UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
Commission File Number: 000-33461
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
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Nevada
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91-1971389
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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111 Pine Street, 2nd Floor,
San Francisco, California
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94111
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code: (415) 392-1400
Securities registered pursuant to Section 12(b) of the Act:
7.25% Noncumulative Perpetual Series D Preferred Stock
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
¨
No
¨
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
¨
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Accelerated filer
¨
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Non-accelerated filer
x
(Do not check if a smaller reporting company)
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Smaller reporting company
¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
¨
No
x
The number of shares outstanding of the registrants common stock, par value $0.01 per share, as of July 31, 2009 was 30,538,277 shares.
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Merrill Lynch Bank & Trust Co., FSB)
TABLE OF CONTENTS
2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
The following interim financial statements as of and for the three and six months ended June 30, 2009 are unaudited. However, the financial statements reflect all adjustments (which included only normal recurring adjustments) that are,
in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. (See Note 1 for discussion of Bank of America Corporations acquisition of
Merrill Lynch & Co. Inc. on January 1, 2009.)
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Merrill Lynch Bank & Trust Co., FSB)
BALANCE SHEETS
(Unaudited)
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Successor
Company
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Predecessor
Company
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June 30,
2009
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December 26,
2008
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ASSETS
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Cash and cash equivalents
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$
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95,095,000
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$
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81,523,000
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Single family mortgage loans
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176,615,000
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194,014,000
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Multifamily mortgage loans
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22,461,000
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24,351,000
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Total mortgage loans
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199,076,000
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218,365,000
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Less: Allowance for loan losses
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(481,000
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Mortgage loans, net
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199,076,000
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217,884,000
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Accrued interest receivable
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810,000
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1,006,000
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Prepaid expenses
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18,000
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2,000
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Total Assets
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$
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294,999,000
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$
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300,415,000
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LIABILITIES AND STOCKHOLDERS EQUITY
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Liabilities:
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Dividends payable on preferred stock (Note 7)
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$
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$
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3,919,000
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Payable to First Republic (Note 4)
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25,000
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138,000
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Other payables
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28,000
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34,000
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Total liabilities
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53,000
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4,091,000
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Stockholders equity (Notes 5 and 6):
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Preferred stock, $0.01 par value per share; 10,000,000 shares authorized:
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10.50% perpetual, exchangeable, noncumulative Series A preferred stock; $1,000 liquidation value per share; 55,000 shares authorized, issued
and outstanding
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55,000,000
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55,000,000
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7.25% perpetual, exchangeable, noncumulative Series D preferred stock; $25 liquidation value per share; 2,400,000 shares authorized, issued
and outstanding
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60,000,000
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60,000,000
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Common stock, $0.01 par value; 50,000,000 shares authorized, 30,538,277 shares issued and outstanding at June 30, 2009 and
December 26, 2008
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305,000
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305,000
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Additional paid-in capital
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177,418,000
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179,905,000
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Retained earnings
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2,223,000
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1,114,000
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Total stockholders equity
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294,946,000
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296,324,000
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Total Liabilities and Stockholders Equity
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$
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294,999,000
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$
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300,415,000
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See accompanying notes to financial statements.
3
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Merrill Lynch Bank & Trust Co., FSB)
STATEMENTS OF INCOME
(Unaudited)
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Successor
Company
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Predecessor
Company
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Successor
Company
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Predecessor
Company
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Three Months
Ended
June 30,
2009
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Three Months
Ended
June 27,
2008
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Six Months
Ended
June 30,
2009
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Six Months
Ended
June 27,
2008
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Interest income:
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Interest on loans
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$
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3,044,000
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$
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3,785,000
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$
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6,655,000
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$
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8,162,000
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Interest on interest-earning deposit with
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First Republic
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403,000
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337,000
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834,000
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622,000
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Total interest income
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3,447,000
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4,122,000
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7,489,000
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8,784,000
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Operating expense:
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Advisory fees payable to First Republic (Note 4)
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25,000
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25,000
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50,000
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50,000
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General and administrative
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49,000
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49,000
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97,000
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111,000
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Total operating expense
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74,000
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74,000
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147,000
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161,000
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Net income
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3,373,000
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4,048,000
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7,342,000
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8,623,000
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Dividends on preferred stock (Note 7)
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2,531,000
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2,507,000
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5,119,000
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5,062,000
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Net income available to common stockholders
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$
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842,000
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$
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1,541,000
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$
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2,223,000
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$
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3,561,000
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See accompanying notes to financial statements.
4
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Merrill Lynch Bank & Trust Co., FSB)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited)
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Predecessor Company
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Preferred
Stock
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Common
Stock
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Additional
Paid-in Capital
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Retained Earnings
(Dividends in
Excess of Retained
Earnings)
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Total
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Balance as of December 28, 2007
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$
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115,000,000
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$
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305,000
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$
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175,463,000
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$
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(200,000
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)
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$
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290,568,000
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Net income
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8,623,000
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8,623,000
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Dividends on preferred stock
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(5,062,000
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)
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(5,062,000
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)
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Balance as of June 27, 2008
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$
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115,000,000
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$
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305,000
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$
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175,463,000
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$
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3,361,000
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$
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294,129,000
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Successor Company
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Balance as of December 26, 2008
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$
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115,000,000
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$
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305,000
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$
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179,905,000
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$
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1,114,000
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$
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296,324,000
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Purchase accounting adjustments (Note 3)
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(2,487,000
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)
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(1,114,000
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)
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(3,601,000
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)
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Capitalization after purchase accounting adjustments
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115,000,000
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305,000
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177,418,000
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292,723,000
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Net income
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7,342,000
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7,342,000
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Dividends on preferred stock
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(5,119,000
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)
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(5,119,000
|
)
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Balance as of June 30, 2009
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$
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115,000,000
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$
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305,000
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$
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177,418,000
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$
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2,223,000
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$
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294,946,000
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See accompanying notes to financial statements.
5
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Merrill Lynch Bank & Trust Co., FSB)
STATEMENTS OF CASH FLOWS
(Unaudited)
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Successor
Company
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Predecessor
Company
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Six Months
Ended
June 30,
2009
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Six Months
Ended
June 27,
2008
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Cash flows from operating activities:
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Net income
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$
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7,342,000
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$
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8,623,000
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Adjustments to reconcile net income to net cash provided by operating activities:
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Discount accretion on loans
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(1,402,000
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)
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(685,000
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)
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Decrease in accrued interest receivable
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196,000
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227,000
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Decrease (increase) in prepaid expenses
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(16,000
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)
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39,000
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Increase (decrease) in payable to First Republic
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(113,000
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)
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19,000
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Increase (decrease) in other payables
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(6,000
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)
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42,000
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|
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Net cash provided by operating activities
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6,001,000
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8,265,000
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Cash flows from investing activities:
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Principal payments on loans
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16,609,000
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33,156,000
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|
Net cash provided by investing activities
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|
16,609,000
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33,156,000
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Cash flows from financing activities:
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|
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Dividends paid on preferred stock
|
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(9,038,000
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)
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(1,143,000
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)
|
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|
|
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|
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|
|
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|
Net cash used for financing activities
|
|
|
(9,038,000
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)
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|
|
|
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(1,143,000
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)
|
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|
|
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|
|
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|
|
|
|
Increase in cash and cash equivalents
|
|
|
13,572,000
|
|
|
|
|
|
|
|
40,278,000
|
|
Cash and cash equivalents at beginning of year
|
|
|
81,523,000
|
|
|
|
|
|
|
|
22,196,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
95,095,000
|
|
|
|
|
|
|
$
|
62,474,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends payable
|
|
$
|
|
|
|
|
|
|
|
$
|
3,919,000
|
|
In connection with Bank of America Corporations acquisition of Merrill Lynch & Co.
