UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-33461
FIRST REPUBLIC
PREFERRED
CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
|
|
|
Nevada
|
|
91-1971389
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
111 Pine Street, 2nd Floor
San Francisco, California
|
|
94111
(Zip Code)
|
(Address of principal executive offices)
|
|
Registrants telephone number, including area code:
(415) 392-1400
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
Title of each class
|
|
Name of each exchange on which registered
|
7.25% Noncumulative Perpetual Series D
Preferred Stock
|
|
The Nasdaq Stock Market LLC
|
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
¨
No
x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
¨
No
x
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 Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulations 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrants 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
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.
|
|
|
Large accelerated filer
¨
|
|
Accelerated filer
¨
|
Non-accelerated filer
x
(Do not check if a smaller reporting company)
|
|
Smaller reporting company
¨
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
¨
No
x
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the book value per share of such common equity as of June 30, 2009 was $0.
The number of shares outstanding of the registrants common stock, par value $.01 per share, as of February 19, 2010 was
30,538,277.
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
TABLE OF CONTENTS
2
PART I
Information Regarding Forward-Looking Statements
This Annual Report on
Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), 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, 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, may contain projections of future results of operation or of 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. All forward-looking statements involve risks and uncertainties, and actual results may differ materially from those expressed or implied by such forward looking statements 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 under Risk Factors on page 13 and elsewhere in this report, in other First Republic Preferred Capital
Corporation filings with the Securities and Exchange Commission (the SEC) and in materials incorporated therein by reference.
Throughout this document, the Company, we, our or us refers to First Republic Preferred Capital Corporation, MLFSB refers to Merrill Lynch
Bank & Trust Co., FSB and BANA refers to Bank of America, N.A. In addition, throughout this document, First Republic means the business of First Republic Bank:
|
|
|
as conducted as an independent institution, including the Company and its other subsidiaries, from 1985 until its acquisition in September 2007 by
MLFSB, a banking subsidiary of Merrill Lynch & Co. Inc. (Merrill Lynch & Co.); and
|
|
|
|
as conducted as a separate business and accounting division within MLFSB, and, effective as of November 2009, as a separate division of BANA following
MLFSBs merger into BANA, in each case including the Company and any other subsidiaries acquired in the 2007 transaction.
|
General
First Republic Preferred Capital Corporation, a Nevada corporation, was formed by First Republic in April 1999 for the purpose of raising
capital. First Republic owned 100% of the Companys outstanding shares of common stock until September 21, 2007, when Merrill Lynch & Co. acquired all of the outstanding shares of First Republics common stock and the Company
became a wholly owned subsidiary of MLFSB, a federal stock
3
savings bank, which was itself a wholly owned subsidiary of Merrill Lynch & Co. The acquisition of First Republic was accounted for under the purchase method of accounting. The
Companys assets and liabilities were remeasured as of September 21, 2007 (the Merrill Lynch & Co. acquisition date) based on their estimated fair values.
On January 1, 2009, Merrill Lynch & Co. was acquired by Bank of America Corporation (Bank of America), with
Merrill Lynch & Co. continuing as a wholly owned subsidiary of Bank of America. As a result, all of the direct and indirect subsidiaries of Merrill Lynch & Co., including MLFSB and the Company, became indirect subsidiaries of Bank
of America (the Bank of America Acquisition).
Following the Bank of America Acquisition, the Companys
assets and liabilities were remeasured as of January 1, 2009 (the Bank of America acquisition date) based on their estimated fair values in accordance with the acquisition method of accounting. Purchase accounting changed the basis
of the Companys assets and liabilities compared with periods prior to the change of control. See Critical Accounting Policies included in Item 7 of this report. As a result of the change in control, the Company changed its
fiscal year end from the last Friday in December to the last calendar day of the year; the Companys activities after its 2008 fiscal year end through December 31, 2008 are included in the Statement of Income for 2009. This change caused
five additional days of activity to be recorded in 2009, resulting in approximately $156,000 of additional net income.
On
November 2, 2009, Bank of America completed an internal corporate restructuring of certain subsidiaries, including MLFSB, pursuant to which MLFSB was merged with and into BANA, with BANA continuing as the surviving entity (the
Restructuring). As a result of the Restructuring, BANA replaced MLFSB as the direct parent and holder of 100% of the common stock of the Company. This transaction did not alter the carrying value of the Companys assets or
liabilities. Except for the changes discussed in Note 6, Preferred Stock, of the Notes to Financial Statements included in Item 8 of this report (the Notes to Financial Statements), there were no other changes in the
Companys Board of Directors, material agreements or outstanding issues of preferred stock.
At December 31, 2009,
all of the Companys 30,538,277 issued and outstanding shares of common stock, par value $0.01 per share, were owned by BANA. Earnings per share data is not presented, as the Companys common stock is not publicly traded.
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 referred to herein as 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.
Financial
information for the fiscal years ended December 31, 2009, December 26, 2008 and December 28, 2007 is presented in the accompanying financial statements.
Recent Development
On October 21, 2009, Bank of America announced
that it had entered into a definitive agreement to sell First Republic and its operating subsidiaries, including the Company, to a number of investors, led by First Republics existing management, and including investment funds managed by
Colony Capital, LLC and General Atlantic LLC. The transaction is expected to close in the second quarter of 2010, subject to receipt of all regulatory approvals. Upon completion of the transaction, the Company will become a subsidiary of a newly
4
formed enterprise doing business as First Republic Bank, since the newly formed enterprise will assume ownership of 100% of the Companys outstanding common stock currently owned by BANA.
The newly formed enterprise will also acquire the 25,410 shares of Series A Preferred Stock currently owned by BANA. Except for these changes, no other changes in the Companys Board of Directors, material agreements or outstanding issues of
preferred stock are expected as a result of this proposed transaction.
General Description of Mortgage Assets
Mortgage Assets
. As of December 31, 2009 and December 26, 2008, the Companys Mortgage Assets consisted of Mortgage
Loans originated by First Republic and secured by single family (one-to-four unit) homes and multifamily properties. The aggregate outstanding gross principal balance of those loans was $273.2 million as of December 31, 2009 and $226.6 million
as of December 26, 2008. The total net unaccreted purchase accounting discount was $8.7 million as of December 31, 2009 and $8.2 million as of December 26, 2008.
Single Family Mortgage Loans
. First Republic originates and may acquire from time to time both conforming and nonconforming single
family mortgage loans. Conventional conforming single family mortgage loans comply with the requirements for inclusion in a loan guarantee program sponsored by either Freddie Mac or Fannie Mae. Substantially all of the single family mortgage loans
that the Company has acquired from First Republic are nonconforming loans because the original loan principal balances exceeded the limits for Freddie Mac or Fannie Mae programs at origination. The Company believes that all of its single family
mortgage loans meet the requirements for sale to national private mortgage conduit programs or other investors in the secondary mortgage market.
Each single family mortgage loan is evidenced by a promissory note secured by a mortgage or deed of trust or other similar security instrument creating a first lien on single family (one-to-four unit)
residential properties, including shares allocated to a dwelling unit in a residential cooperative housing corporation. Real estate properties underlying single family mortgage loans consist of individual dwelling units, individual cooperative
apartment units, individual condominium units, two- to four-family dwelling units, planned unit developments and townhouses. The Company currently expects that most of the single family mortgage loans acquired will be adjustable rate or intermediate
fixed rate mortgage loans; however, the Company may also purchase longer-term fixed rate single family mortgage loans.
Multifamily Mortgage Loans.
The Companys multifamily mortgage loans are predominately for established buildings in the urban neighborhoods of San Francisco and Los Angeles. The buildings used as collateral for the
Companys multifamily loans generally are operating properties with proven occupancy, rental rates and expense levels. The neighborhoods tend to be densely populated, the properties generally are close to employment opportunities and rent
levels are appropriate for the target occupants. Typically, the borrowers are property owners who are experienced at managing these properties. The Companys current policy is not to acquire multifamily mortgage loans if total multifamily
mortgage loans, together with commercial mortgage loans, if any, would constitute more than 15% of the Companys total Mortgage Assets immediately following such acquisition.
Commercial Mortgage Loans
. Although the Company currently does not own any commercial mortgage loans, the Company may acquire
commercial mortgage loans secured by industrial and warehouse properties, recreational facilities, office buildings, retail space and shopping malls, hotels and motels, hospitals, nursing homes or senior living centers. The Companys current
policy is not to acquire any interest in a commercial mortgage loan if commercial mortgage loans and multifamily mortgage loans together would constitute more than 15% of Mortgage Assets immediately following such acquisition. For a variety of
reasons, commercial mortgage loans can be significantly more risky than single family mortgage loans.
5
Management Policies and Programs
As discussed elsewhere in this report, First Republic administers the Companys Mortgage Assets. In doing so, First Republic has a high
degree of autonomy. The Companys Board of Directors, however, has adopted certain policies to guide the acquisition and disposition of assets, use of capital and leverage, credit risk management and certain other activities. These policies,
which are discussed below, may be amended or revised from time to time at the discretion of the Board of Directors without a vote of the Companys shareholders.
Asset Acquisition Policies
. The Company currently anticipates purchasing Mortgage Assets comprised primarily of single family mortgage loans and multifamily mortgage loans, although the Company may
purchase commercial real estate mortgages and other types of Mortgage Assets. Although not required to do so, the Company expects to acquire all or substantially all of these Mortgage Assets from First Republic. As a wholly owned subsidiary of BANA,
the Company acquires loans from First Republic, a division of BANA, at prices equal to First Republics carrying value, which has approximated the fair value of the loans at the date of purchase. The Company intends to acquire only performing
loans from First Republic. However, neither the Company nor First Republic currently has specific policies with respect to the Companys acquisition from First Republic of particular loans or pools of loans, other than the Companys
requirement that these assets must be eligible to be held by a REIT. The Company may periodically acquire Mortgage Assets from unrelated third parties. To date, the Company has not entered into any agreements, arrangements or adopted any procedures
to purchase Mortgage Assets from unrelated third parties. However, First Republic has purchased Mortgage Assets from unrelated third parties, and these assets are eligible to be purchased by the Company. The Company anticipates purchasing Mortgage
Assets from unrelated third parties only if neither First Republic nor any of its affiliates has amounts or types of Mortgage Assets sufficient to meet the Companys requirements.
In addition, the Company is permitted under the REIT guidelines to invest up to 25% of the total value of its assets in assets eligible to
be held by REITs other than those described above. These assets could include shares or interests in other REITs and partnership interests. Since inception, the Company has not acquired any such assets. However, in order to preserve the
Companys status as a REIT under the Internal Revenue Code of 1986, as amended (the Internal Revenue Code), at least 75% of the Companys total assets must consist of mortgage loans and other qualified assets of the type set
forth in Section 856(c)(5)(B) of the Internal Revenue Code. The other qualifying assets include cash, cash equivalents and securities, including shares or interests in other REITs, although the Company currently does not intend to invest in
shares or interests in other REITs.
Capital and Leverage Policies
. If the Companys Board of Directors decides
that additional funding is required, the Company may seek to raise funds through equity offerings or debt financings. The Company may also seek to retain cash that otherwise would be used to pay dividends, but only after considering the consequences
of such action under the provisions of the Internal Revenue Code requiring a REIT to distribute not less than 90% of its REIT taxable income (which excludes accretion of loan discounts and is calculated after the deduction for dividends
paid on preferred stock) and taking into account taxes that would be imposed on undistributed taxable income.
The Company has
no debt outstanding and currently does not intend to incur any indebtedness. Its articles of incorporation, however, do not contain any limitation on the amount or percentage of debt, funded or otherwise, that the Company may incur. Notwithstanding
the foregoing, the terms of the Companys preferred stock provide that the Company may not incur indebtedness in excess of 25% of total stockholders equity without the approval of a majority of the Companys independent directors.
Any debt incurred may include intercompany advances made by BANA to the Company.
The Company may also issue additional
preferred stock. The Company is prohibited, however, from issuing preferred stock ranking senior to its Series A Preferred Stock or Series D Preferred Stock without consent of holders of at least two-thirds of each of the respective classes of
outstanding preferred stock. BANA has advised the Company that, at the date of this report, it owns approximately $25.4 million of the Companys Series A Preferred Stock. Because the Companys articles of incorporation do not prohibit or
otherwise restrict BANA or
6
its affiliates from holding or voting the Companys preferred stock, BANA may be in a position to significantly affect the outcome of any future vote by the holders of the Companys
preferred stock. In connection with the transaction discussed in Item 1 of this report under GeneralRecent Development, the Series A Preferred Stock owned by BANA will be acquired by First Republic. The Company is prohibited
from issuing preferred stock ranking either senior or equal to the Series A Preferred Stock or the Series D Preferred Stock without the approval of a majority of the Companys independent directors.
Credit Risk Management Policies
. The Company intends that each mortgage loan acquired from First Republic or any other party will
represent a first lien position and will be originated in the ordinary course of the originators real estate lending activities based on the underwriting standards generally applied (at the time of origination) for the originators own
account. The Company also intends that all Mortgage Assets held will be serviced pursuant to a loan purchase and servicing agreement with First Republic, which requires servicing in conformity with accepted secondary market standards, with any
servicing guidelines promulgated by the Company and, in the case of the single family mortgage loans, with Freddie Mac and Fannie Mae guidelines and procedures.
Conflict of Interest Policies
. Because of the nature of the Companys relationship with First Republic, conflicts of interest may arise with respect to certain transactions, including, without
limitation, the acquisition of Mortgage Assets from First Republic and the modification of the advisory agreement or the loan purchase and servicing agreement. It is the Companys policy, and the policy of First Republic, to keep the terms of
any financial dealings with First Republic consistent with those available from unrelated third parties in the mortgage lending industry. In addition, neither the advisory agreement nor the loan purchase and servicing agreement, each discussed
elsewhere in this report, may be modified or terminated without the approval of a majority of the Companys independent directors.
Conflicts of interest between the Company and First Republic may arise in connection with making decisions that bear upon the credit arrangements that First Republic may have with a borrower. Conflicts of
interest may arise in connection with actions taken by BANA as the Companys controlling shareholder. It is the Companys intention and the intention of First Republic and BANA that any agreements and transactions between the Company, on
the one hand, and First Republic or BANA, on the other hand, including without limitation the loan purchase and servicing agreement, are fair to both parties and are consistent with market terms for such types of transactions. The loan purchase and
servicing agreement provides that First Republic must perform foreclosures and dispositions of Mortgage Loans with a view toward maximizing the recovery by the Company, and that it must service the Mortgage Loans with a view toward the
Companys interests. However, there can be no assurance that any such agreement or transaction in fact will be on terms as favorable to the Company as would have been obtained from unaffiliated third parties.
There are no provisions in the Companys articles of incorporation limiting any of its officers, directors, security holders or
affiliates from having any direct or indirect interest in any Mortgage Assets to be acquired or disposed of by the Company or in any transaction in which the Company has an interest or from engaging in acquiring, holding or managing such Mortgage
Assets. As described elsewhere in this report, the Company expects that First Republic will have direct interests in transactions with the Company, including without limitation, the transfer of Mortgage Assets to the Company. The Company does not
currently anticipate, however, that any of its officers or directors will have any interests in such Mortgage Assets.
Insurance Policies
. First Republic follows what it believes to be standard practices in the mortgage banking industry by requiring borrowers to obtain and thereafter to maintain insurance covering fire and casualty losses in respect
of the mortgaged properties, but not requiring insurance coverage for natural disasters such as earthquakes. The Company believes that the properties underlying Mortgage Loans held are adequately insured against fire and casualty losses.
7
Other Policies
. The Company does not intend to make direct investments in real estate
or to own other interests in real estate, except as a result of foreclosure proceedings related to Mortgage Assets. The Company does not intend to invest in securities such as bonds, preferred stock and common stock or in the securities of or other
interests in entities engaged in real estate activities, although the Company is permitted under REIT guidelines to invest up to 25% of its portfolio in eligible real estate securities, including shares or interests in other REITs and partnership
interests. The Company intends to operate in a manner that will not subject it to regulation under the Investment Company Act of 1940, as amended (the Investment Company Act). Therefore, the Company does not intend to (i) invest in
the securities of other issuers for the purpose of exercising control over such issuers, (ii) underwrite securities of other issuers, (iii) actively trade in loans or other investments, (iv) offer securities in exchange for property
or (v) make loans to third parties, including, without limitation, its officers, directors or other affiliates.
The
Investment Company Act exempts entities that, directly or through majority-owned subsidiaries, are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. These
interests are referred to as Qualifying Interests. Under current interpretations by the staff of the SEC, in order to qualify for this exemption, the Company, among other things, must maintain at least 55% of its assets in Qualifying
Interests and also may be required to maintain an additional 25% in Qualifying Interests or other real estate-related assets. The assets that the Company may acquire therefore may be limited by the provisions of the Investment Company Act. The
Company has established a policy of limiting authorized investments that are not Qualifying Interests to no more than 20% of the value of its total assets.
