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 September 30, 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
¨
No
x
The number of shares outstanding of the registrants common stock, par value $0.01 per share, as of November 5, 2010 was
30,538,277 shares.
FIRST REPUBLIC
PREFERRED CAPITAL CORPORATION
(A Majority Owned Subsidiary of First Republic Bank)
TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION
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Item 1.
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Financial Statements (Unaudited):
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Balance Sheets at September 30, 2010 and December 31, 2009
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4
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Statements of Income for the Three Months Ended September 30, 2010, Six Months Ended June 30, 2010 and Three and Nine Months Ended
September 30, 2009
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5
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Statements of Changes in Stockholders Equity for the Three Months Ended September 30, 2010, Six Months Ended June 30, 2010
and Nine Months Ended September 30, 2009
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6
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Statements of Cash Flows for the Three Months Ended September 30, 2010, Six Months Ended June 30, 2010 and Nine Months Ended September
30, 2009
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7
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Notes to Financial Statements
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8
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Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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17
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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22
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Item 4.
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Controls and Procedures
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24
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PART II OTHER INFORMATION
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Item 1.
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Legal Proceedings
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24
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Item 1A.
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Risk Factors
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24
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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24
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Item 3.
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Defaults Upon Senior Securities
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24
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Item 4.
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(Removed and Reserved)
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24
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Item 5.
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Other Information
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24
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Item 6.
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Exhibits
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25
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SIGNATURES
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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.);
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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; and
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as conducted by First Republic Bank, a California-chartered commercial bank that acquired the First Republic Bank business and accounting division of
BANA effective July 1, 2010, including the Company and all other subsidiaries acquired in such 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 September 30, 2010 and six months ended June 30, 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 Majority Owned Subsidiary of First Republic Bank)
BALANCE SHEETS
(Unaudited)
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Successor
Company
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Predecessor
Company
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September 30,
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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32,715,000
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$
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31,115,000
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Single family mortgage loans
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403,766,000
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243,845,000
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Multifamily mortgage loans
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19,454,000
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20,686,000
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Total mortgage loans (Note 4)
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423,220,000
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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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423,220,000
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264,531,000
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Accrued interest receivable
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1,523,000
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929,000
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Prepaid expenses
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9,000
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2,000
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Total assets
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$
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457,467,000
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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
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$
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1,444,000
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$
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Payable to First Republic (Note 5)
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25,000
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25,000
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Payable to Bank of America, N.A. (Note 5)
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100,000
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Other payables
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33,000
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23,000
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Total liabilities
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1,502,000
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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, $0.01 par value; 100,000,000 shares authorized at September 30, 2010, 30,538,277 shares issued and outstanding
at September 30, 2010 and December 31, 2009
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305,000
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305,000
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Additional paid-in capital
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338,858,000
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177,539,000
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Retained earnings
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1,802,000
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3,585,000
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Total stockholders equity
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455,965,000
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296,429,000
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Total liabilities and stockholders equity
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$
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457,467,000
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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 Majority Owned Subsidiary of First Republic Bank)
STATEMENTS OF INCOME
(Unaudited)
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Successor
Company
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Predecessor Company
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Three Months
Ended
September 30,
2010
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Three Months
Ended
September 30,
2009
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Six Months
Ended
June 30,
2010
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Nine Months
Ended
September 30,
2009
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Interest income:
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Interest on loans
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$
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4,375,000
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$
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3,026,000
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$
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7,046,000
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$
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9,681,000
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Interest on interest-earning deposit with First Republic
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67,000
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349,000
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199,000
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1,183,000
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Total interest income
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4,442,000
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3,375,000
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7,245,000
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10,864,000
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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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50,000
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75,000
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General and administrative
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84,000
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51,000
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122,000
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148,000
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Total operating expense
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109,000
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76,000
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172,000
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223,000
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Net income
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4,333,000
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3,299,000
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7,073,000
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10,641,000
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Dividends on preferred stock (Note 8)
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2,531,000
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2,531,000
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5,062,000
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7,650,000
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Net income available to common stockholder
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$
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1,802,000
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$
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768,000
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$
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2,011,000
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$
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2,991,000
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See accompanying notes to financial statements.