Inc., the Company recorded purchase accounting adjustments during the first quarter of 2009. These adjustments were recorded as non-cash capital contributions. See Note 3.
See accompanying notes to financial statements.
6
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Merrill Lynch Bank & Trust Co., FSB)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization and Basis of Presentation
First
Republic Preferred Capital Corporation (the Company), a Nevada corporation, was formed in April 1999. The Company is a wholly owned subsidiary of Merrill Lynch Bank & Trust Co., FSB (the Bank), a federal stock
savings bank, which is a wholly owned subsidiary of Merrill Lynch & Co. Inc. (Merrill Lynch & Co.). The Company was initially formed by First Republic Bank (First Republic) for the purpose of raising
capital. The Companys principal business is acquiring, holding, financing and managing assets secured by real estate mortgages and other obligations secured by real property, as well as certain other qualifying real estate investment trust
(REIT) assets (collectively, the Mortgage Assets). The Mortgage Assets presently held by the Company are loans secured by single family and multifamily real estate properties (Mortgage Loans) that were acquired
from First Republic. The Company expects that all, or substantially all, of its Mortgage Assets will continue to be Mortgage Loans acquired from First Republic. The Company has elected to be taxed as a REIT and intends to make distributions to its
stockholders such that the Company is relieved of substantially all income taxes relating to ordinary income under applicable tax regulations. Accordingly, no provision for income taxes is included in the accompanying financial statements.
First Republic owned 100% of the Companys outstanding shares until September 2007 when Merrill Lynch & Co. acquired all of
the outstanding shares of First Republics common stock. First Republic became a division of the Bank, and the Bank became the controlling shareholder of the Company. On January 1, 2009, a wholly-owned subsidiary of Bank of America
Corporation (Bank of America) merged with and into Merrill Lynch & Co., with Merrill Lynch & Co. continuing as the surviving corporation and a subsidiary of Bank of America. As a result of the merger, among other
things, all of the direct and indirect subsidiaries of Merrill Lynch & Co., including the Bank and the Company, have become indirect subsidiaries of Bank of America. The acquisition of the Company was accounted for under the acquisition
method of accounting, as required by Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)). The Companys assets and liabilities were
remeasured as of January 1, 2009 (the acquisition date) based on their estimated fair values. (See Note 3, Purchase Accounting Allocation.) Purchase accounting changed the basis of the Companys assets and
liabilities compared with periods prior to the change of control. Accordingly, the Companys financial statements are presented for periods prior to the acquisition (the Predecessor Company) and subsequent to the acquisition (the
Successor Company). The Predecessor Company and Successor Company periods have been separated by a vertical line on the face of the financial statements to distinguish between the Companys historical basis of accounting prior to
the change of control and after the change of control. Tables in the footnotes to the financial statements and in Managements Discussion and Analysis of Financial Condition and Results of Operations are presented without the
Predecessor Company and Successor Company distinction. As a result of the change in control, the Company changed its fiscal quarter end from the last Friday of the third month in the quarter to the last calendar day of the quarter. In addition, the
Companys activities after its 2008 fiscal year end through December 31, 2008 are included in the Statement of Income for the first six months of 2009. The impact of this change and the additional activity recorded in the first six months
of 2009 resulted in approximately $156,000 of additional net income. There were no changes in the Companys Board of Directors, material agreements or outstanding issues of preferred stock.
At June 30, 2009, the Company has issued 30,538,277 shares of common stock, par value $0.01 per share. The Bank owns all of the common stock of the
Company. Earnings per share data is not presented, as the Companys common stock is not publicly traded.
These
interim financial statements are intended to be read in conjunction with the Companys 2008 Annual Report on Form 10-K for the year ended December 26, 2008 (the 2008 Annual Report), Financial Statements and Notes thereto.
Interim results should not be considered indicative of results to be expected for the full year.
7
The results of operations of the Company and the Bank are subject to various risks, including business,
economic, legal and regulatory conditions and factors. Additional information is included in Item 1A, Risk Factors, in the 2008 Annual Report filed with the Securities and Exchange Commission (the SEC) on March 10,
2009.
Note 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results may differ from these
estimates under different assumptions or conditions. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses.
Mortgage Loans
The Company has acquired all Mortgage
Loans from First Republic at a price equal to First Republics carrying value. Mortgage Loans are carried at the principal amount outstanding, net of purchase discounts and premiums. In accordance with SFAS No. 141(R), Mortgage Loans were
revalued to reflect their estimated fair values as of the acquisition date. (See Note 3.) Discounts or premiums on Mortgage Loans are accreted or amortized as yield adjustments over the weighted average contractual lives of the loans using methods
that approximate the interest method. The unaccreted discount or unamortized premium on a loan sold or paid in full is recognized in income at the time of sale or payoff.
The Company recognizes interest income, net of servicing fees paid to First Republic, in the month earned. The Company places a loan on nonaccrual status, and interest income is not recorded on the loan, when the loan
becomes more than 90 days delinquent, except for a single family loan that is well secured and in the process of collection, or at such earlier times as management determines that the ultimate collection of all contractually due principal or
interest is unlikely. When a loan is placed on nonaccrual status, interest income may be recorded when cash is received if the Companys recorded investment in such loan is deemed collectible. When, in managements judgment, the
borrowers ability to make periodic interest and principal payments resumes, the loan is returned to accrual status. The Company classifies a loan as impaired when, based on current information and events, it is probable that the Company will
be unable to collect all amounts due according to the contractual terms of the loan agreement.
Allowance for Loan Losses
The Company maintains an allowance for loan losses that can be reasonably anticipated based upon specific conditions at the time. The Company considers a
number of factors, including the Companys and First Republics past loss experience, First Republics underwriting policies, the amount of past due and nonperforming loans, legal requirements, recommendations or requirements of
regulatory authorities, current economic conditions and other factors. If the Company were to determine that an additional provision is required, the Company would provide for loan losses by charging current income. The Companys allowance for
loan losses became part of the loan carrying value due to purchase accounting adjustments recorded in the first quarter of 2009. Additionally, there was no provision for loan losses recorded for the first six months of 2009.