The Company may, under certain circumstances, purchase its preferred stock in the open market or otherwise. Any action of this type would be taken only in conformity with applicable federal and state laws
and the requirements for qualifying as a REIT and only upon approval by the Companys Board of Directors.
The Company
currently intends to make investments and to operate its business at all times in such a manner as to be consistent with the requirements of the Internal Revenue Code to qualify as a REIT. Future economic, market, legal, tax or other considerations,
however, may cause the Companys Board of Directors, subject to approval by a majority of the independent directors, to determine that it is in the Companys best interests and in the best interest of its shareholders to revoke the
Companys REIT status. The Company does not currently intend to revoke its status as a REIT.
The Company currently does
not intend to borrow money or issue securities senior to the preferred stock or otherwise to incur any indebtedness in connection with its operations. However, the Company reserves the right to do so at any time, although under its articles of
incorporation, indebtedness in excess of 25% of total stockholders equity may not be incurred without the approval of a majority of the independent directors.
The investment and operating policies described above may be revised from time to time at the discretion of the Companys Board of Directors without a vote of its shareholders.
Description of Loan Portfolio
General.
Except for certain home loans purchased by First Republic in 1998, the Mortgage Loans held by the Company were originated by First Republic in the ordinary course of its real estate lending activities. The Mortgage Loans
consisted solely of single family mortgage loans through the first quarter of 2003. Beginning in the second quarter of 2003, the Company began acquiring multifamily mortgages using the proceeds from the Series D Preferred Stock offering. At
December 31, 2009, Mortgage Loans totaled $264.5 million, of which $243.8 million were secured by single family real estate properties and $20.7 million were secured by multifamily real estate properties. At December 26, 2008, Mortgage
Loans totaled $218.4 million, of which $194.0 million were secured by single family real estate properties and $24.4 million were secured by multifamily properties.
8
At December 31, 2009, the Mortgage Loans had interest rates generally ranging from
2.94% to 8.38% per annum and a weighted average coupon rate of 3.92% per annum. The Mortgage Loans were originated between August 1986 and July 2009, and the average original term to stated maturity was approximately 29 years. The weighted
average number of years from origination of the loans through December 31, 2009 was approximately 6 years, and the weighted average remaining term was approximately 23 years. At December 26, 2008, the Mortgage Loans had rates generally
ranging from 3.13% to 8.38%, a weighted average coupon rate of 4.91%, a weighted average number of years from origination of 7 years and a weighted average remaining term of approximately 21 years.
The weighted average loan-to-value (LTV) ratio for Mortgage Loans was approximately 55% at December 31, 2009 and 53% at
December 26, 2008. The LTV ratio means the ratio (expressed as a percentage) of the current principal amount of a mortgage loan to the lesser of (i) the most recent appraised value of the underlying mortgage property, and (ii) if the
mortgage loan was made to finance the acquisition of a property, the purchase price of the mortgaged property. The Company does not generally reappraise properties subsequent to loan origination unless a loan becomes significantly delinquent.
Interest Rate Types.
Mortgage Loans consist of adjustable and fixed interest rate types, which are described in more
detail below. The interest rate types for adjustable rate mortgage (ARM) loans include Monthly Eleventh District Cost of Funds Index (COFI) ARM, One-Year Treasury (CMT) ARM and London Interbank Offered Rate
(LIBOR) ARM, intermediate fixed rate types, which are adjustable after an initial period, include 5/1 Year ARM, 7/1 Year ARM, 10/1 Year ARM, and 5/5 Year ARM; and fixed interest rate types include 15-Year Fixed and 30-Year Fixed.
The interest rate on an ARM typically is tied to either the COFI, the CMT or the LIBOR index and is adjustable periodically.
A majority of Mortgage Loans have adjustable interest rate types. At December 31, 2009, 57% (by carrying value) of Mortgage Loans were ARMs that bear interest at rates that adjust within one year, and 33% were intermediate fixed rate loans that
bear interest rates that are fixed for an initial period and then adjust after the initial period. Generally, ARMs are subject to lifetime interest rate caps and periodic interest rate caps.
The interest rate on an ARM generally includes a gross margin, which is a fixed percentage that is added to the loans
index in order to calculate the interest rate to be paid by the borrower (without taking into account any interest rate caps or minimum interest rates). Gross margin is not applicable to longer-term fixed rate mortgage loans.
The interest rate on each type of ARM loan product such as the COFI ARM or the CMT ARM adjusts periodically, subject to lifetime interest
rate caps and minimum interest rates, each as specified in the mortgage note relating to the ARM. Each ARM loan bears interest at its initial interest rate until its first rate adjustment date. Effective with each rate adjustment date, the monthly
principal and interest payment on substantially all of the ARM loans will be adjusted to an amount that will fully amortize the then-outstanding principal balance of such mortgage loan over its remaining term to stated maturity and that will be
sufficient to pay interest at the adjusted interest rate.
For intermediate fixed rate loans that are automatically
convertible (5/1 Year ARMs, 7/1 Year ARMs and 10/1 Year ARMs), the interest rate is fixed at an initial rate for a certain amount of years (five, seven or ten years), after which time the loan generally converts to a monthly or One-Year ARM. At
December 31, 2009, these automatically convertible mortgage loans comprised 32% of Mortgage Loans, compared with 8% at December 26, 2008. In addition, 1% of Mortgage Loans at December 31, 2009 and December 26, 2008 were indexed
to the 5-year CMT and reprice every five years.
The Company has purchased from First Republic certain adjustable rate single
family home loans that 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. The borrowers ability to make payments is determined
based
9
on a rate in excess of the fully accrued interest rate, which is well above the initial rate on the negative amortization loan. The amount of any payment shortfall is added to the principal
balance of the loan to be repaid through future monthly payments, which, in turn, could cause increases in the principal amount owed by the borrower over the original amount advanced. At December 31, 2009, loans with the potential for negative
amortization were $5.0 million, or 2% of the total loan portfolio, and there were no loans that had increases in principal balance since origination. There was no interest that had been added to the principal of such negative amortization loans at
December 31, 2009.
In addition, the Company has purchased from First Republic 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. As of December 31, 2009, approximately
$181.3 million of loans, or 72% of the Companys single family loan portfolio, allowed interest only payments for varying periods. These interest only loans had an average LTV ratio of approximately 58%, based on appraised values at the
time of origination. None of the Companys interest only home loans had an LTV ratio at origination of more than 80%.
Underwriting Standards.
First Republic has represented to the Company that all of the Mortgage Loans in the portfolio were originated or subsequently underwritten generally in accordance with the underwriting policies customarily
employed by First Republic during the period in which the Mortgage Loans were originated or purchased by First Republic, as applicable.
In the mortgage loan approval process, First Republic assesses both the borrowers ability to repay the mortgage loan and the adequacy of the proposed security. A borrowers credit score is
considered but is not the sole determining factor in the decision to approve a loan. Credit policies and procedures are established by First Republic, which delegates credit approval to certain executive officers and senior credit officers in
accordance with such policies and procedures.
The approval process for each type of mortgage loan includes on-site appraisals
of the properties securing such loans and a review of the applicants financial statements and credit, payment and banking history, financial statements of any guarantors, and tax returns of guarantors of commercial mortgage loans. First
Republic generally lends up to 80% of the appraised value at the time of origination of single family residential owner-occupied dwellings. The maximum loan-to-value ratio at origination generally applied by First Republic for multifamily mortgage
loans has been 75% of the lesser of the appraised value of the property or the sale price and 70% for commercial mortgage loans.
Substantially all fixed-rate mortgage loans originated by First Republic contain a due-on-sale clause providing that First Republic may declare a mortgage loan immediately due and payable in the event, among other things, that
the borrower sells the property securing the loan without the consent of First Republic. First Republics ARMs generally are assumable by a borrower determined to be qualified by First Republic.
Geographic Distribution; Loan Size
. At December 31, 2009, approximately 77% of Mortgage Loans, based on carrying value, were
secured by properties located in California. Consequently, the Companys loan portfolio would be particularly affected by adverse developments in California, including economic, political and business developments and natural catastrophes such
as storms or earthquakes, to the extent any such developments may affect the ability or willingness of property owners in that state to make payments of principal and interest on Mortgage Loans. First Republic has historically emphasized and
specialized in the origination of loans that are nonconforming as to size.
Insurance
. First Republic requires title
insurance policies protecting the priority of First Republics liens for all Mortgage Loans and fire and casualty insurance for Mortgage Loans. Generally, for any single family mortgage loan in an amount exceeding 80% of the appraised value of
the security property, First Republic currently requires mortgage insurance from an independent mortgage insurance company. At the time of origination of the single family mortgage loans, each of the primary mortgage insurance policy insurers was
10
approved by Fannie Mae or Freddie Mac. A standard hazard insurance policy is required to be maintained by the mortgagor with respect to each single family mortgage loan in an amount equal to the
maximum replacement cost of the improvements securing such single family mortgage loan or the principal balance of such single family mortgage loan, whichever is less. If the real estate property underlying a single family mortgage loan is located
in a flood zone, the loan may also be covered by a flood insurance policy as required by law. The Company does not maintain any special hazard insurance policy or mortgagor bankruptcy insurance with respect to single family mortgage loans, nor is
any single family mortgage loan insured by the Federal Housing Administration or guaranteed by the Veterans Administration.
The
Companys Relationship with First Republic
Amended and Restated Master Loan Purchase and Servicing Agreement
.
The Company acquires Mortgage Loans from First Republic and First Republic services the Mortgage Loans pursuant to an Amended and Restated Master Loan Purchase and Servicing Agreement (the loan purchase and servicing agreement). First
Republic, as servicer, retains a service fee equal to 0.25% per annum calculated monthly based on the gross average outstanding principal balances of loans in the loan portfolio.
The loan purchase and servicing agreement requires First Republic to service the Mortgage Loans in a manner generally consistent with
accepted secondary market practices, with any servicing guidelines promulgated by the Company and, in the case of single family mortgage loans, with Fannie Mae and Freddie Mac guidelines and procedures. The loan purchase and servicing agreement
requires First Republic to service the Mortgage Loans with a view toward the Companys interests. First Republic collects and remits principal and interest payments, administers mortgage escrow accounts, submits and pursues insurance claims,
and initiates and supervises foreclosure proceedings on the Mortgage Loans it services. First Republic also provides accounting and reporting services required by the Company for the Mortgage Loans. The loan purchase and servicing agreement requires
First Republic to follow collection procedures customary in the industry, including contacting delinquent borrowers and supervising both foreclosures and property disposition in the event of unremedied defaults in accordance with servicing
guidelines promulgated by the Company. First Republic may from time to time transfer, assign and sell all of its servicing obligations under the loan purchase and servicing agreement, subject to the Companys reasonable consent.
First Republic is required to pay all expenses related to the performance of its duties under the loan purchase and servicing agreement.
First Republic is required to make advances of the taxes and required insurance premiums that are not collected from borrowers with respect to any mortgage loan serviced by it, unless it determines that such advances are nonrecoverable from the
mortgagor, insurance proceeds or other sources with respect to such mortgage loan. If First Republic makes advances, First Republic generally is reimbursed prior to the Companys receipt of the proceeds of the mortgage loan. First Republic also
is entitled to reimbursement for expenses incurred by it in connection with the liquidation of defaulted mortgage loans serviced by it and in connection with the restoration of mortgaged property. First Republic is responsible to the Company for any
loss suffered as a result of First Republics failure to make and pursue timely claims or as a result of actions taken or omissions made by First Republic that cause the policies to be canceled by the insurer. First Republic may institute
foreclosure proceedings, exercise any power of sale contained in any mortgage or deed of trust, obtain a deed in lieu of foreclosure or otherwise, hold mortgage proceeds for the Companys benefit and acquire title to mortgaged property
underlying a mortgage loan by operation of law or otherwise in accordance with the terms of the loan purchase and servicing agreement. However, First Republic does not have the authority to enter into contracts in the Companys name.
The Company may terminate the loan purchase and servicing agreement upon the occurrence of one or more events specified in
the agreement. These events relate generally to First Republics proper and timely performance of its duties and obligations under the loan purchasing and servicing agreement. The Company may not terminate the loan purchasing and servicing
agreement without the approval of a majority of its independent directors.
11
As is customary in the mortgage loan servicing industry, First Republic is entitled to
retain any late payment charges, prepayment fees, penalties and assumption fees collected in connection with the Mortgage Loans serviced by it. First Republic receives any benefit derived from interest earned on collected principal and interest
payments between the date of collection and the date of remittance to the Company and from interest earned on tax and insurance impound funds with respect to Mortgage Loans serviced by it.
When any mortgaged property underlying a mortgage loan is conveyed by a mortgagor, First Republic generally enforces any
due-on-sale clause contained in the mortgage loan, to the extent permitted under applicable law and governmental regulations. The terms of a particular mortgage loan or applicable law, however, may prohibit First Republic from exercising
the due-on-sale clause under certain circumstances related to the security underlying the mortgage loan and the buyers ability to fulfill the obligations under the loan. Upon a formal assumption of a mortgage loan by a permitted
transferee, a fee equal to a specified percentage of the outstanding principal balance of the mortgage loan is often required, which First Republic retains as additional servicing compensation.
Amended and Restated Advisory Agreement.
The Company has an Amended and Restated Advisory Agreement (the advisory
agreement) with First Republic pursuant to which First Republic administers the Companys day-to-day operations. As advisor, First Republic is responsible for: (i) monitoring the credit quality of the Mortgage Assets;
(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; and
(iii) monitoring the Companys compliance with the requirements necessary to qualify as a REIT for federal income tax purposes. First Republic may from time to time subcontract all or a portion of its obligations under the advisory
agreement to one or more of its affiliates involved in the business of mortgage finance and the administration of Mortgage Assets. First Republic may, with the approval of a majority of the Companys Board of Directors as well as a majority of
the Companys independent directors, subcontract all or a portion of its obligations under the advisory agreement to unrelated third parties. First Republic, in connection with the subcontracting of any of its obligations under the advisory
agreement, may not be discharged or relieved in any respect from its obligations under the advisory agreement.
First Republic
has substantial experience in the mortgage lending industry, both in the origination and in the servicing of Mortgage Loans. At December 31, 2009, First Republic owned approximately $10.1 billion of single family mortgage loans, $2.1 billion of
multifamily mortgage loans and $5.0 billion of other loans secured by real estate. In its single family mortgage loan business, First Republic has historically originated loans and then sold or securitized a portion of such loans to investors in the
secondary market, while generally retaining the rights to service the loans. At December 31, 2009, in addition to loans serviced for its own portfolio, First Republic serviced mortgage loans having an aggregate principal balance of
approximately $4.0 billion.
The advisory agreement had an initial term of one year, and it has been and will be renewed for
additional one-year periods unless the Company terminates the advisory agreement, which the Company may do at any time upon 90 days prior written notice to First Republic. First Republic cannot refuse the Companys request to renew the
advisory agreement. As long as any of its preferred stock remains outstanding, any decision by the Company either to renew the advisory agreement or to terminate the advisory agreement must be approved by a majority of the Companys Board of
Directors, as well as by a majority of its independent directors. During 2009, First Republic received an annual advisory fee equal to $100,000 payable in equal quarterly installments with respect to the advisory and management services. For the
calendar year 2010, the Company and First Republic have maintained the fee at $100,000, payable in equal quarterly installments. That fee may be increased with the approval of a majority of the Companys Board of Directors, including a majority
of its independent directors.
As a result of the Companys relationship with First Republic, certain conflicts of
interest may arise with respect to transactions, including future acquisitions of Mortgage Assets from First Republic, servicing Mortgage Loans, future dispositions of Mortgage Assets to First Republic, and the renewal, termination or modification
of the advisory agreement or the loan purchasing and servicing agreement.
12
Employees
The Company currently has no employees. The Company does not anticipate that it will require any employees because it has retained First Republic to perform certain functions pursuant to the loan purchase
and servicing agreement and the advisory agreement. However, the Company has five executive officers who are described in Item 10 of this report. Each of the Companys executive officers is a current or former employee of First Republic.
The Company maintains corporate records and audited financial statements that are separate from those of First Republic. Currently, none of the Companys officers or directors has any direct or indirect pecuniary interest in any Mortgage Asset
owned by the Company, and the Company does not expect any of its officers, directors or employees (if any) to have any direct or indirect pecuniary interest in any Mortgage Asset acquired or disposed of in any transaction in which the Company has an
interest or will engage in acquiring, holding and managing Mortgage Assets. However, there is no provision in the Companys articles of incorporation prohibiting such persons from having direct or indirect interests in Mortgage Loans. See
Management Policies and ProgramsConflict of Interest Policies.
