, sub- contractor or other third party provider; (c) a person who is employed up to a maximum defined term and who is employed without regular employee benefits; (d) a seasonal employee who is employed for less than twelve (12) consecutive months and who is employed without regular employee benefits; (e) an employee on leave of absence after the period of time the Company or Holding Company has committed or is required to return him or her to active employment based on the requirements of law, written policy or Company or Holding Company practice; (f) a part-time hourly employee who works on an unscheduled, on-call basis; and (g) any employee acquired by the Company or Holding Company as a result of a merger or other business combination until the first anniversary date of the acquisition, unless some other date is specified by agreement with the acquired entity. 6.9 "HOLDING COMPANY" means First Republic Bancorp Inc., a Delaware corporation, and any successor thereto. 7 6.10 "INVOLUNTARY TERMINATION" means Employee's dismissal or discharge by the Company (or, if applicable, by the successor entity) for reasons other than one of the following reasons: (a) the commission by Employee of an act of deliberately criminal or fraudulent misconduct in the line of duty to the Company or Holding Company (including, but not limited to, fraud, misappropriation, embezzlement or the wilful violation of any material law, rule, regulation, or cease and desist order applicable to Employee, the Company or Holding Company), or a deliberate, wilful breach of a fiduciary duty owed by Employee to the Company or the Holding Company; (b) Intentional, continued failure to perform stated duties (including but not limited to chronic absenteeism), gross negligence, or gross incompetence in the performance of stated duties; (c) Employee's chronic alcohol or drug abuse that results in a material impairment of Employee's ability to perform his or her duties as an employee of the Company after reasonable accommodation; (d) Employee's removal from his or her office with the Company pursuant to an effective order under Section 8(e) of the Federal Deposit Insurance Act 12 U.S.C.(S)1818(e). The termination of an Employee's employment will not be deemed to be an "Involuntary Termination" if such termination occurs as a result of the death or disability of Employee. 6.11 "TOTAL COMPENSATION" means, with respect to salaried, exempt Employee's, the sum of the Employee's Annual Base Salary and the Employee's Bonus (as such terms are defined in this Article 6). "Total Compensation" means with respect to hourly wage, non-exempt Employees the Employee's Weekly Wage. 6.12 "WEEKLY WAGE" means the amount of compensation provided by the Company to Employee on a weekly basis if Employee is a non-exempt, hourly wage employee according to the Company's personnel records. Such amount shall be determined by multiplying the highest hourly wage in effect for Employee at any time immediately prior to, on, or after the date of Change in Control (exclusive of all other forms of compensation and benefits) by 2080, and by dividing that product by 52. 6.13 "WELFARE BENEFITS" means benefits providing for coverage or payment in the event of Employee's death, disability, illness or injury that were provided to Employee immediately before a Change in Control, whether taxable or non-taxable and whether funded through insurance or otherwise. ARTICLE 7 TERM OF PLAN AGREEMENT; ADMINISTRATION 7.1 TERM. This Plan Agreement shall have a term of two (2) years, commencing as of the Effective Date. 8 7.2 ADMINISTRATION. The Plan Agreement shall be administered and interpreted by a committee (the "Committee") composed of the three individuals holding the following positions immediately prior to a Change in Control (or at such earlier time that such a decision or interpretation is required to be made): the Executive Vice President/COO, the Senior Vice President/CFO, and the Senior Vice President/General Counsel. The Committee shall have the full and exclusive discretion to interpret and administer the Plan. All actions, interpretations and decisions of the Committee shall be conclusive and binding on all persons, and shall be given the maximum possible deference allowed by law. ARTICLE 8 GENERAL PROVISIONS 8.1 EMPLOYMENT STATUS. This Plan Agreement does not constitute a contract of employment or impose on Employee any obligation to remain as an employee, or impose on the Company any obligation (i)to retain Employee as an employee, (ii) to change the status of Employee as an at-will employee, or (iii) to change the Company's policies regarding termination of employment. 8.2 NOTICES. Any notices provided hereunder must be in writing and such notices or any other written communication shall be deemed effective upon the earlier of personal delivery (including personal delivery by telex or facsimile) or the third day after mailing by first class mail, to the Company at its administrative headquarters located at 388 Market Street, San Francisco, California 94111: Attention: General Counsel (or to its primary office location if no longer at the above address), and to Employee at his or her address as listed in the Company's payroll records. Any payments made by the Company to Employee under the terms of this Plan Agreement shall be delivered to Employee either in person or at his or her address as listed in the Company's payroll records. 8.3 SEVERABILITY. Whenever possible, each provision of this Plan Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Plan Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Plan Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 8.4 WAIVER. If either party should waive any breach of any provisions of this Plan Agreement, such party shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Plan Agreement. 8.5 COMPLETE PLAN AGREEMENT. This Plan Agreement, including Exhibits A, B and C, and any other written agreements expressly referred to in this Plan Agreement, constitutes the entire, complete, final, and exclusive embodiment of the agreement with regard to this subject matter. 8.6 AMENDMENT OR TERMINATION OF PLAN AGREEMENT. This Plan Agreement may be changed or terminated prior to a Change in Control only if such change or termination has been approved by the Company's and Holding Company's Board of Directors (in each case pursuant to which a majority of the Incumbent Directors 9 shall have voted in favor of such approval), and may not be changed or terminated on or after a Change in Control without the written consent of the affected Employee(s). 8.7 HEADINGS. The headings of the Articles and Sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 8.8 SUCCESSORS AND ASSIGNS. This Plan Agreement is intended to bind and inure to the benefit of and be enforceable by Employee and the Company, and their respective successors, assigns, heirs, executors and administrators. 8.9 ARBITRATION. Any and all disputes or controversies, arising from or regarding the interpretation, performance, enforcement or termination of this Plan Agreement shall be resolved, subject to Section 7.2 hereof, by final and binding arbitration under the procedures set forth in the Arbitration Procedure attached hereto as Exhibit C and the then existing Judicial Arbitration and --------- Mediation Services, Inc. ("JAMS") Rules of Practice and Procedure or the rules of practice and procedure of any successor entity to JAMS (except insofar as they are inconsistent with the procedures set forth in the enclosed Arbitration Procedure). 8.10 ATTORNEY FEES. In the event of any arbitration or litigation or any other action or proceeding relating to the interpretation, performance, enforcement or termination of this Plan Agreement, the Company, Holding Company and Employee shall be responsible for its own fees and costs, including reasonable attorneys' fees, incurred as a result of such action or proceeding; provided, however, that if any Employee brings an action or proceeding hereunder in good faith, then the Company or the Holding Company shall reimburse such Employee for his or her fees, costs and reasonable attorneys fees in connection therewith, regardless of the outcome of the proceeding. 8.11 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Plan Agreement will be governed by the laws of the State of California, except to the extent preempted by federal law. 8.12 TRANSFER OF SERVICES TO AFFILIATE. This Plan Agreement shall not prohibit the Company, prior to a "Change in Control", from transferring Employee's services to an affiliate of the Company, provided that the rights and obligations of the parties hereto shall not terminate in the event of such transfer, and provided further that the new entity for which Employee is performing services also shall be bound hereby without the need for further written agreement and without release of the Company. 8.13 NO VIOLATION OF GOVERNING BANKING LAW. Nothing in this Plan Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law, rule, regulation or order. The Company's inability, pursuant to court or regulatory order, to perform its obligations under this Plan Agreement or the modification of this Plan Agreement by the FDIC or other bank regulatory agency through administrative action shall not constitute a breach of this Plan Agreement. Except to the extent provided in Section 3.3, the provisions of this Plan Agreement shall be severable. If this Plan Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall 10 nevertheless perform its obligations hereunder to the full extent permitted by any applicable portion of this Plan Agreement that shall not have been invalidated, and the balance of this Plan Agreement not so invalidated shall be enforceable in accordance with its terms. 8.14 CONSTRUCTION OF PLAN AGREEMENT. In the event of a conflict between the text of the Plan Agreement and any summary, description or other information regarding the Plan Agreement, the text of the Plan Agreement shall control. IN WITNESS WHEREOF, the Company has caused this Plan Agreement to be duly adopted as of the Effective Date. COMPANY HOLDING COMPANY By: /s/ James H. Herbert, II By: /s/ James H. Herbert, II ------------------------------ ---------------------------- Its: President Its: President ------------------------------ ---------------------------- By: /s/ Katherine August-deWilde By: /s/ Katherine August-deWilde ------------------------------ ---------------------------- Its: Executive Vice President Its: Executive Vice President ------------------------------ ---------------------------- Exhibit A: Severance Benefit Table Exhibit B: Employee Plan Agreement and Release Exhibit C: Arbitration Procedure 11 EXHIBIT A SEVERANCE BENEFIT TABLE
Category Title or Grade Factor (# of Years) - -------- -------------- ------------------ I. President/CEO; Executive Vice President/COO; Senior Vice President/CFO; Executive Vice President - Nevada; Senior Vice President/General Counsel................... 2 II. Vice President (other than Vice President - Credit & Underwriting)........................................... 1.5* III. Managing Directors - Lending; Regional Savings Managers; Director of Loan Administration; Director of Secondary Marketing............................................... 1.5* IV. Loan Officers; Savings Branch Managers; Team Processing Managers; Loan Originator; Senior Loan Processors; Director of Marketing; Treasurer; Manager Loan Closing; Savings Operations Manager; Manager, Special Assets; Accounting Manager; Assistant Credit Administrator; MIS Department Personnel; Senior Credit Officer; Vice President - Credit & Underwriting; Senior Consultant; Senior Financial Analyst................................ 1* V. Other Employees in Exempt Status........................ 0.75* VI. Employees in Non Exempt Status.......................... Will receive 4 weeks of Weekly Wage, plus two weeks for every full year with the Company, up to a total maximum of 28 ----- weeks of Weekly Wage.* EXAMPLE: Non-exempt Employee who had worked for the Company for 5 full years at the date of a Covered Termination shall receive a Severance Benefit equal to 14 weeks of Weekly Wage.
______________________ * The factor for any Employee in these categories who has been employed by the Company for less than one year as of the date of a Change in Control shall be reduced in proportion to the percentage of his/her time of employment bears to one year. For this purpose, time of employment shall be based on the number of full months in the Company's employ. EXAMPLE: If an Employee in Category II has been with the Company nine months as of the Change of Control date, his/her severance factor shall be reduced to 1.125 (9 mos. is 75% of 1 yr; 75% of 1.5 = 1.125). The President/CEO and the Executive Vice President/COO each have the authority to waive this factor reduction in their sole and absolute discretion as to any such Employee. 12 EXHIBIT B.1 EMPLOYEE AGREEMENT AND RELEASE I hereby release, acquit and forever discharge the First Republic Savings Bank, its parents and subsidiaries (collectively, the "Company"), and their officers, directors, agents, servants, employees, shareholders, attorneys, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed (other than any claim for indemnification which I may have as a result of any third party action against me based on my employment with the Company), arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the effective date of this Agreement, including but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with my employment with the Company or the termination of that employment, including but not limited to, claims of intentional and negligent infliction of emotional distress, any and all tort claims for personal injury, claims or demands related to salary, bonuses, commissions, stock, stock options, or any other ownership interests in the Company, vacation pay, fringe benefits, expense reimbursements, severance pay, or any other form of compensation; claims pursuant to any federal, state or local law, statute or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Americans with Disabilities Act of 1990; the California Fair Employment and Housing Act, as amended; tort law; contract law; wrongful discharge; discrimination; harassment; fraud; defamation; emotional distress; and breach of the implied covenant of good faith and fair dealing; provided, however, that nothing in this paragraph shall be construed in any way to release the Company (i) from its obligation to indemnify me pursuant to any Indemnification Agreement between me and the Company which is currently in effect; or (ii) from the Company's obligations as otherwise set forth under the Company's Change in Control Severance Benefits Plan Agreement, the Company's Retention Bonus and Insurance Benefits Plan Agreement, and the generally applicable employee benefit plans, programs and arrangements of the Company. In giving this release, which includes claims which may be unknown to me at present, I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO THE CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any claims I may have against the Company. I UNDERSTAND AND AGREE COMPLETELY TO THE TERMS SET FORTH IN THE FOREGOING AGREEMENT. By:____________________________________ [Employee Name] Date:____________________________, 199_ [FOR PARTICIPANTS UNDER AGE 40] 13 EXHIBIT B.2 EMPLOYEE AGREEMENT AND RELEASE I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any claims I may have against First Republic Savings Bank, its parents and subsidiaries (collectively the "Company"). I hereby release, acquit and forever discharge the Company, and their officers, directors, agents, servants, employees, shareholders, attorneys, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed (other than any claim for indemnification I may have as a result of any third party action against me based on my employment with the Company), arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the effective date of this Agreement, including but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with my employment with the Company or the termination of that employment, including but not limited to, claims of intentional and negligent infliction of emotional distress, any and all tort claims for personal injury, claims or demands related to salary, bonuses, commissions, stock, stock options, or any other ownership interests in the Company, vacation pay, fringe benefits, expense reimbursements, severance pay, or any other form of compensation; claims pursuant to any federal, state or local law or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"); the federal Americans with Disabilities Act of 1990; the California Fair Employment and Housing Act, as amended; tort law; contract law; wrongful discharge; discrimination; fraud; defamation; emotional distress; and breach of the implied covenant of good faith and fair dealing; provided, however, that nothing in this paragraph shall be construed in any way to release the Company (i) from its obligation to indemnify me pursuant to any Indemnification Agreement between me and the Company which is currently in effect; or (ii) from the Company's obligations as otherwise set forth under the Company's Change in Control Severance Benefits Plan Agreement, the Company's Retention Bonus and Insurance Benefits Plan Agreement, and the generally applicable employee benefit plans, programs and arrangements of the Company. I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under ADEA. I also acknowledge that the consideration given for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (A) my waiver and release do not apply to any rights or claims that may arise after the effective date of this Agreement; (B) I should consult with an attorney prior to executing this Agreement; (C) I have [TWENTY-ONE (21)] [INSERT OTHER PERIOD OF TIME IF APPROPRIATE] days to consider this Agreement (although I may choose to voluntarily execute this Agreement earlier); (D) I have seven (7) days following the execution of this Agreement by the parties to revoke the Agreement; and (E) this Agreement shall not be effective until the date upon which the revocation period has expired, which shall be the eighth day after this Agreement is executed by me. I UNDERSTAND AND AGREE COMPLETELY TO THE TERMS SET FORTH IN THE FOREGOING AGREEMENT. By:____________________________________ [Employee Name] Date:____________________________, 199_ [FOR PARTICIPANTS WHO ARE AGE 40 AND OLDER] 14 EXHIBIT C ARBITRATION PROCEDURE 1. The parties agree that any dispute that arises in connection with the payment of benefits under this Plan Agreement or the termination of this Plan Agreement shall be resolved by binding arbitration in the manner described below. 2. A party intending to seek resolution of any dispute under the Plan Agreement by arbitration shall provide a written demand for arbitration to the other party, which demand shall contain a brief statement of the issues to be resolved. 3. The arbitration shall be conducted in San Francisco County, California by a mutually acceptable retired judge from the panel of Judicial Arbitration and Mediation Services, Inc. or any entity performing the same type of services that succeeds to its business ("JAMS"). At the request of either party, arbitration proceedings will be conducted in the utmost secrecy and, in such case all documents, testimony and records shall be received, heard and maintained by the arbitrator in secrecy under seal, available for inspection only by the parties to the arbitration, their respective attorneys, and their respective expert consultants or witnesses who shall agree in advance and in writing, to receive all such information confidentially and to maintain such information in secrecy, and make no such use of such information except for the purposes of the arbitration, unless compelled by legal process. 4. The arbitrator is required to disclose any circumstances that might preclude the arbitrator from rendering an objective and impartial determination. In the event the parties cannot mutually agree upon the selection of a JAMS arbitrator, the President of JAMS shall designate the arbitrator. 5. The party demanding arbitration shall promptly request that JAMS conduct a scheduling conference with fifteen (15) days of the date of that party's written demand for arbitration or on the first available date thereafter on the arbitrator's calendar. The arbitration hearing shall be held within thirty (30) days after the scheduling conference or on the first available date thereafter on the arbitrator's calendar. 6. Discovery shall be conducted as follows: (a) prior to the arbitration any party may make a written demand for lists of the witnesses to be called and the documents to be introduced at the hearing; (b) the lists must be served within fifteen (15) days of the date of receipt of the demand, or one day prior to the arbitration, whichever is earlier; and (c) each party may take no more than two depositions (pursuant to the procedures set forth in the California Code of Civil Procedure) with a maximum of five hours of examination time per deposition, and no other form of pre-arbitration discovery shall be permitted. 7. It is the intent of the parties that the Federal Arbitration Act ("FAA") shall apply to the enforcement of this provision unless it is held inapplicable by a court with jurisdiction over the dispute, in which event the California Arbitration Act ("CAA") shall apply. 