UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2010
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)
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Nevada
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91-1971389
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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111 Pine Street, 2nd Floor,
San Francisco, California
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94111
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code:
(415) 392-1400
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
¨
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
x
(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
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No
x
The number of shares outstanding of the registrants common stock, par value $0.01 per share, as of April 30, 2010 was
30,538,277 shares.
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Bank of America, N.A.)
TABLE OF CONTENTS
2
Explanatory Note
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:
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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
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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.
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3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The following interim financial statements as of and for the three months ended March 31, 2010 are unaudited. However, the financial
statements reflect all adjustments (which included only normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods
presented.
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Bank of America, N.A.)
BALANCE SHEETS
(Unaudited)
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March 31,
2010
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December 31,
2009
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ASSETS
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Cash and cash equivalents
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$
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44,113,000
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$
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31,115,000
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Single family mortgage loans
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234,222,000
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243,845,000
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Multifamily mortgage loans
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19,759,000
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20,686,000
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Total mortgage loans (Note 4)
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253,981,000
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264,531,000
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Less: allowance for loan losses
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Mortgage loans, net
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253,981,000
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264,531,000
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Accrued interest receivable
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937,000
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929,000
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Prepaid expenses
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25,000
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2,000
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Total assets
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$
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299,056,000
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$
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296,577,000
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LIABILITIES AND STOCKHOLDERS EQUITY
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Liabilities:
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Dividends payable on preferred stock (Note 8)
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$
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1,444,000
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$
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Payable to Bank of America, N.A. (Note 5)
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39,000
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100,000
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Payable to First Republic (Note 5)
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60,000
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25,000
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Other payables
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26,000
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23,000
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Total liabilities
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1,569,000
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148,000
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Stockholders equity (Notes 6 and 7):
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Preferred stock, $0.01 par value per share; 15,000,000 shares authorized:
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10.50% perpetual, exchangeable, noncumulative Series A Preferred Stock; $1,000 liquidation value per share; 55,000 shares
authorized, issued and outstanding
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55,000,000
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55,000,000
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7.25% perpetual, exchangeable, noncumulative Series D Preferred Stock; $25 liquidation value per share; 2,400,000 shares
authorized, issued and outstanding
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60,000,000
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60,000,000
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Common stock, $0.01 par value; 75,000,000 shares authorized, 30,538,277 shares issued and outstanding at March 31, 2010 and
December 31, 2009
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305,000
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305,000
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Additional paid-in capital
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177,539,000
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177,539,000
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Retained earnings
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4,643,000
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3,585,000
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Total stockholders equity
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297,487,000
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296,429,000
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Total liabilities and stockholders equity
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$
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299,056,000
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$
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296,577,000
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See accompanying notes to financial statements.
4
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Bank of America, N.A.)
STATEMENTS OF INCOME
(Unaudited)
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Three Months Ended
March 31,
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2010
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2009
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Interest income:
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Interest on loans
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$
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3,572,000
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$
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3,611,000
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Interest on interest-earning deposit with First Republic
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85,000
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431,000
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Total interest income
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3,657,000
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4,042,000
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Operating expense:
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Advisory fees payable to First Republic (Note 5)
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25,000
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25,000
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General and administrative
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43,000
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48,000
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Total operating expense
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68,000
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73,000
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Net income
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3,589,000
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3,969,000
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Dividends on preferred stock (Note 8)
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2,531,000
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2,588,000
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Net income available to common stockholder
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$
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1,058,000
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$
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1,381,000
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See accompanying notes to financial statements.
5
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Bank of America, N.A.)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited)
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Preferred
Stock
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Common
Stock
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Additional
Paid-in Capital
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Retained
Earnings
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Total
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Balance as of December 26, 2008
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$
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115,000,000
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$
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305,000
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$
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179,905,000
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$
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1,114,000
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$
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296,324,000
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Purchase accounting adjustments (Note 3)
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(2,488,000
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(1,114,000
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(3,602,000
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Capitalization after purchase accounting adjustments
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115,000,000
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305,000
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177,417,000
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292,722,000
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Net income
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3,969,000
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3,969,000
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Dividends on preferred stock
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(2,588,000
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(2,588,000
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Balance as of March 31, 2009
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$
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115,000,000
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$
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305,000
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$
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177,417,000
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$
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1,381,000
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$
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294,103,000
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Balance as of December 31, 2009
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$
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115,000,000
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$
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305,000
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$
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177,539,000
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$
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3,585,000
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$
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296,429,000
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Net income
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3,589,000
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3,589,000
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Dividends on preferred stock
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(2,531,000
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(2,531,000
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Balance as of March 31, 2010
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$
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115,000,000
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$
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305,000
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$
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177,539,000
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$
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4,643,000
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$
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297,487,000
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See accompanying notes to financial statements.