Competition
The Company does not engage in the business of originating mortgage loans. While the Company intends to acquire additional Mortgage Assets,
the Company anticipates that these additional Mortgage Assets will be acquired from First Republic. Accordingly, the Company does not compete or expect to compete with mortgage conduit programs, investment banking firms, savings and loan
associations, banks, thrift and loan associations, finance companies, mortgage bankers or insurance companies in acquiring Mortgage Assets. First Republic, from which the Company expects to continue to purchase most or all of its Mortgage Assets in
the future, will face competition from these organizations.
Qualification as a REIT
The Company elected to be taxed as a REIT commencing with its initial taxable year ended December 31, 1999 and intends to comply with
the provisions of the Internal Revenue Code with respect thereto. The Company qualifies as a REIT if 90% of the Companys adjusted REIT taxable income is distributed to stockholders and as long as certain assets, income and stock ownership
tests are met. For 2009, 2008 and 2007, all Internal Revenue Code requirements for a REIT were met.
BANA is the holder of
100% of the Companys outstanding common stock. Prior to BANA, MLFSB and First Republic were the holders of such shares. Accordingly, the Company is a controlled company within the meaning of the rules of the NASDAQ Stock Market.
Since 2004, the dividend on the common stock owned by BANA, MLFSB and First Republic was treated as a consent dividend under Section 565 of the Internal Revenue Code. For each year prior to 2004, the Company paid 100% of its net earnings as
cash dividends to the holders of its common stock.
Available Information
The Companys annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are accessible, free of charge, on the SECs website,
www.sec.gov
, as soon as reasonably practicable after those reports have been electronically filed or
submitted to the SEC.
Current and future
weakness in the economy, in the real estate market and in the capital markets, including specific weakness within the Companys geographic footprint, may adversely affect us and the value of real estate collateral securing our loans.
Based on a number of indicators, the United States economy is experiencing a recession. If the U.S. economy in general and
the local economies in which we conduct operations continue to be weak for an extended
13
period of time, this could result in, among other things, a deterioration of credit quality or a reduced demand for credit, including a resultant effect on the Companys loan portfolio and
allowance for loan losses. This could occur at a time when the value of the real estate collateral securing the Companys loans is lower than at loan origination.
Many borrowers have been experiencing the effects of the significant decline in the credit markets and reductions in the availability of credit which may also adversely impact the ability of borrowers to
pay amounts owed. A significant portion of the Companys residential and multifamily mortgage loan portfolios are comprised of borrowers in California and the Northeastern region of the United States, which markets have been particularly
adversely affected by declines in real estate value, declines in home sale volumes, and declines in new home building. Additionally, a number of industries, including the financial services sector, have experienced a downturn in earnings and equity
valuations resulting in fewer jobs, reduced incentive compensation, lower liquidity and lower net worth. These factors could result in loan delinquencies and charge-offs in future periods, which could materially adversely affect the Companys
financial condition and results of operations.
Beginning in 2007 and continuing throughout 2008 and 2009, disruptions in the
capital markets substantially limited the ability of mortgage originators, including First Republic, to sell mortgage loans to the capital markets through whole loan sales or securitization. As a result, First Republic experienced a general loss of
liquidity in most secondary markets for both its loan and asset-backed securities holdings, and this condition has persisted to the present time. The Company cannot forecast if or when either specific secondary markets or broader market liquidity
conditions will see improvement from current stresses.
The Companys results will be affected by factors beyond its control.
The value of the Companys Mortgage Loans and the amount of cash flow generated by its portfolio will be affected by a
number of factors beyond the Companys control. These factors may include the following:
|
|
|
the condition of the national economy and the local economies of the regions in which the Companys mortgage borrowers live, including the recent
economic downturn and the financial and credit crisis, particularly insofar as they affect interest rates and real estate values;
|
|
|
|
sudden or unexpected changes in economic conditions, including changes that might result from recent or future terrorist attacks and the U.S. response
to such attacks;
|
|
|
|
the financial condition of the Companys borrowers and those borrowers ability to make mortgage payments;
|
|
|
|
factors that affect the rates at which obligors on Mortgage Loans may refinance them, including interest rate levels and the availability of credit;
and
|
|
|
|
other factors that affect the affordability and value of real estate, including energy costs and real estate taxes.
|
The Companys loans are concentrated in California and adverse conditions there could adversely affect its operations.
At December 31, 2009, approximately 77% of Mortgage Loans (by carrying value) were secured by properties located in the urban coastal
markets of California in which most of First Republics offices are located. Adverse economic, political or business developments or natural hazards have affected California and the ability of property owners there to make payments of principal
and interest on the underlying mortgages and the values of those properties. If Californias economic, political or business conditions were to deteriorate substantially and the property values of real estate securing the Companys loans
were to continue to decline, the Company would experience higher rates of loss and delinquency on Mortgage Loans than if the loans were more geographically
14
diverse. California has experienced dramatic volatility in energy prices, periodic energy supply shortages and a downturn in some technology-oriented industry sectors. These conditions could
adversely affect the Companys mortgage loan portfolio and thus its future ability to pay dividends on its preferred stock.
The
Mortgage Loans are concentrated in single family residential mortgage loans, including adjustable rate, interest-only and jumbo mortgages, and borrowers may be more likely to default if mortgage credit is not readily available.
Approximately 92% of the Mortgage Loans are secured by single family residencies. Disruptions in capital markets and the deterioration in
housing markets and general economic conditions caused residential real estate lenders to tighten underwriting standards and adjust loan pricing. These actions have reduced the availability of mortgage credit to borrowers and may have contributed to
the significant increase in the number of homeowners who became delinquent on their home loans. This reduction in available mortgage credit may continue if capital markets, housing markets and general economic conditions remain weak, and could
impair the ability of Mortgage Loans borrowers to repay their loans if they are not able to restructure or refinance their loans when needed. In particular, approximately 57% of the Mortgage Loans are currently adjustable rate mortgage loans, and
33% of the Mortgage Loans are hybrid adjustable rate loans that will adjust within one to seven years in the future. Any increase in prevailing market interest rates may result in increased payments for borrowers who have adjustable rate mortgage
loans. The inability of borrowers to refinance their loans, particularly while experiencing increases in the monthly payment on their loan amounts, increases the risk that borrowers will become delinquent and ultimately default on their loans.
The Company may encounter delays and obstacles in liquidating defaulted mortgage loans.
Even assuming that the mortgaged properties underlying the Companys Mortgage Loans provide adequate security for the Mortgage Loans,
the Company could encounter substantial delays in connection with the liquidation of defaulted mortgage loans, with corresponding delays in the receipt of related proceeds. Until the Company receives the proceeds, the Company will be unable to
acquire new mortgage loans or other mortgage assets that produce income that can be used to pay dividends to the holders of its preferred stock.
An action to foreclose on a mortgaged property securing a mortgage loan is regulated by state statutes and rules and is subject to many of the delays and expenses of other lawsuits if the borrower or
other creditors raise defenses or counterclaims are interposed, sometimes requiring several years to complete. Furthermore, in some states, including California, an action to obtain a deficiency judgment is not permitted following a nonjudicial sale
of a mortgaged property. In the event of a default by a mortgagor, these restrictions, among other things, may impede the ability of First Republic to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts
due on the related mortgage loan. In addition, the servicer will be entitled to deduct from collections received all expenses reasonably incurred in attempting to recover amounts due and not yet repaid on liquidated mortgage loans, including legal
fees and costs of legal action, real estate taxes, insurance and maintenance and preservation expenses, thereby reducing amounts available with respect to the mortgage loans.
Certain of the Companys Mortgage Loans are secured by interests in cooperative associations and their related residences. Most
cooperative associations have highly restrictive rules regarding eligibility to purchase shares in the cooperative association and occupy the related residences. These restrictions may have an adverse effect on the time necessary to liquidate the
Companys interest in such cooperative associations and realize the proceeds from the sale of such cooperative residences.
The
Company may not be able to continue to purchase loans at the same volumes or with the same yields as it has historically purchased.
Although not required to do so, to date the Company has purchased all of the loans in its portfolio from First Republic. Almost all of these loans were originated by First Republic. The quantity and quality of future loan originations by
First Republic will depend on conditions in the markets in which First Republic operates,
15
particularly real estate values and interest rates. Consequently, the Company cannot provide assurance that First Republic will be able to originate loans at the same volumes or with the same
yields as it has historically originated. If the volume of loans originated by First Republic declines or the yields on those loans decline further, the Company would experience a material adverse effect on its business, financial condition and
results of operations.
Declines in interest rates could reduce earnings and affect the Companys ability to pay dividends.
The Companys income consists primarily of interest earned on Mortgage Loans and short-term investments. A
significant portion of Mortgage Loans bear interest at adjustable rates. If there is a decline in interest rates, the Company will experience a decrease in income available to stockholders. If interest rates decline, the Company may also experience
an increase in prepayments on Mortgage Loans and may find it difficult to purchase additional mortgage assets bearing rates sufficient to support the payment of dividends on preferred stock. Because the dividend rates on the preferred stock are
fixed, a significant and sustained decline in interest rates could materially adversely affect the Companys ability to pay dividends on preferred stock. Although the Company is permitted to do so, it does not currently hedge its interest rate
exposure and does not expect to do so.
The Company does not have insurance to cover its exposure to borrowers defaults and
bankruptcies or to hazard losses that are not covered by its standard hazard insurance policies.
The Company generally
does not obtain general credit enhancements such as mortgagor bankruptcy insurance or obtain special hazard insurance for Mortgage Assets, other than standard hazard insurance, which, in each case, will only relate to individual mortgage loans.
Accordingly, the Company will be subject to risks of borrower defaults and bankruptcies and special hazard losses, such as losses occurring from earthquakes or floods that are not covered by standard hazard insurance. In the event of a default on
any mortgage loan held by the Company resulting from declining property values or worsening economic conditions, among other factors, the Company would bear the risk of loss of principal to the extent of any deficiency between (i) the value of
the related mortgaged property plus any payments from an insurer (or guarantor in the case of commercial mortgage loans), and (ii) the amount owing on the mortgage loan.
The Company could be held responsible for environmental liabilities of properties it acquires through foreclosure.
If the Company is forced to foreclose on a defaulted mortgage loan to recover its investment, it may be subject to environmental liabilities related to the underlying real property. Hazardous substances
or wastes, contaminants, pollutants or sources thereof may be discovered on properties during its ownership or after a sale to a third party. The amount of environmental liability could exceed the value of the real property. There can be no
assurance that the Company would not be fully liable for the entire cost of any removal and clean up on an acquired property, that the cost of removal and clean up would not exceed the value of the property or that the Company could recoup any of
the costs from any third party. In addition, the Company may find it difficult or impossible to sell the property prior to or following any environmental remediation.
The Company may acquire different kinds of mortgage loans in the future, which could be riskier than the loans it currently holds.
Through the first quarter of 2003, the Companys Mortgage Loans consisted entirely of single family mortgages. Beginning in the second
quarter of 2003, the Company also began acquiring multifamily real estate secured mortgages from First Republic, which can be riskier investments than single family mortgage loans. The Company expects to acquire more multifamily mortgages.
Additionally, although there are no current plans to do so, the Company may acquire other types of mortgages that may have shorter maturities and may not be fully amortizing, meaning that they may have significant principal balances or
balloon payments due on maturity. The properties that secure commercial mortgage loans, particularly industrial and warehouse properties, are
16
generally subject to greater environmental risks than non-commercial properties and the corresponding burdens and costs of compliance with environmental laws and regulations. Also, there may be
costs and delays involved in enforcing rights of property owners against tenants in default under the terms of leases with respect to multifamily residential or commercial properties. For example, tenants may seek the protection of bankruptcy laws,
which could result in lease terminations.
The Company expects to acquire all mortgage loans from First Republic, and the composition of
the loan portfolio will be affected by changes in First Republics credit policies.
The Company has acquired Mortgage
Loans from First Republic and, although it is not required to do so, it expects to continue to acquire all mortgage loans from First Republic in the future. If First Republic were to relax its credit policies, for example, by lowering the credit
quality standards it applies, or increasing the loan-to-value ratios it accepts, the mortgages subsequently purchased would be riskier investments.
The Company is dependent upon First Republic as advisor and servicer.
First Republic is involved in virtually
every aspect of the Companys business. The Company has no employees because it has retained First Republic to perform all necessary functions pursuant to the advisory agreement and the loan purchase and servicing agreement. Accordingly, the
Company is dependent for the selection, structuring and monitoring of Mortgage Assets on the officers and employees of First Republic, as advisor. In addition, the Company is dependent upon the expertise of First Republic, as servicer, for the
servicing of the Mortgage Loans. Neither the advisory agreement nor the loan purchasing and servicing agreement resulted from arms-length negotiations. The Company also faces significant restrictions on obtaining such services from third
parties; the termination of the advisory agreement and the loan purchase and servicing agreement with First Republic requires the affirmative vote of a majority of the Board of Directors, a majority of which is composed of directors and officers of
First Republic. With the approval of a majority of independent directors, First Republic, as advisor and servicer, may subcontract all or a portion of its obligations under these agreements to non-affiliates involved in the business of managing
mortgage assets. In the event First Republic subcontracts its obligations in such a manner, the Company will be dependent upon the subcontractor to provide services.
The Companys relationship with BANA and First Republic creates conflicts of interest.
BANA is the holder of 100% of the common stock of the Company, and First Republic is a division of BANA. First Republic is, and is expected to continue to be, involved in virtually every aspect of the
Companys operations. First Republic will administer the Companys day-to-day activities in its role as advisor under the advisory agreement. First Republic also acts as servicer of the Mortgage Loans under the loan purchasing and
servicing agreement. In addition, other than the independent directors, all of the Companys officers and directors are also officers, former officers or directors of First Republic. Their compensation is paid by First Republic, and they have
substantial responsibilities in connection with their work as employees, officers or directors of First Republic. As the holder of 100% of outstanding voting shares of the Company, BANA has the right to elect all of the directors, including the
independent directors. Following the transaction described in Item 1 of this report under GeneralRecent Development, First Republic will have the right to elect all of the directors.
First Republic has interests that are dissimilar to or in conflict with the Companys interests. Consequently, conflicts of interest
arise with respect to the Companys transactions with First Republic, including without limitation: acquiring mortgage assets from First Republic; servicing mortgage loans; and renewing, terminating or modifying the advisory agreement or the
loan purchase and servicing agreement. It is the Companys intention and the intention of First Republic that any agreements and transactions between the Company, on the one hand, and First Republic, on the other hand, are fair to both parties
and consistent with market terms, including the price to acquire mortgage assets or in connection with servicing Mortgage Loans. There is a requirement in the terms of the preferred stock that a majority of the independent directors must approve
certain Company actions to ensure fair dealings between the Company, First Republic and BANA, although the independent directors are appointed by BANA. There can be no assurance, however, that such agreements or transactions will be on terms as
favorable to the Company as those that could have been obtained from unaffiliated third parties.
17
Although not required to do so, the Company acquires all mortgage assets from First Republic
under the loan purchase and servicing agreement. The Company does not have independent underwriting criteria for the loans that it purchases and relies on First Republics underwriting standards for loan originations. Those criteria may change
over time. The Board of Directors has adopted certain policies to guide the acquisition and disposition of assets, but these policies may be revised from time to time at the discretion of the Board of Directors without a vote of shareholders. The
Company intends to acquire in the future all or substantially all mortgage assets from First Republic on terms that are comparable to those that could be obtained from unrelated third parties, but the Company cannot provide assurance that this will
always be the case.
As a result of BANA being the controlling shareholder of the Company and First Republic being the advisor
of the Company, it is possible that, notwithstanding good faith belief to the contrary, the Company in fact pays more for these loans than if acquired from an unaffiliated third party, and loans purchased from First Republic in the future may be of
lesser quality than those in the current loan portfolio.
If the Company does not distribute 90% of its net taxable income, it may not
qualify as a REIT.
In order to qualify as a REIT, the Company generally is required each year to distribute to its
shareholders at least 90% of its REIT taxable income. The Company may retain the remainder of its REIT taxable income or all or part of its net capital gain, but will be subject to U.S. federal income tax at regular corporate rates on that income.
In addition, the Company is subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions considered as paid by the Company with respect to any calendar year are less than the sum of (i) 85% of the
Companys ordinary income for the calendar year, (ii) 95% of the Companys capital gains net income for the calendar year and (iii) 100% of any undistributed income from prior periods. Under certain circumstances, federal or
state regulatory authorities may restrict the Companys ability, as a subsidiary of BANA, to make distributions to its shareholders in an amount necessary to retain its REIT qualification. Such a restriction could result in the Company failing
to qualify as a REIT. To the extent the Companys REIT taxable income may exceed the actual cash received for a particular period, it may not have sufficient liquidity to make distributions necessary to retain its REIT qualification or may need
to borrow funds on a short-term basis to meet the REIT distribution requirements even if then prevailing market conditions are not favorable for such a borrowing.
If ownership of the Company becomes concentrated in a small number of individuals, the Company may fail to qualify as a REIT.