8. Except to the extent preempted by federal law, the arbitrator shall apply California law, including the California Evidence Code, and shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a preliminary injunction, a permanent injunction, or replevin of Company property. The arbitrator shall also be able to award actual, general or consequential damages, but shall not award any other form of damage (e.g., punitive damages). 15 EX-10.19 3 RETENTION BONUS AND INSURANCE BENEFITS PLAN EXHIBIT 10.19 RETENTION BONUS AND INSURANCE BENEFITS PLAN AGREEMENT Effective as of the 5th day of February, 1997 ("Effective Date"), FIRST REPUBLIC SAVINGS BANK, a Nevada corporation (the "COMPANY"), and its parent, FIRST REPUBLIC BANCORP INC., a Delaware corporation (the "HOLDING COMPANY"), hereby create this RETENTION BONUS AND INSURANCE BENEFITS PLAN AGREEMENT (the "Benefits Plan"). This Benefits Plan is intended to provide Company and Holding Company employees (each, an "Employee") with the compensation and benefits described herein upon the occurrence of specific events. Certain capitalized terms used in this Benefits Plan are defined in Article 4. Reference herein to the rights and obligations of the Company with respect to its Employees shall also be deemed to be the rights and obligations of the Holding Company with respect to its Employees. The Company hereby agrees for the benefit of each Employee as follows: ARTICLE 1 EMPLOYMENT BY THE COMPANY 1.1 Each Employee shall be eligible for the benefits herein set forth on the Effective Date (if such Employee is employed by the Company on that date), or on the date upon which a person subsequently is employed by the Company during the term of this Benefits Plan. 1.2 This Benefits Plan shall remain in full force and effect for the two year period specified in Article 5; provided, however, that the rights and obligations contained in Articles 2 through 5 shall survive for the longer of (i) two (2) years from the Effective Date of the Benefits Plan or (ii) one (1) year following a Change in Control (as hereinafter defined) or such later period as may be required so that all benefits to which Employee is entitled under this Benefits Plan are paid or otherwise provided to Employee. 1.3 The Company wishes to set forth specified compensation and benefits which Employee shall be entitled to receive in the event that there is a Change in Control. Such compensation and benefits are in addition to any other compensation and benefits an Employee may be eligible to receive in the event of a Change in Control or events related thereto as may be provided for in any other plan or agreement. 1.4 The duties and obligations of the Company to Employee under this Benefits Plan shall be in consideration for Employee's services to the Company and Employee's continued employment with the Company. 1 ARTICLE 2 BENEFITS 2.1 ENTITLEMENT TO BENEFITS. Upon the occurrence of the events herein described, the Company shall pay Employee the compensation and benefits described in this Article 2. Payment of any benefits described in this Article 2 shall be subject to the restrictions and limitations set forth in Article 3. 2.2 RETENTION BONUS. 2.2.1 Each Employee, other than Senior Management Employees, shall be entitled to receive a bonus (the "Retention Bonus") in the event that he or she remains employed with the Company for a period of at least four months from the date of a Change in Control. For exempt, salaried Employees, the amount of the Retention Bonus shall be equal to 15% of the sum of: (i) the Employee's current Annual Base Salary (as of the date of the Change in Control); and (ii) the Employee's Bonus earned for the calendar year immediately preceding the date of the Change in Control. For example, if the Employee's Annual Base Salary is $50,000 and the Bonus earned for the prior calendar year was $10,000, the Employee's Retention Bonus would be 15% of $60,000, or $9,000. For each non- exempt, hourly wage Employee, the Retention Bonus shall be equal to 15% of his or her annualized compensation (determined as of the date of Change in Control by the Company's Chief Financial Officer in consultation with the Company's independent auditors). The Retention Bonus shall be paid in a lump sum (after deduction of applicable withholding taxes) to each Employee who has remained employed by the Company for the requisite four month period, within 30 days after the expiration of said four month period. Nothing herein shall require the Company or its successor to continue any Employee's employment with the Company for any period of time after a Change in Control, or otherwise changes each such Employee's at will employment status. In the event the Employee is not employed by the Company for the entire four month period (for any reason, including but not limited to termination of employment), a Retention Bonus will not be paid to said Employee. DEATH OF AN EMPLOYEE. If an Employee dies after becoming eligible to receive the payment of the Retention Bonus, but before such benefit is paid to the Employee, such Retention Bonus shall be paid to the Employee's surviving spouse or, if there is no surviving spouse, to the Employee's estate. 2.2.2 Automatically upon a Change in Control, the Company or its successor shall be obligated to provide the following benefits to each Senior Management Employee: Medical (including dental) insurance benefits, disability insurance benefits, and life insurance benefits which as to scope and cost are either identical to the benefits available to said Senior Management Employees (and their children, dependents and other covered family members) immediately prior to the date of the Change in Control, or identical to the benefits available to senior management of the entity acquiring the Company as of the date of the Change in Control, whichever is the greater benefit to the Senior Management Employee. This obligation to provide medical, disability and life insurance benefits to said Senior Management Employees and his/her children, dependents and other covered family members shall continue with respect to any such Senior Management Employee until he/she reaches the age of 65, and irrespective of whether or not any such Senior Management Employee remains in the employ of the Company or its successor entity. For purposes of this provision, the reference to "life insurance benefits" 2 shall not include the Equitable Split Dollar Life Insurance Plan benefit currently provided by the Company to certain of said Senior Management Employees. The Senior Management Employees shall not be required to mitigate damages or the amount of any payment provided under this Benefits Plan by seeking other employment or otherwise. In the event a Senior Management Employee is no longer employed by the Company or its successor and subsequently elects other medical and/or other disability insurance, the obligation of the Company or its successor shall cease, but only as to the type of insurance so elected by the Senior Management Employee. 2.3 BASIS OF PAYMENTS. All benefits under this Benefits Plan shall be paid by the Company. This Benefits Plan shall be unfunded, and benefits hereunder shall be paid only from the general assets of the Company. ARTICLE 3 LIMITATIONS; OTHER RIGHTS; NON-ALIENATION 3.1 LIMITS IMPOSED BY APPLICABLE BANKING LAW. Notwithstanding any other provision of this Benefits Plan to the contrary, the Company shall not be obligated under this Benefits Plan to pay any benefit to the extent that such payment would violate any prohibition or limitation on termination payments under any applicable federal or state statute, rule or regulation promulgated, or effective order issued, by any federal or state regulatory agency having jurisdiction over the Company. Without limiting the foregoing, the Company acknowledges that the Federal Deposit Insurance Corporation (the "FDIC") has issued a regulation that prohibits payment of certain benefits under certain circumstances, unless such payments were approved by the FDIC and any other applicable regulator. 3.2 NONEXCLUSIVITY. Nothing in the Benefits Plan shall prevent or limit Employee's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices provided by the Company and for which Employee may otherwise qualify, nor, except as specifically provided herein, shall anything herein limit or otherwise affect such rights as Employee may have under any stock option or other agreements or plans with the Company. 3.3 No benefit hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to so subject a benefit hereunder shall be void. ARTICLE 4 DEFINITIONS For purposes of the Plan Agreement, the following terms shall have the meanings set forth below: 4.1 "AGREEMENT" OR "BENEFITS PLAN" means this Retention Bonus and Insurance Benefits Plan Agreement. 4.2 "ANNUAL BASE SALARY" means the amount of compensation provided by the Company to Employee as base salary if the Employee is an exempt, salaried employee according to the Company's personnel 3 records. Such amount shall be determined by annualizing the highest base rate_in effect for Employee at any time immediately prior to, on, or after the date of the Change in Control, exclusive of any bonus or other incentive cash compensation, income from any stock options or other stock awards, supplemental deferred compensation contributions made by the Company, pension or profit sharing contributions or distributions (except as provided below), insurance payments or proceeds, fringe benefits, or other form of additional compensation, but specifically including any amounts withheld from base salary to provide benefits pursuant to Section 125 or 401(k) of the Internal Revenue Code or pursuant to any other plan or program of deferred compensation with respect to elective deferrals of compensation otherwise payable currently. 4.3 "BONUS" means the Employee's bonus compensation received for the calendar year immediately preceding the Change in Control. For purposes of determining a bonus compensation for the preceding calendar year, the bonus compensation shall be attributable to the year in which the bonus was earned, even though all or part of the bonus may have been actually paid to the Employee in the subsequent year. 4.4 "CHANGE IN CONTROL" means the consummation of any of the following transactions during the term of this Benefits Plan: (a) the Company or Holding Company merges or consolidates with any other corporation, other than a merger or consolidation which would result in beneficial owners of the total voting power in the election of directors represented by the voting securities ("Voting Securities") of the Company or Holding Company (as the case may be) outstanding immediately prior thereto continuing to beneficially own securities representing (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total Voting Securities of the Company or Holding Company, or of such surviving entity, outstanding immediately after such merger or consolidation; (b) the Company or Holding Company liquidates or dissolves, or sells, leases, exchanges or otherwise transfers or disposes of all or substantially all of the Company's assets; (c) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than (A) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or Holding Company, (B) a corporation owned directly or indirectly by the shareholders of Holding Company in substantially the same proportions as their beneficial ownership of stock in Holding Company, or (C) Holding Company (with respect to its ownership of the stock of the Company), is or becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of the securities of the Company or Holding Company representing fifty percent (50%) or more of the Voting Securities; or (d) (A) (1) the shareholders of the Company or the Holding Company, approve a merger or consolidation of the Company or Holding Company with any other corporation, other than a merger or consolidation which would result in beneficial owners of Voting Securities of the Company or Holding Company (as the case may be) outstanding immediately prior thereto continuing to beneficially own securities representing (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than seventy-five percent (75%) of the total Voting Securities of the Company or Holding Company, or of such surviving entity, outstanding immediately after such merger or consolidation, or (2) any person (as such term is 4 used in Sections 13(d) or 14(d) of the Exchange Act), other than (a) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or Holding Company, (b) a corporation owned directly or indirectly by the shareholders of Holding Company in substantially the same proportions as their ownership of stock in Holding Company, or (c) Holding Company (with respect to Holding Company's ownership of the stock of the Company), is or becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of the securities of the Company or Holding Company representing 25% or more of the Voting Securities of such corporation, and (B) within twelve (12) months of the occurrence of such event, a change in the composition of the Board of Directors of the Company or Holding Company occurs as a result of which sixty percent (60%) or fewer of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company and of the Holding Company as of the date hereof; (B) are elected, or nominated for election, to the Board of Directors of the Company and of the Holding Company with the affirmative votes of at least a majority of the directors of the Company or Holding Company who are Incumbent Directors described in (A) above at the time of such election or nomination; or (C) are elected, or nominated for election, to the Board of Directors of the Company or the Holding Company with the affirmative votes of at least a majority of the directors of the Company or Holding Company who are Incumbent Directors described in (A) or (B) above at the time of such election or nomination. Notwithstanding the foregoing, "Incumbent Directors" shall not include an individual whose election or nomination to the Board of Directors of the Company or Holding Company occurs in order to provide representation for a person or group of related persons who have initiated or encouraged an actual or threatened proxy contest relating to the election of directors of the Company or Holding Company. 4.5 "COMPANY" means First Republic Savings Bank, a Nevada corporation, and any successor thereto. 4.6 "EMPLOYEE" means a person employed as a common law employee with the Company or Holding Company on the date of a Change in Control. For purposes of this Benefits Plan, "Employee" excludes a person in any of the following categories immediately prior to a Change in Control: (a) person whom the Company or Holding Company treats as an independent contractor; (b) an individual serving the Company or Holding Company through an agency, payroll service, sub- contractor or other third party provider; (c) a person who is employed up to a maximum defined term and who is employed without regular employee benefits; (d) a seasonal employee who is employed for less than twelve (12) consecutive months and who is employed without regular employee benefits; (e) an employee on leave of absence after the period of time the Company or Holding Company has committed or is required to return him or her to active employment based on the requirements of law, written policy or Company or Holding Company practice; (f) a part-time hourly employee who works on an unscheduled, on-call basis; and (g) any employee acquired by the Company or Holding Company as a result of 5 a merger or other business combination until the first anniversary date of the acquisition, unless some other date is specified by agreement with the acquired entity. 4.7 "SENIOR MANAGEMENT" or "SENIOR MANAGEMENT EMPLOYEE" means the following Employees: President/CEO; Executive Vice President/COO; Executive Vice President-Nevada; Senior Vice President/CFO; and Senior Vice President/General Counsel. ARTICLE 5 TERM OF PLAN AGREEMENT; ADMINISTRATION 5.1 TERM. This Benefits Plan shall have a term of two (2) years, commencing as of the Effective Date. 5.2 ADMINISTRATION. This Benefits Plan shall be administered and interpreted by a committee (the "Committee") composed of the three individuals holding the following positions immediately prior to a Change in Control: the Executive Vice President/COO, the Senior Vice President/CFO, and the Senior Vice President/General Counsel. The Committee shall have the full and exclusive discretion to interpret and administer the Benefits Plan. All actions, interpretations and decisions of the Committee shall be conclusive and binding on all persons, and shall be given the maximum possible deference allowed by law. ARTICLE 6 GENERAL PROVISIONS 6.1 EMPLOYMENT STATUS. This Plan Agreement does not constitute a contract of employment or impose on Employee any obligation to remain as an employee, or impose on the Company any obligation (i)to retain Employee as an employee, (ii) to change the status of Employee as an at-will employee, or (iii) to change the Company's policies regarding termination of employment. 6.2 NOTICES. Any notices provided hereunder must be in writing and such notices or any other written communication shall be deemed effective upon the earlier of personal delivery (including personal delivery by telex or facsimile) or the third day after mailing by first class mail, to the Company at its administrative headquarters located at 388 Market Street, San Francisco, California 94111: Attention: General Counsel (or to its primary office location if no longer at the above address), and to Employee at his or her address as listed in the Company's payroll records. Any payments made by the Company to Employee under the terms of this Benefits Plan shall be delivered to Employee either in person or at his or her address as listed in the Company's payroll records. 6.3 SEVERABILITY. Whenever possible, each provision of this Benefits Plan will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Benefits Plan is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Benefits Plan will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions 6 had never been contained herein. 6.4 WAIVER. If either party should waive any breach of any provisions of this Benefits Plan, such party shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Benefits Plan. 6.5 COMPLETE PLAN AGREEMENT. This Benefits Plan, and any other written agreements expressly referred to in this Benefits Plan, constitutes the entire, complete, final, and exclusive embodiment of the agreement with regard to this subject matter. 6.6 AMENDMENT OR TERMINATION OF BENEFITS PLAN. This Benefits Plan Agreement may be changed or terminated prior to a Change in Control only if such change or termination has been approved by the Company's and Holding Company's Board of Directors (in each case pursuant to which a majority of the Incumbent Directors shall have voted in favor of such approval), and may not be changed or terminated on or after a Change in Control without the written consent of the affected Employee(s). 6.7 HEADINGS. The headings of the Articles and Sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 6.8 SUCCESSORS AND ASSIGNS. This Benefits Plan is intended to bind and inure to the benefit of and be enforceable by Employee and the Company, and their respective successors, assigns, heirs, executors and administrators. 6.9 ARBITRATION. Any and all disputes or controversies, arising from or regarding the interpretation, performance, enforcement or termination of this Plan Agreement shall be resolved, subject to Section 5.2 hereof, by final and binding arbitration under the procedures set forth in the Arbitration Procedure attached hereto as Exhibit A and the then existing Judicial Arbitration and --------- Mediation Services, Inc. ("JAMS") Rules of Practice and Procedure or the rules of practice and procedure of any successor entity to JAMS (except insofar as they are inconsistent with the procedures set forth in the enclosed Arbitration Procedure). 6.10 ATTORNEY FEES. In the event of any arbitration or litigation or any other action or proceeding relating to the interpretation, performance, enforcement or termination of this Benefits Plan, the Company, Holding Company and Employee shall be responsible for its own fees and costs, including reasonable attorneys' fees, incurred as a result of such action or proceeding; provided, however, that if any Employee brings an action or proceeding hereunder in good faith, then the Company or the Holding Company shall reimburse such Employee for his or her fees, costs and reasonable attorneys fees in connection therewith, regardless of the outcome of the proceeding. 6.11 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Plan Agreement will be governed by the laws of the State of California. 6.12 TRANSFER OF SERVICES TO AFFILIATE. This Benefits Plan shall not prohibit the Company, prior to a "Change in Control", from transferring Employee's services to an affiliate of the Company, provided that the rights and obligations of the parties hereto shall not terminate in the event of such transfer, and provided 7 further that the new entity for which Employee is performing services also shall be bound hereby without the need for further written agreement and without release of the Company. 