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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER: 0-15882
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FIRST REPUBLIC BANCORP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2964497
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) (IDENTIFICATION NO.)
388 MARKET STREET, 2ND FLOOR, 94111
SAN FRANCISCO, CA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 392-1400
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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
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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.
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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
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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
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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.
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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
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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 $625,000 at December 31, 1996.
The following table presents an analysis of the Company's loan portfolio at
December 31, 1996 by property type and geographic location. The table does not
include amounts which the Company is committed to lend but which are
undisbursed.
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SAN FRANCISCO LOS ANGELES SAN DIEGO LAS VEGAS,
BAY AREA COUNTY COUNTY NEVADA OTHER TOTAL PERCENT
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($ IN MILLIONS)
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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 --%
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Total................ $1,130 $382 $43 $174 $194 $1,923 100%
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Percent by location..... 59% 20% 2% 9% 10% 100%
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(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.
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YEAR ENDED DECEMBER 31,
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1996 1995 1994
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(IN THOUSANDS)
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MORTGAGE BANKING ACTIVITY:
Loans originated................................... $848,278 $584,388 $784,486
Loans purchased.................................... -- 8,041 8,208
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Total loans originated and purchased.............. $848,278 $592,429 $792,694
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Loans sold......................................... $172,769 $ 99,232 $216,951
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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
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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 $687,000 in 1994.
When interest rates are low, the rate at which mortgage loans are repaid
tends to increase as borrowers refinance fixed rate loans to lower rates or
convert from adjustable rate to fixed rate loans. Low rates also increase
housing affordability, stimulating purchases by first time home buyers and
trade up transactions by existing homeowners. With the higher level of general
market rates of interest, including the rates for fixed rate mortgage loans,
which occurred throughout 1994, the Company experienced a reduced volume of
loan originations, loan sales, gain on sale of loans and repayments of loans
serviced as compared to 1993. As interest rates decreased in 1995 and the
yield curve became very flat, the Company experienced an increase in the
repayment of loans in its loan servicing portfolio which, coupled with a lower
volume of new ARM originations and loan sales, resulted in a lower level of
loans serviced at December 31, 1995 than at December 31, 1994. During 1996,
new loan sales approximately equaled repayments of loans in the servicing
portfolio. See "--Asset and Liability Management."
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The following table sets forth the dollar amounts of the Company's mortgage
loan servicing portfolio at the dates indicated, the portion of the Company's
loan servicing portfolio resulting from loan originations and purchases,
respectively, and the carrying value of mortgage servicing rights as a
percentage of loans serviced. Although the Company intends to maintain or
increase the size of its servicing portfolio, such growth will depend on
market conditions including the future level of loan originations, sales and
prepayments.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
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%
</TABLE>
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 $140,913,000 (7.4% of total
assets) at December 31, 1995. The securities in the Company's investment
portfolio at December 31, 1996 had contractual maturities generally ranging
from eight to thirty years.
The following table provides the remaining contractual principal maturities
and yields (taxable-equivalent basis) of debt securities within the investment
portfolio at December 31, 1996. The remaining contractual principal maturities
for mortgage-backed securities were allocated assuming no prepayments.
Expected remaining maturities will differ from contractual maturities because
borrowers may have the right to prepay obligations with or without penalties.
At December 31, 1996, there were no debt securities classified as available
for sale or held to maturity owned by the Company with a contractual principal
maturity of five years or less.
<TABLE>
<CAPTION>
REMAINING CONTRACTUAL PRINCIPAL MATURITY
-------------------------------------------
WEIGHTED AFTER 5 YEARS AFTER 10 YEARS
TOTAL AVERAGE -------------------- ---------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- -------- ---------- --------- ----------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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
======= ========== ===========
</TABLE>
9
<PAGE>
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
<PAGE>
The following table shows the maturity of the Bank's certificates of
$100,000 or more at December 31, 1996.
<TABLE>
<CAPTION>
($ IN THOUSANDS)
<S> <C>
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%
</TABLE>
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, $566,530,000, or 96%, had an
original maturity of 10 years or longer. The longer-term advances provide the
Company with a stable primarily adjustable rate funding source for assets with
longer lives. See "--Asset and Liability Management."