6
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Bank of America, N.A.)
STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended
March 31,
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2010
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2009
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Operating activities:
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Net income
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$
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3,589,000
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$
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3,969,000
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Adjustments to reconcile net income to net cash provided by operating activities:
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Premium amortization on loans
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7,000
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Discount accretion on loans
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(835,000
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(701,000
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(Increase) decrease in accrued interest receivable
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(8,000
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47,000
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Increase in prepaid expenses
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(23,000
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(23,000
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Decrease in payable to Bank of America, N.A.
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(61,000
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Increase (decrease) in payable to First Republic
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35,000
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(113,000
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Increase in other payables
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3,000
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17,000
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Net cash provided by operating activities
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2,707,000
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3,196,000
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Investing activities:
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Proceeds from loans sold to First Republic
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4,179,000
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Principal payments on loans
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7,199,000
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6,794,000
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Net cash provided by investing activities
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11,378,000
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6,794,000
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Financing activities:
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Dividends paid on preferred stock
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(1,087,000
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(5,063,000
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Net cash used for financing activities
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(1,087,000
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(5,063,000
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Increase in cash and cash equivalents
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12,998,000
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4,927,000
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Cash and cash equivalents at beginning of year
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31,115,000
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81,523,000
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Cash and cash equivalents at end of period
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$
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44,113,000
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$
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86,450,000
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Supplemental schedule of noncash financing activities:
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Preferred stock dividends payable
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$
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1,444,000
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$
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1,444,000
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In connection with
Bank of America Corporations acquisition of Merrill Lynch & Co. Inc., the Company recorded purchase accounting adjustments during the three months ended March 31, 2009. These adjustments were recorded as non-cash capital
contributions. See Note 3.
See accompanying notes to financial statements.
7
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Bank of America, N.A.)
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
First Republic Preferred Capital Corporation, a Nevada corporation, was formed in April 1999. The Company is a wholly owned subsidiary of
BANA, a national bank and an indirect subsidiary of Bank of America Corporation (Bank of America). The Company was a wholly owned subsidiary of MLFSB, a federal stock savings bank, which was a wholly owned subsidiary of 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 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 stockholder
of the Company. 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. 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 the first quarter of 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 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 March 31, 2010, the
Company has issued 30,538,277 shares of common stock, par value $0.01 per share. BANA owns all of the Companys common stock. Earnings per share data is not presented, as the Companys common stock is not publicly traded.
These interim financial statements are intended to be read in conjunction with the Companys 2009 Annual Report on Form 10-K for the
year ended December 31, 2009 (the 2009 Annual Report), Financial Statements and Notes thereto. Interim results should not be considered indicative of results to be expected for the full year.
The results of operations of the Company are subject to various risks, including business, economic, legal and regulatory conditions and
factors. Additional information is included in Item 1A, Risk Factors, in the 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the SEC) on March 11, 2010.
8
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 California-chartered bank called First Republic Bank, since the newly formed bank
will assume ownership of 100% of the Companys outstanding common stock currently owned by BANA. The newly formed bank 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 acquisition date. (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.
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. Subsequent to the Bank of America acquisition date, decreases in expected principal cash
flows resulting from deteriorations in credit which exceed the unaccreted purchase accounting discount would result in the Company recording a provision for loan losses. There was no provision for loan losses recorded during the first quarter of
2010 or 2009. (See Note 4, Loans).
9
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.
Statement 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 the three months ended March 31, 2010 or 2009.
Note 3. Purchase Accounting Allocation
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
|
|
|
Preliminary
Purchase
Accounting
Adjustments
(1)
|
|
|
Additional
Adjustments
(2)
|
|
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
|
|
|
|
(1,048,000
|
)
|
|
|
1,000
|
|
|
23,474,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
226,610,000
|
|
|
|
(12,328,000
|
)
|
|
|
1,000
|
|
|
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
|
|
|
$
|
(3,602,000
|
)
|
|
$
|
1,000
|
|
$
|
214,283,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
$
|
179,905,000
|
|
|
$
|
(2,488,000
|
)
|
|
$
|
1,000
|
|
$
|
177,418,000
|
Retained earnings
|
|
|
1,114,000
|
|
|
|
(1,114,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
181,019,000
|
|
|
$
|
(3,602,000
|
)
|
|
$
|
1,000
|
|
$
|
177,418,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Purchase accounting adjustments recorded during the quarter ended March 31, 2009.
|
(2)
|
Purchase accounting adjustments recorded subsequent to March 31, 2009 when such adjustments were finalized.
|
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.