6.13 NO VIOLATION OF GOVERNING BANKING LAW. Nothing in this Benefits Plan is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law, rule, regulation or order. The Company's inability, pursuant to court or regulatory order, to perform its obligations under this Benefits Plan or the modification of this Benefits Plan by the FDIC or other bank regulatory agency through administrative action shall not constitute a breach of this Benefits Plan. Except to the extent provided in Section 3.1, the provisions of this Benefits Plan shall be severable. If this Benefits Plan or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless perform its obligations hereunder to the full extent permitted by any applicable portion of this Benefits Plan that shall not have been invalidated, and the balance of this Benefits Plan not so invalidated shall be enforceable in accordance with its terms. 6.14 CONSTRUCTION OF BENEFITS PLAN. In the event of a conflict between the text of the Benefits Plan and any summary, description or other information regarding the Benefits Plan, the text of the Benefits Plan shall control. IN WITNESS WHEREOF, the Company has caused this Benefits Plan to be duly adopted as of the Effective Date. COMPANY HOLDING COMPANY By: /s/ James H. Herbert, II By: /s/ James H. Herbert, II ------------------------------ ----------------------------- Its: President Its: President ------------------------------ ----------------------------- By: /s/ Katherine August-deWilde By: /s/ Katherine August-deWilde ------------------------------ ----------------------------- Its: Executive Vice President Its: Executive Vice President ------------------------------ ----------------------------- Exhibit A: Arbitration Procedure 8 EXHIBIT A ARBITRATION PROCEDURE 1. The parties agree that any dispute that arises in connection with the payment of benefits under this Benefits Plan or the termination of this Benefits Plan shall be resolved by binding arbitration in the manner described below. 2. A party intending to seek resolution of any dispute under the Benefits Plan by arbitration shall provide a written demand for arbitration to the other party, which demand shall contain a brief statement of the issues to be resolved. 3. The arbitration shall be conducted in San Francisco County, California by a mutually acceptable retired judge from the panel of Judicial Arbitration and Mediation Services, Inc. or any entity performing the same type of services that succeeds to its business ("JAMS"). At the request of either party, arbitration proceedings will be conducted in the utmost secrecy and, in such case all documents, testimony and records shall be received, heard and maintained by the arbitrator in secrecy under seal, available for inspection only by the parties to the arbitration, their respective attorneys, and their respective expert consultants or witnesses who shall agree in advance and in writing, to receive all such information confidentially and to maintain such information in secrecy, and make no such use of such information except for the purposes of the arbitration, unless compelled by legal process. 4. The arbitrator is required to disclose any circumstances that might preclude the arbitrator from rendering an objective and impartial determination. In the event the parties cannot mutually agree upon the selection of a JAMS arbitrator, the President of JAMS shall designate the arbitrator. 5. The party demanding arbitration shall promptly request that JAMS conduct a scheduling conference with fifteen (15) days of the date of that party's written demand for arbitration or on the first available date thereafter on the arbitrator's calendar. The arbitration hearing shall be held within thirty (30) days after the scheduling conference or on the first available date thereafter on the arbitrator's calendar. 6. Discovery shall be conducted as follows: (a) prior to the arbitration any party may make a written demand for lists of the witnesses to be called and the documents to be introduced at the hearing; (b) the lists must be served within fifteen (15) days of the date of receipt of the demand, or one day prior to the arbitration, whichever is earlier; and (c) each party may take no more than two depositions (pursuant to the procedures set forth in the California Code of Civil Procedure) with a maximum of five hours of examination time per deposition, and no other form of pre-arbitration discovery shall be permitted. 7. It is the intent of the parties that the Federal Arbitration Act ("FAA") shall apply to the enforcement of this provision unless it is held inapplicable by a court with jurisdiction over the dispute, in which event the California Arbitration Act ("CAA") shall apply. 8. The arbitrator shall apply California law, including the California Evidence Code, and shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a preliminary injunction, a permanent injunction, or replevin of Company property. The arbitrator shall also be able to award actual, general or consequential damages, but shall not award any other form of damage (e.g., punitive damages). 9 EX-11.1 4 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1 FIRST REPUBLIC BANCORP INC. STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------------ ----------- ----------- ------------ ------------ Primary: Net income available to common stock.......... $ 12,507,000 $ 1,170,000 $ 7,303,000 $ 12,439,000 $ 11,762,000 ============ =========== =========== ============ ============ Wtd. avg. shares out- standing, including treasury shares....... 7,816,400 7,797,100 7,743,965 7,716,086 7,340,523 Wtd. avg. shares issua- ble from Preferred Stock, Series C....... -- -- -- -- 32,854 Wtd. avg. shares con- verted from convert- ible subordinated de- bentures.............. 24,296 -- -- -- -- Effect of stock options exercised during peri- od.................... 15,544 6,051 15,275 7,472 33,667 Wtd. avg. shares of dilutive stock options using average stock price under treasury stock method.......... 321,834 225,923 298,340 284,512 284,017 Wtd. avg. shares of stock purchased by em- ployees............... 8,750 4,986 5,624 2,746 -- Wtd. avg. shares of treasury stock........ (472,091) (444,835) (92,371) (141) -- Wtd. avg. shares of un- allocated ESOP........ (9,273) -- -- -- -- ------------ ----------- ----------- ------------ ------------ Adjusted shares out- standing-primary...... 7,705,460 7,589,225 7,970,833 8,010,675 7,691,061 ============ =========== =========== ============ ============ Net income per share- $1.62 $0.15 $0.92 $1.55 $1.53 primary............... ===== ===== ===== ===== ===== Fully-Diluted: Net income available to common stock.......... $ 12,507,000 $ 1,170,000 $ 7,303,000 $ 12,439,000 $ 11,762,000 Effect of convertible subordinated deben- tures, net of taxes (1)................... 1,571,000 1,594,000 1,597,000 1,599,000 94,000 ------------ ----------- ----------- ------------ ------------ Adjusted net income for fully-diluted calcula- tion.................. $ 14,078,000 $ 2,764,000 $ 8,900,000 $ 14,038,000 $ 11,856,000 ============ =========== =========== ============ ============ Adjusted shares-prima- ry, from above........ 7,705,460 7,589,225 7,970,833 8,010,675 7,691,061 Wtd. avg. shares issua- ble upon conversion of convertible subordi- nated debentures(1)... 2,499,914 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 trea- sury stock method..... 41,045 12,661 4,904 32,915 6,786 ------------ ----------- ----------- ------------ ------------ Adjusted shares out- standing-fully-dilut- ed.................... 10,246,419 10,126,096 10,499,947 10,567,800 7,832,484 ============ =========== =========== ============ ============ Net income per share- $1.37 $0.15(2) $0.85 $1.33 $1.51 fully-diluted......... ===== ======= ===== ===== =====
- -------- Per share amounts and numbers of shares have been adjusted to reflect the effect of two 3% stock dividends declared by the Company's Board of Directors to stockholders of record on February 25, 1993 and February 18, 1994. (1)Due to the issuance of convertible subordinated debentures in December 1992, the fully-diluted calculation includes the number of shares which would be outstanding if all such debentures were converted and adjusts reported net income for the effect of interest expense on the debentures, net of taxes. (2)For 1995, the convertible subordinated debentures are antidilutive and, accordingly, the results of the primary EPS calculation are reported for fully-diluted EPS. EX-12.1 5 RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 FIRST REPUBLIC BANCORP INC. RATIO OF EARNINGS TO FIXED CHARGES
YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1995 1994 1993 1992 -------- -------- -------- ------- ------- ($ IN THOUSANDS) I. Income before income taxes....... $ 21,270 $ 1,856 $ 12,238 $21,399 $19,805 ======== ======== ======== ======= ======= II. Fixed charges, excluding interest on customer deposits: Total interest on debentures and other borrowings................ $ 41,009 $ 42,780 $ 30,411 $21,599 $19,340 ======== ======== ======== ======= ======= III. Fixed charges, including inter- est on customer deposits: Interest on debentures and other borrowings...................... $ 41,009 $ 42,780 $ 30,411 $21,599 $19,340 Interest on customer deposits.... 72,025 62,133 41,024 35,318 39,636 -------- -------- -------- ------- ------- Total fixed charges including interest on customer deposits... $113,034 $104,913 $ 71,435 $56,917 $58,976 ======== ======== ======== ======= ======= IV. Ratio of earnings to fixed charges: Excluding interest on customer deposits........................ 1.52 1.04 1.40 1.99 2.02 Including interest on customer deposits........................ 1.19 1.02 1.17 1.38 1.34
EX-13.1 6 1996 ANNUAL REPORT EXHIBIT 13.1 [LOGO] FIRST REPUBLIC BANCORP 1996 ANNUAL REPORT [PICTURE OF UNITED STATES EAGLE ON REVERSE SIDE OF ONE DOLLAR COIN APPEARS HERE] It's a privilege to serve you[SM] Financial Highlights (in thousands, except per share amounts)
At Year End 1996 1995 1994 1993 1992 Total Assets $2,156,599 $1,904,253 $1,707,319 $1,417,193 $1,232,517 Cash and Investments 218,519 202,352 190,773 146,513 158,306 Loans, Net 1,902,813 1,659,815 1,477,492 1,233,995 1,042,478 Customer Deposits 1,353,148 1,140,441 948,833 751,671 698,772 FHLB Advances 591,530 570,530 570,530 468,530 373,530 Subordinated Debentures 60,166 64,053 64,177 60,957 55,050 Stockholders' Equity 126,410 108,260 107,286 104,946 92,125 Loans Serviced 799,500 804,856 843,144 814,453 781,564 Tangible Book Value Per Share $16.46 $14.76 $14.40 $13.58 $11.94 For the Year 1996 1995 1994 1993 1992 Total Interest Income $ 159,746 $ 139,594 $ 109,365 $ 98,347 $ 95,563 Net Interest Income 46,712 34,681 37,930 41,430 36,587 Net Income $ 12,507 $ 1,170 $ 7,303 $ 12,439 $ 11,762 Average Fully-Diluted Shares Outstanding 10,246 10,126 10,500 10,568 7,832 Fully-Diluted Earnings Per Share $1.37 $0.15 $0.85 $1.33 $1.51
[BAR GRAPH OF TOTAL ASSETS APPEARS HERE]
(dollars in millions) 92 1,233 93 1,417 94 1,707 95 1,904 96 2,157
[BAR GRAPH OF TOTAL CAPITAL APPEARS HERE]
(dollars in millions) 92 160 93 179 94 186 95 190 96 204
[BAR GRAPH OF NET INCOME APPEARS HERE]
(dollars in millions) 92 11.8 93 12.4 94 7.3 95 1.2 96 12.5
To Our Stockholders and Customers 1996 was a year of growth and change for First Republic. During the year, we reported record earnings, enhanced our asset quality and strengthened our capital base. We achieved solid loan growth, as our California markets rebounded from recession, and we significantly expanded and broadened our deposit franchise. Perhaps most importantly, we began an evolution in 1996 that we expect will result in our becoming a full-service commercial bank during 1997. This major change will help us meet our objective of building stockholder value as we continue to expand our products further while delivering our brand of outstanding, relationship-based service to our well-established high-end client base. [LOGOS OF FDIC, NEW YORK STOCK EXCHANGE AND FEDERAL HOME LOAN BANK APPEAR HERE] 1 Operating Markets [MAP OF CALIFORNIA AND NEVADA APPEARS HERE, SHOWING LOCATION OF COMPANY OFFICES] Evolution From Thrift to Bank We are currently embarked on an important transition that will eliminate our holding company and result in fully-chartered bank status, changes that will improve efficiency, lower our cost of funds and better position us to serve the substantial customer base that we have built over the past decade. Before we discuss this evolution, however, we would like to review First Republic's performance in 1996. Strong Financial Performance By most measures, 1996 was a good year for First Republic. The operating environment improved considerably in our three California metropolitan markets--San Francisco/Silicon Valley, Los Angeles/Beverly Hills and San Diego--and continued to be extremely strong in our Las Vegas market. The favorable operating climate in our markets, combined with our strategy of conservative fiscal management and careful growth, produced the following strong results: . Total assets exceeded $2.1 billion, up 13% for the year. . Net income of $12.5 million, or $1.37 earnings per fully-diluted share, was a new record for the Company and more than ten times last year's net income, as we returned to our prior profitability level. . Asset quality improved significantly, with non-earning assets declining at year end to only 1.3% of total assets. . Loan originations increased 45% to $848 million in 1996. . Deposits grew 19% in 1996 to $1.35 billion, reflecting our expanding deposit franchise, which now includes thirteen branch offices in four major metropolitan markets. . And, total capital passed $204 million, a strong 14.8% of risk-adjusted assets and well above regulatory requirements. 2 [PHOTOGRAPH OF CHAIRMAN AND PRESIDENT APPEARS HERE] Roger O. Walther, Chairman (left) and James H. Herbert, II, President and Chief Executive Officer "It's a privilege to serve our customers. We are pleased that service and satisfaction levels are extraordinarily high." Building for the Future One of our more important accomplishments in 1996 was the merging of our two thrift and loans into one Nevada banking subsidiary, First Republic Savings Bank--a major step in our transition to a commercial bank. In 1997, we hope to complete the conversion of our operating charter to a full-service bank and the concurrent merger of our holding company into the resultant bank, subject to regulatory and stockholder approval. We expect to emerge in mid-1997 as a publicly traded bank--a single operating entity with a strong management team and a consolidated Board of Directors. As a commercial bank, we will be able to offer a broader range of products and services to our growing client base, which we believe will enhance client satisfaction, improve profitability and increase stockholder value. 3 [BAR GRAPH APPEARS HERE] Total Deposits (dollars in millions) 92 699 93 752 94 949 95 1,140 96 1,353 17.4% per annum growth rate for the past five years. "Our greatest opportunity is to expand the range of services to our well- established, highly loyal and upscale client base." Meeting Customer Needs We have already begun to expand our deposit and loan products. We have introduced Reward checking for our individual customers, which provides unlimited check writing, pays interest and allows for worldwide ATM access. We will extend our checking services to businesses and partnerships later this year. These are valuable services for our customers and will help reduce our cost of funds. We've also introduced additional loan products to meet the diverse financing needs of our customers, including home construction loans, securities-collateralized loans, and unsecured loans for the bank's most qualified clients. Our strategy is to add new products and services that are most demanded by our customers, are service oriented, and are consistent with our criteria for profitability. We intend, for instance, to introduce home banking products that will provide our customers increased access to their First Republic accounts by telephone and personal computer. Our goal is to expand the service-oriented relationships that exist between the bank and our customers. 1997: A Watershed Year We expect 1997 to be both a pivotal and profitable year for First Republic. During the year, we will continue to introduce new products and open new branches to better position our Company to meet more of our customers' 4 banking needs. First Republic already ranks 29th out of a total of over 450 California and Nevada financial institutions in terms of assets. We expect to enhance this strong market position even further in 1997. As we continue to grow and evolve, however, the fundamentals of our business remain unchanged. We are committed to our core geographic markets, all four of which are growth markets with good economic trends and a combined population of more than 20 million people. We are committed to providing our customers with superior personal and responsive service. We are committed to remaining a leading home lender and a responsible corporate citizen in the markets we serve. And, we are committed to a course of careful, profitable growth that will enable us to maintain our high standards for credit and asset quality. In 1997, we expect to slow our balance sheet growth and focus on completing the transition from thrift to bank, to reduce our overall cost of funds, to broaden our range of products and services, and to achieve strong earnings growth. In closing, we'd like to thank our stockholders for their support, our customers for their business, and our employees for their dedication and hard work. We look forward to reporting to you on our progress in the coming months. /s/ Roger O. Walther Roger O. Walther Chairman /s/ James H. Herbert James H. Herbert, II President and Chief Executive Officer [BAR GRAPH APPEARS HERE] Tangible Book Value Per Share (in dollars) 92 11.94 93 13.58 94 14.40 95 14.76 96 16.46 11.4% per annum after tax rate of growth for the past five years. 5 "First Republic's service was extraordinary. They did everything they said they were going to do exactly when they said they were going to do it." /s/ Frank C. Herringer Frank C. Herringer, Chairman and Chief Executive Officer Transamerica Corporation With so many lenders and banks to choose from, why do our clients--most of whom could do business with any financial institution--choose First Republic? We believe that the answer lies in our unique combination of capital strength, excellent products, responsive service and old-fashioned concern for the customer. We put our clients first every time, whether meeting their time schedule, doing business how, when and where they want it, or designing a custom solution that's right for their situation. Quick closes are a First Republic hallmark. We completed Frank Herringer's loan within a very short timeframe even though the transaction was anything but routine. 6 [Photo of Frank C. Herringer] 7 [Photo of Michael K. Douglas] 8 "It is great to have a bank that is prompt, professional and private." /s/ Michael K. Douglas Michael K. Douglas, Actor and Producer Creative Solutions Whether building, buying or remodeling a house, condominium or estate, First Republic offers a broad range of loans--including construction and renovation loans--and the flexibility to meet our customers' needs. Home loans have been our core business since First Republic was founded. Since then, we have made loans totaling more than $5.8 billion and have refined our lending process to ensure that it is as smooth, efficient and timely as possible for our clients. Our experienced loan professionals provide attentive, responsive one-on-one service that leads to quick loan commitments and high customer loyalty. In fact, more than half of First Republic's loan customers return for refinancings, new loans or other banking services. 9 "If they gave a prize for banking, First Republic would surely be at the top of the list. Their creative, responsive and knowledgeable service is remarkable." /s/ Jane Smiley Jane Smiley, Pulitzer Prize-Winning Author [BAR GRAPH APPEARS HERE] Loans Originated (dollars in millions) 92 826 93 945 94 784 95 584 96 848