Other Real Estate Owned
Real estate acquired through
foreclosure is recorded at the lower of cost or fair value, less estimated costs to sell such real estate. The Company records costs related to holding real estate as expenses when incurred. The Company has not owned any real estate since inception.
8
Statement of Cash Flows
For the purpose of reporting cash flows, cash and cash equivalents include cash and an interest-earning deposit with First Republic. As a REIT making sufficient dividend distributions, the Company paid no income taxes
for the six months ended June 30, 2009 or June 27, 2008.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 168, FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles (SFAS No. 168). SFAS No. 168 approved the FASB Accounting Standards Codification (the Codification) as the single source of authoritative nongovernmental
GAAP. The Codification is effective for interim or annual periods ending after September 15, 2009. All existing accounting standards have been superseded and all other accounting literature not included in the Codification will be considered
nonauthoritative. The adoption of SFAS No. 168 will not impact the Companys financial condition, results of operations or cash flows.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165). SFAS No. 165 provides general standards of accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. In addition, SFAS No. 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The adoption of SFAS
No. 165, which became effective during the quarter ended June 30, 2009, did not impact the Companys financial condition, results of operations or cash flows. The Company evaluated subsequent events through the date of filing,
August 10, 2009. (See Note 10 Subsequent Events.)
In April 2009, the FASB issued FSP FAS 107-1 and APB Opinion 28-1,
Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1). FSP FAS 107-1 requires expanded disclosures for all financial instruments as defined by SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, such as loans that are not measured at fair value through earnings. The expanded disclosure requirements for FSP FAS 107-1 are effective for interim reporting periods ending after June 15, 2009. The Company adopted
the provisions of FSP FAS 107-1 during the second quarter of 2009. Since FSP FAS 107-1 only requires certain additional disclosures, it did not affect the Companys financial position, results of operations or cash flows. (See Note 8 Fair
Value of Financial Instruments.)
In December 2007, the FASB issued SFAS No. 141(R), which significantly changes the financial
accounting and reporting for business combinations. SFAS No. 141(R) requires, for example: (i) more assets and liabilities to be measured at fair value as of the acquisition date, (ii) liabilities related to contingent consideration
to be remeasured at fair value in each subsequent reporting period with changes reflected in earnings and not goodwill, and (iii) all acquisition-related costs to be expensed as incurred by the acquirer. Bank of America applied SFAS
No. 141(R) to its January 1, 2009 acquisition of the Company, the effects of which are included in the Companys financial statements. See Note 3.
In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (FSP FAS 141(R)-1). This FSP
requires assets acquired and liabilities assumed in a business combination that arise from contingencies to be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be
determined, companies should typically account for the acquired contingencies using existing guidance. FSP FAS 141(R)-1 is effective for new acquisitions consummated on or after January 1, 2009. Bank of America applied the concepts of FSP FAS
141(R)-1 to its January 1, 2009 acquisition of the Company. The adoption of FSP FAS 141(R)-1 by the Company did not have an impact on the Companys financial position, results of operations or cash flows.
Note 3. Purchase Accounting Allocation
Management
estimated the fair value of assets and liabilities as of the acquisition date to be equal to their carrying values with the exception of Mortgage Loans. As a result of applying the acquisition method of accounting to the Companys assets and
liabilities, the Companys Mortgage Loans were adjusted to their estimated fair values. The following table presents the purchase accounting
9
adjustments to recognize assets and liabilities at their estimated fair values as of the acquisition date, with the net reduction to assets recorded in
additional paid-in capital. In addition, the Companys retained earnings as of January 1, 2009 was reclassified to additional paid-in capital. The allocation of the purchase price will be finalized upon completion of Bank of Americas
analysis of the fair values of Merrill Lynch & Co.s assets and liabilities; therefore, the purchase accounting adjustments may be revised in future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
as
of
December 26, 2008
|
|
|
Purchase
Accounting
Adjustments
|
|
|
Estimated
Fair Value
as of
January 1, 2009
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Single family mortgage loans
|
|
$
|
202,089,000
|
|
|
$
|
(11,280,000
|
)
|
|
$
|
190,809,000
|
Multifamily mortgage loans
|
|
|
24,521,000
|
|
|
|
(1,047,000
|
)
|
|
|
23,474,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
226,610,000
|
|
|
|
(12,327,000
|
)
|
|
|
214,283,000
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Net unearned discount
|
|
|
(8,245,000
|
)
|
|
|
8,245,000
|
|
|
|
|
Allowance for loan losses
|
|
|
(481,000
|
)
|
|
|
481,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
217,884,000
|
|
|
$
|
8,726,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
$
|
179,905,000
|
|
|
$
|
(2,487,000
|
)
|
|
$
|
177,418,000
|
Retained earnings
|
|
|
1,114,000
|
|
|
|
(1,114,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
181,019,000
|
|
|
$
|
(3,601,000
|
)
|
|
$
|
177,418,000
|
|
|
|
|
|
|
|
|
|
|
|
|
The net reduction to the carrying value of Mortgage Loans was accounted for as a loan purchase
discount, which is accreted into interest income over the remaining weighted average life of the related loans, beginning in the first quarter of 2009. The purchase accounting adjustments did not impact cash flows.
Note 4. Related Party Transactions
The
Companys related party transactions include the acquisition of Mortgage Loans from First Republic, loan servicing fees paid to First Republic and advisory fees paid to First Republic. The following table presents the Companys related
party transactions for the three and six months ended June 30, 2009 and June 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
2009
|
|
June 27,
2008
|
|
June 30,
2009
|
|
June 27,
2008
|
Loan servicing fee expense
|
|
$
|
133,000
|
|
$
|
152,000
|
|
$
|
269,000
|
|
$
|
314,000
|
Advisory fee expense
|
|
$
|
25,000
|
|
$
|
25,000
|
|
$
|
50,000
|
|
$
|
50,000
|
Since inception, the Company has acquired all Mortgage Loans from First Republic at a price equal
to First Republics carrying value of the loans. The Company did not purchase any loans from First Republic for the first three or six months of 2009 and 2008.
First Republic retains loan servicing fees on the Companys Mortgage Loans under a loan purchase and servicing agreement pursuant to which First Republic performs, among other things, servicing of loans held by
the Company in accordance with normal industry practice. In its capacity as servicer, First Republic receives Mortgage Loan payments on behalf of the Company and holds the payments in custodial accounts at First Republic. Pursuant to the agreement,
First Republic charges an annual servicing fee of 0.25% of the gross average outstanding principal balances of Mortgage Loans that First Republic services. The Company records these loan servicing fees as a reduction of interest income.
The Company pays advisory fees to First Republic under an advisory agreement pursuant to which First Republic administers the day-to-day operations of
the Company. First Republic is responsible for: (i) monitoring the credit quality of the Mortgage Assets held by the Company; (ii) advising the Company with respect to the reinvestment of income from, and principal payments on, the
Mortgage Assets, and with respect to the acquisition, management, financing and disposition of the Mortgage Assets; (iii) monitoring the Companys compliance with the requirements necessary to qualify as a REIT and (iv) performing
financial reporting and internal
10
control duties required for all public companies. The advisory agreement is renewable on an annual basis. The advisory fees were $100,000 per annum for 2009
and 2008, payable in equal quarterly installments. The Company had advisory fees payable to First Republic of $25,000 at June 30, 2009 and at December 26, 2008.