To maintain the Companys status as a REIT, not more than 50% in value of its outstanding shares may be owned, directly or indirectly,
by five or fewer individuals, as defined in the Internal Revenue Code to include certain entities, at any time during the last half of each taxable year. The Company believes that it currently satisfies, and expects to continue to satisfy, this
requirement because for this purpose its common stock held by BANA is treated as held by Bank of America, the parent company of BANA. However, the Company must also have 100 or more shareholders in order to meet the beneficial ownership requirements
of a qualified REIT. The Company may have difficulty monitoring the daily ownership and constructive ownership of its outstanding shares and, therefore, the Company cannot assure that it will continue to meet the beneficial ownership requirement. In
addition, while the fact that the Companys preferred stock may be redeemed or exchanged will not affect the Companys REIT status prior to any redemption or exchange, the redemption or exchange of all or a part of the preferred stock
could adversely affect the Companys ability to satisfy the beneficial ownership requirements in the future.
If the Company were to
fail to qualify as a REIT, it would be subject to U.S. federal income tax at regular corporate rates.
If the Company were
to fail to qualify as a REIT for any taxable year, it would be subject to federal income tax, including any applicable alternative minimum tax, on taxable income at regular corporate rates. As a result,
18
the amount available for distribution to shareholders, including the holders of preferred stock, would be reduced for the year or years involved, and the Company would not be subject to the REIT
requirement to distribute substantially all of its net taxable income. In addition, unless entitled to relief under statutory provisions, the Company would be disqualified from treatment as a REIT for the four taxable years following the year during
which qualification was lost. The failure to qualify as a REIT would reduce net earnings available for distribution to shareholders, including holders of preferred stock, because of the additional federal tax liability for the year or years
involved. Failure to qualify as a REIT would neither by itself give the Company the right to redeem the preferred stock, nor would it give the holders of the preferred stock the right to have their shares redeemed.
Although the Company intends to operate in a manner designed to qualify as a REIT, future economic, market, legal, tax or other
considerations, including actions by banking regulators as discussed below, may determine that it is in the best interest of the Company and in the best interest of holders of common stock and preferred stock to revoke the Companys REIT
election. The tax law generally prohibits electing treatment as a REIT for the four taxable years following the year of any such revocation.
Bank regulators may limit the Companys ability to implement its business plan and may restrict the ability to pay dividends.
Because the Company is a wholly owned subsidiary of BANA and an indirect subsidiary of Bank of America, federal regulatory authorities have the right to examine the Company and its activities and under
certain circumstances, to impose restrictions on Bank of America, BANA or the Company that could impact the Companys ability to conduct business according to its business plan, which could materially adversely affect the Companys
financial condition or results of operations. Such regulatory actions might include the following:
|
|
|
If BANAs regulators were to determine that BANAs relationship to the Company results in an unsafe and unsound banking practice, the
regulators could restrict the Companys ability to acquire or transfer assets, make distributions to shareholders, including dividends on the preferred stock, or redeem the preferred stock or even require BANA to sever its relationship with or
divest its ownership interest in the Company. These types of actions potentially could have a material adverse effect on the Companys financial condition and results of operations.
|
|
|
|
Regulators also could prohibit or limit the payment of dividends on the preferred stock if BANA were to become undercapitalized. Under current
regulations and guidelines, BANA is well-capitalized, but no assurance can be given that this will always be the case.
|
|
|
|
BANAs regulators could limit or prohibit the payment of dividends on the preferred stock, if it is determined that the payment of those dividends
constituted a capital distribution by BANA and that BANAs earnings and regulatory capital levels were below specified levels. Capital distributions are defined to include payment of dividends, share repurchases, cash-out mergers and other
distributions charged against the capital accounts of an institution.
|
|
|
|
The Company may be affected by increased regulation and regulatory and political scrutiny of the financial services industry, including but not limited
to as a result of Bank of Americas or BANAs having participated in the U.S. Treasurys Troubled Asset Relief Program (TARP), the U.S. Treasurys Capital Purchase Program, the U.S. Treasurys Financial Stability
Plan, the U.S. Treasurys Making Home Affordable program, the FDIC-insured Temporary Liquidity Guarantee Program, the FDIC-insured Transaction Account Guarantee Program, or as a result of the current economic and political environment. No
assurances can be made that federal regulators (or the U.S. Congress) will not impose operating restrictions, capital requirements, special taxes, assessments or other limitations on Bank of America, BANA or their affiliates (including the Company)
that could adversely impact the Companys ability to conduct business according to its business plan, including its ability to make dividend payments or repurchase shares.
|
19
|
|
|
If regulators were to impose restrictions on payment of dividends, the Company could be prevented from complying with the requirement for continued
REIT status to distribute 90% of REIT taxable income for any calendar year. If, as a result, the Company ceased to qualify as a REIT, it would become subject to corporate level taxation. Such additional taxation would reduce the amount of income
available to pay dividends.
|
If the Company loses its exemption under the Investment Company Act, it could have a
material adverse effect on the Company.
The Company believes that it is not, and intends to conduct its operations so as
not to be, required to register as an investment company under the Investment Company Act. Under the Investment Company Act, a non-exempt entity that is an investment company is required to register with the SEC and is subject to extensive,
restrictive and potentially adverse regulation relating to, among other things, operating methods, management, capital structure, dividends and transactions with affiliates. The Investment Company Act exempts entities that, directly or through
majority-owned subsidiaries, are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate (Qualifying Interests). Under current interpretations of the
staff of the SEC, in order to qualify for this exemption, the Company, among other things, must maintain at least 55% of its assets in Qualifying Interests and also may be required to maintain an additional 25% in Qualifying Interests or other real
estate related assets. The assets that the Company may acquire therefore may be limited by the provisions of the Investment Company Act. The Investment Company Act does not treat cash and cash equivalents as either Qualifying Interests or other real
estate related assets.
Based on the criteria outlined above, the Company believes that at December 31, 2009 its
Qualifying Interests comprised well in excess of 80% of the estimated fair market value of its total assets. As a result, the Company believes that it is not required to register as an investment company under the Investment Company Act. The Company
does not intend, however, to seek an exemptive order, no-action letter or other form of interpretive guidance from the SEC on this position. If the SEC were to take a different position with respect to whether the Companys assets constitute
Qualifying Interests, the Company could be required either (i) to change the manner in which it conducts its operations to avoid being required to register as an investment company, or (ii) to register as an investment company, either of
which could have a material adverse effect on the Companys ability to make dividend payments and, accordingly, the trading price of its preferred stock. Further, in order to ensure that the Company at all times continues to qualify for the
above exemption from the Investment Company Act, the Company may be required at times to adopt less efficient methods of financing certain assets than would otherwise be the case and may be precluded from acquiring certain types of assets whose
yield is higher than the yield on assets that could be purchased in a manner consistent with the exemption. The net effect of these factors may be to lower at times the Companys net interest income. Finally, if the Company were an unregistered
investment company, there would be a risk that it would be subject to monetary penalties and injunctive relief in an action brought by the SEC, that it would be unable to enforce contracts with third parties and that third parties could seek to
obtain rescission of transactions undertaken during the period the Company was determined to be an unregistered investment company.
Item 1B.
|
UNRESOLVED STAFF COMMENTS.
|
Not applicable.
The Company
neither owns nor leases any property.
Item 3.
|
LEGAL PROCEEDINGS.
|
The
Company is not currently involved in nor, to its knowledge, currently threatened with any material legal proceedings.
20
PART II
Item 5.
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
|
Common Stock
There is no
established trading market for the Companys common stock, and the common stock is not listed on any exchange or automated quotation system. At December 31, 2009, the Company was authorized to issue 75,000,000 shares of common stock with a
par value of $0.01 per share, of which 30,538,277 shares of common stock were outstanding and owned by BANA. The Company currently expects to pay to holders of its common stock an aggregate amount of dividends equal to not less than 90% of the
Companys REIT taxable income in order to remain qualified as a REIT. At the end of each year, the Company had declared dividends on its common stock in an aggregate amount of $121,000 for 2009, $4,442,000 for 2008 and $5,870,000 for 2007, in
each case representing 100% of the Companys REIT taxable income. Dividends on common stock generally cannot be paid, however, for periods in which less than full dividends are paid on the Companys preferred stock. The dividends paid to
BANA in 2009 and to MLFSB in 2008 and 2007 were treated as consent dividends under Section 565 of the Internal Revenue Code.
Series A
Preferred Stock
In June 1999, the Company completed a private offering of 55,000 shares of its Perpetual, Exchangeable,
Noncumulative Series A Preferred Stock and received proceeds of $55 million. First Republic paid all expenses of the offering, including underwriting commissions and discounts. The Series A Preferred Stock have not been registered under the
Securities Act or any other applicable securities law. The Series A Preferred Stock may not be resold, pledged or otherwise transferred by the purchaser or any subsequent holder except (A)(i) to a person whom the transferor reasonably believes is a
Qualified Institutional Buyer (QIB) in a transaction meeting the requirements of Rule 144A under the Securities Act; (ii) to institutional accredited investors (of the type described in Rule 501(a)(1) or (3) under the
Securities Act) in transactions exempt from the registration requirements of the Securities Act; or (iii) pursuant to the exemption from registration under the Securities Act provided by Rule 144 (if available), and (B) in accordance with
all applicable securities laws of the states of the United States. The Series A Preferred Stock are not listed on any national securities exchange or national securities association. The Series A Preferred Stock are eligible for trading in the
Private Offerings, Resales and Trading through Automated Linkages System of the National Association of Securities Dealers (PORTAL).
The Company used the proceeds from the offering to fund a dividend distribution to First Republic as the then holder of all of the outstanding shares of its common stock.
The Series A Preferred Stock are redeemable at the option of the Company at any time beginning June 1, 2009. The Series A Preferred
Stock are redeemable at a cash redemption price equal to the liquidation preference plus any accrued and unpaid dividends. The redemption premium per share is equal to (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 Stock 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 Stock, if authorized and declared, are payable semiannually in arrears on June 30 and December 30 of each year. Dividends on the Series A Preferred Stock were
$5,807,000 for the year ended December 31, 2009, $5,775,000 for the year ended December 26, 2008 and $5,743,000 for the year ended December 28, 2007.
Following the Restructuring, the Companys Board of Directors approved and adopted amendments to the Certificate of Designations of the Series A Preferred Stock, which 1) suspended the automatic
exchange provisions under certain circumstances contained in the Certificate of Designations so long as BANA has no
21
preferred stock authorized for such automatic exchange, 2) updated references to the new parent company and its primary regulator, and 3) made other non-substantive and conforming changes and
clarified existing provisions.
Series B Preferred Stock
In January 2002, the Company issued 1,680,000 shares of its 8.875% Noncumulative Perpetual Series B Preferred Stock in a public offering. On November 19, 2007 (the Redemption Date), the
Company redeemed the Series B Preferred Stock at a total redemption price of $42.5 million, which represented $25.00 per share plus accrued and unpaid dividends to the Redemption Date at a rate of $0.296 per share of all the issued and outstanding
Series B Preferred Stock.
Series C Preferred Stock
In June 2001, the Company issued 7,000 shares of its 5.7% Noncumulative Series C Exchangeable Preferred Stock in a private placement to a single holder and received proceeds of $7 million. In June 2007,
the holder of the Series C Preferred Stock elected to exercise the right to convert all of the shares into common stock of First Republic. The conversion was pursuant to the terms set forth in the certificate of designations governing the Series C
Preferred Stock. The former holder of the Series C Preferred Stock has no further rights arising out of the ownership of such shares.
Series D Preferred Stock
In June 2003, the Company completed a public offering and received proceeds of $60
million from the issuance of 2,400,000 shares of its 7.25% Noncumulative Perpetual Series D Preferred Stock. First Republic paid all expenses of the offering, including underwriting commissions and discounts. The Series D Preferred Stock are quoted
on the NASDAQ Global Market under the symbol FRCCO. The Series D Preferred Stock are redeemable at the option of the Company at any time since June 27, 2008 at the redemption price of $25 per share, plus accrued and unpaid
dividends. Holders of the Series D Preferred Stock are entitled to receive, if authorized and declared by the Board of Directors of the Company, non-cumulative dividends at a rate of 7.25% per annum or $1.8125 per annum per share. Dividends on
the Series D Preferred Stock are payable quarterly in arrears on March 30, June 30, September 30, and December 30 of each year. Dividends on the Series D Preferred Stock were $4,374,000 for the year ended
December 31, 2009, $4,350,000 for the year ended December 26, 2008 and $4,326,000 for the year ended December 28, 2007.
The Company used the proceeds from the issuance of the Series D Preferred Stock to acquire single family loans and multifamily loans from First Republic.
Following the Restructuring, the Companys Board of Directors approved and adopted amendments to the Certificate of Designations of the Series D Preferred Stock, which 1) suspended the automatic
exchange provisions under certain circumstances contained in the Certificate of Designations so long as BANA has no preferred stock authorized for such automatic exchange, 2) updated references to the new parent company and its primary regulator,
and 3) made other non-substantive and conforming changes and clarified existing provisions.
The following table presents the
high and low sales prices for the Series D Preferred Stock for each quarter in 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
Quarter
|
|
High
|
|
Low
|
|
High
|
|
Low
|
First
|
|
$
|
18.45
|
|
$
|
8.99
|
|
$
|
23.61
|
|
$
|
16.24
|
Second
|
|
$
|
17.85
|
|
$
|
13.00
|
|
$
|
21.50
|
|
$
|
18.32
|
Third
|
|
$
|
20.40
|
|
$
|
16.37
|
|
$
|
22.00
|
|
$
|
11.50
|
Fourth
|
|
$
|
21.00
|
|
$
|
17.90
|
|
$
|
17.99
|
|
$
|
11.73
|
Except under certain
limited circumstances, holders of the Companys preferred stock have no voting rights. Any redemption of the Companys preferred stock would be subject to regulatory approval if these shares are considered Tier 1 capital.
22
Item 6.
|
SELECTED FINANCIAL DATA.
|
The following table presents certain financial data for the years ended December 31, 2009, December 26, 2008, December 28, 2007, and December 31, 2006 and 2005. The selected data presented below under the
captions Selected Balance Sheet Data and Selected Financial Information are derived from the Companys financial statements. The financial statements as of and for the year ended December 31, 2009 have been audited
by PricewaterhouseCoopers LLP. The financial statements as of and for the years ended December 26, 2008 and December 28, 2007 have been audited by Deloitte & Touche LLP. The financial statements as of and for the years ended
December 31, 2006 and 2005 have been audited by KPMG LLP. Each firm is an independent registered public accounting firm. This selected financial data is qualified in its entirety by, and should be read in connection with, the financial
statements, including the notes thereto, included in Item 8 of this report and managements discussion and analysis of the Companys financial condition and results of operation in Item 7 of this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or For the Year Ended
|
|
|
|
December 31,
2009
|
|
|
December 26,
2008
|
|
|
December 28,
2007
|
|
|
December 31,
|
|
($ in thousands)
|
|
|
|
|
2006
|
|
|
2005
|
|
Selected Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
31,115
|
|
|
$
|
81,523
|
|
|
$
|
22,196
|
|
|
$
|
12,813
|
|
|
$
|
17,250
|
|
Single family mortgage loans
|
|
|
243,845
|
|
|
|
194,014
|
|
|
|
237,382
|
|
|
|
288,725
|
|
|
|
283,530
|
|
Multifamily mortgage loans
|
|
|
20,686
|
|
|
|
24,351
|
|
|
|
30,124
|
|
|
|
34,491
|
|
|
|
31,249
|
|
Less: allowance for loan losses
|
|
|
|
|
|
|
(481
|
)
|
|
|
(481
|
)
|
|
|
(481
|
)
|
|
|
(481
|
)
|
Other assets
|
|
|
931
|
|
|
|
1,008
|
|
|
|
1,441
|
|
|
|
1,685
|
|
|
|
1,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
296,577
|
|
|
$
|
300,415
|
|
|
$
|
290,662
|
|
|
$
|
337,233
|
|
|
$
|
333,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends payable
|
|
$
|
|
|
|
$
|
3,919
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Other payables
|
|
|
148
|
|
|
|
172
|
|
|
|
94
|
|
|
|
111
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
148
|
|
|
|
4,091
|
|
|
|
94
|
|
|
|
111
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
|
|
|
55,000
|
|
|
|
55,000
|
|
|
|
55,000
|
|
|
|
55,000
|
|
|
|
55,000
|
|
Series B Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,000
|
|
|
|
42,000
|
|
Series C Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Series D Preferred Stock
|
|
|
60,000
|
|
|
|
60,000
|
|
|
|
60,000
|
|
|
|
60,000
|
|
|
|
60,000
|
|
Common stock
|
|
|
305
|
|
|
|
305
|
|
|
|
305
|
|
|
|
294
|
|
|
|
294
|
|
Additional paid-in capital
|
|
|
177,539
|
|
|
|
179,905
|
|
|
|
175,463
|
|
|
|
173,028
|
|
|
|
168,824
|
|
Retained earnings (dividends in excess of retained earnings)
|
|
|
3,585
|
|
|
|
1,114
|
|
|
|
(200
|
)
|
|
|
(200
|
)
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
296,429
|
|
|
|
296,324
|
|
|
|
290,568
|
|
|
|
337,122
|
|
|
|
332,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
296,577
|
|
|
$
|
300,415
|
|
|
$
|
290,662
|
|
|
$
|
337,233
|
|
|
$
|
333,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Asset Quality Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans
|
|
$
|
628
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Other real estate owned
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Loans 90+ days past due and on accrual status
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Nonperforming assets as a percent of total assets
|
|
|
0.21
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
Loans 90+ days past due and on accrual status, as a percent of total assets
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
Selected Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on loans
|
|
$
|
12,705
|
|
|
$
|
14,561
|
|
|
$
|
18,313
|
|
|
$
|
18,470
|
|
|
$
|
16,327
|
|
Interest on interest-earning deposit with First Republic
|
|
|
1,482
|
|
|
|
1,626
|
|
|
|
1,354
|
|
|
|
264
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
14,187
|
|
|
|
16,187
|
|
|
|
19,667
|
|
|
|
18,734
|
|
|
|
16,509
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
300
|
|
|
|
306
|
|
|
|
315
|
|
|
|
278
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
13,887
|
|
|
|
15,881
|
|
|
|
19,410
|
|
|
|
18,456
|
|
|
|
16,176
|
|
Dividends on preferred stock
|
|
|
10,181
|
|
|
|
10,125
|
|
|
|
13,540
|
|
|
|
14,252
|
|
|
|
14,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
3,706
|
|
|
$
|
5,756
|
|
|
$
|
5,870
|
|
|
$
|
4,204
|
|
|
$
|
1,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to fixed charges
|
|
|
1.36x
|
|
|
|
1.57x
|
|
|
|
1.43x
|
|
|
|
1.30x
|
|
|
|
1.13x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
Critical Accounting Policies
The discussion and analysis of the Companys financial condition and results of operation are based upon the Companys 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 related disclosure of 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. Estimates are based on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of the Companys 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.