First Republic operates in four metropolitan areas--San Francisco/Silicon Valley, Los Angeles/Beverly Hills and San Diego, California and Las Vegas, Nevada. These markets have a combined total population of more than 20 million, providing us substantial opportunity to build both our lending and deposit franchises. In Las Vegas, which is one of the fastest growing markets in the nation, we continue to expand our deposit franchise and build our customer base. When Jane Smiley, author of the Pulitzer Prize-winning book, "Thousand Acres," and her husband Stephen Mortensen moved to California, they turned to First Republic to finance their home. 10 [Photo of Jane Smiley and Stephen Mortensen] 11 [Photo of Howard L. Clark Jr.] 12 "I get quick and decisive service from First Republic. I deal directly with the decision makers, even when I'm in New York and they're in San Francisco." /s/ Howard L. Clark Howard L. Clark Jr., Vice Chairman Lehman Brothers Technology Our extensive video teleconferencing system connects our clients with our loan officers or our executive loan committee. This technology contributes to a streamlined approval process and quick loan commitments, wherever our clients are located. First Republic is committed to providing personal service to its customers wherever they are located. With over 75 video teleconferencing units--one in each branch office, in the homes of loan officers and at realtor and title companies--we can meet face-to-face with customers anywhere they are. On a regular basis, our executive loan committee (pictured below) reviews the needs of our clients in transcontinental video conferences, leading to efficiency and clear communications. Corporate executives use our customized lending programs to exercise stock options, diversify their portfolios or meet other financial objectives. [PHOTOGRAPH OF EXECUTIVE LOAN COMMITTEE APPEARS HERE] From his office in Beverly Hills, Scott Dufresne, Regional Managing Director Lending, meets with Executive Loan Committee members (left to right) Paula Lazar, Katherine August-deWilde, and David Lichtman, in San Francisco. 13 "I'm not the tough guy that you may think. I appreciate First Republic's friendly, common sense approach and will do business with them again." /s/ Dennis Franz Dennis Franz, Emmy Award-Winning Actor of NYPD Blue The top priority for our team of bankers is to ensure that the loan process is as smooth and orderly as possible for clients from start to finish. To this end, we work hard to know our customers and understand their individual needs no matter how complex. With this insight, we can provide the highest level of personalized service and anticipate--or avoid altogether--many of the problems that can arise during the loan process. Our service philosophy is to minimize red tape and maximize one-on-one interaction with First Republic's professionals. We can work around the most demanding schedule, such as Dennis Franz's nearly daily filming of the highly popular television series, NYPD Blue. Dennis is pictured here with his wife Joanie Franz. 14 [Photo of Dennis and Joanie Franz] 15 [Photo of Alice A. Ruth] 16 "From a buyer's perspective, First Republic is the lender of choice. Their service is top drawer and their track record is superb." /s/ Alice A. Ruth Alice A. Ruth, Managing Director Montgomery Securities ATM Access Global ATM access is a must in today's increasingly small world. Whether at an ATM in San Francisco, New York, Paris or elsewhere around the globe, our customers can access cash anytime from over 350,000 ATMs worldwide. First Republic is well known as the luxury home financing specialist in the San Francisco, Los Angeles and San Diego areas. We are sensitive to the estate and tax planning and title issues associated with purchasing, refinancing or building a home--and to each buyer's unique financial situation. This understanding better enables us to serve as our clients' advisors, helping them decide what type of loan to choose and how much to borrow. Together as partners, we help potential borrowers evaluate their options and make the best choice for their needs. 17 "I bank with First Republic. They're smart, experienced and resourceful, traits I look for in everyone I do business with." /s/ William R. Johnson William R. Johnson, President and Chief Operating Officer H. J. Heinz Company First Republic is a relationship bank. We strive to deliver consistently outstanding and highly personalized service so that our customers will come back to us for more and more of their banking needs, whenever a need arises. Building long-term relationships has been our formula for success since we opened our doors and will remain the cornerstone of our growth in the years to come. First Republic is honored to have among its clients many of our nation's business leaders. 18 [Photo of William R. Johnson] 19 [Photo of Georgia R. Nelson] 20 "First Republic met my complex financing needs. On top of that, their service was personal and user friendly." /s/ Georgia R. Nelson Georgia R. Nelson, President Edison Mission Energy-Americas, an Edison International Company Market Knowledge First Republic provides far more than the financial resources home buyers need. We bring to each transaction the market expertise that our loan officers have gained through many years of experience. More than a mortgage lender, First Republic offers a growing array of financial products that make it easy for clients to bank with us. Our Reward checking account, for example, earns interest for our customers while providing unlimited check-writing ability. With our ATM card, First Republic checking account holders can access cash at over 350,000 locations around the world, and our savings customers have the flexibility of choosing certificates of deposit of virtually any maturity. We are committed to meeting more of our clients' needs and providing the superior service that has become a First Republic hallmark. 21 "Reputation counts but results count more. I refer my clients to First Republic because they are the market leader and a class act." /s/ Skip Brittenham Harry (Skip) Brittenham, Senior Partner Ziffren, Brittenham, Branca and Fischer Home buyers and real estate and financial professionals rely on First Republic for its wide range of loan programs. We offer a full array of conventional fixed and adjustable rate loans for residential properties, as well as such custom- tailored products as bridge financing, blended mortgages, cooperative loans, commercial loans and our FirstLine/TM/ home equity line of credit. We also develop and offer new loan products that keep pace with the changing needs of our customers. For example, a First Republic specialty is home renovation and construction lending. We also offer loans secured by marketable securities and, for our most qualified clients, unsecured loans. Satisfied clients, such as prominent entertainment lawyer Skip Brittenham, are our best form of advertising. 22 [Photo of Skip Brittenham] 23 [Photo of Garret Tom, his wife and his son] 24 "With our growing family, security is more important to us than ever. We trust First Republic; they're reliable and financially sound." /s/ Garret Tom Garret Tom, Sergeant San Francisco Police Department Reward Checking Checking is a vital link to our customers. With our new Reward account, customers have all the advantages of free, unlimited checking and earn interest as well. Our customers want the security of knowing they are banking with an institution that is financially sound and fiscally conservative. First Republic is both and has never been stronger. At the end of 1996, our assets totaled more than $2.1 billion and our capital was in excess of $204 million. Another important measure of our financial stability is our capital-to-risk adjusted assets, which is nearly double the required level and substantially higher than that of many financial institutions. Sergeant Garret Tom and his wife Anita with their two-year old son. 25 "Service, discretion and professionalism--that's what I get from First Republic." /s/ Cheryl Tiegs Cheryl Tiegs, Model/Designer Non-Earning Assets (percent of assets) [BAR GRAPH APPEARS HERE] 1994 2.41 1995 2.46 1996 1.32 46% decrease in the last year. At First Republic, our clients are our most valuable assets. From a newlywed couple purchasing their first house to a high-profile celebrity financing a vacation home, we respect and adapt to each client's individual needs--whether for confidentiality, advice or simply a streamlined transaction. Our ability to be flexible in meeting a broad range of customers' needs is the foundation of our customer care and service. 26 [Photo of Cheryl Tiegs] [Photo of Anthony M. Frank] "It's been years since I've gotten this kind of personal service from a bank. First Republic has the great service of a smaller bank and the resources of a larger institution." /s/ Anthony M. Frank Anthony M. Frank, Former U.S. Postmaster General and Chairman, Belvedere Capital Partners We listen carefully to our customers and respond in many ways both visible to our customers and behind the scenes--from extended branch hours and multi-lingual staff to our multi-faceted construction loan program and new Reward checking account. The products and services we offer reflect not what we believe a bank should provide, but what our customers--our most important constituency--tell us they want from First Republic. Construction Lending Our residential construction loan is an all-in-one construction and permanent loan that eliminates time-consuming steps and multiple fees so that our customers can focus on building their homes. 29 "First Republic knows the luxury home market better than any lender. Their market knowledge and service gets the job done right every time." /s/ Neal Ward Neal Ward, Realtor McGuire Real Estate First Republic works closely with the real estate community. Here at the 1996 San Francisco Designer Showcase is Neal Ward, McGuire Real Estate, with Carmen Castro- Franceschi, Managing Director Lending, First Republic. At First Republic, we know home values. We stay current with the local economic conditions in our lending areas and closely monitor trends in home prices. Our First Republic Prestige Home Index,(TM) which looks back to 1985, tracks on a quarterly basis the changing values of homes worth $1 million or more in the San Francisco and Los Angeles markets, and $750,000 and up in San Diego. Our customers, as well as home buyers, sellers, borrowers and real estate professionals, use the Index as a rela- tive and historical barometer of luxury home prices in these key markets. PRESTIGE HOME INDEX(TM) San Francisco Bay Area [GRAPH APPEARS HERE]
First Republic Average Prestige Home Year Month Home Value Index(TM) - --------------------------------------------------------------------------- 1985 3/85 $ 578,548 100.00 1986 3/86 $ 628,590 108.65 1987 3/87 $ 708,250 122.42 1988 3/88 $ 833,585 144.08 1989 3/89 $ 996,581 172.26 1990 3/90 $1,143,395 197.63 1991 3/91 $1,080,276 186.72 1992 3/92 $1,064,530 184.00 1993 3/93 $1,042,186 180.14 1994 3/94 $1,060,826 183.26 12/94 $1,095,942 189.43 1995 3/95 $1,127,199 194.83 6/95 $1,131,634 195.60 9/95 $1,108,235 191.55 12/95 $1,093,238 188.96 1996 3/96 $1,095,873 189.42 6/96 $1,114,120 192.57 9/96 $1,155,412 199.71 12/96 $1,146,237 198.12
30 [Photo of Neal Ward and Carmen Castro-Franceschi] [Photo of George & Karen McCown] "First Republic shares our entrepreneurial approach to business. We are very impressed with the service, knowledge and experience of their bankers." /s/ George E. McCown /s/ Karen McCown George E. McCown, Co-Founder and Managing Partner, McCown De Leeuw & Co., and Karen Stone McCown, Founder, Nueva School Range of Products At First Republic, we provide a broad array of fixed and adjustable rate loans as well as many FDIC-insured deposit products-- from free, unlimited checking accounts and our Advantage Money Market account to customized CDs and passbook savings. We are committed to being a leading lender across the price spectrum and to the broadest possible range of home buyers. As a company-- and as members of the communities in which we live and work--our well-established pos- ition in financing low-to-moderate income housing is a source of pride. In fact, nearly half of the housing units we have financed for our balance sheet are in low-to-moderate income census tracts. While our lending standards are high, we are flexible and work hard to meet the often special needs of our clients, whether they are purchasing their first home or an estate property. George and Karen McCown are long-standing First Republic clients. We financed their Silicon Valley home and the expansion of the Nueva School, which Karen Stone McCown founded. 33 "Good rates, no monthly fees and the convenience of banking by mail, by phone or face-to-face in the branch. That's why we choose First Republic." /s/ William Engel William Engel, Franchisee Owner El Pollo Loco Restaurants Residential Loan Profile (by housing units) [PIE CHART APPEARS HERE] Low-to-moderate income census tracts 47% All other census tracts 53% We continue to expand our branch office net- work to make banking with First Republic more convenient than ever. We recently opened new branches in Las Vegas and San Mateo bringing our total to thirteen offices. We plan to continue to open additional branches in our market areas, including a branch in Menlo Park, California in 1997, to make it easier for customers to do business with us in person. Many of our customers, such as William and Marla Engel of San Diego, rely on First Republic for both lending and deposit banking services. 34 [Photo of William and Marla Engel] [Photo of Teacher David Duncan, other school personnel and NFTE Staff Members] [DESCRIPTION TO COME] "First Republic's commitment to education has helped us become better teachers and will help many students become entrepreneurs." /s/ David Duncan David Duncan, Public School Teacher Balboa High School, San Francisco Branch Network In addition to competitive rates and capital safety, we provide our customers the convenience of a growing branch network. Today, we have thirteen locations throughout California and in Las Vegas, Nevada. Civic responsibility is part of our mission at First Republic. We support projects and organizations that benefit our communities and improve the quality of life for our neigh- bors. One area of ongoing focus for us is education. In addition to financing the construction or renovation of more than ten primary and secondary schools, we provide scholarships through the First Republic Scholars Program. A current emphasis is our support of the National Foundation for Teaching Entrepreneurship (NFTE), which has created an innovative program that teaches business skills to at-risk youth. With First Republic's leadership and financial assistance, many teachers have been trained to teach entrepreneurship and this program is now offered in the first public school system in the country, San Francisco. National Foundation for Teaching Entrepreneurship (NFTE) staff members Margaret March and (moving counter clock- wise) Duane Moyer, School District Admin- istrator Joe Baker and participating San Francisco high school teachers Todd Twyman, Jonathan Wang and (center) David Duncan. 37 First Republic Bancorp Consolidated Balance Sheet
December 31, 1996 1995 ............................... Assets Cash $ 26,398,000 $ 15,918,000 Federal funds sold and short term investments 2,900,000 15,000,000 Interest bearing deposits at other financial institutions -- 200,000 Investment securities: at cost (Note 2) 52,899,000 33,974,000 Investment securities: at market (Note 2) 103,673,000 106,939,000 Federal Home Loan Bank stock, at cost 32,649,000 30,321,000 -------------- -------------- 218,519,000 202,352,000 Loans (Note 3): Single family (1-4 units) mortgages 1,224,542,000 977,220,000 Multifamily (5+ units) mortgages 320,715,000 350,507,000 Commercial real estate mortgages 285,141,000 286,824,000 Commercial business loans 2,434,000 3,663,000 Multifamily/commercial construction 7,347,000 9,013,000 Single family construction 36,686,000 19,349,000 Equity lines of credit 35,497,000 26,572,000 Leases, contracts and other 2,651,000 933,000 Loans held for sale 8,436,000 8,182,000 -------------- -------------- 1,923,449,000 1,682,263,000 Less: Unearned loan fee income (3,116,000) (4,380,000) Reserve for possible losses (17,520,000) (18,068,000) -------------- -------------- Net loans 1,902,813,000 1,659,815,000 Interest receivable 13,084,000 12,582,000 Prepaid expenses and other assets (Note 4) 13,361,000 15,126,000 Other real estate owned 4,313,000 10,198,000 Premises, equipment and leasehold improvements, net of accumulated depreciation of $7,095,000 and $6,033,000 at December 31, 1996 and 1995, respectively 4,509,000 4,180,000 -------------- -------------- Total Assets $2,156,599,000 $1,904,253,000 ============== ==============
See accompanying notes. 38 First Republic Bancorp
December 31, 1996 1995 ............................... Liabilities and Stockholders' Equity Liabilities: Customer deposits (Note 5): Passbook, MMA and NOW checking accounts $ 293,844,000 $ 180,205,000 Certificates of deposit 1,059,304,000 960,236,000 -------------- -------------- Total customer deposits 1,353,148,000 1,140,441,000 Interest payable 14,592,000 14,813,000 Custodial receipts on loans serviced for others 208,000 1,086,000 Other liabilities 9,878,000 5,070,000 Federal Home Loan Bank advances (Note 6) 591,530,000 570,530,000 Other borrowings (Note 7) 667,000 -- -------------- -------------- Total senior liabilities 1,970,023,000 1,731,940,000 Senior subordinated debentures (Note 8) 9,966,000 9,974,000 Subordinated debentures (Note 9) 19,515,000 19,579,000 Convertible subordinated debentures (Note 10) 30,685,000 34,500,000 -------------- -------------- Total liabilities 2,030,189,000 1,795,993,000 Commitments (Note 15) Stockholders' equity (Notes 13, 14 and 16): Common stock, $.01 par value; 20,000,000 shares authorized, 8,141,652 and 7,816,400 shares issued and outstanding at December 31, 1996 and 1995, respectively 81,000 78,000 Capital in excess of par value 79,369,000 74,919,000 Retained earnings 53,115,000 40,608,000 Deferred compensation--ESOP; 40,404 shares at December 31, 1996 (667,000) -- Treasury stock, at cost; 425,394 shares and 486,000 shares at December 31, 1996 and 1995, respectively (4,763,000) (5,763,000) Net unrealized loss on available for sale securities (Note 2) (725,000) (1,582,000 -------------- -------------- Total stockholders' equity 126,410,000 108,260,000 -------------- -------------- Total Liabilities and Stockholders' Equity $2,156,599,000 $1,904,253,000 ============== ==============
See accompanying notes. 39 First Republic Bancorp Consolidated Statement of Income
Year Ended December 31, 1996 1995 1994 ........................................ Interest income: Interest on real estate and other loans $145,474,000 $127,341,000 $100,816,000 Interest on investments 14,272,000 12,253,000 8,549,000 ------------ ------------ ------------ Total interest income 159,746,000 139,594,000 109,365,000 ------------ ------------ ------------ Interest expense: Interest on customer deposits 72,025,000 62,133,000 41,024,000 Interest on FHLB advances and other borrowings 35,292,000 37,003,000 24,736,000 Interest on debentures 5,717,000 5,777,000 5,675,000 ------------ ------------ ------------ Total interest expense 113,034,000 104,913,000 71,435,000 ------------ ------------ ------------ Net interest income 46,712,000 34,681,000 37,930,000 Provision for losses 5,838,000 14,765,000 9,720,000 ------------ ------------ ------------ Net interest income after provision for losses 40,874,000 19,916,000 28,210,000 ------------ ------------ ------------ Non-interest income: Servicing fees, net 2,174,000 2,675,000 2,330,000 Loan and related fees 1,435,000 1,289,000 1,915,000 Gain (loss) on sale of loans 1,345,000 (67,000) 430,000 Gain on sale of investment securities 28,000 130,000 -- Other income 125,000 272,000 458,000 ------------ ------------ ------------ Total non-interest income 5,107,000 4,299,000 5,133,000 ------------ ------------ ------------ Non-interest expense: Salaries and related benefits 10,081,000 7,542,000 7,175,000 Occupancy 3,343,000 3,084,000 2,793,000 Advertising 2,202,000 1,500,000 1,863,000 Professional fees 1,164,000 613,000 542,000 FDIC insurance premiums 332,000 1,264,000 1,809,000 REO costs and losses 850,000 3,163,000 1,202,000 Other general and administrative 6,739,000 5,193,000 5,721,000 ------------ ------------ ------------ Total non-interest expense 24,711,000 22,359,000 21,105,000 ------------ ------------ ------------ Income before income taxes 21,270,000 1,856,000 12,238,000 Provision for income taxes (Note 12) 8,763,000 686,000 4,935,000 ------------ ------------ ------------ Net income $ 12,507,000 $ 1,170,000 $ 7,303,000 ============ ============ ============ Primary earnings per share $ 1.62 $ 0.15 $ 0.92 ============ ============ ============ Fully diluted earnings per share $ 1.37 $ 0.15 $ 0.85 ============ ============ ============ Weighted average fully-diluted shares outstanding 10,246,419 10,126,096 10,499,947 ============ ============ ============
See accompanying notes. 40 First Republic Bancorp Consolidated Statement of Stockholders' Equity
Net unrealized Capital in Deferred loss on Total Years Ended December 31, Common excess of Retained compensation- available for Treasury stockholders' 1994, 1995, and 1996 stock par value earnings ESOP sale securities stock equity .............................................................................................. Balance at January 1, 1994 $78,000 $71,123,000 $35,296,000 $(1,200,000) $ -- $ (351,000) $104,946,000 Allocated ESOP shares 550,000 550,000 Unrealized loss on available for sale securities (2,010,000) (2,010,000) Effect of stock dividend 3,159,000 (3,161,000) (2,000) Exercise of options on 40,378 shares of common stock 321,000 321,000 Issuance of 12,181 shares of common stock 142,000 142,000 Purchase of 326,647 shares of treasury stock (3,964,000) (3,964,000) Net income 7,303,000 7,303,000 ------- ----------- ----------- ----------- ----------- ----------- ------------ Balance at December 31, 1994 78,000 74,745,000 39,438,000 (650,000) (2,010,000) (4,315,000) 107,286,000 Allocated ESOP shares 650,000 650,000 Net unrealized gain on available for sale securities 428,000 428,000 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 Conversion of $3,815,000 of convertible debentures into 279,125 shares of common stock 3,000 3,655,000 3,658,000 Sale of 60,606 shares of treasury stock to the ESOP (1,000,000) 1,000,000 -- Effect of increase in share price on variable stock options 217,000 217,000 Allocated ESOP shares 3,000 333,000 336,000 Net unrealized gain on available for sale securities 857,000 857,000 Exercise of options on 31,519 shares of common stock 388,000 388,000 Issuance of 14,608 shares of common stock 187,000 187,000 Net income 12,507,000 12,507,000 ------- ----------- ----------- ----------- ----------- ----------- ------------ Balance at December 31, 1996 $81,000 $79,369,000 $53,115,000 $ (667,000) $(725,000) $(4,763,000) $126,410,000 ======= =========== =========== =========== =========== =========== ============