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 March 31, 2010 and December 31, 2009:
10
|
|
|
|
|
|
|
|
|
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
Single family mortgage loans
|
|
|
|
|
|
|
|
|
Gross principal
|
|
$
|
241,105,000
|
|
|
$
|
251,660,000
|
|
Net unaccreted purchase accounting discount
|
|
|
(6,994,000
|
)
|
|
|
(7,933,000
|
)
|
Unamortized premium on mortgage loans acquired from First Republic
|
|
|
111,000
|
|
|
|
118,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
234,222,000
|
|
|
|
243,845,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily mortgage loans
|
|
|
|
|
|
|
|
|
Gross principal
|
|
|
20,491,000
|
|
|
|
21,495,000
|
|
Net unaccreted purchase accounting discount
|
|
|
(732,000
|
)
|
|
|
(809,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,759,000
|
|
|
|
20,686,000
|
|
|
|
|
|
|
|
|
|
|
Total carrying value of mortgage loans
|
|
$
|
253,981,000
|
|
|
$
|
264,531,000
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010, there were no nonaccrual loans or impaired loans. 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 loan during 2009. At March 31, 2010 and December 31, 2009, 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 the
Three Months
Ended
March 31,
|
|
|
For the
Year
Ended
December 31,
2009
|
|
|
|
2010
|
|
|
2009
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
|
|
|
$
|
481,000
|
|
|
$
|
481,000
|
|
Purchase accounting adjustment
|
|
|
|
|
|
|
(481,000
|
)
|
|
|
(481,000
|
)
|
Provision charged to expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargeoffs
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Mortgage Loans for the period
|
|
$
|
261,768,000
|
|
|
$
|
211,175,000
|
|
|
$
|
199,392,000
|
|
Total Mortgage Loans at end of period
|
|
$
|
253,981,000
|
|
|
$
|
208,189,000
|
|
|
$
|
264,531,000
|
|
Ratio of allowance for loan losses to total loans
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
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 March 31, 2010, December 31, 2009 or March 31, 2009.
Note 5. Related Party Transactions
The Companys related party transactions include the acquisition of Mortgage Loans from First Republic, the sale of Mortgage Loans to
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 March 31, 2010 and December 31, 2009 result from this funding. The following tables present the Companys related party transactions for the periods indicated:
11
|
|
|
|
|
|
|
|
|
|
As
of
March 31,
2010
|
|
|
As of
December 31,
2009
|
Cash and cash equivalents with First Republic
|
|
$
|
43,982,000
|
|
|
$
|
31,047,000
|
Cash and cash equivalents with BANA
|
|
$
|
131,000
|
|
|
$
|
68,000
|
Payable to BANA
|
|
$
|
39,000
|
|
|
$
|
100,000
|
Payable to First Republic
|
|
$
|
60,000
|
|
|
$
|
25,000
|
|
|
|
|
Three Months Ended
March
31,
|
|
|
2009
|
|
|
2010
|
Mortgage Loans sold to First Republic
|
|
|
|
|
|
|
|
Gross principal
|
|
$
|
4,360,000
|
|
|
$
|
|
Net unaccreted purchase accounting discount
|
|
|
(181,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Loans sold
|
|
$
|
4,179,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on deposit account with First Republic
|
|
$
|
85,000
|
|
|
$
|
431,000
|
Loan servicing fee expense
|
|
$
|
174,000
|
|
|
$
|
136,000
|
Advisory fee expense
|
|
$
|
25,000
|
|
|
$
|
25,000
|
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. The Company did not purchase any loans from First Republic for the
first three months of 2010 and 2009.
As part of the definitive agreement to sell First Republic, BANA will retain certain
loans from a list of loans designated by First Republics management dated as of October 21, 2009. As part of the transaction, during the first quarter of 2010, the loans that will be retained by BANA were sold to First Republic. First
Republic will subsequently transfer these loans to BANA. The loans were sold to First Republic at carrying value, 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 these loan servicing fees as a reduction of interest income.