The following table sets forth certain information with respect to the
Company's short-term borrowings at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
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%
</TABLE>
- --------
(1) The amounts shown at the dates indicated are not necessarily reflective of
the Company's activity in short-term borrowings during the periods.
(2) See Note 7 of Notes to Consolidated Financial Statements for a discussion
of general terms relating to repurchase agreements.
ASSET AND LIABILITY MANAGEMENT
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
<PAGE>
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
<TABLE>
<CAPTION>
NON-
3 MONTHS 3 TO 6 6 TO 12 1 TO 2 OVER INTEREST
IMMEDIATE OR LESS MONTHS MONTHS YEARS 2 YEARS SENSITIVE TOTAL
--------- ---------- -------- --------- --------- -------- --------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans(1)................ $ -- $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%
======= ========== ======== ========= ========= ======== =========
</TABLE>
- --------
(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
<PAGE>
In evaluating the Company's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing
table must be considered. For example, although certain assets and liabilities
may have similar maturities or periods to reprice, they may react differently
to changes in market interest rates. Additionally, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Further, certain assets, such as adjustable rate
mortgages, have features which restrict changes in interest rates on a short-
term basis and over the life of the asset. The Company considers the
anticipated effects of these various factors in implementing its interest rate
risk management activities, including the utilization of interest rate caps.
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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 $10,000,000 of capital
notes issued to First Republic and its allowance for loan losses. Additional
information is provided in Note 13 to the Company's Annual Report to
stockholders, incorporated by reference herein.
17
<PAGE>
The following table presents the regulatory capital position of First
Republic and the Bank at December 31, 1996 under the risk-based capital
guidelines:
<TABLE>
<CAPTION>
FIRST REPUBLIC FIRST REPUBLIC
BANCORP SAVINGS BANK
--------------------- ---------------------
PERCENT OF PERCENT OF
RISK- RISK-
ADJUSTED ADJUSTED
AMOUNT ASSETS AMOUNT ASSETS
---------- ---------- ---------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
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 $1,363,942
========== ==========
</TABLE>
In addition to the risk-based guidelines, the FDIC requires maintenance of a
minimum amount of Tier 1 capital to adjusted average total assets, referred to
as the leverage capital ratio. For a financial institution rated in the
highest of the five categories by regulators to rate for rating institutions
such as the Bank, the minimum leverage ratio of Tier 1 capital to total assets
is 3%. It is improbable, however, that a financial institution with a 3%
leverage ratio would receive the highest rating since a strong capital
position is a significant part of the regulatory rating. For all financial
institutions not rated in the highest category, the minimum leverage ratio is
at least 100 to 200 basis points above the 3% minimum. Thus, the effective
minimum leverage ratio is at least 4% or 5%. In addition to these uniform
risk-based capital guidelines and leverage ratios, the FDIC has the discretion
to set individual minimum capital requirements for particular financial
institutions at rates significantly above the minimum guidelines and ratios.
The FDIC's regulations provide that a financial institution's minimum leverage
ratio is determined by dividing its Tier 1 capital by its quarterly average
total assets, less intangibles not includable in Tier 1 capital.
The leverage ratio represents a minimum standard affecting the ability of
financial institutions, including the Bank, to increase assets and liabilities
without increasing capital proportionately. The following table presents the
leverage ratios of First Republic and the Bank at December 31, 1996:
<TABLE>
<CAPTION>
FIRST REPUBLIC FIRST REPUBLIC
BANCORP SAVINGS BANK
--------------------- ---------------------
PERCENT OF PERCENT OF
AMOUNT ASSETS AMOUNT ASSETS
---------- ---------- ---------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
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
========== ==========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1995 1994
--------------------------- --------------------------- ---------------------------
AVERAGE YIELDS/ AVERAGE YIELDS/ AVERAGE YIELDS/
BALANCE INTEREST RATES BALANCE INTEREST RATES BALANCE INTEREST RATES
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning
deposits with other
institutions........... $ 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%
======= ======= =======
</TABLE>
- -------
(1) Net interest spread represents the average yield earned on interest-
earning assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
RATE AND VOLUME VARIANCES
Net interest income is affected by changes in volume and changes in rates.