See accompanying notes. 41 First Republic Bancorp Consolidated Statement of Cash Flows
Year Ended December 31, 1996 1995 1994 ............................................. Operating Activities Net Income $ 12,507,000 $ 1,170,000 $ 7,303,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses 5,838,000 14,765,000 9,720,000 Provision for depreciation and amortization 3,801,000 4,085,000 2,687,000 Amortization of loan fees (1,948,000) (3,791,000) (4,371,000) Amortization of mortgage servicing rights 548,000 358,000 687,000 Amortization of investment securities discounts (49,000) (44,000) (12,000) Amortization of investment securities premiums 264,000 248,000 230,000 Loans originated for sale (70,875,000) (100,130,000) (82,173,000) Loans sold into commitments 72,586,000 99,232,000 85,543,000 (Increase) decrease in deferred taxes 981,000 (3,023,000) 1,338,000 Net (gains) losses on sale of investment securities (28,000) 11,000 -- Net (gains) losses on sale of loans (1,345,000) 67,000 (430,000) Increase in interest receivable (2,303,000) (3,869,000) (3,201,000) Increase (decrease) in interest payable (221,000) 2,481,000 4,227,000 (Increase) decrease in other assets (2,915,000) 2,764,000 (2,855,000) Increase (decrease) in other liabilities 3,916,000 2,587,000 (7,233,000) ------------- ------------- ------------- Net Cash Provided By Operating Activities 20,757,000 16,911,000 11,460,000 Investing Activities Loans originated (777,403,000) (484,258,000) (702,313,000) Loans purchased -- (8,041,000) (8,208,000) Other loans sold 100,183,000 -- 131,408,000 Principal payments on loans 408,135,000 275,288,000 306,496,000 Purchases of investment securities (36,733,000) (21,039,000) (49,037,000) Sales of investment securities 4,558,000 276,000 -- Repayments of investment securities 19,522,000 12,772,000 10,176,000 Net decrease in short term investments 200,000 10,000 394,000 Additions to fixed assets (1,426,000) (1,151,000) (1,359,000) Net proceeds from sale of REO (Note 1) 25,377,000 17,520,000 8,116,000 ------------- ------------- ------------- Net Cash Used by Investing Activities (257,587,000) (208,623,000) (304,327,000) Financing Activities Net increase in passbook, MMA and NOW checking accounts 113,639,000 41,479,000 21,565,000 Issuance of certificates of deposit 406,677,000 416,602,000 395,684,000 Repayments of certificates of deposit (307,609,000) (266,473,000) (220,087,000) Increase in long term FHLB advances 25,000,000 40,000,000 112,000,000 Repayments of long term FHLB advances -- (44,000,000) -- Increase in other long term borrowings 1,000,000 -- -- Repayments of long term borrowings (333,000) (650,000) (550,000) Net increase (decrease) in short term borrowings (4,000,000) 4,000,000 (22,380,000) Decrease in deferred compensation--ESOP 333,000 650,000 550,000 Issuance of subordinated debentures -- -- 3,245,000 Repayments of subordinated debentures (72,000) (124,000) (25,000) Sale of common stock 187,000 81,000 142,000 Proceeds from common stock options exercised 388,000 93,000 321,000 Purchase of treasury stock -- (1,448,000) (3,964,000) ------------- ------------- ------------- Net Cash Provided by Financing Activities 235,210,000 190,210,000 286,501,000 Decrease in Cash and Cash Equivalents (1,620,000) (1,502,000) (6,366,000) Cash and Cash Equivalents at Beginning of Year 30,918,000 32,420,000 38,786,000 ------------- ------------- ------------- Cash and Cash Equivalents at End of Year $ 29,298,000 $ 30,918,000 $ 32,420,000 ============= ============= =============
See accompanying notes. 42 First Republic Bancorp Notes to Consolidated Financial Statements December 31, 1996 and 1995 1 Summary of Significant Accounting Policies Basis of presentation and organization The consolidated financial statements of First Republic Bancorp Inc. ("First Republic") include its Nevada chartered thrift and loan subsidiary, First Republic Savings Bank ("the Bank"). On October 31, 1996, First Republic's wholly owned subsidiary, First Republic Thrift & Loan, was merged into the Bank; all references to activities of either subsidiary prior to the merger, contained herein, are attributed to the Bank as successor entity. First Republic and its subsidiary are collectively referred to as "the Company". All material intercompany transactions and balances are eliminated in consolidation. Certain reclassifications have been made to the 1995 and 1994 financial statements in order for them to conform with the 1996 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, in Los Angeles, Beverly Hills, 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 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 a method approximating 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 underwriting 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, 1995, and 1996 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 $5,119,000 in 1996, $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". 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 The Company accounts for its investment securities in accordance with SFAS No. 115, "Accounting For Certain Investments in Debt and Equity 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. 43 First Republic Bancorp 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, 1996 and 1995, no trading securities were owned and during 1996 and 1995 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. Direct expenses related to holding real estate are recorded when incurred. The Company owned real estate of $4,313,000 at December 31, 1996 and $10,198,000 at December 31, 1995. Loans in the amount of $24,463,000 in 1996 and $25,707,000 in 1995 were transferred to other real estate owned. Additionally, subsequent loans to facilitate the sale of other real estate owned were $12,627,000 and $14,926,000 in 1996 and 1995, 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. Effective January 1, 1996, the Company adopted 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 is allocated between the loan and the servicing rights, based on their relative fair values. Fair value of the mortgage servicing rights is determined based on valuation techniques utilizing discounted cash flows incorporating assumptions that market participants would use. During 1996, the Company sold $172,769,000 of loans and recorded $1,495,000 as the value of the servicing rights on those loans. The recorded value of mortgage servicing rights is amortized over the period of estimated net servicing income. SFAS No. 122 also requires the assessment of all capitalized mortgage servicing rights for impairment based on current fair value of those rights. The carrying value of mortgage servicing rights is periodically measured based on the actual prepayment experience and market factors; writedowns and adjustments in the amortization rates are made when an impairment is indicated. For purposes of evaluating and measuring impairment, the Company stratifies mortgage servicing rights based on the type and interest rates of the underlying loans. Impairment is measured as the amount by which the mortgage servicing rights for a stratum exceed their fair value. Loan servicing fees are recorded as income when received and are presented net of the amortization of mortgage servicing rights. The amount of loans being serviced for others was $799,500,000 and $804,856,000 at December 31, 1996 and 1995, 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 on a loan by loan basis. Long-lived assets The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity. Transfers and Servicing of Financial Assets and Extinguishments of Liabilities In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial- components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Management of the Company does not expect that adoption of SFAS No. 125 will have a material impact on the Company's financial position, results of operations, or liquidity. 44 First Republic Bancorp Derivative financial instruments--interest rate cap and swap agreements The Company uses interest rate cap agreements and interest rate swap agreements, known as derivative financial instruments, for interest rate risk protection or liability matching. Interest rate cap agreements are purchased primarily to reduce the Company's exposure to rising interest rates which would increase the cost of liabilities above the maximum yield which could be earned on certain adjustable rate mortgages and investments. Costs are amortized to interest expense using the straight-line method over the life of interest rate cap agreements, and benefits are recognized when realized. The unamortized cost of interest rate cap agreements is included in other assets. Interest rate swap agreements match asset yields with liability costs by converting the cost of specific Federal Home Loan Bank advances from a fixed rate to a variable rate, with the term of each swap agreement matched to the maturity of the underlying advance. The differential to be paid or received is accrued as an adjustment to interest expense as interest rates change. The related receivable from counterparties is included in interest receivable. The fair values of interest rate swap agreements are not recognized in the financial statements. The Company is an end-user of derivative financial instruments and does not conduct trading activities for derivatives. The Company 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. Stock Option Awards Prior to January 1, 1996, the Company accounted for its stock options in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense for fixed options would be recorded on the date of grant only if the current market price of underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 (see Note 14). 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 maturity dates of less than ninety days. The Company paid interest of approximately $113,255,000 in 1996, $102,432,000 in 1995, and $67,208,000 in 1994. Additionally, the Company paid income taxes of $7,150,000, $1,220,000, and $6,620,000, for the years ended December 31, 1996, 1995 and 1994, 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. Due to the issuance of convertible subordinated debentures in December 1992, the calculation of fully diluted EPS adds back to the Company's reported net income the effect of interest expense on such convertible debentures, net of taxes, and increases the number of shares outstanding as if the debentures were converted into common stock. For the year 1995 and the second quarter of 1995, the Company's convertible subordinated debentures were antidilutive and the results of the primary EPS calculation for those periods became the fully diluted EPS amounts. Upon conversion of the convertible subordinated debentures into shares of the Company's common stock, the number of shares outstanding for primary EPS is increased and the number of shares outstanding for fully diluted EPS is unchanged. 45 First Republic Bancorp 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, 1996 and 1995 .
Estimated Estimated Unrealized Unrealized Amortized Gross Gross Fair (In $ thousands) Cost Gain Loss Value .............................................. December 31, 1996 Held to Maturity Securities at Cost: Other MBS $ 52,899 $ 270 $ (446) $ 52,723 ========= ======= ========= ========= Available for Sale Securities at Fair Value: U.S. Government $ 22,157 $ 499 $ (105) $ 22,551 Agency MBS 29,455 243 (283) 29,415 Other MBS 39,137 350 (370) 39,117 --------- ------- --------- --------- Debt Securities 90,749 1,092 (758) 91,083 Equity Securities 13,488 -- (898) 12,590 --------- ------- --------- --------- Total $ 104,237 $ 1,092 $ (1,656) $ 103,673 ========= ======= ========= ========= 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 -- (1,671) 11,816 --------- ------- --------- --------- Total $ 108,464 $ 1,344 $ (2,869) $ 106,939 ========= ======= ========= =========
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, 1996, 85% of the Company's investment securities carried interest rates which adjust annually or more frequently; the weighted average yield earned was 7.41% for held to maturity investments, 7.37% for available for sale debt securities and 8.93% for available for sale equity securities, on a tax equivalent basis. At December 31, 1996, the fair value of Agency MBS included $16,753,000 of securities converted from Company originated loans. Market values are determined by current quotation, or analysis of estimated future cash flows. The following table summarizes the Company's amortized cost and estimated fair value by maturity of debt securities owned at December 31, 1996, with MBS classified as available for sale and held to maturity.
Amortized Estimated Cost Fair Value ............................. Due in one year or less $ -- $ -- Due after one year through five years -- -- Due after five years through ten years 1,176,000 1,185,000 Due after ten years 20,981,000 21,366,000 ------------ ------------ 22,157,000 22,551,000 MBS -- available for sale 68,592,000 68,532,000 MBS -- held to maturity 52,899,000 52,723,000 ------------ ------------ $143,648,000 $143,806,000 ============ ============
In 1996, the Company sold $4,539,000 of debt securities from the available for sale portfolio, resulting in gross gains of $28,000 and there were no sales of equity securities. During 1995 and 1994, 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, 1996, loans of $931,023,000 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, 1996 1995 ........................ Nonaccrual loans: Balance at year end $24,254,000 $36,550,000 Interest foregone 1,819,000 1,605,000 Restructured loans: Balance at year end 7,220,000 12,795,000 (Net of nonaccrual loans) Actual interest income recognized 611,000 736,000 Pro forma interest income under original terms $ 653,000 $ 1,170,000
46 First Republic Bancorp 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:
1996 1995 1994 ....................................... Balance at beginning of year $18,068,000 $14,355,000 $12,657,000 Provision charged to operations 5,838,000 14,765,000 9,720,000 Reserve from purchased loans -- -- 34,000 Chargeoffs on originated loans: Single family (302,000) (14,000) (210,000) Multifamily (6,548,000) (9,314,000) (7,177,000) Commercial real estate (705,000) (2,163,000) (695,000) Commercial business loans (21,000) (48,000) (79,000) Construction loans -- (353,000) -- Recoveries on originated loans: Single family -- 3,000 11,000 Multifamily 287,000 765,000 119,000 Commercial real estate 855,000 30,000 -- Commercial business loans 46,000 54,000 15,000 Acquired loans, net 2,000 (12,000) (40,000) ----------- ----------- ----------- Net chargeoffs (6,386,000) (11,052,000) (8,056,000) ----------- ----------- ----------- Balance at end of year $17,520,000 $18,068,000 $14,355,000 =========== =========== ===========
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, 1996. 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 been written down or have a net collateral fair value which exceeds the loan balance.
Related Recorded SFAS No. 114 Investment in Allowance for Impaired Loans Losses ............................. Impaired loans requiring a SFAS No. 114 allowance: Multifamily 7,606,000 701,000 Commercial Real Estate 1,146,000 255,000 Other 80,000 8,000 -------------- ------------- $ 8,832,000 $964,000 -------------- ============= Impaired loans not requiring a SFAS No. 114 allowance: Multifamily 14,401,000 Commercial Real Estate 8,242,000 -------------- 22,643,000 -------------- Total $31,475,000 ==============
Total impaired loans were $31,475,000 and $49,345,000 at December 31, 1996 and 1995, respectively. The loans with a recorded investment of $22,643,000, reported as impaired loans not requiring a SFAS No. 114 allowance, have been reduced to their collateral fair value, net of selling costs, by $5,436,000 of specific chargeoffs to the Company's reserves. At December 31, 1996, the Company has designated $67,000 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 was $1,061,000 for 1996 and $1,570,000 for 1995, all of which was recorded using the cash received method. The average recorded investment in impaired loans was approximately $39,000,000 for 1996 and $48,000,000 for 1995. 4 Prepaid Expenses and Other Assets At December 31, prepaid expenses and other assets consist of the following:
1996 1995 ....................... Debt issuance costs, net $ 4,008,000 $ 4,720,000 Interest rate cap agreements, net 2,507,000 3,822,000 Prepaid expenses 988,000 1,506,000 Mortgage servicing rights, net 1,397,000 449,000 Other assets 4,461,000 4,629,000 ----------- ----------- $13,361,000 $15,126,000 =========== ===========
47 First Republic Bancorp Debt issuance costs are amortized over the life of the issue on a straight line basis which approximates a level yield method. Upon conversion of convertible subordinated debentures, a prorata portion of the remaining debt issuance costs is transferred from prepaid expenses as a reduction in capital in excess of par value. 5 Customer Deposits NOW accounts provide unlimited check writing to customers and bear interest at rates ranging from 1.0% to 2.5% at December 31, 1996. Passbook and money market accounts, which have no contractual maturity, pay interest at rates ranging from 2.3% to 5.5% per annum at December 31, 1996 and 1995, compounded daily. Certificates of deposit have maturities primarily ranging from 91 days to 60 months and bear interest at varying rates based on money market conditions, generally ranging from 4.2% to 7.3% and from 3.5% to 8.3% at December 31, 1996 and 1995, respectively. The Bank is a member of the FDIC's Bank Insurance Fund ("BIF") and its savings accounts are insured by the FDIC up to $100,000 each per insured depositor. At December 31, 1996, certificates of deposit in excess of $100,000 totalled $84,946,000. 6 Federal Home Loan Bank Advances The Bank is a voluntary member of the Federal Home Loan Bank of San Francisco ("FHLB"). The Bank was approved for $856,000,000 of FHLB advances at December 31, 1996. The Bank is required to own FHLB stock equal to 5% of the FHLB advances outstanding and owned $32,649,000 of FHLB stock at December 31, 1996. 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:
1996 1995 ------------------ ------------------- Advances maturing in Amount Rate Amount Rate .................. ................... One year or less $ -- --% $ 4,000,000 6.90% 1 to 2 years -- -- -- -- 2 to 5 years 128,970,000 6.10 -- -- After five years 462,560,000 5.89 566,530,000 6.16 ------------ ------------ $591,530,000 5.94% $570,530,000 6.17% ============ ============
The stated interest rates include the effect of interest rate swap agreements with a total notional principal amount of $25,000,000, which mature in 2001. Under the Company's interest swap agreements, a fixed rate which is equal to the fixed rate paid on FHLB advances is received and the Company pays a rate which varies semiannually with market rates of interest. During 1996, the Company did not enter into any new interest rate swap agreements, no interest rate swap agreements matured, and $624,000 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 counterparty fails 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, 1996 and 1995, all interest rate swap agreements were with the FHLB and the Company had not separately pledged any collateral. 7 Other Borrowings At December 31, 1996, other borrowings included borrowings of the Company's Employee Stock Ownership Plan ("ESOP") Trust from an unaffiliated commercial bank totalling $667,000. These borrowings were guaranteed by First Republic and had interest rates which varied with the prime rate (see Note 16). 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 First Republic Bancorp rates which vary with market conditions and the securities are maintained under the control of the securities dealer. For 1996, borrowings under repurchase agreements averaged $275,000 and the maximum amount outstanding at any month-end was $1,522,000. For 1995, borrowings under repurchase agreements averaged $2,321,000 and the maximum amount outstanding at any month-end was $13,522,000. 8 Senior Subordinated Debentures Senior subordinated debentures are due September 30, 2003 and bear interest ranging from 10% to 11% (average rate 10.6%). The senior subordinated debentures pay interest monthly. The Company may be required to redeem the senior subordinated debentures early only upon death of the holder. 48 9 Subordinated Debentures The Company's subordinated debentures consist of two issues, with outstanding amounts as follows at December 31:
1996 1995 ........................ Debentures maturing May 15, 2008, with semiannual interest payments at 8.5% $12,963,000 $12,972,000 Debentures maturing January 15, 2009, with quarterly interest payments at: -- 8.0% until maturity 5,025,000 5,070,000 -- 8.0% until reset 1,527,000 1,537,000 ----------- ----------- $19,515,000 $19,579,000 =========== ===========