At June 30, 2009 and at December 26, 2008, the Bank owned 25,410 shares of the Companys Series A Preferred Shares, with a liquidation preference value of $25.4 million. For the first six months of 2009
and 2008, neither the Bank nor First Republic purchased any of the Companys outstanding Series A Preferred Shares. The Company had no dividends payable to the Bank at June 30, 2009, compared with $1,319,000 at December 26, 2008.
Note 5. Preferred Stock
At
June 30, 2009, the Company was authorized to issue 10,000,000 shares of preferred stock, of which 2,455,000 shares were outstanding. The Company has issued and outstanding shares for each of the following series of preferred stock, par value
$0.01 per share at June 30, 2009 and December 26, 2008:
|
|
|
|
|
|
|
|
|
June 30,
2009
|
|
December 26,
2008
|
Series A 55,000 shares authorized, issued and outstanding
|
|
$
|
55,000,000
|
|
$
|
55,000,000
|
Series D 2,400,000 shares authorized, issued and outstanding
|
|
|
60,000,000
|
|
|
60,000,000
|
|
|
|
|
|
|
|
Total preferred stock
|
|
$
|
115,000,000
|
|
$
|
115,000,000
|
|
|
|
|
|
|
|
In June 1999, the Company issued 55,000 Series A Preferred Shares. The Companys proceeds
from this issuance were $55 million. First Republic paid all expenses of the offering, including underwriting commissions and discounts. The Series A Preferred Shares are not redeemable at the Companys option prior to June 1, 2009. On or
after that date, the Preferred Shares will be redeemable at a cash redemption price equal to the liquidation preference plus any accrued and unpaid dividends. The redemption premium per share shall be (i) $1,035 if the date of redemption is
after June 1, 2009 but on or prior to June 1, 2010; (ii) $1,028 if the date of redemption is after June 1, 2010 but on or prior to June 1, 2011; (iii) $1,021 if the date of redemption is after June 1, 2011 but on
or prior to June 1, 2012; (iv) $1,014 if the date of redemption is after June 1, 2012 but on or prior to June 1, 2013; and (v) $1,007 if the date of redemption is after June 1, 2013 but on or prior to June 1, 2014.
No redemption premium shall be payable if the date of redemption is after June 1, 2014. Holders of the Series A Preferred Shares are entitled to receive, if authorized and declared by the Board of Directors of the Company, noncumulative
dividends at a rate of 10.5% per annum, or $105 per annum per share. Dividends on the Series A Preferred Shares, if authorized and declared, are payable semiannually in arrears on June 30 and December 30 of each year.
In June 2003, the Company issued 2,400,000 Series D Preferred Shares. The Companys proceeds from this issuance were $60 million. First Republic
paid all expenses of the offering, including underwriting commissions and discounts. The Series D Preferred Shares are redeemable at the option of the Company any time after June 27, 2008 at the redemption price of $25 per share, plus accrued
and unpaid dividends. Holders of the Series D Preferred Shares are entitled to receive, if authorized and declared by the Board of Directors of the Company, noncumulative dividends at a rate of 7.25% per annum, or $1.8125 per annum per share.
Dividends on the Series D Preferred Shares, if authorized and declared, are payable quarterly in arrears on March 30, June 30, September 30, and December 30 of each year.
Upon the occurrence of an adverse change in relevant tax laws, the Company will have the right to redeem its preferred shares, in whole (but not in
part). The liquidation preference for the Series A Preferred Shares is $1,000 per share plus the semiannual dividend thereon accrued through the date of redemption for the dividend period in which the redemption occurs. The liquidation preference
for the Series D Preferred Shares is $25 per share plus the quarterly dividend thereon accrued through the date of redemption for the dividend period in which the redemption occurs.
The Companys preferred shares will be exchanged into preferred shares of the Bank upon the occurrence of certain events. The exchange rate for the
Series A Preferred Shares is 1:1. The exchange rate for the Series D Preferred Shares is 1:1/40. Except under certain limited circumstances, the holders of the Companys preferred shares have no voting rights.
11
Note 6. Common Stock
At June 30, 2009, the Company was authorized to issue 50,000,000 shares of common stock with a par value of $0.01 per share, of which 30,538,277 shares were outstanding and owned by the Bank. The Company issued
no common stock in the first six months of 2009 and 2008.
The holder of common stock is entitled to receive dividends if and when
authorized and declared by the Board of Directors out of funds legally available after all preferred dividends have been paid for the full year.
Note
7. Dividends on Preferred Stock and Common Stock
The following table presents the dividends on preferred stock for the three and six
months ended June 30, 2009 and June 27, 2008. The Company paid dividends on the Series A Preferred Shares and the Series D Preferred Shares during the three and six months ended June 30, 2009. During the three and six months ended
June 27, 2008, the Company had accrued dividends on the Series A Preferred Shares and the Series D Preferred Shares, which were paid on June 30, 2008. There were no accrued dividends payable on the Series A or Series D Preferred Shares as
of June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
2009
|
|
June 27,
2008
|
|
June 30,
2009
|
|
June 27,
2008
|
Series A Preferred Shares
|
|
$
|
1,444,000
|
|
$
|
1,443,000
|
|
$
|
2,920,000
|
|
$
|
2,887,000
|
Series D Preferred Shares
|
|
|
1,087,000
|
|
|
1,064,000
|
|
|
2,199,000
|
|
|
2,175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,531,000
|
|
$
|
2,507,000
|
|
$
|
5,119,000
|
|
$
|
5,062,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on the Companys preferred shares are payable if, when and as authorized by the
Companys Board of Directors. If the Board of Directors does not authorize a dividend on any series of preferred shares for any respective dividend period, holders of each series of preferred shares will not be entitled to be paid that dividend
later or to recover any unpaid dividend whether or not funds are, or subsequently become, available. The Board of Directors, in its business judgment, may determine that it would be in the best interest of the Company to pay less than the full
amount of the stated dividend on each series of preferred shares for any dividend period. However, to remain qualified as a REIT, the Company must distribute annually at least 90% of its REIT taxable income (excluding deductions for any
dividends paid and any net capital gains) to stockholders, and, generally, the Company cannot pay dividends on common stock for periods in which less than full dividends are paid on each series of preferred shares.
The Company expects to pay the holders of common stock an amount of dividends that when aggregated with the dividends paid to holders of the preferred
shares is not less than 90% of the Companys REIT taxable income (excluding deductions for any dividends paid and any net capital gains) in order to remain qualified as a REIT. The Company did not declare dividends on its common
stock during the three and six months ended June 30, 2009 or June 27, 2008.