Volume changes are caused by differences in the level of interest-earning
assets and interest-bearing liabilities. Rate changes result from differences
in yields earned on assets and rates paid on liabilities.
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
<PAGE>
<TABLE>
<CAPTION>
1996 VS. 1995 1995 VS. 1994
----------------------- ------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ------ ------- ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
INTEREST INCOME:
Interest-earning deposits
with other institutions..... $ 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)
====== ====== ======= ====== ======= =======
</TABLE>
TYPES OF LOANS
The following table sets forth by category the total loan portfolio of the
Company at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
========== ========== ========== ========== ==========
</TABLE>
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.
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN MORE THAN
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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
======= ======= ==== =======
</TABLE>
26
<PAGE>
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 $40.5 million of losses. Such losses primarily resulted from the
economic recession which affected the California economy commencing in late
1990 and continuing in parts of the state through 1995 and the Northridge
earthquake which struck the Los Angeles area in January 1994. As a result of
the Northridge earthquake, which affected primarily the Company's loans
secured by multifamily properties in Los Angeles County, the Company
experienced until late 1996 increased loan delinquencies and REO, additional
loan loss provisions and a higher level of modified and restructured loans.
The Company's loss experience since inception on single-family mortgage
loans has been 0.06% of loans originated in over eleven years. The Company's
average annualized net chargeoff experience on its single family loans for the
last three years was less than 0.02% of average single family loans. The
Company has experienced a higher level of chargeoffs in the past three years
in connection with the resolution of delinquent loans and sale of REO than in
prior years. The ratio of the Company's net loan chargeoffs to average loans
was 0.35% for 1996, 0.69% for 1995, and 0.58% for 1994.
Additional information is provided under the captions "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Asset Quality and--Provisions for Losses and Reserve Activity" on pages 58 to
60 of the Company's 1996 Annual Report to stockholders, incorporated by
reference herein.
The following table presents nonaccruing loans and investments, REO,
restructured performing loans and accruing single family loans more than 90
days past due at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
27
<PAGE>
The following table provides certain information with respect to the
Company's reserve position and provisions for losses as well as chargeoff and
recovery activity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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 $1,008,783
Total loans at year end. 1,923,449 1,682,263 1,498,663 1,256,058 1,067,785
Ratios of reserve to:
Total loans............ 0.91% 1.07% 0.96% 1.01% 1.19%
Nonaccruing loans...... 72% 49% 44% 109% 133%
Nonaccruing loans and
restructured
performing loans...... 56% 37% 29% 70% 98%
Net chargeoffs to
average loans.......... 0.35% 0.69% 0.58% 0.44% 0.74%
</TABLE>
The following table sets forth management's historical allocation of the
reserve for possible losses by loan category and the percentage of loans in
each category to total loans at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
RESERVE RESERVE RESERVE RESERVE RESERVE
FOR % OF FOR % OF FOR % OF FOR % OF FOR % OF
LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES LOANS LOANS LOANS
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
28
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-------------------------------
1996 1995 1994 1993 1992
----- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
29
<PAGE>
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.
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<C> <S>
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
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
There is no pending proceeding, other than ordinary routine litigation
incidental to the Company's business, to which the Company is a party or to
which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the year
ended December 31, 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
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the directors and executive officers of First
Republic and certain pertinent information about them.
<TABLE>
<CAPTION>
AGE POSITION HELD WITH THE COMPANY
--- ------------------------------
<C> <C> <S>
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
</TABLE>
- --------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
The directors of First Republic serve three-year terms. The terms are
staggered to provide for the election of approximately one-third of the Board
members each year. Each director (except Mr. Cox-Johnson who was elected in
October 1986 and Ms. August-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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
PAGE OF
ANNUAL REPORT
-------------
<S> <C>
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
</TABLE>
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
<PAGE>
(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.
<TABLE>
<C> <S>
3.1### Certificate of Incorporation, as amended. (3.1)
3.2+++ By-Laws as currently in effect.
4.1# Indenture dated as of September 1, 1991 between First Republic
Bancorp Inc. and National City Bank of Minneapolis. (10.35)
4.2## Supplemental Indenture dated as of November 1, 1991 between First
Republic Bancorp Inc. and National City Bank of Minneapolis.