The Company pays advisory fees to First Republic under
an advisory agreement pursuant to which First Republic administers the day-to-day operations of the Company. First Republic is responsible for: (i) monitoring the credit quality of the Mortgage Assets held by the Company; (ii) advising the
Company with respect to the reinvestment of income from, and principal payments on, the Mortgage Assets, and with respect to the acquisition, management, financing and disposition of the Mortgage Assets; (iii) monitoring the Companys
compliance with the requirements necessary to qualify as a REIT and (iv) performing financial reporting and internal 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 2010 and 2009, payable in equal quarterly installments. The Company had advisory fees payable to First Republic of $25,000 at March 31, 2010 and at December 31, 2009. At March 31, 2010, in addition to
advisory fees, the Company had $35,000 payable to First Republic for stockholder costs First Republic had paid on the Companys behalf.
At March 31, 2010 and 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. For the first three months of 2010 and 2009, neither BANA nor MLFSB purchased any of the Companys outstanding Series
A Preferred Stock.
12
Note 6. Preferred Stock
At March 31, 2010, 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 March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
March 31,
2010
|
|
December 31,
2009
|
Series A 55,000 shares authorized, issued and outstanding
|
|
$
|
55,000,000
|
|
$
|
55,000,000
|
Series D 2,400,000 shares authorized, issued and outstanding
|
|
|
60,000,000
|
|
|
60,000,000
|
|
|
|
|
|
|
|
Total preferred stock
|
|
$
|
115,000,000
|
|
$
|
115,000,000
|
|
|
|
|
|
|
|
In June 1999, the Company issued 55,000 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 commissions and discounts. The Series A Preferred Stock have been redeemable at the
option of the Company at any time since 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 2003, the Company issued 2,400,000 shares of 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 have been 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
March 31, 2010, 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 the first three
months of 2010 and 2009.
The holder of common stock is entitled to receive dividends if and when authorized and declared by
the Board of Directors out of funds legally available after all preferred dividends have been paid for the full year.
13
Note 8. Dividends on Preferred Stock and Common Stock
The following table presents the dividends on preferred stock for the three months ended March 31, 2010 and 2009. Dividends payable
on the Series A Preferred Stock as of March 31, 2010 were $1,444,000. There were no accrued dividends payable on the Series A or Series D Preferred Stock as of December 31, 2009.
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2010
|
|
2009
|
Series A Preferred Stock
|
|
$
|
1,444,000
|
|
$
|
1,476,000
|
Series D Preferred Stock
|
|
|
1,087,000
|
|
|
1,112,000
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,531,000
|
|
$
|
2,588,000
|
|
|
|
|
|
|
|
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.
From a stockholders perspective, the dividends the Company
pays as a REIT are ordinary income not eligible for the dividends received deduction for corporate stockholders or for the favorable maximum 15% rate applicable to qualified dividends received by non-corporate taxpayers. If the Company was not a
REIT, dividends paid generally would qualify for the dividends received deduction and the favorable tax rate applicable to non-corporate taxpayers.
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 did not declare dividends on its common stock during the three months ended March 31, 2010 or 2009.
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 March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2010
|
|
December
31,
2009
|
($ in thousands)
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
Cash and cash equivalents
|
|
$
|
44,113
|
|
$
|
44,113
|
|
$
|
31,115
|
|
$
|
31,115
|
Mortgage loans, net
|
|
$
|
253,981
|
|
$
|
249,890
|
|
$
|
264,531
|
|
$
|
259,640
|
14
The following methods and assumptions were used to estimate the fair value of each type of
financial instrument:
Cash and Cash Equivalents
: The carrying value approximates the estimated fair value.
Mortgage Loans
: The carrying value of Mortgage Loans is the gross principal, net of unaccreted purchase accounting discounts. 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
At March 31, 2010, approximately 77% of Mortgage Loans (by carrying value) were secured by real estate properties located in
California. Future economic, political or other developments in California could adversely affect the value of the Mortgage Loans. See Financial Condition - Significant Concentration of Credit Risk under Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Note 11. Subsequent Events
The Company evaluated the effects of subsequent events that have occurred subsequent to the quarter ended March 31, 2010, and through
the date of filing with the SEC. The Company determined that there were no subsequent events that have occurred through this date.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
This discussion summarizes the significant factors affecting the financial condition of the Company as of March 31,
2010 and results of operations for the three months ended March 31, 2010. This discussion is provided to increase the understanding of, and should be read in conjunction with, the unaudited interim financial statements, accompanying notes and
tables included in this Quarterly Report on Form 10-Q and in the 2009 Annual Report.