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 7 1/4% rate, are convertible into 2,524,210 shares of common stock at approximately $13.67 per share, and are redeemable after December 1, 1996 at a price of 103.0%, with the redemption premium declining at 0.50% per year ratable to par at maturity. In 1996, $3,815,000 of the convertible subordinated debentures were converted into 279,125 shares of the Company's common stock, resulting in $30,685,000 of the issue remaining outstanding at December 31, 1996. These conversions increased the Company's stockholders' equity by $3,658,000, after giving effect to a prorata portion of the unamortized issuance costs related to the debentures converted. 11 Interest Rate Caps In connection with its asset and liability management policies, the Bank 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, 1996, the aggregate notional amount of interest rate cap contracts was $1,260,000,000, which mature in periods ranging from March 1997 through September 2000. At December 31, 1995, the notional amount of interest rate cap contracts owned by the Bank was $1,155,000,000 and during 1996 there were purchases of $275,000,000 and maturities of $170,000,000. The terms and amount of interest rate caps maintained by the Company is based on management's expectations about future interest rates and the level of maximum interest rates inherent in the Company's loans. Under the terms of the cap contracts, each with an unrelated commercial or investment banking institution, the Bank 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 generally ranging from 8.5% to 12.0% as established in each agreement. The Company has no future financial obligation related to its cap contracts. Additionally, $37,400,000 of the Bank's advances with the FHLB contain interest rate caps of 12% as part of the borrowing agreement. The Company evaluates the credit worthiness of its counterparties under interest rate cap contracts and has established an approved limit for each institution. The Company is exposed to market risk to the extent its counterparties are unable to perform; however, the Company does not expect such nonperformance. The amortization of interest rate cap costs increased interest expense by $1,673,000 in 1996, $1,688,000 in 1995, and $1,210,000 in 1994. Additionally, the Bank purchased in 1994 certain shorter-term interest rate cap contracts as protection against increases in interest rates during 1995 and 1996. The Company owned monthly repricing caps in the notional principal amount of $150,000,000 with a strike rate which increased 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 with a strike rate of 8% until maturity in December 1996; all of these agreements had matured at December 31, 1996. 12 Income Taxes The annual provision for income taxes consists of the following:
1996 1995 1994 .................................... Federal taxes: Current $6,125,000 $ 2,957,000 $2,761,000 Deferred 502,000 (2,383,000) 771,000 ---------- ----------- ---------- 6,627,000 574,000 3,532,000 State taxes: Current 1,657,000 752,000 836,000 Deferred 479,000 (640,000) 567,000 ---------- ----------- ---------- 2,136,000 112,000 1,403,000 ---------- ----------- ---------- Total $8,763,000 $ 686,000 $4,935,000 ========== =========== ==========
49 First Republic Bancorp The effective income tax rate differs from the federal statutory rate due to the following for the past three years:
1996 1995 1994 ........................... Expected statutory rate 35.0% 35.0% 35.0% State taxes, net of federal benefits 6.5 4.0 7.5 ---- ---- ---- Other, net (.3) (2.0) (2.2) Effective tax rate 41.2% 37.0% 40.3% ==== ==== ====
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:
1996 1995 ......................... Deferred tax assets: Bad debt deduction $6,586,000 $5,693,000 Deferred franchise tax 743,000 363,000 Other deferred tax assets 36,000 10,000 Depreciation and amortization 92,000 -- ---------- ---------- Total gross deferred tax assets 7,457,000 6,066,000 Less valuation allowance (421,000) (421,000) ---------- ---------- Deferred tax assets 7,036,000 5,645,000 ---------- ---------- Deferred tax liabilities: Loan fee income 4,447,000 2,068,000 FHLB stock dividend income 273,000 269,000 Tax on net unrealized gain on available for sale securities 162,000 57,000 Depreciation and amortization -- 11,000 ---------- ---------- Total gross deferred tax liabilities 4,882,000 2,405,000 ---------- ---------- Net deferred tax asset $2,154,000 $3,240,000 ========== ==========
The net deferred tax asset represents recoverable taxes and is included in other assets. The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. 13 Stockholders' Equity Upon Board of Directors' authorization, the Company repurchased in the open market 25,750 shares of common stock in 1993, 326,647 shares in 1994 and 133,603 shares in 1995. As of December 31, 1995, 486,000 shares were held as treasury stock, with a total cost of $5,763,000. During 1996, 60,606 shares of such treasury stock with a fair market value of $1,000,000 were reissued to the Company's ESOP (see Note 16). At December 31, 1996, there were 425,394 shares held as treasury stock with a total cost of $4,763,000. The Company's ability to pay cash dividends on its common stock is restricted to approximately $10,714,000 at December 31, 1996 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 1996, First Republic received or was due dividends of $4,264,000 from First Republic Savings Bank. The Bank is subject to various regulatory capital requirements administered by the FDIC. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total capital and Tier 1 capital to risk weighted assets and of Tier 1 capital to average assets. Management believes, as of December 31, 1996, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution's category. The actual capital amounts and ratios of the Company on a consolidated basis and the Bank are also presented in the follow- 50 ing table. First Republic is not a bank holding company at the present time and is not subject to the Federal Reserve Board's bank holding company regulations. However, the Company's capital and ratios are presented as if such regulations applied. To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------- -------------------- ----------------------- (in $ thousands) Amount Ratio Amount Ratio Amount Ratio ..................................................................... As of December 31, 1996 Total Capital (to Risk Weighted Assets): Consolidated $203,477 14.8% $110,012 8.0% $137,515 10.0% Bank $177,397 13.0% $109,115 8.0% $136,394 10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated $126,122 9.2% $ 55,006 4.0% $ 82,509 6.0% Bank $150,347 11.0% $ 54,558 4.0% $ 81,837 6.0% Tier 1 Capital (to Average Assets): Consolidated $126,122 5.90% $ 85,506 4.0% $106,883 5.0% Bank $150,347 7.09% $ 84,822 4.0% $106,028 5.0%
14 Stock Compensation Plans At December 31, 1996, the Company has five stock-based compensation plans, which are described below. The Company applies APB Opinion No. 25 and related Interpretations in accounting for these plans. Accordingly, no compensation cost has been recognized for its fixed stock options and its stock purchase plan. In 1996, the compensation cost that has been charged against income for its 1995 Performance-Based Contingent Stock Options was $370,000. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income and earnings per share ("EPS") would have been reduced to the pro forma amounts indicated below:
1996 1995 ....................... Net Income As Reported $12,507,000 $1,170,000 Pro Forma $11,713,000 $ 660,000 Primary EPS As Reported $ 1.62 $ 0.15 Pro Forma $ 1.52 $ 0.09 Fully Diluted EPS As Reported $ 1.37 $ 0.15 Pro Forma $ 1.30 $ 0.09
Pro forma net income and EPS amounts reflect only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of up to three years and compensation cost for options granted prior to January 1, 1995 is not considered. Further, the effects of applying SFAS No. 123 for disclosing compensation cost may not be representative of the effects on the reported net income for future years. The Company has granted fixed options under two programs. At December 31, 1996, under the 1985 Employee Stock Option Plan (the "1985 Option Plan"), there were remaining options on 620,093 shares of common stock reserved for issuance and options on 608,911 shares had been granted to employees, 607,161 of which were exercisable. Additionally, the Company has granted options to its directors, to directors of the Bank, and management personnel for 480,143 shares of common stock. Under all such option agreements, the exercise price of each option equals the market price of the Company's stock (or the tangible book value per share if higher) on the date of grant. Options generally vest at the date of grant and have a maximum term of ten years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1996 and 1995, respectively: No dividends are paid for all years; expected volatility of 34%, and 39%; risk-free interest rates of 6.75% and 6.41%; and expected lives of ten years and ten years. 51 .... First Republic Bancorp A summary of the status of the Company's fixed stock options as of December 31, 1996 and 1995 and changes during the years ended on those dates is presented below:
1996 1995 ---------------------- --------------------- Weighted- Weighted- Average Average Exercise Exercise Fixed Options Shares Price Shares Price ............................................. Outstanding at beginning of year 1,020,730 $10.23 1,016,476 $10.16 Granted 105,600 15.51 24,580 13.99 Exercised (31,519) 12.31 (6,148) 9.28 Forfeited (5,757) 13.60 (14,178) 12.10 --------- --------- Outstanding at end of year 1,089,054 $10.66 1,020,730 $10.23 ========= ========= Options exercisable at year-end 1,087,304 1,015,730 Weighted-average fair value of options granted during the year $8.83 $7.75
The following table summarizes information about fixed stock options outstanding at December 31, 1996:
Options Outstanding ------------------------------------------- Weighted-Avg. Number of Range of Remaining Weighted-Avg. Exercisable Exercise Prices Number Contractual Life Exercise Price Options ......................................................................... $6.74 to 9.50 530,517 2.9 years $ 7.20 530,517 9.51 to 12.00 90,314 5.7 years 11.65 90,314 12.01 to 14.50 196,964 5.8 years 12.94 195,464 14.51 to 16.02 271,259 7.6 years 15.46 271,009 --------- ----------- $6.74 to 16.02 1,089,054 4.8 years $10.66 1,087,304 ========= ===========
Employee Stock Purchase Plan Under the 1992 Employee Stock Purchase Plan (the "Purchase Plan"), the Company is authorized to issue up to 424,360 shares of common stock to its full-time employees, nearly all of whom are eligible to participate. Under the terms of the Purchase Plan, employees can purchase shares of the Company's common stock at 90% of the closing price at the end of each semimonthly payroll period, subject to an annual limitation of common stock valued at $25,000. Approximately 37% of eligible employees have participated in the Purchase Plan in the last three years and a total of 41,488 shares have been sold to employees under the Purchase Plan since its inception. Under the Purchase Plan, the Company sold 14,608 shares, 7,843 shares, and 12,181 shares to employees in 1996, 1995, and 1994, respectively. Under SFAS No. 123, no compensation cost is recognized for the Purchase Plan because the discount from market price offered to employees approximates the Company's historical stock issuance costs. Performance-Based Stock Options Under its 1992 Performance-Based Contingent Stock Options ("1992 Contingent Options") and its 1995 Performance-Based Contingent Stock Options ("1995 Contingent Options"), the Company has granted selected executives and other key employees stock option awards, the vesting of which has been or continues to be contingent upon achieving targeted increases in the Company's tangible book value per share. The number of shares subject to option under the 1992 Contingent Options is limited to 477,405 shares and the options carry an exercise price of $14.84. The number of shares subject to option under the 1995 Contingent Options is 350,000 and the options carry an exercise price of $13.13. The exercise price of each option, which has a ten-year life, is equal to the market price of the Company's stock on May 7, 1992 and December 31, 1995, respectively, the dates the options were created and the dates on which most of the options were granted. The fair value of the 1995 Contingent Options granted in 1996 and 1995 was estimated using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rate of 5.7%, no dividends are paid, expected life of ten years, and volatility of 38.5%. A summary of the status of the Company's performance-based stock options as of December 31, 1996 and 1995 and changes during the years ended on those dates is presented below:
1996 1995 ------------------ ------------------ Weighted- Weighted- Average Average Exercise Exercise Performance Options Shares Price Shares Price - ------------------- ...................................... Outstanding at beginning of year 819,905 $14.13 477,405 $14.84 Granted 7,500 13.13 342,500 13.13 Exercised -- -- Forfeited -- -- ------- ------- Outstanding at end of year 827,405 $14.12 819,905 $14.13 ======= ======= Options exercisable at year-end 436,159 $14.31 434,659 $14.57 Weighted-average fair value of options granted during the year $7.69 $7.69
As of December 31, 1996, 366,159 of the 477,405 performance options granted under the 1992 Contingent Plan were vested and exercisable; these options have an exercise price of $14.84 and a remaining contractual life of 5.3 years. At December 31, 1996, 70,000 of the 350,000 performance options granted under the 1995 Contingent Plan were vested and exercisable and an additional 94,164 options were earned as a result of 1996 increases 52 First Republic Bancorp in tangible book value per share; these options have an exercise price of $13.13 and a remaining contractual life of 9.0 years. The Company expects that the nonvested awards under the 1995 Contingent Plan at December 31, 1996 may vest in 1997 and 1998 based on projected increases in tangible book value per share. 15 Commitments At December 31, 1996, the Company had conditional commitments to originate loans of $29,594,000 and to disburse additional funds on existing loans and lines of credit of $100,445,000. 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, 1996 are as follows: 1997-- $1,794,000; 1998--$1,720,000; 1999--$1,477,000; 2000--$1,277,000; 2001-- $682,000; thereafter $2,489,000. Rent and related occupancy expense was $1,710,000 in 1996, $1,742,000 in 1995 and $1,398,000 in 1994. 16 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 1996, 1995 and 1994 were approximately $462,000, $340,000 and $324,000, respectively. The Company established an Employee Stock Ownership Plan ("ESOP") in 1985 which enables eligible employees to own common stock of First Republic. The ESOP Trust has borrowed funds to purchase shares of common stock at the market price at the time of purchase. The Company has guaranteed these borrowings and make contributions to the Trust, in amounts required to make principal and interest payments. As the debt is repaid, the common stock is allocated to the accounts of the ESOP's participants, with vesting over a period of five years. The Company made contributions of $353,000, $683,000 and $615,000 to the ESOP in 1996, 1995 and 1994, respectively, of which $20,000, $33,000 and $65,000 represents interest expense. Additional compensation expense of $5,000 in 1996 was recognized using the shares allocated method, based on the fair value of such shares. The number of shares allocated by the ESOP were 20,202 in 1996, 67,154 in 1995, and 60,549 in 1994. At December 31, 1996, the ESOP holds 325,212 shares allocated to participants and 40,404 unallocated shares, which had a fair value of $677,000. Since inception, the Company has not offered any other employee benefit plans and, at December 31, 1996, 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. 17 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, 1996 and 1995; 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. 53 First Republic Bancorp FHLB stock: FHLB stock has no trading market, is required as part of membership, and is redeemable at par; therefore, its fair value is equal to its cost. Loans receivable: The carrying amount of loans is net of unearned fee income and the reserve for possible losses. To estimate fair value of the Company's loans, primarily adjustable rate real estate secured mortgages, each loan collateral type is segmented into categories based on fixed or adjustable interest rate terms (index, margin, current rate and time to next adjustment), maturity, estimated credit risk, and accrual status. The fair value of single family, 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 judgementally 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 mortgage servicing rights related to loans originated and sold by the Company or purchased mortgage servicing rights is based on estimates of fair values for servicing rights with similar characteristics, with no value attributed to servicing rights on 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 $90,000 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, 1996 December 31, 1995 -------------------------- ------------------------- Carrying Fair Carrying Fair (In $ thousands) Amount Value Amount Value ...................................................... Assets: Cash $ 29,298 $ 29,298 $ 31,118 $ 31,118 Investments 156,572 156,395 140,913 140,394 FHLB stock 32,649 32,649 30,321 30,321 Loans, net 1,902,813 1,928,103 1,659,815 1,678,839 Servicing rights 1,397 11,000 449 7,203 Liabilities: Deposits 1,353,148 1,355,229 1,140,441 1,114,397 Borrowings 592,197 585,768 570,530 564,791 Subordinated debentures 29,481 28,204 29,553 28,497 Convertible debentures 30,685 37,743 34,500 36,398 Off-balance sheet: Interest rate caps 2,507 971 3,822 1,572 Interest rate swaps -- 2,142 -- 3,295
18 First Republic Bancorp Inc. (Parent Company Only) Condensed Balance Sheet
December 31, 1996 1995 ......................... Assets Cash and investments $ 5,665,000 $ 5,706,000 Loans, net 509,000 335,000 Investment in subsidiaries 160,277,000 145,246,000 Advance to subsidiaries -- 374,000 Other assets 22,200,000 21,531,000 ------------ ------------ $188,651,000 $173,192,000 ============ ============ Liabilities and Stockholders' Equity Accounts payable and accrued liabilities $ 1,408,000 $ 879,000 Other borrowings 667,000 -- Subordinated debentures 29,481,000 29,553,000 Convertible subordinated debentures 30,685,000 34,500,000 ------------ ------------ 62,241,000 64,932,000 ------------ ------------ Stockholders' equity 126,410,000 108,260,000 ------------ ------------ $188,651,000 $173,192,000 ============ ============
54 Condensed Statement of Income
Year Ended December 31, 1996 1995 1994 ........... .......... .......... Interest income $ 289,000 $ 474,000 $ 286,000 Interest expense 5,737,000 5,809,000 5,742,000 Dividends from subsidiaries 3,190,000 982,000 2,500,000 Other income 4,487,000 3,501,000 5,031,000 General and administrative expense 3,896,000 2,031,000 1,979,000 ----------- ---------- ---------- Operating income (loss) (1,667,000) (2,883,000) 96,000 Equity in undistributed earnings of subsidiaries 14,174,000 4,053,000 7,207,000 ----------- ---------- ---------- Net income $12,507,000 $1,170,000 $7,303,000 =========== ========== ===========
Condensed Statement of Cash Flows
Year Ended December 31, 1996 1995 1994 ............ ........... ........... Operating Activities: Net Income $ 12,507,000 $ 1,170,000 $ 7,303,000 Adjustments to net cash from operating activities: Provision for losses (65,000) -- -- Gain on sale of servicing -- -- (703,000) Increase in other assets (669,000) (820,000) (1,631,000) Increase (decrease) in other liabilities 592,000 (607,000) 575,000 Equity in undistributed earnings of subs. (14,174,000) (4,053,000) (7,207,000) ------------ ----------- ----------- Net Cash Used (1,809,000) (4,310,000) (1,663,000) Investment Activities: Loans originated (1,284,000) -- (1,358,000) Loans sold or repaid 1,175,000 1,334,000 1,640,000 Servicing sold -- -- 738,000 Capital from (into) subs. -- -- 4,413,000 Advances to subs., net 374,000 (160,000) 816,000 ------------ ----------- ----------- Net Cash Provided 265,000 1,174,000 6,249,000 Financing Activities: Net increase (decrease) in other borrowings 667,000 (650,000) (550,000) Net decrease in def. comp. ESOP 333,000 650,000 550,000 Issuance of subordinated debentures, net (72,000) (124,000) 3,220,000 Sale of stock 575,000 174,000 463,000 Purchase of treasury stock -- (1,448,000) (3,964,000) ------------ ----------- ----------- Net Cash Provided (Used) 1,503,000 (1,398,000) (281,000) Increase (decrease) in Cash (41,000) (4,534,000) 4,305,000 Cash at start of year 5,706,000 10,240,000 5,935,000 ------------ ----------- ----------- Cash at end of year $ 5,665,000 $5,706,000 $10,240,000 ============ =========== ===========