The Company also considers purchase accounting to be a critical accounting policy. The Companys assets and liabilities were remeasured as of the Bank of America acquisition date based on their
estimated fair values in accordance with the acquisition method of accounting. (See Note 3, Purchase Accounting Allocation, of the Notes to Financial Statements.) 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 in Item 8 of this report are presented for periods prior to the Bank of America Acquisition (the Predecessor
Company) and subsequent to the Bank of America 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 Notes to Financial Statements and in Item 6 and Item 7 of this report are presented without the
Predecessor Company and Successor Company distinction.
The Companys assets and liabilities were also remeasured as of
the Merrill Lynch & Co. acquisition date based on their estimated fair values. (See Note 3, Purchase Accounting Allocation, of the Notes to Financial Statements.) A vertical line appears on the 2007 Statement of Income in
Item 8 of this report to distinguish between the Companys results of operations prior to and after this initial change of control.
Results of Operations
Overview
Net income was $13,887,000 for 2009, compared with $15,881,000 for 2008 and $19,410,000 for 2007. The decrease in net income for 2009
compared with 2008 and 2007 was primarily due to a decrease in interest income resulting from lower average loan balances. The ratio of earnings to fixed charges was 1.36x for 2009, compared with 1.57x for 2008 and 1.43x for 2007. The decrease in
this ratio in 2009 compared with 2008 was primarily due to lower interest income. The increase in this ratio in 2008 compared with 2007 was primarily due to the conversion of the Series C Preferred Stock and the redemption of Series B Preferred
Stock in 2007. Preferred stock dividend payments were 100% of fixed charges.
24
Total Interest Income
Total interest income decreased in 2009 compared with 2008 and 2007 primarily due to lower average loan balances, and lower coupon rates,
before the impact of discount accretion. The following table presents the average balances, interest income (which includes discount accretion on loans) and yields on the Companys interest-earning assets for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2009
|
|
|
December 26, 2008
|
|
|
December 28, 2007
|
|
($ in thousands)
|
|
Average
Balance
|
|
Interest
Income
|
|
Yield
|
|
|
Average
Balance
|
|
Interest
Income
|
|
Yield
|
|
|
Average
Balance
|
|
Interest
Income
|
|
Yield
|
|
Loans
|
|
$
|
199,392
|
|
$
|
12,705
|
|
6.37
|
%
|
|
$
|
237,093
|
|
$
|
14,561
|
|
6.14
|
%
|
|
$
|
304,270
|
|
$
|
18,313
|
|
6.02
|
%
|
Short-term investments
|
|
|
96,420
|
|
|
1,482
|
|
1.54
|
|
|
|
57,689
|
|
|
1,626
|
|
2.82
|
|
|
|
31,564
|
|
|
1,354
|
|
4.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
295,812
|
|
$
|
14,187
|
|
4.80
|
%
|
|
$
|
294,782
|
|
$
|
16,187
|
|
5.49
|
%
|
|
$
|
335,834
|
|
$
|
19,667
|
|
5.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on Mortgage Loans decreased in 2009, compared with 2008 and 2007, primarily due to
lower average balances as loans have repaid and cash has been accumulated.
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 $522,000 in
2009, $605,000 in 2008 and $752,000 in 2007. The decrease in loan servicing fees for 2009 and 2008 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 decreases in the average yield on loans. The average
yield on loans, including accretion of loan discounts, was 6.37% for 2009, compared with 6.14% for 2008 and 6.02% for 2007. Net discount accretion was $3,585,000 for 2009, $1,314,000 for 2008, and $117,000 for 2007. The increase in net discount
accretion for 2009 is primarily due to the increase in the purchase accounting discount to $12.3 million in the first quarter of 2009. The total net unaccreted purchase accounting discount was $8.7 million at December 31, 2009, compared with
$8.2 million at December 26, 2008.
The weighted average coupon rate on Mortgage Loans decreased to 3.92% at
December 31, 2009 from 4.91% at December 26, 2008 and 6.12% at December 28, 2007. The average net coupon rate has declined in 2009 primarily due to lower market rates of interest. See Quantitative and Qualitative Disclosures
about Market Risks.
Interest income on short-term investments decreased in 2009, compared with 2008, due to lower
interest rates, notwithstanding higher average investment balances. In 2008, interest income on short-term investments increased, compared with 2007, due to higher average balances partially offset by lower interest rates. The average yield on the
Companys interest-bearing money market account decreased 128 basis points in 2009 compared with 2008 and 275 basis points compared with 2007. The average yield on short-term investments has declined primarily due to lower market rates of
interest.
25
Interest income is affected by changes in both asset volume and interest rates. Volume
changes are caused by increases or decreases during the year in the level of average interest-earning assets. Rate changes result from increases or decreases in the yields earned on assets. The following table presents for each of the last two years
a summary of the changes in interest income resulting from changes in the volume of average asset balances and changes in the average yields compared with the preceding year. If significant, the change in interest income due to both volume and rate
has been prorated between the volume and the rate variances based on the dollar amount of each variance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
2008 vs. 2007
|
|
($ in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
Loans
|
|
$
|
(2,388
|
)
|
|
$
|
532
|
|
|
$
|
(1,856
|
)
|
|
$
|
(4,112
|
)
|
|
$
|
360
|
|
|
$
|
(3,752
|
)
|
Short-term investments
|
|
|
930
|
|
|
|
(1,074
|
)
|
|
|
(144
|
)
|
|
|
942
|
|
|
|
(670
|
)
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease)
|
|
$
|
(1,458
|
)
|
|
$
|
(542
|
)
|
|
$
|
(2,000
|
)
|
|
$
|
(3,170
|
)
|
|
$
|
(310
|
)
|
|
$
|
(3,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 for 2009, 2008, and 2007 were $100,000 per annum. For 2010, advisory fees will remain unchanged. The amount of annual advisory fees is approved by the Companys Board of Directors on an annual basis.
General and administrative expenses consisted primarily of audit fees, rating agency fees, exchange listing fees and other stockholder
costs. Total general and administrative expenses were $200,000 in 2009, $206,000 in 2008 and $215,000 in 2007. Audit fees were $75,000 in 2009, $70,000 in 2008 and $82,000 in 2007.
Financial Condition
Cash and Cash Equivalents
At December 31, 2009 and December 26, 2008, cash and cash equivalents consisted primarily of a money market account held at First
Republic.
Mortgage Loans
The loan portfolio at December 31, 2009 and December 26, 2008 consisted of both single family and multifamily mortgage loans acquired from First Republic. The Company anticipates that in the
future it will continue to acquire all of its loans from First Republic.
A loan is placed on nonaccrual status when any
installment of principal or interest is over 90 days past due, except for any single family loan that is well secured and in the process of collection, or when the Company determines that the ultimate collection of all contractually due principal or
interest is unlikely. The Company classifies a loan as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan purchase and
servicing agreement. Refer to Note 4, Loans, of the Notes to Financial Statements for a discussion of the Companys nonaccrual loans and allowance for loan losses.
26
Vintage Analysis
The following table presents a vintage analysis of Mortgage Loans (by carrying value) at December 31, 2009 by year of origination:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
Loan Type
|
|
Year
Originated
|
|
Balance
|
|
% of Total
Loans
|
|
|
Average
FICO
|
|
Average
LTV
|
|
Single family mortgage loans
|
|
2009
|
|
$
|
79,097
|
|
30
|
%
|
|
765
|
|
58
|
%
|
|
|
2005
|
|
|
12,415
|
|
5
|
|
|
756
|
|
68
|
|
|
|
2004
|
|
|
37,323
|
|
14
|
|
|
769
|
|
57
|
|
|
|
2003
|
|
|
39,993
|
|
15
|
|
|
768
|
|
55
|
|
|
|
2002
|
|
|
27,546
|
|
10
|
|
|
767
|
|
58
|
|
|
|
2001
|
|
|
7,369
|
|
3
|
|
|
755
|
|
51
|
|
|
|
2000 & prior
|
|
|
40,102
|
|
15
|
|
|
739
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
243,845
|
|
92
|
|
|
761
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily mortgage loans
|
|
2004
|
|
|
4,289
|
|
1
|
|
|
|
|
51
|
|
|
|
2003
|
|
|
10,011
|
|
4
|
|
|
|
|
50
|
|
|
|
2002
|
|
|
4,520
|
|
2
|
|
|
|
|
59
|
|
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 & prior
|
|
|
1,866
|
|
1
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
20,686
|
|
8
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
|
$
|
264,531
|
|
100
|
%
|
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As shown in the table above, 70% of the Mortgage Loans at December 31, 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 December 31, 2009 by major geographic location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
San
Francisco
Bay Area,
California
|
|
|
New
York/New
England
|
|
|
Los
Angeles
Area,
California
|
|
|
San
Diego
Area,
California
|
|
|
Other
California
Areas
|
|
|
Other
|
|
|
Las
Vegas,
Nevada
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
%
|
|
Single family
|
|
$
|
139,260
|
|
|
$
|
40,454
|
|
|
$
|
24,937
|
|
|
$
|
14,655
|
|
|
$
|
3,042
|
|
|
$
|
20,497
|
|
|
$
|
1,000
|
|
|
$
|
243,845
|
|
|
92
|
%
|
Multifamily
|
|
|
15,939
|
|
|
|
838
|
|
|
|
1,537
|
|
|
|
598
|
|
|
|
1,774
|
|
|
|
|
|
|
|
|
|
|
|
20,686
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
155,199
|
|
|
$
|
41,292
|
|
|
$
|
26,474
|
|
|
$
|
15,253
|
|
|
$
|
4,816
|
|
|
$
|
20,497
|
|
|
$
|
1,000
|
|
|
$
|
264,531
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent by location
|
|
|
59
|
%
|
|
|
15
|
%
|
|
|
10
|
%
|
|
|
6
|
%
|
|
|
2
|
%
|
|
|
8
|
%
|
|
|
|
%
|
|
|
100
|
%
|
|
|
|
At December 31, 2009, approximately 77% of Mortgage Loans were secured by properties located
in California. The weighted average LTV ratio on Mortgage Loans was approximately 55%, based upon the appraised values of the properties at the time the loans were originated.
27
Liquidity and Capital Resources
The Companys principal liquidity needs are to pay dividends, to fund the acquisition of additional Mortgage Assets as borrowers repay
Mortgage Loans and, from time to time, to redeem preferred stock. The Company intends to fund the acquisition of additional Mortgage Loans with the proceeds from principal payments 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 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
Interest Rate Risk Management
The Company services fixed-rate dividend
obligations to preferred stockholders and operating expenses by the collection of interest income from Mortgage Loans. To meet dividend payments, the Company has historically maintained an average interest-earning asset balance of approximately two
times the liquidation preference of its outstanding preferred stock. The Companys earnings to fixed charges ratio was 1.36x for 2009, compared with 1.57x for 2008 and 1.43x for 2007.
Since September 2007, interest rates have generally fallen. The yield on total interest-earning assets decreased 69 basis points to 4.80%
for 2009, compared with 5.49% for 2008, and a decrease of 106 basis points from 5.86% for 2007. The decrease in the yield for 2009 compared with 2008 and 2007 was 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 increased 23 basis points in 2009 compared with 2008. However, excluding the net discount accretion, the yield would have decreased approximately 105 basis points. The loan
portfolio mix by interest rate type at December 31, 2009 was less adjustable compared with December 26, 2008 due to loans purchased in 2009. ARMs were 57% of Mortgage Loans at December 31, 2009 and 76% at December 26, 2008. The
weighted average coupon rate at December 31, 2009 for ARMs decreased 138 basis points from a year ago, compared with a 89 basis point decrease in the weighted average coupon rate for intermediate fixed rate loans and a 1 basis point increase
for fixed rate loans. The weighted average remaining maturity of Mortgage Loans was 23 years at December 31, 2009 and 21.3 years at December 26, 2008. The Company manages the loan portfolio to generate adequate cash flow to service its
current and projected dividend requirements and considers conditions in the interest rate environment and the secondary market in selecting loans for purchase.
For ARMs, the timing of changes in average yields 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 3.31% at December 31, 2009, representing a decrease of 138 basis points from 4.69% at December 26, 2008 due to the drop in short-term rates. The decrease in ARM loan yields was mitigated by a significant volume of
ARM loans indexed to 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 December 31, 2009, ARM loans indexed to COFI were 82% of total ARMs, or 47% of
Mortgage Loans, and 84% of total ARMs at December 26, 2008, or 63% of Mortgage Loans.
For intermediate fixed and fixed
rate loans, the balance at December 31, 2009 was $113.6 million, or 43% of total Mortgage Loans, representing an increase from $52.8 million at December 26, 2008, or 24% of total Mortgage Loans due to loans purchased in 2009. The weighted
average coupon rate for intermediate fixed rate loans was 4.51% at December 31, 2009, representing a decrease of 89 basis points from 5.40% at December 26, 2008. The weighted average coupon rate for fixed rate loans was 5.69% at
December 31, 2009 and 5.68% at December 26, 2008. A portion of the repayments of intermediate fixed and fixed rate loans were reinvested in ARMs.
28
The following table presents an analysis of Mortgage Loans at December 31, 2009 by
interest rate type:
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Balance
|
|
Net
Coupon
(1) (2)
|
|
|
Months
to Next
Reset
(1)
|
|
% of Total
Loans
|
|
ARM loans:
|
|
|
|
|
|
|
|
|
|
|
|
COFI
|
|
$
|
124,020
|
|
3.32
|
%
|
|
1
|
|
47
|
%
|
CMT
|
|
|
17,332
|
|
3.18
|
|
|
6
|
|
7
|
|
LIBOR
|
|
|
9,572
|
|
3.37
|
|
|
2
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ARMs
|
|
|
150,924
|
|
3.31
|
|
|
2
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate fixed:
|
|
|
|
|
|
|
|
|
|
|
|
12 months to 36 months
|
|
|
2,085
|
|
6.23
|
|
|
25
|
|
1
|
|
37 months to 60 months
|
|
|
85,040
|
|
4.45
|
|
|
52
|
|
32
|
|
Greater than 60 months
|
|
|
1,026
|
|
6.00
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intermediate fixed
|
|
|
88,151
|
|
4.51
|
|
|
52
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable rate loans
|
|
|
239,075
|
|
3.74
|
|
|
20
|
|
90
|
|
Fixed rate loans
|
|
|
25,456
|
|
5.69
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
264,531
|
|
3.92
|
%
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Net of servicing fees retained by First Republic.
|
The following table presents maturities or interest rate adjustments based upon the contractual maturities or adjustment dates as of December 31, 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
|
|
$
|
31,115
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,115
|
Loans, net
|
|
|
153,192
|
|
|
|
16,441
|
|
|
|
31,790
|
|
|
|
57,574
|
|
|
|
5,534
|
|
|
|
|
|
|
|
264,531
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
931
|
|
|
|
931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
184,307
|
|
|
$
|
16,441
|
|
|
$
|
31,790
|
|
|
$
|
57,574
|
|
|
$
|
5,534
|
|
|
$
|
931
|
|
|
$
|
296,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
148
|
|
|
$
|
148
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
296,429
|
|
|
|
296,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
296,577
|
|
|
$
|
296,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repricing gappositive (negative)
|
|
$
|
184,307
|
|
|
$
|
16,441
|
|
|
$
|
31,790
|
|
|
$
|
57,574
|
|
|
$
|
5,534
|
|
|
$
|
(295,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative repricing gap:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar amount
|
|
$
|
184,307
|
|
|
$
|
200,748
|
|
|
$
|
232,538
|
|
|
$
|
290,112
|
|
|
$
|
295,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total assets
|
|
|
62.1
|
%
|
|
|
67.7
|
%
|
|
|
78.4
|
%
|
|
|
97.8
|
%
|
|
|
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 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|
See Financial Statements table of contents on page F-2 incorporated by reference herein.