For the tax year ending
December 31, 2010, the Company expects to be taxed as a real estate investment trust (a REIT), and intends to comply with the relevant provisions of the Internal Revenue Code to be taxed as a REIT. These provisions for qualifying as
a REIT for federal income tax purposes are complex, involving many requirements, including among others, distributing the majority of the Companys earnings to stockholders and satisfying certain asset, income and stock ownership tests. To the
extent the Company meets those provisions, it will not be subject to federal income tax on net income. The Company currently believes that it continues to satisfy each of these requirements and therefore continues to qualify as a REIT. The Company
continues to monitor each of these complex tests.
Information Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements reflect managements current views and assumptions and are subject to known and unknown risks,
uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking
statements include, but are not limited to, statements regarding the following:
|
|
|
estimates regarding capital requirements and the need for additional financing; and
|
|
|
|
plans, objectives, expectations and intentions contained in this report that are not historical facts.
|
15
Forward-looking statements often include words such as may, would,
should, could, expect, anticipate, believe, estimate, plan, target, project, predict, intend, potential,
continue, or similar expressions. In addition, other statements may also be forward-looking statements. All forward-looking statements should be read carefully because they discuss future expectations, contain projections of future
results of operation or financial condition or state other forward-looking information. There may be events in the future, however, that cannot be accurately predicted or controlled and that may cause actual results to differ materially from the
expectations described in the forward-looking statements. The reader is cautioned that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors,
including, but not limited to, competitive pressure in the mortgage lending industry; changes in the interest rate environment that reduce margins; general economic conditions, either nationally or regionally, that are less favorable than expected,
resulting in, among other things, a deterioration in credit quality and an increase in the provision for loan losses; changes in the regulatory environment; changes in business conditions, particularly in San Francisco and Los Angeles counties and
the New York area and in the home mortgage lending industry; and changes in the securities markets. Other risks, uncertainties and factors are discussed elsewhere in this report, in other Company filings with the Securities and Exchange Commission
(the SEC), including in Item 1A, Risk Factors, in the 2009 Annual Report and in materials incorporated therein by reference.
Critical Accounting Policies and Estimates
The Companys discussion and analysis of its financial condition and results of operation are based upon its financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosures for contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to allowance for loan losses, credit risks, estimated loan lives,
interest rate risk, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions it believes are reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of its assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company considers accounting for allowance for loan losses to be a critical accounting policy because it is a complex process
involving difficult and subjective judgments, assumptions and estimates. The allowance for loan losses is an estimate that can change under different assumptions and conditions. The Company estimates credit losses resulting from the inability of
borrowers to make required payments. If the financial condition of borrowers were to deteriorate, resulting in an impairment of their ability to make payments, or the value of collateral securing Mortgage Loans were to decline, an increase in the
allowance may be required by charging current income. A significant decline in the credit quality of the Companys loan portfolio could have a material adverse affect on the Companys financial condition and results of operations.
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.
Results of Operations
Overview
Net income was $3,589,000 for the first quarter of 2010, compared with $3,969,000 for the first quarter of 2009. The decrease
was primarily due to a decrease in interest income resulting from lower average short-term investment balances and lower market rates of interest. The ratio of earnings to fixed charges for the first quarter was 1.42x in 2010 and 1.53x in 2009.
Preferred stock dividend payments were 100% of fixed charges.
16
Total Interest Income
Total interest income decreased in the first quarter of 2010 compared with the same period in 2009 primarily due to lower yields on
interest-earning assets and lower average short-term investments, partially offset by higher average loan balances. The following table presents the average balances and yields on the Companys interest-earning assets for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
($ in thousands)
|
|
Average
Balance
|
|
Interest
Income
|
|
Yield
|
|
|
Average
Balance
|
|
Interest
Income
|
|
Yield
|
|
Loans
|
|
$
|
261,768
|
|
$
|
3,572
|
|
5.53
|
%
|
|
$
|
211,175
|
|
$
|
3,611
|
|
6.66
|
%
|
Short-term investments
|
|
|
35,293
|
|
|
85
|
|
0.99
|
|
|
|
82,664
|
|
|
431
|
|
2.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
297,061
|
|
$
|
3,657
|
|
4.99
|
%
|
|
$
|
293,839
|
|
$
|
4,042
|
|
5.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on Mortgage Loans decreased in 2010, compared with 2009, primarily due to lower
yields, partially offset by higher average balances.
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 $174,000 in the first quarter of
2010, compared with $136,000 in the same period in 2009. The increase in loan servicing fees was consistent with the increase 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 5.53% in the first quarter of 2010, compared with 6.66% in the same period in 2009. Net discount accretion was $835,000 and
$701,000 in the first quarter of 2010 and 2009, respectively. The total net unaccreted purchase accounting discount was $7.7 million at March 31, 2010, compared with $8.7 million at December 31, 2009 and $11.6 million at March 31,
2009.