Note 8. Fair Value of Financial Instruments
The following table presents the carrying values and fair values of the Companys financial instruments as of June 30, 2009:
|
|
|
|
|
|
|
|
|
June 30,
2009
|
($ in thousands)
|
|
Carrying
Value
|
|
Fair
Value
|
Cash and interest-earning deposit
|
|
$
|
95,095
|
|
$
|
95,095
|
Mortgage loans, net
|
|
$
|
199,076
|
|
$
|
186,524
|
12
The following methods and assumptions were used to estimate the fair value of each type of financial
instrument:
Cash and Interest-earning Deposit
: The carrying value approximates the estimated fair value.
Mortgage Loans
: The carrying value of Mortgage Loans is the gross principal, net of unaccreted purchase accounting discounts. To estimate the fair
value of Mortgage Loans, the Company segments each loan collateral type 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 Company based the fair value of single family and multifamily mortgages loans primarily upon prices of loans with similar terms
obtained by or quoted to the Company, adjusted for differences in loan characteristics and market conditions.
Note 9. Concentration of Credit Risk
At June 30, 2009, approximately 81% of Mortgage Loans (by carrying value) were secured by real estate properties located in
California. Future economic, political or other developments in California could adversely affect the value of the Mortgage Loans. See Financial Condition - Significant Concentration of Credit Risk under Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Note 10. Subsequent Events
Sale of the Bank to Bank of America, N.A.
During the
second quarter of 2009, the Banks board of directors approved the sale of the Bank to Bank of America, N.A., a subsidiary of Bank of America.
In this transaction, Merrill Lynch & Co. will sell the shares of the Bank to Bank of America, N.A. The sale price will be equal to the net book value of the Bank as of the date of transfer, and consideration will be in the form of
floating rate demand notes payable from Bank of America, N.A. to Merrill Lynch & Co. The demand notes will be established at market rates at the time of the sale. This transaction is not expected to alter the carrying value of the
Companys assets or liabilities.
The sale of the Bank is expected to be completed on or about October 1, 2009.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
This discussion summarizes the
significant factors affecting the financial condition of First Republic Preferred Capital Corporation (the Company) as of June 30, 2009 and results of operations for the three and six months ended June 30, 2009. This discussion
is provided to increase the understanding of, and should be read in conjunction with, the unaudited interim financial statements, accompanying notes and tables included in this Quarterly Report on Form 10-Q and in the Companys 2008 Annual
Report on Form 10-K for the year ended December 26, 2008 (the 2008 Annual Report).
Bank of America Acquisition
On January 1, 2009, a wholly-owned subsidiary of Bank of America Corporation (Bank of America) merged with and into Merrill
Lynch & Co. Inc. (Merrill Lynch & Co.), with Merrill Lynch & Co. continuing as the surviving corporation and a subsidiary of Bank of America. As a result of the merger, among other things, all of the direct and
indirect subsidiaries of Merrill Lynch & Co., including Merrill Lynch Bank & Trust Co., FSB (the Bank) and the Company, have become indirect subsidiaries of Bank of America. See Critical Accounting Policies and
Estimates below.
13
Information Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements 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 (the Exchange Act). These statements reflect managements current views and assumptions and are subject to known and unknown risks, uncertainties and other
factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are
not limited to, statements regarding the following:
|
|
|
estimates regarding capital requirements and the need for additional financing; and
|
|
|
|
plans, objectives, expectations and intentions contained in this report that are not historical facts.
|
Forward-looking statements often include words such as may, would, should, could, expect,
anticipate, believe, estimate, plan, target, project, predict, intend, potential, continue, or similar expressions. In addition,
other statements may also be forward-looking statements. All forward-looking statements should be read carefully because they discuss future expectations, contain projections of future results of operation or financial condition or state other
forward-looking information. There may be events in the future, however, that cannot be accurately predicted or controlled and that may cause actual results to differ materially from the expectations described in the forward-looking statements. The
reader is cautioned that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including, but not limited to, competitive pressure in the
mortgage lending industry; changes in the interest rate environment that reduce margins; general economic conditions, either nationally or regionally, that are less favorable than expected, resulting in, among other things, a deterioration in credit
quality and an increase in the provision for loan losses; changes in the regulatory environment; changes in business conditions, particularly in San Francisco and Los Angeles counties and the New York area and in the home mortgage lending industry;
and changes in the securities markets. Other risks, uncertainties and factors are discussed elsewhere in this report, in other Company filings with the Securities and Exchange Commission ( the SEC), including in Item 1A, Risk
Factors, in the 2008 Annual Report and in materials incorporated therein by reference.
Throughout this document, the
Company, we, our or us refers to First Republic Preferred Capital Corporation, First Republic refers to First Republic Bank, and the Bank refers to Merrill Lynch Bank &
Trust Co., FSB.
Critical Accounting Policies and Estimates
The Companys discussion and analysis of its financial condition and results of operation are based upon its financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures for contingent
assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to allowance for loan losses, credit risks, estimated loan lives, interest rate risk, contingencies and litigation. The Company bases its
estimates on historical experience and on various other assumptions it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of its assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company
considers accounting for allowance for loan losses to be a critical accounting policy because it is a complex process involving difficult and subjective judgments, assumptions and estimates. The allowance for loan losses is an estimate that can
change under different assumptions and conditions. The Company estimates credit losses resulting from the inability of borrowers to make required payments. If the financial condition of borrowers were to deteriorate, resulting in an impairment of
their ability to make payments, or the value of collateral securing Mortgage Loans were to decline, an increase in the allowance may be required by charging current income. A significant decline in the credit quality of the Companys loan
portfolio could have a material adverse affect on the Companys financial condition and results of operations.
14
The acquisition of the Company on January 1, 2009 was accounted for under the acquisition method of
accounting, as required by SFAS No. 141(R). The Companys assets and liabilities were remeasured as of January 1, 2009 (the acquisition date) based on their estimated fair values. (See Note 3, Purchase Accounting
Allocation.) Purchase accounting changed the basis of the Companys assets and liabilities compared with periods prior to the change of control. Accordingly, the Companys financial statements are presented for periods prior to the
acquisition (the Predecessor Company) and subsequent to the acquisition (the Successor Company). The Predecessor Company and Successor Company periods have been separated by a vertical line on the face of the financial
statements to distinguish between the Companys historical basis of accounting prior to the change of control and after the change of control. Tables in the footnotes to the financial statements and in Managements Discussion and
Analysis of Financial Condition and Results of Operations are presented without the Predecessor Company and Successor Company distinction. As a result of the change in control, the Company changed its fiscal quarter end from the last Friday of
the third month in the quarter to the last calendar day of the quarter. In addition, the Companys activities after its 2008 fiscal year end through December 31, 2008 are included in the Statement of Income for the first six months of
2009. The impact of this change and the additional activity recorded in the first six months of 2009 resulted in approximately $156,000 of additional net income. There were no changes in the Companys Board of Directors, material agreements or
outstanding issues of preferred stock.