29
Item 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|
On May 6, 2009, the Company filed a Current Report on Form 8-K/A (which amended the Current Report on Form 8-K filed on April 16,
2009) disclosing a change in the Companys principal accountant. The decision to change accountants was approved by the audit committee of the Board of Directors of the Company. There have been no disagreements with the Companys
accountants on any matter of accounting principles, practices or financial statement disclosures since the Companys inception in April 1999.
Item 9A(T). 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 December 31, 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.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such
term is defined in Rule 13a-15(f) under the Exchange Act. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. Using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in the
Internal Control-Integrated Framework
, our management has concluded that, as of December 31, 2009, our internal control over financial reporting is effective based on these criteria.
This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys
registered public accounting firm pursuant to temporary rules of the Securities Exchange Commission that permit the Company to provide only managements report in this annual report.
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 December 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
Item 9B.
|
OTHER INFORMATION.
|
Not
applicable.
30
PART III
Item 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
Directors and Executive Officers
As the holder of all of the
Companys outstanding shares of common stock, BANA has the right to elect the Companys directors, including the independent directors. The Companys Board of Directors currently consists of six members, including two independent
directors. The Company currently has five officers, three of whom are also directors, and it is estimated that they spend between approximately 5% and 10% of their time managing the Companys business. The Companys directors and officers
are elected annually. The Company has no employees and does not anticipate requiring any employees.
The Companys
directors and executive officers are listed below. Each director or executive officer has served in his/her capacity since the Companys inception in April 1999, except for Mr. Roffler, who was elected in March 2010, Ms. Chan, who was
appointed in September 2004, Mr. Merrill, who was elected in December 2004 and Ms. Moulds, who was elected in March 2005. The qualifications of each director and executive officer was assessed by the owner of the Companys common
stock at the time each director and executive officer was appointed.
|
|
|
|
|
Name
|
|
Age
|
|
Position and Offices Held
|
James J. Baumberger
|
|
67
|
|
President, Director
|
Thomas A. Cunningham
(1)
|
|
75
|
|
Director
|
Barrant V. Merrill
|
|
79
|
|
Director
|
Linda G. Moulds
(1)
|
|
59
|
|
Director
|
Edward J. Dobranski
|
|
59
|
|
Vice President, General Counsel, Director
|
Willis H. Newton, Jr.
|
|
60
|
|
Vice President, Chief Financial Officer, Director
|
Michael Roffler
|
|
39
|
|
Vice President, Treasurer
|
May Chan
|
|
37
|
|
Assistant Vice President, Corporate Secretary
|
(1)
|
Independent Director and Audit Committee Member.
|
The following is a summary of the experience of the Companys executive officers and directors:
Mr. Baumberger currently serves on First Republics advisory board. He was employed by First Republic and its predecessors from 1990 until December 31, 2007 and served as a director from
1994 to 2007. From December 1993 until October 1996, Mr. Baumberger was President of First Republic Savings Bank, an FDIC insured financial institution. Mr. Baumberger has been involved in banking and real estate lending in the Las Vegas,
Nevada area for more than forty years.
Mr. Cunningham is retired. From 1986 to 1994, he was President of the California
Thrift Guarantee Corporation. Previously Mr. Cunningham held senior executive positions in several banking institutions. He was a member of the U.S. Marine Corp. until 1971. From 1988 to 1998, Mr. Cunningham served as a director of First
Republic and one of its predecessor financial institutions.
Mr. Merrill is the Managing Partner of Sun Valley Partners,
a private investment company. Mr. Merrill also currently serves on the board of First Republic Securities Company, LLC. From 1985 to 2004, Mr. Merrill was a director of First Republic and its legal predecessors. Previously, he was a
General Partner of Dakota Partners, a private investment partnership, and Chairman of Pershing & Co., Inc., a division of Donaldson, Lufkin & Jenrette, a global investment bank.
Ms. Moulds was Vice President, Secretary and Controller of First Republic from 1985 to 1996 and was a director of First Republic from
1997 to 1998. Previously, Ms. Moulds was Secretary and Controller of San Francisco Bancorp and a director of First United Thrift and Loan.
31
Mr. Dobranski has served as Executive Vice President, General Counsel and Secretary
since joining First Republic in 1992. Prior to that, Mr. Dobranski practiced banking, real estate and corporate law through positions held with the federal government, in private practice and as Corporate Counsel.
Mr. Newton is Executive Vice President and Chief Financial Officer of First Republic and has held such position since August 1988.
Previously, Mr. Newton was Vice President and Controller of Homestead Financial and was a Certified Public Accountant with KPMG LLP for nine years.
Mr. Roffler is Senior Vice President and Deputy Chief Financial Officer of First Republic and has held such position since November 2009. Previously, Mr. Roffler was a Certified Public
Accountant with KPMG LLP for sixteen years, five of which were as an audit partner.
Ms. Chan joined First Republic in
2003 as the Director of Corporate Tax. Prior to that, Ms. Chan was with KPMG LLP for nine years, five of which were in the tax department.
Independent Directors
The terms of the preferred stock require that, as long as any preferred stock is
outstanding, certain actions by the Company need to be approved by a majority of the Companys independent directors. In order to be considered independent for this purpose, a director must not be or have been in the last three
years one of the Companys officers or employees or a director, officer or employee of First Republic or an affiliate of First Republic. Members of the Companys Board of Directors elected by holders of preferred stock will not be deemed
to be independent directors for purposes of approving actions requiring the approval of a majority of the independent directors. Mr. Cunningham (Chairman) and Ms. Moulds are currently the Companys independent directors.
If at the time of any of the Companys annual shareholder meetings, the Company has failed to pay or declare and set aside for
payment a full quarterly dividend during any of the four preceding quarterly dividend periods on any series of the Companys preferred stock, the number of directors then constituting the Companys Board of Directors will be increased by
two, and the holders of the Companys outstanding series of preferred stock voting as a single class at that meeting will be entitled to elect the two additional directors to serve on the Board of Directors. Any member of the Board of Directors
elected by holders of the preferred stock will not be deemed an independent director for purposes of the actions requiring the approval of a majority of the independent directors.
Audit Committee
The Companys Board of Directors has established an
audit committee that reviews the engagement and independence of the Companys independent registered public accounting firm. The audit committee also reviews the adequacy of the Companys internal accounting controls. The audit committee
is comprised of the Companys independent directors: Mr. Cunningham and Ms. Moulds, who are both audit committee financial experts. As described in Item 10, both of these directors have experience in banking, financial services
or mortgage industries.
Compensation of Directors
The Company pays each director a fee of $1,250 for attending each regularly scheduled Board meeting (in person or by telephone) and a fee ranging from $750 to $1,000 for attending (in person or by
telephone) any additional meetings. The fees paid during 2009 were as follows: Mr. Baumberger: $5,750, Mr. Cunningham: $4,750, Mr. Merrill: $4,750, Ms. Moulds: $6,000, and Mr. Lykins: $3,750. (Mr. Lykins was formerly a
director of the Company during 2009.) Directors employed by First Republic are not paid a fee.
32
Code of Ethics
The Company follows a code of ethics in accordance with corporate governance requirements and in 2009 adopted the code of ethics of Bank of America, its ultimate parent. This code covers the activities of
the Companys officers, including its principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. This code of ethics is posted on Bank of Americas
website at www.bankofamerica.com in the corporate governance section. A copy will be made available in print, without charge, to any stockholder of the Company who requests it by contacting the Company by mail.
Item 11.
|
EXECUTIVE COMPENSATION.
|
The Company does not pay any compensation to its officers, and it is estimated that none of its officers spend greater than 10% of their time managing the Companys business. See also Item 10Compensation of Directors.
Item 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|
The following table sets forth, as of January 29, 2010, the number and percentage of outstanding shares of common stock, Series A Preferred
Stock and Series D Preferred Stock beneficially owned by (i) all persons known by the Company to own more than five percent of such shares; (ii) each of the Companys directors; (iii) each of the Companys executive
officers; and (iv) all of the Companys executive officers and directors as a group. The persons or entities named in the table have sole voting and sole investment power with respect to each of the shares beneficially owned by such person
or entity. The calculations were based on a total of 30,538,277 shares of common stock, 55,000 Series A Preferred Stock and 2,400,000 Series D Preferred Stock outstanding as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Series A
Preferred Stock
|
|
|
Series D
Preferred Stock
|
|
|
|
(Number of Shares and Percentage of Outstanding Shares)
|
|
Name and Address of Beneficial Owner
(1)
|
|
Number
|
|
%
|
|
|
Number
|
|
%
|
|
|
Number
|
|
%
|
|
Bank of America, N.A.
|
|
30,538,277
|
|
100
|
%
|
|
25,410
|
|
46.2
|
%
|
|
|
|
|
|
Executive Officers and Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James J. Baumberger
(2) (3)
|
|
|
|
|
|
|
|
|
|
|
|
18,000
|
|
0.8
|
%
|
Thomas A. Cunningham
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barrant V. Merrill
(3)
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
0.1
|
%
|
Linda G. Moulds
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward J. Dobranski
(2) (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Willis H. Newton, Jr.
(2) (3)
|
|
|
|
|
|
|
|
|
|
|
|
12,300
|
|
0.5
|
%
|
Michael Roffler
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May Chan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Executive Officers and Directors as a group (8 persons)
|
|
|
|
|
|
|
|
|
|
|
|
33,300
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Unless otherwise indicated, the address of each beneficial owner is c/o First Republic Preferred Capital Corporation, 111 Pine Street, San Francisco,
California 94111
|
On October 21, 2009, Bank of America announced that it had entered into a definitive agreement to sell First Republic to a number of investors, led by First Republics existing management, and including investment funds managed by
Colony Capital, LLC and General Atlantic LLC. The transaction is expected to close in the
33
second quarter of 2010, subject to receipt of all regulatory approvals. Upon completion of the transaction, the Company will become a subsidiary of a newly formed enterprise doing business as
First Republic Bank. The newly formed enterprise will acquire all of the outstanding shares of common stock and the 25,410 shares of Series A Preferred Stock currently owned by BANA.
Item 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
|
Transactions with Management and Others
Please see the discussion in
Item 1 of this report under the heading The Companys Relationship with First Republic.
Certain Business
Relationships
All of the Companys executive officers are also officers or employees of First Republic.
Indebtedness of Management
None of the Companys directors, officers, or any of their immediate family or other affiliates, is indebted to the Company since the beginning of the year ended December 31, 2009, in an amount in excess of $120,000.
Director Independence
Please see the discussion in Item 10 of this report under the heading Independent Directors.
Item 14.
|
PRINCIPAL ACCOUNTING FEES AND SERVICES.
|
The following table presents fees billed for professional services rendered by PricewaterhouseCoopers LLP for the audit of the Companys annual financial statements for 2009 and Deloitte &
Touche LLP for the audit of the Companys annual financial statements for 2008.
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
Audit fees
|
|
$
|
130,000
|
|
$
|
70,000
|
Audit-related fees
|
|
|
|
|
|
|
Tax fees
|
|
|
|
|
|
|
All other fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees
|
|
$
|
130,000
|
|
$
|
70,000
|
|
|
|
|
|
|
|
The Audit Committee implemented a policy in May 2003
that requires all future auditing services and permitted non-audit services of its independent registered public accounting firm to be approved by the Audit Committee, including fees and terms. Following the implementation of this policy, the Audit
Committee has approved all of the engagements and fees for the audit of the Company.
34
PART IV
Item 15.
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
|
(a)
|
Financial Statements.
|
|
(1)
|
Financial Statements:
|
Please
see Financial Statements table of contents on page F-2 of this report.
|
(2)
|
Financial Statement Schedules:
|
Financial statement schedules are omitted because either the required information is not present in amounts sufficient to require submission of the schedules or the information required is included in the financial statements and notes
thereto.
The majority of the
following exhibits were previously filed as exhibits to other reports or registration statements filed by the Company and are incorporated herein by reference to such reports or registration statements as indicated parenthetically below.
35
EXHIBIT INDEX
|
|
|
Exhibit No.
|
|
Description
|
3.1
|
|
Articles of Incorporation of First Republic Preferred Capital Corporation, including any amendments thereto (incorporated herein by reference to Exhibit 3.1 of Form 10-K filed on
March 16, 2007).
|
|
|
3.2
|
|
Amended and Restated Bylaws of First Republic Preferred Capital Corporation (incorporated herein by reference to Exhibit 3(ii) of Form 8-K filed on May 12, 2009).
|
|
|
3.3
|
|
Amended and Restated Certificate of Designations of the 10.5% Noncumulative Perpetual Series A Preferred Stock (incorporated herein by reference to Exhibit 3.1 of Form 8-K filed on
November 3, 2009).
|
|
|
3.4
|
|
Amended and Restated Certificate of Designations of the 7.25% Noncumulative Perpetual Series D Preferred Stock (incorporated herein by reference to Exhibit 3.2 of Form 8-K filed on
November 3, 2009).
|
|
|
4.1
|
|
Specimen certificate representing Noncumulative Series D Preferred Stock (incorporated herein by reference to Exhibit 4 of Form S-11 filed on June 16, 2003).
|
|
|
10.1
|
|
Amended and Restated Master Loan Purchase and Servicing Agreement between First Republic Preferred Capital Corporation and First Republic Bank (incorporated herein by reference to
Exhibit 10.1 of Form S-11 filed on December 7, 2001).
|
|
|
10.2
|
|
Amended and Restated Advisory Agreement between First Republic Preferred Capital Corporation and First Republic Bank (incorporated herein by reference to Exhibit 10.2 of
Form S-11 filed on December 7, 2001).
|
|
|
12*
|
|
Statement regarding calculation of ratio 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.
|
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ WILLIS H. NEWTON, JR.
Willis H. Newton, Jr.
|
|
Vice President,
Chief
Financial Officer,
Director
(Principal Financial Officer)
|
|
March 11, 2010
|
|
|
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/ JAMES J. BAUMBERGER
(James J. Baumberger)
|
|
President, Director
(Principal
Executive Officer)
|
|
March 11, 2010
|
|
|
|
/s/ THOMAS A. CUNNINGHAM
(Thomas A. Cunningham)
|
|
Director
|
|
March 11, 2010
|
|
|
|
/s/ BARRANT V. MERRILL
(Barrant V. Merrill)
|
|
Director
|
|
March 11, 2010
|
|
|
|
/s/ LINDA G. MOULDS
(Linda G. Moulds)
|
|
Director
|
|
March 11, 2010
|
|
|
|
/s/ EDWARD J. DOBRANSKI
(Edward J. Dobranski)
|
|
Vice President,
General
Counsel, Director
|
|
March 11, 2010
|
|
|
|
/s/ WILLIS H. NEWTON, JR.
(Willis H. Newton, Jr.)
|
|
Vice President, Chief Financial Officer, Director
(Principal Financial Officer)
|
|
March 11, 2010
|
37
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A
Wholly Owned Subsidiary of Bank of America, N.A.)
Financial Statements
December 31, 2009 and December 26, 2008
(With Reports of Independent Registered Public Accounting Firms Thereon)
F-1
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
TABLE OF CONTENTS
All other schedules are
omitted since the required information is not present in amounts sufficient to require submission of the schedules or the information required is included in the financial statements and notes thereto.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
First Republic Preferred Capital Corporation
In our opinion, the accompanying balance sheet and
the related statements of income, stockholders equity and cash flows present fairly, in all material respects, the financial position of First Republic Preferred Capital Corporation (the Company) at December 31, 2009 and the
results of its operations and its cash flows for the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board
(United States). 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 11, 2010
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
First Republic Preferred Capital Corporation
We have audited the accompanying balance sheet of First Republic Preferred Capital
Corporation (the Company) as of December 26, 2008, and the related statements of income, changes in stockholders equity, and cash flows for the years ended December 26, 2008 and December 28, 2007. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such financial statements present fairly, in all material respects, the financial position of First Republic Preferred Capital Corporation as of December 26, 2008, and the results of
its operations and its cash flows for the years ended December 26, 2008 and December 28, 2007, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, the Company became an indirect wholly owned subsidiary of Bank of America Corporation on January 1,
2009.