The weighted average coupon rate on Mortgage Loans was 4.13% at March 31, 2010, compared to 3.92% at
December 31, 2009 and 4.80% at March 31, 2009. The decline in the weighted average coupon rate at March 31, 2010 compared to March 31, 2009 is primarily due to a decrease in interest rates on adjustable rate mortgage
(ARM) loans indexed to the Monthly Eleventh District Cost of Funds Index (COFI). In addition, there was a decrease in the weighted average coupon rate on intermediate fixed rate loans at March 31, 2010 compared to
March 31, 2009 as a result of the loans purchased at the end of 2009. Refer to Item 3, Quantitative and Qualitative Disclosures About Market Risk, for further discussion.
Interest income on short-term investments decreased in the first quarter of 2010, compared with the same period in 2009, primarily due to
lower average investment balances and lower rates. The average yield on short-term investments decreased to 0.99% in the first quarter of 2010, compared with 2.03% for the same period in 2009.
Operating Expense
The
Company incurs advisory fee expenses payable to First Republic pursuant to an advisory agreement with First Republic for services that First Republic renders on the Companys behalf. Advisory fees were $100,000 per annum for 2010 and 2009, or
$25,000 per quarter.
General and administrative expenses were $43,000 for the first quarter of 2010 and $48,000 for the same
period in 2009. These expenses consisted primarily of audit fees, directors fees, regulatory costs and other stockholder costs.
17
Financial Condition
Cash and Cash Equivalents
At March 31, 2010 and December 31, 2009, cash and cash equivalents consisted primarily of a money market account held at First
Republic.
Mortgage Loans
The loan portfolio at March 31, 2010 and December 31, 2009 consisted of both single family and multifamily mortgage loans
acquired from First Republic. The Company anticipates that in the future it will continue to acquire all of its loans from First Republic.
The Company has purchased from First Republic single family loans with a period of interest only payments. Underwriting standards for all
such loans have required a high level of borrower net worth, substantial post-loan liquidity, excellent FICO scores and significant down payments. At March 31, 2010, approximately $174.5 million of loans, or 72% of the Companys single
family loan portfolio, allowed interest only payments for varying periods. These interest only loans had an average loan-to-value (LTV) ratio at March 31, 2010 of approximately 57%, based on appraised value at the time of
origination. None of the Companys interest only home loans had an LTV ratio at origination of more than 80%.
A loan is
placed on nonaccrual status when any installment of principal or interest is over 90 days past due, except for any single family loan that is well secured and in the process of collection or when the Company determines that the ultimate collection
of all contractually due principal or interest is unlikely. The Company classifies a loan as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the
contractual terms of the loan purchase and servicing agreement. Refer to Note 4, Loans, of the Notes to Financial Statements for a discussion of the Companys nonaccrual loans and allowance for loan losses.
Vintage Analysis
The
following table presents a vintage analysis of Mortgage Loans (by carrying value) at March 31, 2010 by year of origination:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
Loan Type
|
|
Year
Originated
|
|
Balance
|
|
% of Total
Loans
|
|
|
Average
FICO
|
|
Average
LTV
|
|
Single family mortgage loans
|
|
2009
|
|
$
|
76,911
|
|
30
|
%
|
|
765
|
|
59
|
%
|
|
|
2005
|
|
|
12,481
|
|
5
|
|
|
756
|
|
68
|
|
|
|
2004
|
|
|
34,601
|
|
14
|
|
|
773
|
|
56
|
|
|
|
2003
|
|
|
38,124
|
|
15
|
|
|
768
|
|
55
|
|
|
|
2002
|
|
|
26,530
|
|
10
|
|
|
766
|
|
58
|
|
|
|
2001
|
|
|
7,254
|
|
3
|
|
|
754
|
|
52
|
|
|
|
2000 & prior
|
|
|
38,321
|
|
15
|
|
|
742
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
234,222
|
|
92
|
|
|
763
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily mortgage loans
|
|
2004
|
|
|
4,280
|
|
2
|
|
|
|
|
50
|
|
|
|
2003
|
|
|
9,952
|
|
4
|
|
|
|
|
49
|
|
|
|
2002
|
|
|
3,683
|
|
1
|
|
|
|
|
62
|
|
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 & prior
|
|
|
1,844
|
|
1
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
19,759
|
|
8
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
|
$
|
253,981
|
|
100
|
%
|
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As shown in the table above, 70% of the Mortgage Loans at March 31, 2010 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.