(10.35)
4.3### Indenture dated as of December 1, 1992 between First Republic
Bancorp Inc. and U.S. Trust Company of California, N.A. (4.1)
4.4+ Indenture dated as of May 15, 1993, between First Republic Bancorp
Inc. and United States Trust Company of New York. (4.1)
4.5++ Indenture dated as of August 4, 1993, between First Republic
Bancorp Inc. and United States Trust Company of New York. (4.1)
10.1+++ Employee Stock Ownership Plan. (10.1)
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)
</TABLE>
34
<PAGE>
<TABLE>
<C> <S>
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.
</TABLE>
35
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
First Republic Bancorp Inc.
/s/ Willis H. Newton, Jr.
By: _________________________________
WILLIS H. NEWTON, JR. SENIOR VICE
PRESIDENT AND CHIEF FINANCIAL
OFFICER
March 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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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.
</TABLE>
38
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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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
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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
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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
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EXHIBIT A
SEVERANCE BENEFIT TABLE
<TABLE>
<CAPTION>
Category Title or Grade Factor (# of Years)
- -------- -------------- ------------------
<C> <S> <C>
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.
</TABLE>
______________________
* 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.
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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]
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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]
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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).
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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.
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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"
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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
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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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
EXHIBIT 11.1
FIRST REPUBLIC BANCORP INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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 $1.51
fully-diluted......... ===== ======= ===== ===== =====
</TABLE>
- --------
Per share amounts and numbers of shares have been adjusted to reflect the
effect of two 3% stock dividends declared by the Company's Board of Directors
to stockholders of record on February 25, 1993 and February 18, 1994.
(1)Due to the issuance of convertible subordinated debentures in December
1992, the fully-diluted calculation includes the number of shares which would
be outstanding if all such debentures were converted and adjusts reported net
income for the effect of interest expense on the debentures, net of taxes.
(2)For 1995, the convertible subordinated debentures are antidilutive and,
accordingly, the results of the primary EPS calculation are reported for
fully-diluted EPS.
<PAGE>
EXHIBIT 12.1
FIRST REPUBLIC BANCORP INC.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
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]
<PAGE>
Financial Highlights
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
At Year End 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
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
<CAPTION>
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
</TABLE>
[BAR GRAPH OF TOTAL ASSETS APPEARS HERE]
<TABLE>
<CAPTION>
(dollars in millions)
<S> <C>
92 1,233
93 1,417
94 1,707
95 1,904
96 2,157
</TABLE>
[BAR GRAPH OF TOTAL CAPITAL APPEARS HERE]
<TABLE>
<CAPTION>
(dollars in millions)
<S> <C>
92 160
93 179
94 186
95 190
96 204
</TABLE>
[BAR GRAPH OF NET INCOME APPEARS HERE]
<TABLE>
<CAPTION>
(dollars in millions)
<S> <C>
92 11.8
93 12.4
94 7.3
95 1.2
96 12.5
</TABLE>
<PAGE>
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
<PAGE>
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
<PAGE>
[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
<PAGE>
[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
<PAGE>
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
<PAGE>
"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
<PAGE>
[Photo of Frank C. Herringer]
7
<PAGE>
[Photo of Michael K. Douglas]
8
<PAGE>
"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
<PAGE>
"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)
<TABLE>
<S> <C>
92 826
93 945
94 784
95 584
96 848
</TABLE>
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
<PAGE>
[Photo of Jane Smiley and Stephen Mortensen]
11
<PAGE>
[Photo of Howard L. Clark Jr.]