Results of Operations
Overview
Net income was $3,373,000 and $7,342,000 for the second quarter and first six months of 2009, compared with
$4,048,000 and $8,623,000 for the same periods in 2008. The decrease was primarily due to a decrease in interest income resulting from lower average loan balances. The ratio of earnings to fixed charges was 1.33x and 1.43x for the second quarter and
first six months of 2009, and 1.61x and 1.70x for the same periods in 2008; the decrease in 2009 is due to lower interest income. Preferred stock dividend payments were 100% of fixed charges.
Total Interest Income
Total interest income
decreased in the second quarter and first six months of 2009, compared with the same periods in 2008 primarily due to lower average loan balances and lower loan yields. The following table presents the average balances and yields on the
Companys interest-earning assets for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30, 2009
|
|
|
June 27, 2008
|
|
($ in thousands)
|
|
Average
Balance
|
|
Interest
Income
|
|
Yield
|
|
|
Average
Balance
|
|
Interest
Income
|
|
Yield
|
|
Loans
|
|
$
|
204,233
|
|
$
|
3,044
|
|
6.06
|
%
|
|
$
|
240,681
|
|
$
|
3,785
|
|
6.31
|
%
|
Short-term investments
|
|
|
91,763
|
|
|
403
|
|
1.79
|
|
|
|
54,221
|
|
|
337
|
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
295,996
|
|
$
|
3,447
|
|
4.73
|
%
|
|
$
|
294,902
|
|
$
|
4,122
|
|
5.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30, 2009
|
|
|
June 27, 2008
|
|
($ in thousands)
|
|
Average
Balance
|
|
Interest
Income
|
|
Yield
|
|
|
Average
Balance
|
|
Interest
Income
|
|
Yield
|
|
Loans
|
|
$
|
207,779
|
|
$
|
6,655
|
|
6.37
|
%
|
|
$
|
249,015
|
|
$
|
8,162
|
|
6.57
|
%
|
Short-term investments
|
|
|
87,115
|
|
|
834
|
|
1.90
|
|
|
|
44,163
|
|
|
622
|
|
2.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
294,894
|
|
$
|
7,489
|
|
5.05
|
%
|
|
$
|
293,178
|
|
$
|
8,784
|
|
6.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on Mortgage Loans decreased $741,000, or 20%, in the second quarter of 2009 and
$1,507,000, or 18%, for the first six months of 2009, compared with the same periods in 2008 primarily due to lower average balances as cash has been accumulated in anticipation of the possible redemption of the outstanding issues of Preferred
Shares. The average yield on loans was 6.06% and 6.37% for the second quarter and first six months of 2009, compared with 6.31% and 6.57% for the same periods in 2008. The weighted average net coupon rate on Mortgage Loans was 4.11% at June 30,
2009, 4.91% at December 26, 2008 and 5.38% at June 27, 2008. The average yield on loans and the average net coupon rate have declined in 2009 due to lower market rates of interest. See Quantitative and Qualitative Disclosures about
Market Risks.
15
Included in interest income on Mortgage Loans is a reduction for loan servicing fees that First Republic
retains. The annual servicing fee is 25 basis points on the gross average outstanding principal balance of the Mortgage Loans that First Republic services. Loan servicing fees were $133,000 and $269,000 for the second quarter and first six months of
2009 and $152,000 and $314,000 for the same periods in 2008. The decrease in loan servicing fees was consistent with the decrease in the average loan balances. Interest income on Mortgage Loans includes discount accretion related to the valuation of
loans for purchase accounting, which partially offset the decrease in the average yield on loans. Net discount accretion was $701,000 and $1,402,000 for the second quarter and first six months of 2009, compared with $273,000 and $685,000 for the
same periods in 2008. The total net unaccreted purchase accounting discount was $10.9 million at June 30, 2009 and $8.9 million at June 27, 2008.
Interest income on short-term investments increased in the second quarter and first six months of 2009, compared with the same periods in 2008, primarily due to higher average investment balances, partially offset by
lower rates. The average yields on short-term investments for the second quarter and first six months of 2009 decreased to 1.79% and 1.90% respectively, compared with 2.49% and 2.82% for the same periods in 2008. The average yield on short-term
investments has declined in 2009 due to lower market rates of interest.
Operating Expense
The Company incurs advisory fee expenses payable to First Republic pursuant to an advisory agreement with First Republic for services that First Republic
renders on the Companys behalf. Advisory fees were $100,000 per annum for 2009 and 2008, or $25,000 per quarter.
General and
administrative expenses were $49,000 and $97,000 for the second quarter and first six months of 2009, compared with $49,000 and $111,000 for the same periods in 2008. These expenses consisted primarily of audit fees, directors fees, regulatory
costs and other stockholder costs.
Financial Condition
Cash Equivalents on Deposit with First Republic
At June 30, 2009 and December 26, 2008, cash equivalents
consisted entirely of a money market account held at First Republic.
Mortgage Loans
The loan portfolio at June 30, 2009 and December 26, 2008 consisted of both single family and multifamily mortgage loans acquired from First
Republic. The Company anticipates that in the future it will continue to acquire all of its loans from First Republic.
The Company has
purchased from First Republic single family loans with a period of interest only payments. Underwriting standards for all such loans have required a high level of borrower net worth, substantial post-loan liquidity, excellent FICO scores and
significant down payments. At June 30, 2009, approximately $110.9 million of loans, or 60% of the Companys single family loan portfolio, allowed interest only payments for varying periods. These interest only loans had an average
loan-to-value (LTV) ratio at June 30, 2009 of approximately 56%, based on appraised value at the time of origination. None of the Companys interest only home loans had an LTV ratio at origination of more than 80%.
Nonaccrual Loans and Allowance for Loan Losses
A
loan is placed on nonaccrual status when any installment of principal or interest is over 90 days past due, except for any single family loan that is well secured and in the process of collection or when the Company determines that the ultimate
collection of all contractually due principal or interest is unlikely. The Company classifies a loan as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan purchase and servicing agreement.
16
At June 30, 2009, there was one single family loan of $659,000 that was contractually past due more
than 90 days and on accrual status. At June 30, 2009 and December 26, 2008, there were no nonaccrual loans, impaired loans or loans that were troubled debt restructurings. The following table presents information with respect to the
Companys allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Six Months Ended
|
|
|
For the
Year Ended
December 26,
2008
|
|
|
|
June 30,
2009
|
|
|
June 27,
2008
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
481,000
|
|
|
$
|
481,000
|
|
|
$
|
481,000
|
|
Provision charged to expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargeoffs
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase accounting adjustment
|
|
|
(481,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
|
|
|
$
|
481,000
|
|
|
$
|
481,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Mortgage Loans for the period
|
|
$
|
207,779,000
|
|
|
$
|
249,015,000
|
|
|
$
|
237,093,000
|
|
Total Mortgage Loans at end of period
|
|
$
|
199,076,000
|
|
|
$
|
235,035,000
|
|
|
$
|
218,365,000
|
|
Ratio of allowance for loan losses to total loans
|
|
|
|
%
|
|
|
0.20
|
%
|
|
|
0.22
|
%
|
The Companys allowance for loan losses became part of the loan carrying value due to
purchase accounting adjustments recorded in the first quarter of 2009. AICPA Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3) requires impaired
loans acquired in a business combination to be recorded at fair value and prohibits the carryover of the allowance for loan losses. The net purchase accounting discount recorded in the first quarter was determined by discounting cash flows expected
to be collected using an observable discount rate for similar instruments. Subsequent decreases to expected principal cash flows will result in a charge to provision for loan losses. None of the Companys loans were considered impaired under
SOP 03-3 and no additional provision for loan losses was required as of June 30, 2009.