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 subsidiary as of December 31, 1996 and 1995 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP San Francisco, California January 28, 1997 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 loans and investments and the interest expense it pays on interest- bearing liabilities such as customer deposits and borrowings; (2) the origination and sale of real estate secured loans in the secondary market; and (3) servicing fee and other 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 addition to historical information, this report includes certain forward-looking statements regarding events and trends which may affect the Company's future results. Such statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially. Such factors include, but are not limited to, those described in this discussion and analysis. In 1996, the Company's earnings were increased, compared to 1995, as the impact of interest rate volatility diminished and the lingering effects of the January 1994 Northridge earthquake declined; as a result of these factors and continued asset growth in 1996, there was higher net interest income, lower average nonearning assets, and lower provisions for losses. Loan origination volume increased to $848,278,000 compared to $584,388,000 in 1995, primarily due to higher volume of adjustable rate home loan originations and increased purchases of homes. Total assets increased to $2,156,599,000 at December 31, 1996 from $1,904,253,000 at December 31, 1995, as the Company expanded its single family mortgage loans to $1,260,039,000, or 66% of the total loan portfolio. During 1996, total deposits increased $212,707,000, or 19%, in part due to the result of adding two new deposit locations in the last half of 1995 and one in late 1996. Interest Income and Expense Interest income on loans rose to $145,474,000 in 1996 from $127,341,000 in 1995 and $100,816,000 in 1994, 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% in both 1996 and 1995 and 7.31% in 1994. The average yield on the Company's loans was lower in 1994 for a number of reasons. As a result of low market rates and competitive conditions 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 1994, interest rates rose throughout the year, so the average yield on loans in 1995 gradually increased due to periodic interest rate changes which are generally limited in frequency and amount for mortgages. On average, interest rates and indices on which the Company's ARM loans reprice were stable throughout 1996. The average balance of the Company's loans was $1,818,100,000 for 1996, compared to $1,591,827,000 and $1,379,640,000 for 1995 and 1994, respectively. Loans totalled $1,923,449,000 at December 31, 1996. Interest income on short-term investments, investment securities and FHLB stock increased to $14,272,000 in 1996 and $12,253,000 in 1995 compared to $8,549,000 in 1994, as a result of earning higher rates on increased average balances. The average rates earned on these assets, adjusted for the effect of tax-exempt securities, were 7.00% in 1996 and 6.79% in 1995 compared to 5.39% in 1994. During 1996 and 1995, the interest rates earned on these assets increased due to asset repricings at higher average market rates and increased earnings on FHLB stock. At December 31, 1996, the book value of cash, short-term investments, investment securities and FHLB stock was $218,519,000 compared to $202,352,000 at December 31, 1995. Total interest expense increased to $113,034,000 in 1996 compared to $104,913,000 in 1995 and $71,435,000 in 1994. Total interest expense consists of three components: interest expense on deposits, interest expense on FHLB advances and other borrowings, and interest expense on debentures. Interest expense on deposits, comprised of NOW checking accounts, money market and passbook accounts and certificates of deposit, was $72,025,000 in 1996 compared to $62,133,000 in 1995 and $41,024,000 in 1994. The Company's outstanding deposits have grown to $1,353,148,000 at December 31, 1996 from $1,140,441,000 at December 31, 1995 and $948,833,000 at December 31, 1994. This deposit growth is attributable to increased deposit-gathering activities and the opening of additional branches. The Company's average cost of deposits decreased to 5.74% for 1996 from 5.93% for 1995, and was 4.78% in 1994. The general increase in market interest rates contributed to the higher average cost of deposits for 1995. As market rates stabilized in 1996, the average cost of deposits declined as term deposits rolled over at lower rates. The Company's new branches have allowed additional deposits to be raised in existing markets at competitive terms, although extensive competition for new 56 First Republic Bancorp deposits affects the cost of incremental deposit funds. At December 31, 1996, the weighted average rate paid by the Company on its deposits was 5.57%, compared to 5.88% at December 31, 1995. The Bank 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 $591,530,000 at December 31, 1996 and $570,530,000 at December 31, 1995. 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. Interest expense on FHLB advances and other borrowings was $35,292,000 in 1996 as compared with $37,003,000 in 1995 and $24,736,000 in 1994. The average cost of these liabilities was 5.96% in 1996 compared to 6.60% in 1995 and 4.80% in 1994, with the fluctuations primarily due to changes in average market interest rates. At December 31, 1996 and 1995, the weighted average rate paid on the Company's long-term FHLB advances was 5.94% and 6.16%, respectively. In 1994 and 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 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 and FHLB stock which are assets of the Bank and, although the Bank may substitute other loans for such pledged loans, the Bank 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, 1996, the Bank had an approved borrowing capacity with the FHLB of $856,000,000, approximately 40% of its total assets. The Company expects that the interest rates paid on FHLB advances will continue to fluctuate with changes in market rates and the Company will continue to emphasize retail deposits to fund a significant percentage of future asset growth. 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 8.97% in 1996, 9.01% in 1995, and 9.01% in 1994. At December 31, 1996 and 1995, the weighted average rate paid on outstanding debentures was 8.10% and 8.11%, respectively. Included in interest expense is the amortization of the cost of interest rate cap agreements. 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." At December 31, 1996, the Company owned a portfolio of interest rate cap agreements with a net cost of $2,507,000. These costs are amortized over the lives of the agreements, resulting in expenses of $1,673,000 in 1996, $1,688,000 in 1995 and $1,210,000 in 1994. These costs added approximately 0.09% to the overall rate paid on liabilities in 1996, 0.10% in 1995, and 0.08% in 1994. Net Interest Income Net interest income constitutes the principal source of income for the Company. The Company's net interest income increased to $46,712,000 in 1996 from $34,681,000 in 1995 and $37,930,000 in 1994. The increase in net interest income for 1996 resulted primarily from the growth in lower cost deposit products and a lower average level of nonearning assets, as well as generally lower and more stable market rates of interest which resulted in the average cost on FHLB advances decreasing more rapidly than the average yield on loans. The Company's net interest spread increased to 1.98% in 1996 from 1.60% in 1995 and 2.13% in 1994. 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.
1996 1995 1994 ..................... Cash and investments 7.00% 6.79% 5.38% Loans 8.00% 8.00% 7.31% ----- ----- ----- All interest-earning assets 7.90% 7.87% 7.11% ----- ----- ----- Deposits 5.74% 5.93% 4.78% Borrowings 5.96% 6.60% 4.80% Debentures 8.97% 9.01% 9.01% ----- ----- ----- All interest-bearing liabilities 5.91% 6.27% 4.97% ----- ----- ----- Net interest spread 1.98% 1.60% 2.13% ===== ===== ===== Net interest margin 2.32% 1.97% 2.47% ===== ===== ===== Interest-earning assets as % of interest-bearing liabilities 106% 106% 107% ===== ===== =====
57 First Republic Bancorp 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, 1996, 87% of loans on the Company's balance sheet adjust or were due within one year. As a portfolio lender and seller in the secondary market, some single family loans, including substantially all long-term fixed rate loans, are originated for sale, whereas historically a small percentage of apartment and commercial loans has been sold. From its inception in 1985 through December 31, 1996, the Company has originated approximately $5.8 billion of loans, of which approximately $2.0 billion have been sold to investors. The Company's loan originations totalled $848,278,000 in 1996, $584,388,000 in 1995, and $784,486,000 in 1994. The level of loan originations in 1996 and 1994 reflected increased single family lending as a result of the relatively lower rates of interest available to borrowers and increased home purchases in the Company's primary markets in 1996. For much of 1995, a relatively flat yield curve resulted in lower single family ARM lending. Management expects that loan origination volume for 1997 may approximate the 1996 level, based on the current level of interest rates and home purchase volume, as well as current conditions in the local economies and the secondary market for mortgage loans. The Company focuses on originating a limited number of loans by property type, location and borrower. The Company's loans are of sufficient average size to justify executive management's involvement in most transactions. Approximately 80% of the Company's loans are secured by properties located within 20 miles of one of the Company's offices. The following table shows the Company's loan originations during the past two years by property type and location:
1996 1995 -------------- ------------- (In $ millions) $ % $ % ............................... Single Family: San Francisco $459.6 54% $291.4 50% Los Angeles 139.0 17 105.0 18 San Diego 45.2 5 16.1 3 Las Vegas -- - 0.5 - ------ --- ------ --- 643.8 76 413.0 71 ------ --- ------ --- Income Property: San Francisco 38.9 5 53.6 9 Los Angeles 12.9 1 10.2 2 Las Vegas 50.7 6 35.7 6 ------ --- ------ --- 102.5 12 99.5 17 ------ --- ------ --- Construction 97.7 12 69.4 12 Other 4.3 -- 2.6 -- ------ --- ------ --- Total $848.3 100% $584.5 100% ====== === ====== ===
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 when the loan-to- value ratio is greater than 65%. 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 weighted average loan-to-value ratios on loans originated in 1996 were 67% on single family, 61% on multifamily and 60% on 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, 1996, 59% of the Company's loans are secured by properties located in the San Francisco Bay Area, 20% in Los Angeles County, 2% in San Diego County and 9% in the Las Vegas, Nevada area. By property type, single family mortgage loans, including home equity lines of credit, aggregated $1,260,039,000 and accounted for 66% of the Company's total loans, while multifamily loans were $320,715,000 or 17% and loans secured by commercial real estate were $285,141,000 or 15%. During 1996 and 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, 1994, an amount equal to 98% 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, 1996 by property type and major geographic location.
San Los Total Francisco Angeles Las Vegas, ----------------- (In $ millions) Bay Area County Nevada Other $ % ........................................................... Single family $ 786 $267 $ 10 $197 $1,260 66% Multifamily 137 68 100 16 321 17% Commercial 191 33 44 17 285 15% Construction 11 11 19 3 44 2% Other 5 3 1 4 13 --% ------ ---- ---- ---- ------ ---- Total $1,130 $382 $174 $237 $1,923 100% ====== ==== ==== ==== ====== ==== Percent by location 59% 20% 9% 12% 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 58 .... First Republic Bancorp 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 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, lowered the principal balance. As a result of the lingering effects of this natural disaster, the Company experienced loan delinquencies, REO foreclosures, and additional loan loss provisions at levels higher than previous historical experience. Also, the Company experienced higher levels of nonaccrual and restructured loans during 1994 and 1995, 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 reduced 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, 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, 1996 1995 ........................ Nonaccruing loans $24,254,000 $36,550,000 Real estate owned 4,313,000 10,198,000 ----------- ----------- Total nonaccruing assets 28,567,000 46,748,000 Restructured performing loans 7,220,000 12,795,000 ----------- ----------- Nonaccruing and restructured assets $35,787,000 $59,543,000 =========== =========== Accruing single family loans over 90 days past due $ 4,565,000 $ 3,747,000 =========== =========== Percent of Total Assets: All nonaccruing assets 1.32% 2.46% Nonaccruing and restructured assets 1.66% 3.13%
At December 31, 1996, nonaccruing loans and REO had declined 33% from the level at June 30, 1996 as a result of loan payoffs, REO sales, and writedowns. Nonaccruing assets at December 31, 1996 included $17,521,000 of loans and REO adversely affected by the earthquake. Restructured performing loans were paying at a weighted average rate of 8.12% at December 31, 1996 and $6,074,000 of these loans are eligible for removal from this category in 1997. At December 31, 1996, the REO balance of $4,313,000 consists of 3 properties. Since late 1992, the Company has owned an 800 acre parcel of land in the San Francisco Bay Area and the Company reduced the carrying value of this asset by $1,370,000 during 1996 and $1,093,000 during 1995, all of which was recorded as REO expense. The Company's asset quality measures improved significantly in the last half of 1996, as a result of improved economic conditions in local markets, increased buyer interest in REO properties and aggressive foreclosure and collection efforts. The Company expects nonaccruing loans and REO will continue to decline in dollar amount and as a percent of total assets in 1997, although 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 loan terms. 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. Since inception through December 31, 1996, 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 cumulative single family loan loss experience since inception is 0.06% on all loans originated. For the three-year period ended December 31, 1996, average net chargeoffs on single family loans as a percentage of average single family loans was less than 0.02%. As of December 31, 1996, the Company has not experienced any losses on its permanent loan portfolio secured by real estate located in the Las Vegas market. Collectively, the single family loan and Las Vegas permanent loan categories represented 73% of the Company's total loans at December 31, 1996. 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 1996, 1995, and 1994 due to effects of the earthquake and the difficult economic conditions in the Company's California markets in recent years. Net chargeoffs to the reserve for losses were $6,386,000 in 1996, $11,052,000 in 1995 and $8,056,000 in 1994. During 1996, 1995 and 1994, chargeoffs of $5,119,000, $7,590,000 and $6,133,000, or 68%, 64% and 75%, respectively, of total chargeoffs 59 First Republic Bancorp for each year, related to loans adversely affected by the Northridge earthquake. During 1996, net chargeoffs were $302,000 for single family and $6,261,000 for multifamily; there were net recoveries of $150,000 for commercial real estate and $27,000 for other 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 and actual losses in any year may exceed reserve amounts. As a percentage of the Company's recorded investment in nonaccruing loans after previous writedowns, the reserve for possible losses was 72% at December 31, 1996 and 49% at December 31, 1995. 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 have been reduced to their currently estimated collateral fair value (net of selling costs) at December 31, 1996, 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 certificates of deposits, liquid deposits comprised of passbook, money market and NOW checking accounts, 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. 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. Despite the Company's positive repricing position, the Company's net interest margin decreased throughout 1994 and the first two quarters of 1995, but began to increase gradually in the third and fourth quarters of 1995. For most of 1996, market rates of interest were relatively stable and the Company's net interest margin was higher and more stable, averaging 2.32% in 1996 versus 1.97% in 1995. Important factors affecting the Company's net interest margin include the composition of the Company's customer deposits, the cost of the Company's FHLB advances, mortgage loan repricings being subject to interim limitations on asset repricings, the level of nonaccruing assets, and the Company's strategy to increase its home loans which generally carry lower margins. At December 31, 1996, approximately 88% of the Company's interest-earning assets and 80% of interest-bearing liabilities will reprice within the next year and the Company's one-year cumulative gap was positive 13%. If interest rates remain near the current level, the amount of lower cost transaction accounts increase and actual loan repayment rates are similar to projected repayment rates, the Company's most recent interest rate risk model indicates that the Company's net interest margin is expected to remain in the 1996 range or to increase modestly in 1997. 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 eight unrelated commercial or investment banking institutions, the Company generally will be reimbursed quarterly for increases in three-month LIBOR for any quarter 60 First Republic Bancorp during the terms of the applicable transaction in which such rate, known as the strike rate, exceeds a rate ranging generally from 8.5% to 12%. 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. At December 31, 1996 and 1995, the Company owned interest rate cap agreements with an aggregate notional principal amount of approximately $1.2 billion. The Company purchased three year interest rate caps totalling $250 million with a 9% strike rate and $25 million with an 8.5% strike rate during 1996 and $50 million of three year interest rate caps with a 9% strike rate during 1995. 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 1996 and 1995, the Company did not enter into any new interest rate swap agreements and $40.0 million of such agreements matured during 1995. The Company collected $624,000 for 1996, $1,027,000 for 1995, and $2,376,000 for 1994 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 53 to 54 of this annual report. Because interest rates declined substantially throughout 1995 and modestly during the last six months of 1996, current market rates at the end of each year varied 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. As a result of such rate decreases, at December 31, 1996 and 1995, the Company's adjustable rate loans and investments, in general, have a fair value above their carrying amount, while borrowings and debentures have a fair value below their carrying amount. 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, 1996 is as follows:
0-6 7-12 1-5 Over Not Rate (In $ millions) Months Months Years 5 Years Sensitive Total ....................................................................................... Cash and investments $ 178.0 $ 17.3 $ -- $ 23.2 $ -- $ 218.5 Loans 1,592.1 94.8 193.4 43.1 -- 1,923.4 Other assets -- -- -- -- 14.7 14.7 -------- ------- ------- ------ ------- -------- Total assets 1,770.1 112.1 193.4 66.3 14.7 2,156.6 -------- ------- ------- ------ ------- -------- Deposits 723.8 374.8 254.3 .3 -- 1,353.2 FHLB advances and borrowings 478.5 10.0 80.5 22.5 -- 591.5 Debentures -- -- 1.5 58.6 -- 60.1 Other -- -- -- -- 25.4 25.4 Equity -- -- -- -- 126.4 126.4 -------- ------- ------- ------ ------- -------- Total liabilities and equity 1,202.3 384.8 336.3 81.4 151.8 $2,156.6 ======== Effect of interest rate swaps -- pay variable rates 25.0 -- (25.0) -- -- -------- ------- ------- ------ ------- Repricing gap -- positive (negative) $ 542.8 $(272.7) $(117.9) $(15.1) $(137.1) ======== ======= ======= ====== ======= Cumulative repricing gap: Dollar amount $ 542.8 $ 270.1 $ 152.2 $137.1 Percent of total assets 25.2% 12.5% 7.1% 6.4%