18
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 March 31, 2010 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
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
%
|
|
Single family
|
|
$
|
135,804
|
|
|
$
|
38,352
|
|
|
$
|
29,747
|
|
|
$
|
8,363
|
|
|
$
|
3,045
|
|
|
$
|
18,911
|
|
|
$
|
234,222
|
|
|
92
|
%
|
Multifamily
|
|
|
15,029
|
|
|
|
833
|
|
|
|
1,534
|
|
|
|
596
|
|
|
|
1,767
|
|
|
|
|
|
|
|
19,759
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
150,833
|
|
|
$
|
39,185
|
|
|
$
|
31,281
|
|
|
$
|
8,959
|
|
|
$
|
4,812
|
|
|
$
|
18,911
|
|
|
$
|
253,981
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent by location
|
|
|
59
|
%
|
|
|
16
|
%
|
|
|
12
|
%
|
|
|
4
|
%
|
|
|
2
|
%
|
|
|
7
|
%
|
|
|
100
|
%
|
|
|
|
At March 31, 2010, 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.
Liquidity and Capital Resources
The Companys principal liquidity needs are to pay dividends and to fund the acquisition of additional Mortgage Assets as borrowers
repay Mortgage Loans and, from time to time, redeem preferred stock. The Company intends to fund the acquisition of 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 3. 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 1.42x for the first quarter of 2010, compared with 1.53x for the first quarter of 2009 and 1.36x for the year 2009.
Since September 2007, interest rates have generally fallen. The yield on total interest-earning assets decreased 37 basis points to 4.99%
for the first quarter of 2010, compared with 5.36% for the first quarter of 2009. The decrease in yield was primarily due to declining interest rates, partially offset by discount accretion on loans and a decrease in lower-yielding short-term
investments. The yield on loans decreased 113 basis points in the first quarter of 2010 compared to the same period in 2009. However, excluding net discount accretion, the yield would have decreased approximately 99 basis points. The loan portfolio
mix by interest rate type at March 31, 2010 was less adjustable compared with March 31, 2009 due to loans purchased in the fourth quarter of 2009. ARM loans were 57% of Mortgage Loans at March 31, 2010 and 76% at March 31, 2009.
The weighted average coupon rate for ARMs at March 31, 2010 decreased 90 basis points from a year ago, compared with a 91 basis point decrease in the weighted average coupon rate for intermediate fixed rate loans and a 5 basis point increase
for fixed rate loans. The weighted average remaining maturity of Mortgage Loans was 22.8 years at March 31, 2010 and 21.0 years at March 31, 2009.
19
For ARMs, the timing of changes in the average yield depends on the underlying interest rate
index, the timing of changes in the index and the frequency of adjustments to the loan rate. The weighted average coupon rate for ARMs was 3.66% at March 31, 2010, representing a decrease of 90 basis points from 4.56% at March 31, 2009
primarily due to a decrease in short-term rates. The decrease in ARM loan yields is primarily due to a significant portion 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. The COFI index at March 31, 2010 has declined compared to March 31, 2009. At March 31, 2010, ARM loans indexed to COFI were 82% of total ARMs, or 46% of Mortgage Loans, compared with 83% of
total ARMs, or 63% of Mortgage Loans at March 31, 2009.
For intermediate fixed and fixed rate loans, the balance at
March 31, 2010 was $110.4 million, or 43% of total Mortgage Loans, compared with $49.4 million at March 31, 2009, or 24% of total Mortgage Loans. The weighted average coupon rate for intermediate fixed rate loans was 4.52% at
March 31, 2010, down from 5.43% at March 31, 2009. The decline in the intermediate fixed rate yield was due to the purchase of loans late in 2009 that had coupon rates lower than the existing portfolio. The weighted average coupon rate for
fixed rate loans was 5.71% at March 31, 2010, up slightly from 5.66% at March 31, 2009.