/s/ Deloitte & Touche LLP
San Francisco, California
March 10, 2009
F-4
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Bank of America, N.A.)
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
Successor
Company
|
|
|
|
Predecessor
Company
|
|
|
|
December 31,
2009
|
|
|
|
December 26,
2008
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
31,115,000
|
|
|
|
$
|
81,523,000
|
|
|
|
|
|
Single family mortgage loans
|
|
|
243,845,000
|
|
|
|
|
194,014,000
|
|
Multifamily mortgage loans
|
|
|
20,686,000
|
|
|
|
|
24,351,000
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans (Note 4)
|
|
|
264,531,000
|
|
|
|
|
218,365,000
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
|
|
|
|
|
(481,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans, net
|
|
|
264,531,000
|
|
|
|
|
217,884,000
|
|
|
|
|
|
Accrued interest receivable
|
|
|
929,000
|
|
|
|
|
1,006,000
|
|
Prepaid expenses
|
|
|
2,000
|
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
296,577,000
|
|
|
|
$
|
300,415,000
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Dividends payable on preferred stock (Note 8)
|
|
$
|
|
|
|
|
$
|
3,919,000
|
|
Payable to Bank of America, N.A. (Note 5)
|
|
|
100,000
|
|
|
|
|
|
|
Payable to First Republic (Note 5)
|
|
|
25,000
|
|
|
|
|
138,000
|
|
Other payables
|
|
|
23,000
|
|
|
|
|
34,000
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
148,000
|
|
|
|
|
4,091,000
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (Notes 6 and 7):
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value per share; 15,000,000 shares authorized:
|
|
|
|
|
|
|
|
|
|
10.50% perpetual, exchangeable, noncumulative Series A preferred stock; $1,000 liquidation value per share; 55,000 shares
authorized, issued and outstanding
|
|
|
55,000,000
|
|
|
|
|
55,000,000
|
|
7.25% perpetual, exchangeable, noncumulative Series D preferred stock; $25 liquidation value per share; 2,400,000 shares
authorized, issued and outstanding
|
|
|
60,000,000
|
|
|
|
|
60,000,000
|
|
Common stock, $0.01 par value; 75,000,000 shares authorized, 30,538,277 shares issued and outstanding at December 31, 2009
and December 26, 2008
|
|
|
305,000
|
|
|
|
|
305,000
|
|
Additional paid-in capital
|
|
|
177,539,000
|
|
|
|
|
179,905,000
|
|
Retained earnings
|
|
|
3,585,000
|
|
|
|
|
1,114,000
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
296,429,000
|
|
|
|
|
296,324,000
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
296,577,000
|
|
|
|
$
|
300,415,000
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-5
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Bank of America, N.A.)
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
Company
|
|
|
|
Predecessor Companies
|
|
|
Year Ended
December 31,
2009
|
|
|
|
Year Ended
December 26,
2008
|
|
Three Months
Ended
December 28,
2007
|
|
|
|
Nine Months
Ended
September 30,
2007
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on loans
|
|
$
|
12,705,000
|
|
|
|
$
|
14,561,000
|
|
$
|
4,461,000
|
|
|
|
$
|
13,852,000
|
Interest on interest-earning deposit with First Republic
|
|
|
1,482,000
|
|
|
|
|
1,626,000
|
|
|
434,000
|
|
|
|
|
920,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
14,187,000
|
|
|
|
|
16,187,000
|
|
|
4,895,000
|
|
|
|
|
14,772,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,000
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory fees payable to First Republic (Note 5)
|
|
|
100,000
|
|
|
|
|
100,000
|
|
|
25,000
|
|
|
|
|
75,000
|
General and administrative
|
|
|
200,000
|
|
|
|
|
206,000
|
|
|
49,000
|
|
|
|
|
166,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
300,000
|
|
|
|
|
306,000
|
|
|
74,000
|
|
|
|
|
241,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
13,887,000
|
|
|
|
|
15,881,000
|
|
|
4,821,000
|
|
|
|
|
14,589,000
|
Dividends on preferred stock (Note 8)
|
|
|
10,181,000
|
|
|
|
|
10,125,000
|
|
|
2,972,000
|
|
|
|
|
10,568,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholder
|
|
$
|
3,706,000
|
|
|
|
$
|
5,756,000
|
|
$
|
1,849,000
|
|
|
|
$
|
4,021,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-6
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Bank of America, N.A.)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Companies
|
|
|
|
Preferred Stock
|
|
|
Common
Stock
|
|
Additional
Paid-in Capital
|
|
|
Retained Earnings
(Dividends in
Excess of Retained
Earnings)
|
|
|
Total
|
|
Balance as of December 31, 2006
|
|
$
|
164,000,000
|
|
|
$
|
294,000
|
|
$
|
173,028,000
|
|
|
$
|
(200,000
|
)
|
|
$
|
337,122,000
|
|
Conversion of 7,000 shares of Series C preferred stock into common stock of First Republic
|
|
|
(7,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,000,000
|
)
|
Redemption of 1,680,000 shares of Series B preferred stock
|
|
|
(42,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,000,000
|
)
|
Issuance of 1,185,484 shares of common stock to First Republic
|
|
|
|
|
|
|
11,000
|
|
|
6,989,000
|
|
|
|
|
|
|
|
7,000,000
|
|
Purchase accounting adjustments (Note 3)
|
|
|
|
|
|
|
|
|
|
(10,424,000
|
)
|
|
|
|
|
|
|
(10,424,000
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,410,000
|
|
|
|
19,410,000
|
|
Dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,540,000
|
)
|
|
|
(13,540,000
|
)
|
Consent dividends on common stock
|
|
|
|
|
|
|
|
|
|
5,870,000
|
|
|
|
(5,870,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 28, 2007
|
|
|
115,000,000
|
|
|
|
305,000
|
|
|
175,463,000
|
|
|
|
(200,000
|
)
|
|
|
290,568,000
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,881,000
|
|
|
|
15,881,000
|
|
Dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,125,000
|
)
|
|
|
(10,125,000
|
)
|
Consent dividends on common stock
|
|
|
|
|
|
|
|
|
|
4,442,000
|
|
|
|
(4,442,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 26, 2008
|
|
$
|
115,000,000
|
|
|
$
|
305,000
|
|
$
|
179,905,000
|
|
|
$
|
1,114,000
|
|
|
$
|
296,324,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
Balance as of December 26, 2008
|
|
$
|
115,000,000
|
|
|
$
|
305,000
|
|
$
|
179,905,000
|
|
|
$
|
1,114,000
|
|
|
$
|
296,324,000
|
|
Purchase accounting adjustments (Note 3)
|
|
|
|
|
|
|
|
|
|
(2,487,000
|
)
|
|
|
(1,114,000
|
)
|
|
|
(3,601,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization after purchase accounting adjustments
|
|
|
115,000,000
|
|
|
|
305,000
|
|
|
177,418,000
|
|
|
|
|
|
|
|
292,723,000
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,887,000
|
|
|
|
13,887,000
|
|
Dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,181,000
|
)
|
|
|
(10,181,000
|
)
|
Consent dividends on common stock
|
|
|
|
|
|
|
|
|
|
121,000
|
|
|
|
(121,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
115,000,000
|
|
|
$
|
305,000
|
|
$
|
177,539,000
|
|
|
$
|
3,585,000
|
|
|
$
|
296,429,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-7
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Bank of America, N.A.)
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
Company
|
|
|
|
|
Predecessor Companies
|
|
|
|
Year Ended
December 31,
2009
|
|
|
|
|
Year Ended
December 26,
2008
|
|
|
Year Ended
December 28,
2007
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,887,000
|
|
|
|
|
$
|
15,881,000
|
|
|
$
|
19,410,000
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount accretion on loans
|
|
|
(3,585,000
|
)
|
|
|
|
|
(1,314,000
|
)
|
|
|
(117,000
|
)
|
Decrease in accrued interest receivable
|
|
|
77,000
|
|
|
|
|
|
377,000
|
|
|
|
300,000
|
|
Decrease (increase) in prepaid expenses
|
|
|
|
|
|
|
|
|
56,000
|
|
|
|
(56,000
|
)
|
Increase in payable to Bank of America, N.A.
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in payable to First Republic
|
|
|
(113,000
|
)
|
|
|
|
|
113,000
|
|
|
|
|
|
Decrease in other payables
|
|
|
(11,000
|
)
|
|
|
|
|
(35,000
|
)
|
|
|
(17,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
10,355,000
|
|
|
|
|
|
15,078,000
|
|
|
|
19,520,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans acquired from First Republic
|
|
|
(79,097,000
|
)
|
|
|
|
|
|
|
|
|
(22,693,000
|
)
|
Principal payments on loans
|
|
|
32,434,000
|
|
|
|
|
|
50,455,000
|
|
|
|
68,096,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by investing activities
|
|
|
(46,663,000
|
)
|
|
|
|
|
50,455,000
|
|
|
|
45,403,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid on preferred stock
|
|
|
(14,100,000
|
)
|
|
|
|
|
(6,206,000
|
)
|
|
|
(13,540,000
|
)
|
Redemption of Series B preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(14,100,000
|
)
|
|
|
|
|
(6,206,000
|
)
|
|
|
(55,540,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(50,408,000
|
)
|
|
|
|
|
59,327,000
|
|
|
|
9,383,000
|
|
Cash and cash equivalents at beginning of year
|
|
|
81,523,000
|
|
|
|
|
|
22,196,000
|
|
|
|
12,813,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
31,115,000
|
|
|
|
|
$
|
81,523,000
|
|
|
$
|
22,196,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consent dividends on common stock
|
|
$
|
121,000
|
|
|
|
|
$
|
4,442,000
|
|
|
$
|
5,870,000
|
|
Preferred stock dividends payable
|
|
$
|
|
|
|
|
|
$
|
3,919,000
|
|
|
$
|
|
|
Conversion of Series C preferred stock into common stock of First Republic
|
|
$
|
|
|
|
|
|
$
|
|
|
|
$
|
7,000,000
|
|
The Company recorded
purchase accounting adjustments during 2009 and 2007. These adjustments were recorded as noncash capital contributions. See Note 3.
See accompanying notes to financial statements.
F-8
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Bank of America, N.A.)
NOTES TO FINANCIAL STATEMENTS
December 31, 2009
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 Bank of America, N.A.
(BANA), a national bank and an indirect subsidiary of Bank of America Corporation (Bank of America). The Company was a wholly owned subsidiary of Merrill Lynch Bank & Trust Co., FSB (MLFSB), a federal
stock savings bank, which was a wholly owned subsidiary of Merrill Lynch & Co. Inc. (Merrill Lynch & Co.) from September 21, 2007 until November 2, 2009. On January 1, 2009, Merrill Lynch & Co.
was acquired by Bank of America, with Merrill Lynch & Co. continuing as the surviving corporation and a wholly owned subsidiary of Bank of America, and all of the direct and indirect subsidiaries of Merrill Lynch & Co., including
MLFSB and the Company, became indirect subsidiaries of Bank of America (the Bank of America Acquisition). On November 2, 2009, Bank of America completed an internal corporate restructuring of certain subsidiaries, including MLFSB,
pursuant to which MLFSB was merged with and into BANA, with BANA continuing as the surviving entity. As a result of the merger, BANA replaced MLFSB as the direct parent and holder of 100% of the common stock of the Company. This transaction did not
alter the carrying value of the Companys assets or liabilities. Except for the changes discussed in Note 6, Preferred Stock, there were no other changes in the Companys Board of Directors, material agreements or outstanding
issues of preferred stock.
The Company was initially formed by First Republic Bank (First Republic) for the
purpose of raising capital. First Republic owned 100% of the Companys outstanding shares until September 21, 2007 when Merrill Lynch & Co. acquired all of the outstanding shares of First Republics common stock. First
Republic became a division of MLFSB, and MLFSB became the controlling shareholder of the Company. The acquisition of First Republic was accounted for under the purchase method of accounting. The Companys assets and liabilities were remeasured
as of September 21, 2007 (the Merrill Lynch & Co. acquisition date) based on their estimated fair values. A vertical line appears on the Statement of Income for 2007 to distinguish between the Companys results of
operations prior to and after this initial change of control. Following the Bank of America Acquisition, the Companys assets and liabilities were remeasured as of January 1, 2009 (the Bank of America acquisition date) based on
their estimated fair values in accordance with the acquisition method of accounting. (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 Bank of America Acquisition (the Predecessor Company) and subsequent to the Bank of America 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 year end from the last Friday in December to the last calendar day of the year; the Companys activities after its 2008
fiscal year end through December 31, 2008 are included in the Statement of Income for 2009. This change caused five additional days of activity to be recorded in 2009, resulting in approximately $156,000 of additional net income.
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
F-9
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.
At December 31, 2009, the Company has issued
30,538,277 shares of common stock, par value $0.01 per share. BANA owns all of the common stock. Earnings per share data is not presented, as the Companys common stock is not publicly traded.
Recent Development
On October 21, 2009, Bank of America announced that it had entered into a definitive agreement to sell First Republic and its operating subsidiaries, including the Company, to a number of investors, led by First Republics
existing management, and including investment funds managed by Colony Capital, LLC and General Atlantic LLC. The transaction is expected to close in the second quarter of 2010, subject to receipt of all regulatory approvals. Upon completion of the
transaction, the Company will become a subsidiary of a newly formed enterprise doing business as First Republic Bank, since the newly formed enterprise will assume ownership of 100% of the Companys outstanding common stock currently owned by
BANA. The newly formed enterprise will also acquire the 25,410 shares of Series A Preferred Stock currently owned by BANA. Except for these changes, no other changes in the Companys Board of Directors, material agreements or outstanding issues
of preferred stock are expected as a result of this proposed transaction.
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 (GAAP) 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, which has approximated the fair value of the loans at the date of purchase. Mortgage Loans are carried at the principal amount outstanding, net of purchase discounts and premiums. In accordance with the acquisition
method of accounting, Mortgage Loans were revalued to reflect their estimated fair values as of the Bank of America and Merrill Lynch & Co. acquisition dates. (See Note 3, Purchase Accounting Allocation). Discounts or premiums
on Mortgage Loans are accreted or amortized to interest income as yield adjustments using methods that approximate the interest method.
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.
F-10
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 during 2009. (See Note 4,
Loans).
Other Real Estate Owned
Real estate acquired through foreclosure is recorded at fair value, less estimated costs to sell such real estate. After foreclosure, other
real estate owned is carried at the lower of 1) fair value less estimated costs to sell or 2) the cost of 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.
Income Taxes
The Company has elected to be taxed as a REIT and believes it complies with the provisions of the Internal Revenue Code with respect thereto. Accordingly, the Company will not be subject to federal income
tax on that portion of its income that is distributed to shareholders as long as certain asset, income and stock ownership tests are met.
Statements of Cash Flows
For the purpose of reporting cash flows, cash and
cash equivalents include an interest-earning deposit with First Republic and other cash on deposit with First Republic and BANA. As a REIT making sufficient dividend distributions, the Company paid no income taxes for each year ended
December 31, 2009, December 26, 2008 or December 28, 2007.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification
(ASC) 105, Generally Accepted Accounting Principles (ASC 105). ASC 105 approved the FASB Accounting Standards Codification (the Codification) as the single source of authoritative nongovernmental GAAP.
All existing accounting standards have been superseded and all other accounting literature not included in the Codification is considered nonauthoritative. The Codification is effective for interim or annual periods ending after September 15,
2009. The adoption of ASC 105, which became effective during the third quarter of 2009, did not impact the Companys financial condition, results of operations or cash flows. All accounting references in this Annual Report on Form 10-K are in
accordance with the Codification.
In February 2010, the FASB issued amendments to ASC 855, Subsequent Events
(ASC 855), to remove the requirement for Securities and Exchange Commission (SEC) filers to disclose the date through which an entity evaluated subsequent events. Previously, in May 2009, the FASB issued ASC 855, which
provided 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. The adoption of the amendments to ASC 855, which became effective
upon issuance in February 2010, did not impact the Companys financial condition, results of operations or cash flows. The Company evaluated subsequent events through the date of filing with the SEC. (See Note 11, Subsequent
Events.)
F-11
In April 2009, the FASB amended ASC 825, Financial Instruments (ASC
825), to require expanded disclosures for all financial instruments within its scope, such as loans that are not measured at fair value through earnings. These expanded disclosure requirements are effective for interim reporting periods ending
after June 15, 2009. The Company adopted the amendments during the second quarter of 2009. Since the amendments only require certain additional disclosures, they did not affect the Companys financial position, results of operations or
cash flows. (See Note 9, Fair Value of Financial Instruments.)