12
<PAGE>
"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
<PAGE>
"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
<PAGE>
[Photo of Dennis and Joanie Franz]
15
<PAGE>
[Photo of Alice A. Ruth]
16
<PAGE>
"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
<PAGE>
"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
<PAGE>
[Photo of William R. Johnson]
19
<PAGE>
[Photo of Georgia R. Nelson]
20
<PAGE>
"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
<PAGE>
"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
<PAGE>
[Photo of Skip Brittenham]
23
<PAGE>
[Photo of Garret Tom, his wife and his son]
24
<PAGE>
"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
<PAGE>
"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
<PAGE>
[Photo of Cheryl Tiegs]
<PAGE>
[Photo of Anthony M. Frank]
<PAGE>
"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
<PAGE>
"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]
<TABLE>
<CAPTION>
First Republic
Average Prestige Home
Year Month Home Value Index(TM)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
30
<PAGE>
[Photo of Neal Ward and Carmen Castro-Franceschi]
<PAGE>
[Photo of George & Karen McCown]
<PAGE>
"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
<PAGE>
"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
<PAGE>
[Photo of William and Marla Engel]
<PAGE>
[Photo of Teacher David Duncan, other school personnel and NFTE Staff Members]
[DESCRIPTION TO COME]
<PAGE>
"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
<PAGE>
First Republic Bancorp
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31, 1996 1995
...............................
<S> <C> <C>
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
============== ==============
</TABLE>
See accompanying notes.
38
<PAGE>
First Republic Bancorp
<TABLE>
<CAPTION>
December 31, 1996 1995
...............................
<S> <C> <C>
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
============== ==============
</TABLE>
See accompanying notes.
39
<PAGE>
First Republic Bancorp
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
........................................
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
See accompanying notes.
40
<PAGE>
First Republic Bancorp
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
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
..............................................................................................
<S> <C> <C> <C> <C> <C> <C> <C>
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
======= =========== =========== =========== =========== =========== ============
</TABLE>
See accompanying notes.
41
<PAGE>
First Republic Bancorp
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
.............................................
<S> <C> <C> <C>
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
============= ============= =============
</TABLE>
See accompanying notes.
42
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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 .
<TABLE>
<CAPTION>
Estimated Estimated
Unrealized Unrealized
Amortized Gross Gross Fair
(In $ thousands) Cost Gain Loss Value
..............................................
<S> <C> <C> <C> <C>
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
========= ======= ========= =========
</TABLE>
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.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
.............................
<S> <C> <C>
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
============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
At or for the year ended December 31, 1996 1995
........................
<S> <C> <C>
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
</TABLE>
46
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
.......................................
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
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.
<TABLE>
<CAPTION>
Related
Recorded SFAS No. 114
Investment in Allowance for
Impaired Loans Losses
.............................
<S> <C> <C>
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
==============
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
.......................
<S> <C> <C>
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
=========== ===========
</TABLE>
47
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995
------------------ -------------------
Advances maturing in Amount Rate Amount Rate
<S> <C> <C> <C> <C>
.................. ...................
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%
============ ============
</TABLE>
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
<PAGE>
9 Subordinated Debentures
The Company's subordinated debentures consist of two issues, with outstanding
amounts as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
........................
<S> <C> <C>
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
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
....................................
<S> <C> <C> <C>
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
========== =========== ==========
</TABLE>
49
<PAGE>
First Republic Bancorp
The effective income tax rate differs from the federal statutory rate due to
the following for the past three years:
<TABLE>
<CAPTION>
1996 1995 1994
...........................
<S> <C> <C> <C>
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%
==== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below at December 31:
<TABLE>
<CAPTION>
1996 1995
.........................
<S> <C> <C>
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
========== ==========
</TABLE>
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
<PAGE>
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.
<TABLE>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- -------------------- -----------------------
(in $ thousands) Amount Ratio Amount Ratio Amount Ratio
.....................................................................
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
.......................
<S> <C> <C>
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
</TABLE>
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
....
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995
---------------------- ---------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
.............................................
<S> <C> <C> <C> <C>
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
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------
Weighted-Avg. Number of
Range of Remaining Weighted-Avg. Exercisable
Exercise Prices Number Contractual Life Exercise Price Options
.........................................................................
<S> <C> <C> <C> <C>
$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
========= ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Performance Options Shares Price Shares Price
- ------------------- ......................................
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------------- -------------------------
Carrying Fair Carrying Fair
(In $ thousands) Amount Value Amount Value
......................................................
<S> <C> <C> <C> <C>
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
</TABLE>
18 First Republic Bancorp Inc.
(Parent Company Only)
Condensed Balance Sheet
<TABLE>
<CAPTION>
December 31, 1996 1995
.........................