Vintage Analysis
The following table presents a vintage analysis of Mortgage Loans (by carrying value) at June 30, 2009 by year of origination:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Type
|
|
Year
Originated
|
|
Balance
|
|
% of Total
Loans
|
|
|
Average
FICO
|
|
Average
LTV
|
|
Single family mortgage loans
|
|
2005
|
|
$
|
12,637
|
|
6
|
%
|
|
759
|
|
67
|
%
|
|
|
2004
|
|
|
38,331
|
|
19
|
|
|
777
|
|
58
|
|
|
|
2003
|
|
|
45,765
|
|
23
|
|
|
773
|
|
54
|
|
|
|
2002
|
|
|
28,655
|
|
15
|
|
|
766
|
|
57
|
|
|
|
2001
|
|
|
9,030
|
|
5
|
|
|
772
|
|
47
|
|
|
|
2000 & prior
|
|
|
42,197
|
|
21
|
|
|
736
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
176,615
|
|
89
|
|
|
763
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily mortgage loans
|
|
2004
|
|
|
4,305
|
|
2
|
|
|
|
|
51
|
|
|
|
2003
|
|
|
10,127
|
|
5
|
|
|
|
|
50
|
|
|
|
2002
|
|
|
6,123
|
|
3
|
|
|
|
|
60
|
|
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 & prior
|
|
|
1,906
|
|
1
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
22,461
|
|
11
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
|
$
|
199,076
|
|
100
|
%
|
|
|
|
54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
As shown in the table above, the Mortgage Loans at June 30, 2009 were originated prior to 2006. The
FICO score ratios are weighted averages as of the date of origination and the LTV ratios are based upon the current loan balance and the original appraisal amount.
Significant Concentration of Credit Risk
Concentration of credit risk generally arises with respect to the loan portfolio
when a number of borrowers engage in similar business activities or activities in the same geographical region. Concentration of credit risk indicates the relative sensitivity of the Companys performance to both positive and negative
developments affecting a particular industry. The balance sheet exposure to geographic concentrations directly affects the credit risk of the Companys Mortgage Loans. The Companys Mortgage Loans are concentrated in California, and
adverse conditions there could adversely affect the Companys operations. The following table presents an analysis of Mortgage Loans (by carrying value) at June 30, 2009 by major geographic location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
San
Francisco
Bay Area
|
|
|
New York
/New
England
|
|
|
Los
Angeles
County
|
|
|
San
Diego
County
|
|
|
Other
California
Areas
|
|
|
Other
|
|
|
Las
Vegas,
Nevada
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
%
|
|
Single family
|
|
$
|
104,529
|
|
|
$
|
20,209
|
|
|
$
|
19,032
|
|
|
$
|
13,220
|
|
|
$
|
2,528
|
|
|
$
|
16,097
|
|
|
$
|
1,000
|
|
|
$
|
176,615
|
|
|
89
|
%
|
Multifamily
|
|
|
16,122
|
|
|
|
844
|
|
|
|
3,105
|
|
|
|
603
|
|
|
|
1,787
|
|
|
|
|
|
|
|
|
|
|
|
22,461
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
120,651
|
|
|
$
|
21,053
|
|
|
$
|
22,137
|
|
|
$
|
13,823
|
|
|
$
|
4,315
|
|
|
$
|
16,097
|
|
|
$
|
1,000
|
|
|
$
|
199,076
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent by location
|
|
|
61
|
%
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
7
|
%
|
|
|
2
|
%
|
|
|
7
|
%
|
|
|
1
|
%
|
|
|
100
|
%
|
|
|
|
At June 30, 2009, approximately 81% of Mortgage Loans were secured by properties located in
California. The weighted average loan to value ratio on Mortgage Loans was approximately 54%, based upon the appraised values of the properties at the time the loans were originated.
Liquidity and Capital Resources
The Companys principal liquidity needs are to pay dividends
and to fund the acquisition of additional Mortgage Assets as borrowers repay Mortgage Loans and, from time to time, redeem preferred stock. The Company intends to fund the acquisition of any additional Mortgage Loans from available cash or proceeds
from principal repayments on Mortgage Loans. Proceeds from interest payments will be reinvested until used for the payment of operating expenses and dividends. The Company does not anticipate that it will have any other material capital
expenditures. The cash generated from interest and principal payments on Mortgage Assets is expected to provide sufficient funds for operating requirements and dividend payments in accordance with the requirements to be taxed as a REIT for the
foreseeable future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
The Company services fixed-rate
dividend obligations to preferred stockholders and operating expenses by the collection of interest income from Mortgage Loans and short-term investments. To meet dividend payments, the Company maintains an average interest-earning asset balance of
approximately two times the liquidation preference of its outstanding preferred shares. The Companys earnings to fixed charges ratio was 1.33x for the second quarter of 2009, compared with 1.61x for the second quarter of 2008 and 1.57x for the
year 2008.
Since September 2007, interest rates have generally fallen. The yield on total interest-earning assets decreased 88 basis
points to 4.73% for the second quarter of 2009, compared with 5.61% for the second quarter of 2008. The decrease in yield was primarily due to declining interest rates, partially offset by discount accretion on loans and an increase in
lower-yielding short-term investments. The yield on loans decreased 25 basis points in the second quarter of 2009 compared to the same period in 2008. However, excluding the net discount accretion, the yield would have decreased approximately 122
basis points. The loan portfolio mix by interest rate type at June 30, 2009 was similar to that at June 27, 2008. Adjustable rate mortgage (ARM) loans were 80% of Mortgage Loans at June 30, 2009 and 76% at June 27,
2008. The weighted average net coupon rate for ARMs at June 30, 2009 decreased 159 basis points from a year ago, compared with a 11 basis point increase in the weighted average net coupon rate for intermediate fixed rate loans and 1 basis point
increase for fixed rate loans. The weighted average remaining maturity of Mortgage Loans was 20.8 years at June 30, 2009 and 21.8 years at June 27, 2008.
18
For ARMs, the timing of changes in the average yield depends on the underlying interest rate index, the
timing of changes in the index and the frequency of adjustments to the loan rate. The weighted average coupon rate for ARMs was 3.73% at June 30, 2009, compared with 5.32% at June 27, 2008 primarily due to a decrease in short-term rates.