In December 2007, the FASB issued ASC 805-10,
Business Combinations (ASC 805-10), which significantly changes the financial accounting and reporting for business combinations. ASC 805-10 requires, for example: (i) 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 ASC 805-10 to its January 1, 2009 acquisition of the Company, the effects of which are included in the Companys financial statements. (See Note 3, Purchase
Accounting Allocation).
In April 2009, the FASB amended ASC 805-10 to require 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. This guidance is effective for new acquisitions consummated on or after January 1, 2009. Bank of America applied this guidance to its January 1, 2009 acquisition of the Company. The
adoption of these amendments to ASC 805-10 did not have an impact on the Companys financial position, results of operations or cash flows.
Note 3. Purchase Accounting Allocation
Bank of America Acquisition
Management estimated the fair value of assets and liabilities as of the Bank of America 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 adjustments to recognize assets and liabilities at their estimated fair values as of the Bank of America 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
(3,601,000
|
)
|
|
$
|
214,283,000
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
The net reduction to the carrying value of Mortgage Loans was accounted for as a loan
purchase discount, which is accreted into interest income using methods that approximate the interest method beginning in the first quarter of 2009. The purchase accounting adjustments did not impact cash flows.
Merrill Lynch & Co. Acquisition
The following table presents the purchase accounting adjustments to recognize assets and liabilities at their estimated fair values as of the Merrill Lynch & Co. acquisition date; the offset was
recognized in additional paid-in capital.
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value as
of
September 21, 2007
|
|
Purchase
Accounting
Adjustments
|
|
|
Estimated
Fair Value
as of
September 21, 2007
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Single family mortgage loans
|
|
$
|
257,744,000
|
|
$
|
(10,256,000
|
)
|
|
$
|
247,488,000
|
Multifamily mortgage loans
|
|
|
30,516,000
|
|
|
(168,000
|
)
|
|
|
30,348,000
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
$
|
288,260,000
|
|
$
|
(10,424,000
|
)
|
|
$
|
277,836,000
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
$
|
180,016,000
|
|
$
|
(10,424,000
|
)
|
|
$
|
169,592,000
|
|
|
|
|
|
|
|
|
|
|
|
Management estimated the fair value of assets and
liabilities as of the Merrill Lynch & Co. acquisition date to be equal to their carrying values with the exception of Mortgage Loans. The net reduction to the carrying value of Mortgage Loans was accounted for as a loan purchase discount
and a portion was accreted into interest income from the fourth quarter of 2007 through the end of 2008. The purchase accounting adjustments did not impact cash flows.
Note 4. Loans
The Companys Mortgage Loans are
secured by single family and multifamily real estate properties located primarily in California. The Mortgage Loans generally mature over periods of up to thirty years. The following table presents the gross principal, net unaccreted purchase
accounting discount, unamortized premium on Mortgage Loans acquired from First Republic and carrying value of the Mortgage Loan portfolio at December 31, 2009 and December 26, 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2009
|
|
|
December 26,
2008
|
|
Single family mortgage loans
|
|
|
|
|
|
|
|
|
Gross principal
|
|
$
|
251,660,000
|
|
|
$
|
202,089,000
|
|
Net unaccreted purchase accounting discount
|
|
|
(7,933,000
|
)
|
|
|
(8,075,000
|
)
|
Unamortized premium on mortgage loans acquired from First Republic
|
|
|
118,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
243,845,000
|
|
|
|
194,014,000
|
|
|
|
|
|
|
|
|
|
|
Multifamily mortgage loans
|
|
|
|
|
|
|
|
|
Gross principal
|
|
|
21,495,000
|
|
|
|
24,521,000
|
|
Net unaccreted purchase accounting discount
|
|
|
(809,000
|
)
|
|
|
(170,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
20,686,000
|
|
|
|
24,351,000
|
|
|
|
|
|
|
|
|
|
|
Total carrying value of mortgage loans
|
|
$
|
264,531,000
|
|
|
$
|
218,365,000
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, there was one impaired nonaccrual single family loan of $628,000 (net of
unaccreted purchase accounting discount). The Company did not recognize any interest income related to this
F-13
loan during 2009. There were no nonaccrual loans or impaired loans at December 26, 2008. At December 31, 2009 and December 26, 2008, there were no loans that were troubled debt
restructurings or accruing loans that were contractually past due more than 90 days. The following table presents information with respect to the Companys allowance for loan losses for each of the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
2009
|
|
|
December 26,
2008
|
|
|
December 28,
2007
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of year
|
|
$
|
481,000
|
|
|
$
|
481,000
|
|
|
$
|
481,000
|
|
Provision charged to expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargeoffs
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase accounting adjustment
|
|
|
(481,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of year
|
|
$
|
|
|
|
$
|
481,000
|
|
|
$
|
481,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Mortgage Loans for the period
|
|
$
|
199,392,000
|
|
|
$
|
237,093,000
|
|
|
$
|
304,270,000
|
|
Total Mortgage Loans at the end of year
|
|
$
|
264,531,000
|
|
|
$
|
218,365,000
|
|
|
$
|
267,506,000
|
|
Ratio of allowance for loan losses to total loans
|
|
|
|
%
|
|
|
0.22
|
%
|
|
|
0.18
|
%
|
The Companys
allowance for loan losses became part of the loan carrying value due to purchase accounting adjustments recorded in 2009. (See Note 3, Purchase Accounting Allocation). ASC 310-30, Loans and Debt Securities Acquired with
Deteriorated Credit Quality (ASC 310-30) 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 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 ASC 310-30 at January 1, 2009. In addition, no additional provision for loan losses was required as of December 31, 2009.
Note 5. 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. During 2009, the Company received $100,000 in funding from
BANA for settlement of accounts payable transactions. The cash and cash equivalents with BANA and the payable to BANA at December 31, 2009 result from this funding. The following tables present the Companys related party transactions for
the periods indicated:
|
|
|
|
|
|
|
|
|
As of
December 31,
2009
|
|
As of
December 26,
2008
|
Cash and cash equivalents with First Republic
|
|
$
|
31,047,000
|
|
$
|
81,523,000
|
Cash and cash equivalents with BANA
|
|
$
|
68,000
|
|
$
|
|
Payable to BANA
|
|
$
|
100,000
|
|
$
|
|
F-14
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
December 31,
2009
|
|
December 26,
2008
|
|
December 28,
2007
|
Mortgage Loans acquired from First Republic:
|
|
|
|
|
|
|
|
|
|
Principal
|
|
$
|
78,979,000
|
|
$
|
|
|
$
|
22,666,000
|
Premium
|
|
|
118,000
|
|
|
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Loans acquired
|
|
$
|
79,097,000
|
|
$
|
|
|
$
|
22,693,000
|
|
|
|
|
|
|
|
|
|
|
Interest income on deposit account with First Republic
|
|
$
|
1,482,000
|
|
$
|
1,626,000
|
|
$
|
1,354,000
|
Loan servicing fee expense
|
|
$
|
522,000
|
|
$
|
605,000
|
|
$
|
752,000
|
Advisory fee expense
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
Since inception,
the Company has acquired all Mortgage Loans from First Republic at a price equal to First Republics carrying value of the loans, which approximated the fair value of the loans.
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 the 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 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, 2008 and 2007, payable in equal quarterly installments. The Company had advisory fees payable to First Republic of $25,000 at December 31, 2009 and December 26, 2008.
At December 31, 2009, BANA owned 25,410 shares of the Companys Series A Preferred Stock, with a liquidation preference value of
$25.4 million; these shares were purchased by First Republic prior to December 31, 2006. During 2009, 2008 and 2007, there were no purchases of the Companys outstanding Series A Preferred Stock by BANA, MLFSB or First Republic.
Note 6. Preferred Stock
At December 31, 2009, the Company was authorized to issue 15,000,000 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 December 31, 2009 and December 26, 2008:
|
|
|
|
|
|
|
|
|
December 31,
2009
|
|
December 26,
2008
|
Series A55,000 shares authorized, issued and outstanding
|
|
$
|
55,000,000
|
|
$
|
55,000,000
|
Series D2,400,000 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 shares of
Series A Preferred Stock. The Companys proceeds from this issuance were $55 million; First Republic paid all expenses of the offering, including underwriting
F-15
commissions and discounts. The Series A Preferred Stock are redeemable at the option of the Company at any time beginning June 1, 2009. The Series A Preferred Stock are redeemable at a cash
redemption price equal to the liquidation preference plus any accrued and unpaid dividends. The redemption premium per share is equal to (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 Stock 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 Stock, if authorized and declared, are payable semiannually in arrears on June 30 and December 30 of each year.
In June 2001, the Company issued 7,000 Series C Preferred Stock. In June 2007, the holder of the Series C Preferred Stock elected to exercise the right to convert all of the shares into common stock of
First Republic. The conversion was pursuant to the terms set forth in the certificate of designations governing the Series C Preferred Stock. The former holder of the Series C Preferred Stock has no further rights arising out of the ownership of
such shares.
In January 2002, the Company issued 1,680,000 Series B Preferred Stock. On November 19, 2007 (the
Redemption Date), the Company redeemed the Series B Preferred Stock at a total redemption price of $42.5 million, which represented $25.00 per share plus accrued and unpaid dividends to the Redemption Date at a rate of $0.296 per share
of all the issued and outstanding Series B Preferred Stock.
In June 2003, the Company issued 2,400,000 Series D Preferred
Stock. 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 Stock are redeemable at the option of the Company at
any time since June 27, 2008 at the redemption price of $25 per share, plus accrued and unpaid dividends. Holders of the Series D Preferred Stock 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 Stock, 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 stock, in whole (but not in part). The liquidation preference for the Series A Preferred Stock 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 Stock is $25 per share plus the quarterly dividend thereon accrued through the date of redemption for the dividend period in which the redemption occurs.
Since BANA does not have any authorized classes of preferred stock, the automatic exchange feature of the Companys Series A Preferred
Stock and Series D Preferred Stock is suspended. Except under certain limited circumstances, the holders of the Companys preferred stock have no voting rights.
Note 7. Common Stock
At December 31, 2009, the
Company was authorized to issue 75,000,000 shares of common stock with a par value of $0.01 per share, of which 30,538,277 shares were outstanding and owned by BANA. The Company issued no common stock in 2009 or in 2008. In June 2007, the Company
issued 1,185,484 shares of common stock to First Republic in connection with the conversion of the Companys Series C Preferred Stock.
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 therefore after all preferred dividends have been
paid for the full year.
F-16
Note 8. Dividends on Preferred Stock and Common Stock
The following table presents the dividends on preferred stock for 2009, 2008 and 2007. There were no accrued dividends payable on the Series
A or Series D Preferred Stock as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
Series A Preferred Stock
|
|
$
|
5,807,000
|
|
$
|
5,775,000
|
|
$
|
5,743,000
|
Series B Preferred Stock
|
|
|
|
|
|
|
|
|
3,293,000
|
Series C Preferred Stock
|
|
|
|
|
|
|
|
|
178,000
|
Series D Preferred Stock
|
|
|
4,374,000
|
|
|
4,350,000
|
|
|
4,326,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,181,000
|
|
$
|
10,125,000
|
|
$
|
13,540,000
|
|
|
|
|
|
|
|
|
|
|
Dividends on the Companys preferred stock 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 stock for any respective dividend period, holders of each series of preferred stock 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 stock for any dividend period. However, to remain qualified as a REIT, the Company must distribute annually at least 90% of its REIT taxable
income (which excludes accretion of loan discounts and is calculated after the deduction for dividends paid on preferred stock) 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 stock.
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 stock is not less than 90% of the Companys REIT taxable income in order to remain qualified as a REIT. The Company declared dividends on its common stock of
$121,000 for 2009, $4,442,000 for 2008 and $5,870,000 for 2007. The dividends on the common stock shares owned by BANA in 2009 and MLFSB in 2008 and 2007 were treated as a consent dividend under Section 565 of the Internal Revenue Code.
Note 9. Fair Value of Financial Instruments
Disclosure is required on an interim and annual basis of the estimated fair value of financial instruments. The fair values of such
instruments have been derived, in part, by managements assumptions, the estimated amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimated fair values. Accordingly,
the net realizable values could be materially different from the estimates presented below. In addition, the estimates are only indicative of the value of individual financial instruments and should not be considered an indication of the fair value
of the Company.
The following table presents the carrying values and fair values of the Companys financial instruments
as of December 31, 2009 and December 26, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
December 26, 2008
|
($ in thousands)
|
|
Carrying
Value
|
|
Fair Value
|
|
Carrying
Value
|
|
Fair Value
|
Cash and interest-earning deposit
|
|
$
|
31,115
|
|
$
|
31,115
|
|
$
|
81,523
|
|
$
|
81,523
|
Mortgage loans, net
|
|
$
|
264,531
|
|
$
|
259,640
|
|
$
|
217,884
|
|
$
|
211,140
|
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.
F-17
Mortgage Loans
: The carrying value of Mortgage Loans is the gross principal, net of
unaccreted purchase accounting discounts. Fair values were generally determined by discounting both principal and interest cash flows expected to be collected using an observable discount rate for similar instruments with adjustments that management
believes a market participant would consider in determining fair value. The Company estimates the cash flows expected to be collected using internal credit risk, interest rate and prepayment risk models that incorporate managements best
estimate of current key marketplace assumptions, such as default rates, loss severity and prepayment speeds for the life of the loan.
Note
10. 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 following table presents an analysis of Mortgage Loans (by
carrying value) at December 31, 2009 by major geographic location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San
Francisco
Bay Area,
California
|
|
|
New
York/New
England
|
|
|
Los
Angeles
Area,
California
|
|
|
San
Diego
Area,
California
|
|
|
Other
California
Areas
|
|
|
Other
|
|
|
Las
Vegas,
Nevada
|
|
|
Total
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Amount
|
|
|
%
|
|
Single family
|
|
$
|
139,260
|
|
|
$
|
40,454
|
|
|
$
|
24,937
|
|
|
$
|
14,655
|
|
|
$
|
3,042
|
|
|
$
|
20,497
|
|
|
$
|
1,000
|
|
|
$
|
243,845
|
|
|
92
|
%
|
Multifamily
|
|
|
15,939
|
|
|
|
838
|
|
|
|
1,537
|
|
|
|
598
|
|
|
|
1,774
|
|
|
|
|
|
|
|
|
|
|
|
20,686
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
155,199
|
|
|
$
|
41,292
|
|
|
$
|
26,474
|
|
|
$
|
15,253
|
|
|
$
|
4,816
|
|
|
$
|
20,497
|
|
|
$
|
1,000
|
|
|
$
|
264,531
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent by location
|
|
|
59
|
%
|
|
|
15
|
%
|
|
|
10
|
%
|
|
|
6
|
%
|
|
|
2
|
%
|
|
|
8
|
%
|
|
|
|
%
|
|
|
100
|
%
|
|
|
|
At December 31, 2009, approximately 77% of Mortgage Loans were secured by real estate
properties located primarily in California. Future economic, political or other developments in California could adversely affect the value of Mortgage Loans.
Note 11. Subsequent Events
The Company evaluated
the effects of subsequent events that have occurred subsequent to the year ended December 31, 2009, and through the date of filing with the SEC.
The Company declared dividends on its Series D Preferred Stock on March 3, 2010. The Company will pay these dividends on March 30, 2010.
Note 12. Quarterly Data (Unaudited)
The following table presents the Companys summary unaudited financial information on a quarterly basis for 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
($ in thousands)
|
|
Fourth
Quarter
|
|
Third
Quarter
|
|
Second
Quarter
|
|
First
Quarter
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
Second
Quarter
|
|
First
Quarter
|
Interest income
|
|
$
|
3,323
|
|
$
|
3,375
|
|
$
|
3,447
|
|
$
|
4,042
|
|
$
|
3,538
|
|
|
$
|
3,865
|
|
$
|
4,122
|
|
$
|
4,662
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense
|
|
|
77
|
|
|
76
|
|
|
74
|
|
|
73
|
|
|
71
|
|
|
|
74
|
|
|
74
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3,246
|
|
|
3,299
|
|
|
3,373
|
|
|
3,969
|
|
|
3,467
|
|
|
|
3,791
|
|
|
4,048
|
|
|
4,575
|
Preferred stock dividends
|
|
|
2,531
|
|
|
2,531
|
|
|
2,531
|
|
|
2,588
|
|
|
2,531
|
|
|
|
2,532
|
|
|
2,507
|
|
|
2,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholder
|
|
$
|
715
|
|
$
|
768
|
|
$
|
842
|
|
$
|
1,381
|
|
$
|
936
|
|
|
$
|
1,259
|
|
$
|
1,541
|
|
$
|
2,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
First Republic Preferred Capital Corp. - Preferred Stock, Convertible (MM) (NASDAQ:FRCCO)
Historical Stock Chart
From Sep 2024 to Oct 2024
First Republic Preferred Capital Corp. - Preferred Stock, Convertible (MM) (NASDAQ:FRCCO)
Historical Stock Chart
From Oct 2023 to Oct 2024