61 First Republic Bancorp Non-Interest Income For 1996, service fee revenue, net of amortization costs on the Company's mortgage servicing rights, was $2,174,000 compared to $2,675,000 for 1995 and $2,330,000 for 1994. In the last six months of 1995 and the first six months of 1996, the Company experienced an increased level of prepayment activity, particularly with respect to treasury indexed ARM loans, resulting in increased amortization of servicing rights. Given the present size of the servicing portfolio, expected future loan sales and the current level of interest rates, the Company expects that the future range of net service fee revenues will be approximately at the 1996 level as long as interest rates are relatively stable. Total loans serviced were $799,500,000 at December 31, 1996, with an average portfolio of $790,833,000 for 1996, $823,965,000 for 1995, and $849,652,000 for 1994. 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 0.50% and averaged 0.34% for 1996, 0.37% for 1995 and 0.36% for 1994. Loan and related fee income was $1,435,000 in 1996, $1,289,000 in 1995 and $1,915,000 in 1994. This category includes late charge income which increases as the average loan and servicing portfolios grow, and prepayment penalty and pay- off fee income which varies with loan repayment activity. The Company sells whole loans and loan participations in the secondary market under several specific programs. Loan sales were $172,769,000 in 1996, $99,232,000 in 1995, and $216,951,000 in 1994. For the last six months of 1994 and all of 1995, the level of loan sales was modest. The higher level of loans sold in 1996 was a result of higher single family lending volume, lower interest rates which created more customer demand for fixed rate loans, and increased demand for ARM loans in the secondary market. The focus of the Company's secondary marketing 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 42% of the total sold in 1996, 100% in 1995 and 39% in 1994. 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 $100,183,000, and $131,408,000, of adjustable rate loans to these investors in 1996 and 1994, respectively, in part to limit the amount of the Company's annual mortgage loan growth. During 1994, the Company sold one pool of $67,300,000 of adjustable rate mortgage loans to reduce interest rate risk and recorded a loss of $471,000. The amount of loans which are sold is dependent upon conditions in both the mortgage origination and secondary loan sales markets and the level of gains fluctuates with the amount of loans sold and market conditions. The Company computes a gain or loss at the time of sale by comparing sales price with carrying value which, in 1996, included valuing the servicing rights retained on loans sold in accordance with SFAS No. 122. The sale of loans resulted in net gains of $1,345,000 in 1996, net losses of $67,000 in 1995, and net gains of $430,000 in 1994. Loan sales volume was higher in 1996 as compared to 1995 and, prior to the adoption of SFAS No. 122, no value was recorded for mortgage servicing rights on loans originated and sold in 1995 and 1994. The net gain on the Company's 1996 loan sales included $1,495,000 of value related to originated mortgage servicing rights. As long as interest rates remain in their 1996 range and secondary market conditions are stable, the Company expects that the future level of loan sales and related gains should be consistent with activity and results in 1996. Over the past three years, the Company has expanded its investment portfolio of primarily adjustable rate debt securities. In 1996, the Company sold $4,539,000 of debt securities, recording gross gains of $28,000. There were no sales of debt securities in 1995 or 1994. Purchases over the past three years related primarily to adjustable rate mortgage backed securities rated "A" or better. As of December 31, 1996, 92% of the Company's investments were U.S. Government, agency or other mortgage backed securities and 85% were adjustable, repricing annually or more frequently. During 1994, the Bank 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 62 .... First Republic Bancorp 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, $276,000 of these preferred stocks 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. During 1996, further price increases resulted in the unrealized loss in these preferred stocks being reduced to $898,000 at December 31, 1996 and there was an unrealized gain of $173,000, net of taxes, recorded on available for sale debt securities at that date. Because preferred stocks receive capital gain and loss treatment under tax rules, the unrealized loss has not been reduced by the effect of any potential tax benefits; at December 31, 1996, these investments carried a weighted average, tax adjusted yield of 8.93%. 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 $24,711,000 in 1996, $22,359,000 in 1995 and $21,105,000 in 1994. The Company has capitalized general and administrative costs related to loan originations totalling $6,109,000 in 1996, $3,920,000 in 1995, and $5,654,000 in 1994; 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 $3,116,000 at December 31, 1996, $4,380,000 at December 31, 1995 and $6,816,000 at December 31, 1994. During 1996 and 1995, the Company originated more single family no "points" loans which resulted in a decrease in unearned fees net of costs. However, there has been an increase in the percentage of such loans which contain prepayment penalties. 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 collectively increased in each of the past three years. Primarily as a result of lower loan volume in 1995 as compared to both 1996 and 1994, both salary expense and capitalized costs related to loan origination were lower in 1995. Also, in 1996, salary expense increased due to loan origination personnel achieving certain incentive goals and performance based compensation being earned by executive management. In 1996, there was a 13% increase in total assets and a 10% increase in average employees. In 1995, there was a 12% increase in total assets with a small decrease in average employees. Occupancy costs were $3,343,000 in 1996 and $3,084,000 in 1995, compared to $2,793,000 in 1994. The increase for 1996 and 1995 is related to having three additional deposit branches in San Francisco and Las Vegas, as well as expanded facilities in San Francisco. Advertising expense was $2,202,000 in 1996 compared to $1,500,000 in 1995 and $1,863,000 in 1994. Newspaper ads are placed primarily to support retail deposit gathering and, in 1996 and in 1994, there was more promotional and advertising costs associated with the Company's higher level of loan originations. Deposit- related advertising expense as a percentage of average deposits was 0.08% in 1996, 0.07% in 1995 and 0.12% in 1994. The future level of these expenses may increase as the Company emphasizes deposits as a funding source, solicits transaction deposit accounts 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 expenses were $1,164,000 for 1996, $613,000 for 1995 and $542,000 for 1994. A portion of the 1996 increase is not expected to be recurring as it is primarily due to the accrual of certain services on a calendar year which were previously amortized over the following year and services rendered in connection with corporate reorganizations. 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 that specific natural disaster. The costs and losses, net of income and gains, related to REO properties was $850,000 in 1996, $3,163,000 in 1995, and $1,202,000 in 1994. This expense category included net gains or recoveries of $1,909,000 in 1996 and $161,000 in 1994 versus net writedowns or losses of 63 First Republic Bancorp $785,000 in 1995; expenses for taxes, insurance, maintenance and other operating expenses, net of operating income, of $2,747,000 in 1996, $1,593,000 in 1995 and $957,000 in 1994; and collection costs of $12,000 in 1996, $785,000 in 1995 and $406,000 in 1994. 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 $332,000 in 1996, compared to $1,264,000 in 1995 and $1,809,000 in 1994. In 1996 and 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 was significantly lower for all of 1996. The Company expects that payments to the FDIC will be approximately 1.3% of assessable deposits in 1997, based on current regulations. Other general and administrative expenses were $6,739,000 in 1996, $5,193,000 in 1995, and $5,721,000 in 1994. Expenses in this category include liability insurance costs and expenses which vary in proportion with transaction volume, the number of locations and inflation, such as certain costs related to single family loan originations, data processing, communications, travel and other operating costs. In 1996, the Company recorded nonrecurring costs for a corporate identity review, for the merger of its two subsidiaries and for the conversion of debentures. 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 1996, the Company's operating efficiency ratio was 47%, compared to 49% for 1995 and 47% for 1994, with the decrease in this ratio for 1996 resulting primarily from the higher level of net interest income in 1996. As a measure of its ability to control costs, the Company computes recurring non-interest expense as a percentage of average total assets. This ratio was 1.17% in 1996 compared to 1.07% in 1995 and 1.28% in 1994. 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 1996 provision for income taxes of $8,763,000 represents an effective tax rate of 41.2%, compared to $686,000 or 37.0% for 1995, and $4,935,000 or 40.3% for 1994. 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, 1996, the investment securities portfolio of $156,572,000 and cash plus short-term investments of $29,298,000 amounted to over 8.6% of total assets. Additionally, the Company had available unused FHLB advances of approximately $265,000,000. 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. 64 .... First Republic Bancorp At December 31, 1996, 83% of the Company's interest-earning assets possess the ability to reprice within six months. As part of a long term strategy, having assets on which the interest rate adjusts frequently allows the Company more flexibility in setting rates required to obtain deposits and other liabilities. As shown in the Company's Consolidated Statement of Cash Flows, the source of funds to finance the $848,278,000 of loans originated in 1996 was diversified and included loan principal repayments of $408,135,000, the sale of $172,769,000 of loans, a net increase in deposits of $212,707,000, and an increase in long term FHLB advances of $25,000,000. In 1995 and 1994, the Company's loan origination activities and asset growth were financed by a similar combination of loan principal repayments, FHLB advances, deposit increases and loan sales. First Republic has also generated funds from the sale of debentures or common stock. Capital Resources At December 31, 1996, the Company's capital, consisting of stockholders' equity, long-term debentures and reserves, was $204,096,000, or 9.46% 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. In 1997, the Company intends to pursue the merger of First Republic Bancorp Inc. into First Republic Savings Bank, with a concurrent conversion to a commercial bank charter. This corporate change would result in a successor entity which would be a publicly traded bank, subject to both regulatory and stockholder approval. First Republic has used the proceeds of the issuance of common stock and debentures to, in part, provide capital to its subsidiary, First Republic Savings Bank. First Republic is a legal entity separate and distinct from its subsidiary and is dependent upon its own operations and dividends from its subsidiary as the source of cash to service and ultimately repay its outstanding debt. At December 31, 1996, First Republic has invested $10,000,000 in the Bank as interest-bearing capital notes, with interest and principal payments which generally correspond to the payment terms of First Republic's senior subordinated debentures. At December 31, 1996, First Republic had $29,481,000 of long-term subordinated debentures outstanding with maturities ranging from 2003 to 2009 and $30,685,000 of convertible subordinated debentures maturing in 2002. The Company completed the conversion of $3,815,000 of the convertible subordinated debentures during 1996 and an additional $14,129,000 was converted in January 1997; all such debentures are expected to be converted to common stock prior to maturity. 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, 1996, First Republic had stockholders' equity of $126,410,000 and its investment was $160,277,000 in the Bank. First Republic received or was due dividends of $4,264,000 for 1996, $1,058,000 for 1995 and $2,500,000 for 1994 from the Bank. These dividends represented approximately 25% in 1996, 22% in 1995, and 26% in 1994 of the earnings of the Bank for such periods. Additionally, First Republic received interest payments from the Bank of $1,054,000 in both 1996 and 1995 and $1,540,000 in 1994; during 1994, $5,000,000 of capital notes were repaid by the Bank. The ability of First Republic to receive future dividends depends upon the operating results of and government regulations applicable to its subsidiary. 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 the Bank and the continued receipt of dividends from the Bank. 65 .... First Republic Bancorp Directors and Corporate Officers .............................................) The Directors of First Republic Seated center to right: James H. Herbert, II, Roger O. Walther, and Barrant V. Merrill. Standing left to right: James F. Joy, John F. [Photo Appears Here] Mangan, Richard M. Cox-Johnson, L. Martin Gibbs, Frank J. Fahrenkopf, Jr., Kenneth W. Dougherty, and Katherine August-deWilde Roger O. Walther, James H. Herbert, II, 61, Chairman of the Board 52, President, Chief Executive of Directors. Mr. Walther is Officer and Director. From 1980 Chairman and Chief Executive to July 1985, Mr. Herbert was Officer of ELS Educational President, Chief Executive Offi- Services, Inc., America's largest cer and a director of San Fran- teacher of English as a second cisco Bancorp. B.S., 1966, Babson language. He is a director of College; M.B.A., 1969, New York Charles Schwab & Co., Inc. University; and member of the He was formerly Chairman of Babson Corporation. 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. 66 First Republic Bancorp Katherine August-deWilde, 49, Executive Vice President, Chief Operating Officer and Director. Previously, Ms. August-deWilde was Senior V.P. and Chief Financial Officer at PMI Corporation A.B., 1969, Goucher College; M.B.A., 1975, Stanford University. Willis H. Newton, Jr., 47, Senior Vice President 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. Edward J. Dobranski, 46, Senior Vice President, Secretary and 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, 34, Vice President and 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. Richard M. Cox-Johnson, 62, Director. Mr. Cox-Johnson is a director of Premier Consolidated Oilfields PLC. Graduate of Oxford University, 1955. Kenneth W. Dougherty, 70, 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., 57, 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, he was Chairman of the Republican National Committee. B.A., 1962, University of Nevada, Reno; L.L.B., 1965, University of California, Berkeley. L. Martin Gibbs, 59, 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, 59, 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, 60, 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. B.A., 1959, University of Pennsylvania. Barrant V. Merrill, 66, 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. 67 First Republic Bancorp Quarterly and Additional Information
Total Net Provision Pretax Net Fully- Common Stock Interest Interest For Income Income Diluted Price Range --------------- Income Income Losses (Loss) (Loss) EPS High Low ........... ........... .......... ........... ........... ..... ...... ...... 1996 1Q $38,658,000 $11,256,000 $1,773,000 $ 4,740,000 $ 2,770,000 $ .31 $13.88 $12.25 2Q 39,324,000 11,792,000 1,815,000 5,041,000 3,001,000 .33 15.38 12.63 3Q 40,423,000 11,697,000 1,500,000 5,582,000 3,275,000 .36 15.63 12.63 4Q 41,341,000 11,967,000 750,000 5,907,000 3,461,000 .37 17.88 15.38 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
First Republic Bancorp Inc. Common Stock is traded on the New York and Pacific Stock Exchanges under the symbol FRC. At December 31, 1996, there were approximately 200 stockholders of record, although the Company believes that its shares are held beneficially by approximately 2,000 stockholders. First Republic Bancorp Inc. is a financial services company operating principally in California and Nevada as a holding company for an FDIC insured, state chartered industrial bank subsidiary. The Company functions as a direct lender as well as a mortgage banking company, originating, holding or selling and servicing mortgage loans. The Company has purchased servicing rights and retains responsibility for servicing loans which it has sold in the secondary market, thereby earning ongoing servicing fee revenues. The Company emphasizes real estate secured lending and mortgage banking operations that are targeted primarily toward loans secured by single family residences and, to a lesser extent, by existing multifamily and commercial properties. From its inception in 1985 through December 31, 1996, the Company has originated $5.8 billion of loans, $2.0 billion of which have been sold in the secondary market to institutional investors. At December 31, 1996, the Company's loan portfolio of $1.9 billion consisted primarily of real estate secured loans, 87% 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. [BAR GRAPH APPEARS HERE] [BAR GRAPH APPEARS HERE]
Average Assets Trend in General and per Employee Administrative Expenses (dollars in millions) (percent of average assets) 92 9.6 1.30 93 9.8 1.33 94 10.5 1.28 95 12.3 1.07 96 12.7 1.17
68 .... Officers, Directors and Corporate Information
Offcers Stock Exchanges Branch Locations Roger O. Walther Common Stock listed on the First Republic Savings Bank Chairman, Board New York and Pacific Stock 101 Pine Street of Directors Exchanges - Symbol FRC San Francisco, California 94111 (415) 392-1400 James H. Herbert, II General Counsel (800) 392-1400 President and Chief Executive Officer Rogers & Wells 1088 Stockton Street Director San Francisco, California 94108 Auditors (415) 834-0888 Katherine August-deWilde KPMG Peat Marwick LLP Executive Vice President and 5628 Geary Boulevard Chief Operating Officer Registrars/ San Francisco, California 94121 Director Transfer Agent: (415) 751-3888 Willis H. Newton, Jr. Common Stock-- 1809 Irving at 19th Avenue Senior Vice President and ChaseMellon Shareholder San Francisco, California 94122 Chief Financial Officer Services, L.L.C. (415) 664-0888 Edward J. Dobranski Subordinated and 1099 Fourth Street Senior Vice President, Convertible Debentures-- San Rafael, California 94901 Secretary and (415) 485-3888 General Counsel U.S. Trust Company (800) 700-0388 of California or National David B. Lichtman City Bank 1111 South El Camino Real Vice President and San Mateo, California 94010 Chief Credit Officer Annual Meeting (415) 571-8388 (888) 571-8388 The Company's Annual Directors Stockholders' Meeting will be held 3928 Wilshire Boulevard on Wednesday, April 30, 1997 at Los Angeles, California 90010 R.M. Cox-Johnson 4pm at the New York Yacht Club, (213) 384-0777 Director 37 West 44th Street, New York, (800) 777-9507 Director, Premier New York 10036. Consolidated Oilfields PLC 9593 Wilshire Boulevard Headquarters Office Beverly Hills, California 90212 Kenneth W. Dougherty (310) 288-0777 Director First Republic Bancorp Inc. (800) 311-0777 Investments 388 Market Street San Francisco, California 94111 116 East Grand Avenue Frank J. Fahrenkopf, Jr. (415) 392-1400 Escondido, California 92025 Director (800) 392-1400 (619) 740-7000 President, American Gaming Association 1110 Camino Del Mar Del Mar, California 92014 L. Martin Gibbs (619) 755-5600 Director (800) 221-9333 Partner, Rogers & Wells 8347 La Mesa Boulevard James F. Joy La Mesa, California 91941 Director (619) 462-6700 Director, European Business Development for CVC Capital 2510 South Maryland Parkway Partners Europe Limited Las Vegas, Nevada 89109 (702) 792-2200 John F. Mangan Director It's a privilege 6700 West Charleston Boulevard Investments to serve you(SM) Las Vegas, Nevada 89102 (702) 880-3700 Barrant V. Merrill Director Investments
Designed by Howry Design Associates, San Francisco [LOGOS OF NEW YORK STOCK EXCHANGE, FEDERAL HOME LOAN BANK, EQUAL HOUSING LENDER AND FDIC APPEAR HERE] EX-21.1 7 SUBSIDIARIES OF FIRST REPUBLIC BANCORP INC EXHIBIT 21.1 SUBSIDIARIES OF FIRST REPUBLIC BANCORP INC First Republic Bancorp Inc. has one wholly-owned subsidiary as of this date: 1.First Republic Savings Bank--a Nevada state chartered thrift company. EX-23.1 8 CONSENT OF INDEPENDENT AUDITORS 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 Statements on Form S-8 (No. 33-65806 pertaining to the First Republic Bancorp Inc. 1985 Stock Option Plan and No. 33-58978 pertaining to the First Republic Bancorp Inc. Employee Stock Purchase Plan) and in the Registration Statement on Form S-3 (No. 33-66336 pertaining to the Subordinated Debentures Due 2009) of our report dated January 28, 1997, relating to the Consolidated Balance Sheet of First Republic Bancorp Inc. and subsidiary as of December 31, 1996 and 1995, 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, 1996, which report appears in the December 31, 1996 Annual Report of First Republic Bancorp Inc. incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1996. By /s/ KPMG Peat Marwick LLP --------------------------- KPMG Peat Marwick LLP San Francisco, California March 13, 1997 EX-27 9 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1996 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 12-MOS DEC-31-1996 DEC-31-1996 26,398 0 2,900 0 103,673 85,548 85,372 1,923,449 17,520 2,156,599 1,353,148 0 24,333 652,363 0 0 79,450 46,960 2,156,599 145,474 14,272 0 159,746 72,025 113,034 46,712 5,838 28 14,281 21,270 21,270 0 0 12,507 1.62 1.37 2.32 24,254 4,565 7,220 3,000 18,068 7,576 1,190 17,520 17,520 0 16,556
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