The following table
presents an analysis of Mortgage Loans at March 31, 2010 by interest rate type:
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Balance
|
|
Net
Coupon
(1) (2)
|
|
|
Months
to
Next
Reset
(1)
|
|
% of Total
Loans
|
|
ARM loans:
|
|
|
|
|
|
|
|
|
|
|
|
COFI
|
|
$
|
117,753
|
|
3.80
|
%
|
|
1
|
|
46
|
%
|
CMT
(3)
|
|
|
16,278
|
|
2.88
|
|
|
8
|
|
7
|
|
LIBOR
(4)
|
|
|
9,582
|
|
3.24
|
|
|
1
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ARMs
|
|
|
143,613
|
|
3.66
|
|
|
2
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate fixed:
|
|
|
|
|
|
|
|
|
|
|
|
12 months to 36 months
|
|
|
3,778
|
|
5.72
|
|
|
28
|
|
1
|
|
37 months to 60 months
|
|
|
81,824
|
|
4.45
|
|
|
50
|
|
32
|
|
Greater than 60 months
|
|
|
275
|
|
6.25
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intermediate fixed
|
|
|
85,877
|
|
4.52
|
|
|
49
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable rate loans
|
|
|
229,490
|
|
3.97
|
|
|
19
|
|
90
|
|
|
|
|
|
|
Fixed rate loans
|
|
|
24,491
|
|
5.71
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
253,981
|
|
4.13
|
%
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Net of servicing fees retained by First Republic
|
(4)
|
London Interbank Offered Rate
|
20
The following table presents maturities or interest rate adjustments based upon the
contractual maturities or adjustment dates as of March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ 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
|
|
$
|
44,113
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
44,113
|
Loans, net
|
|
|
143,705
|
|
|
|
18,011
|
|
|
|
31,879
|
|
|
|
55,356
|
|
|
|
5,030
|
|
|
|
|
|
|
|
253,981
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
962
|
|
|
|
962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
187,818
|
|
|
$
|
18,011
|
|
|
$
|
31,879
|
|
|
$
|
55,356
|
|
|
$
|
5,030
|
|
|
$
|
962
|
|
|
$
|
299,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,569
|
|
|
$
|
1,569
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
297,487
|
|
|
|
297,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
299,056
|
|
|
$
|
299,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repricing gap positive (negative)
|
|
$
|
187,818
|
|
|
$
|
18,011
|
|
|
$
|
31,879
|
|
|
$
|
55,356
|
|
|
$
|
5,030
|
|
|
$
|
(298,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative repricing gap:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar amount
|
|
$
|
187,818
|
|
|
$
|
205,829
|
|
|
$
|
237,708
|
|
|
$
|
293,064
|
|
|
$
|
298,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total assets
|
|
|
62.8
|
%
|
|
|
68.8
|
%
|
|
|
79.5
|
%
|
|
|
98.0
|
%
|
|
|
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 4. 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 March 31, 2010,
were effective for providing reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified
by the SECs rules and forms, and that such information is accumulated and communicated to the Companys management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in the Companys internal control over financial reporting, as such term is defined in Rule 13a-15(f) and
15d-15(f) under the Exchange Act, that occurred during the quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not currently involved in nor, to its knowledge, currently threatened with any material legal proceedings.
Item 1A. Risk Factors.
There are risks, many beyond the Companys control, which could cause the Companys results to differ significantly from
managements expectations. Some of these factors are described in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. Any factor described in the Companys 2009 Form 10-K or in this report
could, by itself or together with one or more other factors, adversely affect the Companys business, results of operations and/or financial condition. There may be other factors not described in the Companys 2009 Form 10-K or in
this Quarterly Report on Form 10-Q that could cause results to differ from the Companys expectations.
21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. (Removed and Reserved).
Item 5. Other Information.
None.
Item 6. Exhibits.
|
12
|
Statement of computation of ratios of earnings to fixed charges.
|
|
31.1
|
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
|
|
|
|
|
|
|
|
|
Date: May 11, 2010
|
|
|
|
By:
|
|
/s/ WILLIS H. NEWTON, JR.
|
|
|
|
|
|
|
|
|
Willis H. Newton, Jr.
|
|
|
|
|
|
|
|
|
Vice President,
|
|
|
|
|
|
|
|
|
Chief Financial Officer,
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
(Principal Financial Officer)
|
|
|
|
|
Date: May 11, 2010
|
|
|
|
By:
|
|
/s/ MICHAEL ROFFLER
|
|
|
|
|
|
|
|
|
Michael Roffler
|
|
|
|
|
|
|
|
|
Vice President,
|
|
|
|
|
|
|
|
|
Treasurer
|
|
|
|
|
|
|
|
|
(Principal Accounting Officer)
|
23
INDEX TO EXHIBITS
|
|
|
Exhibit
Number
|
|
Exhibit Title
|
12
|
|
Statement of computation of ratios of earnings to fixed charges.
|
|
|
31.1
|
|
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2
|
|
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.2
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
24
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