The decrease in ARM loan yields was mitigated by a significant volume of ARM loans indexed to Monthly Eleventh District Cost of Funds Index (COFI). COFI is a lagging index that tends to respond more slowly to changes in the general
interest rate environment than a market rate index. At June 30, 2009, ARM loans indexed to COFI were 82% of total ARMs and 65% of Mortgage Loans, compared with 83% of total ARMs and 63% of Mortgage Loans at June 27, 2008.
For intermediate fixed and fixed rate loans, the balance outstanding at June 30, 2009 was $40.6 million, or 20% of total Mortgage Loans, compared
with $57.1 million at June 27, 2008, or 24% of total Mortgage Loans. The weighted average coupon rate for intermediate fixed rate loans was 5.54% at June 30, 2009, up slightly from 5.43% at June 27, 2008. The weighted average coupon
rate for fixed rate loans was 5.68% at June 30, 2009 and 5.67% at June 27, 2008.
The following table presents an analysis of
Mortgage Loans at June 30, 2009 by interest rate type:
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Balance
|
|
Net
Coupon
(1)
(2)
|
|
|
Months
to Next
Reset
(1)
|
|
% of Total
Loans
|
|
ARM loans:
|
|
|
|
|
|
|
|
|
|
|
|
COFI
|
|
$
|
130,038
|
|
3.71
|
%
|
|
1
|
|
65
|
%
|
CMT
(3)
|
|
|
18,597
|
|
4.04
|
|
|
6
|
|
10
|
|
LIBOR
(4)
|
|
|
9,855
|
|
3.40
|
|
|
4
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ARMs
|
|
|
158,490
|
|
3.73
|
|
|
2
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate fixed:
|
|
|
|
|
|
|
|
|
|
|
|
12 months to 36 months
|
|
|
3,124
|
|
5.91
|
|
|
26
|
|
1
|
|
37 months to 60 months
|
|
|
7,081
|
|
5.31
|
|
|
42
|
|
3
|
|
Greater than 60 months
|
|
|
1,033
|
|
6.00
|
|
|
77
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intermediate fixed
|
|
|
11,238
|
|
5.54
|
|
|
41
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable rate loans
|
|
|
169,728
|
|
3.85
|
|
|
4
|
|
85
|
|
|
|
|
|
|
Fixed rate loans
|
|
|
29,348
|
|
5.68
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
199,076
|
|
4.11
|
%
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Weighted average coupon rate
|
(2)
|
Net of servicing fees retained by First Republic
|
(4)
|
London Interbank Offered Rate
|
19
The following table presents maturities or interest rate adjustments based upon the contractual
maturities or adjustment dates as of June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
6 Months
or Less
|
|
|
>6 to 12
Months
|
|
|
>1 to 3
Years
|
|
|
>3 to 5
Years
|
|
|
>5
Years
|
|
|
Not Rate
Sensitive
|
|
|
Total
|
Cash and investments
|
|
$
|
95,095
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
95,095
|
Loans, net
|
|
|
152,315
|
|
|
|
13,901
|
|
|
|
15,528
|
|
|
|
10,684
|
|
|
|
6,648
|
|
|
|
|
|
|
|
199,076
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
828
|
|
|
|
828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
247,410
|
|
|
$
|
13,901
|
|
|
$
|
15,528
|
|
|
$
|
10,684
|
|
|
$
|
6,648
|
|
|
$
|
828
|
|
|
$
|
294,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
53
|
|
|
$
|
53
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
294,946
|
|
|
|
294,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
294,999
|
|
|
$
|
294,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repricing gap positive (negative)
|
|
$
|
247,410
|
|
|
$
|
13,901
|
|
|
$
|
15,528
|
|
|
$
|
10,684
|
|
|
$
|
6,648
|
|
|
$
|
(294,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative repricing gap:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar amount
|
|
$
|
247,410
|
|
|
$
|
261,311
|
|
|
$
|
276,839
|
|
|
$
|
287,523
|
|
|
$
|
294,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total assets
|
|
|
83.9
|
%
|
|
|
88.6
|
%
|
|
|
93.8
|
%
|
|
|
97.5
|
%
|
|
|
99.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has not engaged in business activities related to foreign currency
transactions or commodity-based instruments and has not made any investments in equity securities subject to price fluctuations.
Item 4T. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by SEC rules, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and
procedures, as such term is defined in Rule 13a-15(e) under the Exchange Act as of the end of the period covered by this report. The Companys management, including the Companys chief executive officer and chief financial officer,
supervised and participated in the evaluation. Based on that evaluation, the chief executive officer and the chief financial officer concluded that the Companys disclosure controls and procedures, as of June 30, 2009, were effective for
providing reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SECs
rules and forms, and that such information is accumulated and communicated to the Companys management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in the Companys internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the quarter ended
June 30, 2009 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not currently involved in nor, to its knowledge, currently threatened with any material legal proceedings.
Item 1A. Risk Factors.
There are risks, many beyond the Companys control, which could cause the Companys results to differ significantly from managements expectations. Some of these factors are described in the 2008 Annual Report. Any factor
described in the 2008 Annual Report or in this Quarterly Report on Form 10-Q could, by itself or together with one or more other factors, adversely affect the
20
Companys business, results of operations and/or financial condition. There may be other factors not described in the 2008 Annual Report or in this
Quarterly Report on Form 10-Q that could cause results to differ from the Companys expectations.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other
Information.
None.
Item 6. Exhibits.
|
3(ii)
|
Amended and Restated Bylaws of First Republic Preferred Capital Corporation (incorporated by reference to Exhibit 3(ii) of Form 8-K filed on May 12, 2009).
|
|
12
|
Statement of computation of ratios of earnings to fixed charges.
|
|
31.1
|
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
|
|
|
|
|
|
|
|
|
Date: August 10, 2009
|
|
|
|
By:
|
|
/s/ JAMES J. BAUMBERGER
|
|
|
|
|
|
|
|
|
James J. Baumberger
|
|
|
|
|
|
|
|
|
President and Director
|
|
|
|
|
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
Date: August 10, 2009
|
|
|
|
By:
|
|
/s/ WILLIS H. NEWTON, JR.
|
|
|
|
|
|
|
|
|
Willis H. Newton, Jr.
|
|
|
|
|
|
|
|
|
Vice President,
|
|
|
|
|
|
|
|
|
Chief Financial Officer,
|
|
|
|
|
|
|
|
|
Treasurer and Director
|
|
|
|
|
|
|
|
|
(Principal Financial Officer)
|
22
INDEX TO EXHIBITS
|
|
|
Exhibit
Number
|
|
Exhibit Title
|
3(ii)
|
|
Amended and Restated Bylaws of First Republic Preferred Capital Corporation (incorporated by reference to Exhibit 3(ii) of Form 8-K filed on May 12, 2009).
|
|
|
12
|
|
Statement of computation of ratios of earnings to fixed charges.
|
|
|
31.1
|
|
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
|
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.2
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
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