<S> <C> <C>
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
============ ============
</TABLE>
54
<PAGE>
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
........... .......... ..........
<S> <C> <C> <C>
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
=========== ========== ===========
</TABLE>
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
............ ........... ...........
<S> <C> <C> <C>
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
============ =========== ===========
</TABLE>
Independent Auditors' Report
The Board of Directors and Stockholders
First Republic Bancorp Inc.:
We have audited the accompanying consolidated balance sheet of First
Republic Bancorp Inc. and 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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
1996 1995 1994
.....................
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>
57
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
(In $ millions) $ % $ %
...............................
<S> <C> <C> <C> <C>
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%
====== === ====== ===
</TABLE>
The Company has approved a limited group of third-party appraisers for
appraising all of the properties on which it makes loans and requires two
appraisals for single family loans in excess of $1,100,000 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.
<TABLE>
<CAPTION>
San Los Total
Francisco Angeles Las Vegas, -----------------
(In $ millions) Bay Area County Nevada Other $ %
...........................................................
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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
....
<PAGE>
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.
<TABLE>
<CAPTION>
December 31, 1996 1995
........................
<S> <C> <C>
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%
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
0-6 7-12 1-5 Over Not Rate
(In $ millions) Months Months Years 5 Years Sensitive Total
.......................................................................................
<S> <C> <C> <C> <C> <C> <C>
Cash and investments $ 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%
</TABLE>
61
<PAGE>
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
....
<PAGE>
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
<PAGE>
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
....
<PAGE>
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
....
<PAGE>
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
<PAGE>
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
<PAGE>
First Republic Bancorp
Quarterly and Additional Information
<TABLE>
<CAPTION>
Total Net Provision Pretax Net Fully- Common Stock
Interest Interest For Income Income Diluted Price Range
---------------
Income Income Losses (Loss) (Loss) EPS High Low
........... ........... .......... ........... ........... ..... ...... ......
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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]
<TABLE>
<CAPTION>
Average Assets Trend in General and
per Employee Administrative Expenses
(dollars in millions) (percent of average assets)
<S> <C> <C>
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
</TABLE>
68
....
<PAGE>
Officers, Directors and Corporate Information
<TABLE>
<CAPTION>
Offcers Stock Exchanges Branch Locations
<S> <C> <C>
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
</TABLE>
Designed by Howry Design Associates, San Francisco
[LOGOS OF NEW YORK STOCK EXCHANGE, FEDERAL HOME LOAN BANK, EQUAL HOUSING LENDER
AND FDIC APPEAR HERE]
<PAGE>
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.
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 26,398
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 103,673
<INVESTMENTS-CARRYING> 85,548
<INVESTMENTS-MARKET> 85,372
<LOANS> 1,923,449
<ALLOWANCE> 17,520
<TOTAL-ASSETS> 2,156,599
<DEPOSITS> 1,353,148
<SHORT-TERM> 0
<LIABILITIES-OTHER> 24,333
<LONG-TERM> 652,363
0
0
<COMMON> 79,450
<OTHER-SE> 46,960
<TOTAL-LIABILITIES-AND-EQUITY> 2,156,599
<INTEREST-LOAN> 145,474
<INTEREST-INVEST> 14,272
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 159,746
<INTEREST-DEPOSIT> 72,025
<INTEREST-EXPENSE> 113,034
<INTEREST-INCOME-NET> 46,712
<LOAN-LOSSES> 5,838
<SECURITIES-GAINS> 28
<EXPENSE-OTHER> 14,281
<INCOME-PRETAX> 21,270
<INCOME-PRE-EXTRAORDINARY> 21,270
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,507
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.37
<YIELD-ACTUAL> 2.32
<LOANS-NON> 24,254
<LOANS-PAST> 4,565
<LOANS-TROUBLED> 7,220
<LOANS-PROBLEM> 3,000
<ALLOWANCE-OPEN> 18,068
<CHARGE-OFFS> 7,576
<RECOVERIES> 1,190
<ALLOWANCE-CLOSE> 17,520
<ALLOWANCE-DOMESTIC> 17,520
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 16,556
</TABLE>