5
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Majority Owned Subsidiary of First Republic Bank)
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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Predecessor Company
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Balance as of December 26, 2008
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$
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115,000,000
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$
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305,000
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$
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179,905,000
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$
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1,114,000
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$
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296,324,000
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Purchase accounting adjustments
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(2,487,000
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)
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(1,114,000
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)
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(3,601,000
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)
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Capitalization after purchase accounting adjustments
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115,000,000
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305,000
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177,418,000
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292,723,000
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Net income
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10,641,000
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10,641,000
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Dividends on preferred stock
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(7,650,000
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)
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(7,650,000
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)
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Balance as of September 30, 2009
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$
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115,000,000
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$
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305,000
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$
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177,418,000
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$
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2,991,000
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$
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295,714,000
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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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7,073,000
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7,073,000
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Dividends on preferred stock
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(5,062,000
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)
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(5,062,000
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)
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Balance as of June 30, 2010
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115,000,000
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305,000
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177,539,000
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|
5,596,000
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298,440,000
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Successor Company
|
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Purchase accounting adjustments (Note 3)
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6,319,000
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(5,596,000
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)
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723,000
|
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Capital contribution
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155,000,000
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155,000,000
|
|
Net income
|
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|
|
|
|
|
|
|
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4,333,000
|
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4,333,000
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Dividends on preferred stock
|
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|
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|
|
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(2,531,000
|
)
|
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|
(2,531,000
|
)
|
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|
|
|
|
|
|
|
|
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Balance as of September 30, 2010
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$
|
115,000,000
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|
|
$
|
305,000
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$
|
338,858,000
|
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$
|
1,802,000
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|
$
|
455,965,000
|
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See accompanying notes to financial statements.
6
FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Majority Owned Subsidiary of First Republic Bank)
STATEMENTS OF CASH FLOWS
(Unaudited)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
Company
|
|
|
Predecessor Company
|
|
|
|
Three Months
Ended
September 30,
2010
|
|
|
Six Months
Ended
June
30,
2010
|
|
|
Nine Months
Ended
September 30,
2009
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,333,000
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|
|
$
|
7,073,000
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|
$
|
10,641,000
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|
Adjustments to reconcile net income to net cash provided by operating activities:
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|
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|
(Accretion) amortization of net loan discount/premium
|
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|
(262,000
|
)
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|
10,000
|
|
|
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|
Accretion of purchase accounting discount
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|
(204,000
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)
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|
(1,704,000
|
)
|
|
|
(2,440,000
|
)
|
(Increase) decrease in accrued interest receivable
|
|
|
(615,000
|
)
|
|
|
21,000
|
|
|
|
311,000
|
|
Decrease (increase) in prepaid expenses
|
|
|
9,000
|
|
|
|
(16,000
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)
|
|
|
(8,000
|
)
|
Decrease in payable to Bank of America, N.A.
|
|
|
|
|
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|
(100,000
|
)
|
|
|
|
|
Decrease in payable to First Republic
|
|
|
|
|
|
|
|
|
|
|
(113,000
|
)
|
Increase in other payables
|
|
|
6,000
|
|
|
|
4,000
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,267,000
|
|
|
|
5,288,000
|
|
|
|
8,394,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans acquired from First Republic
|
|
|
(38,943,000
|
)
|
|
|
|
|
|
|
|
|
Proceeds from loans sold to First Republic
|
|
|
|
|
|
|
4,179,000
|
|
|
|
|
|
Principal payments on loans
|
|
|
18,349,000
|
|
|
|
15,609,000
|
|
|
|
26,896,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by investing activities
|
|
|
(20,594,000
|
)
|
|
|
19,788,000
|
|
|
|
26,896,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid on preferred stock
|
|
|
(1,087,000
|
)
|
|
|
(5,062,000
|
)
|
|
|
(10,125,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(1,087,000
|
)
|
|
|
(5,062,000
|
)
|
|
|
(10,125,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(18,414,000
|
)
|
|
|
20,014,000
|
|
|
|
25,165,000
|
|
Cash and cash equivalents at beginning of period
|
|
|
51,129,000
|
|
|
|
31,115,000
|
|
|
|
81,523,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
32,715,000
|
|
|
$
|
51,129,000
|
|
|
$
|
106,688,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends payable
|
|
$
|
1,444,000
|
|
|
$
|
|
|
|
$
|
1,444,000
|
|
Capital contribution of loans
|
|
$
|
155,000,000
|
|
|
$
|
|
|
|
$
|
|
|
In connection with
Bank of America Corporations acquisition of Merrill Lynch & Co. Inc. and upon the closing of the July 1, 2010 Transaction, the Company recorded purchase accounting adjustments during the first quarter of 2009 and the third
quarter of 2010. 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 Majority Owned Subsidiary of First Republic Bank)
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 majority
owned subsidiary of First Republic Bank, a California-chartered bank (First Republic).
The Company was initially
formed in 1999 by First Republic for the purpose of raising capital. First Republic owned 100% of the Companys outstanding shares at 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. The Company was a subsidiary of MLFSB 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.
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. 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.
On October 21, 2009, First Republic entered into an agreement among First Republic, MLFSB and BANA, whereby First
Republic agreed to purchase certain assets and assume certain liabilities related to the business operated through BANAs First Republic Bank division and certain of BANAs subsidiaries, including the Company (the Transaction).
In connection with the Transaction, capital was contributed to First Republic by a number of investors led by existing management and including investment funds managed by Colony Capital, LLC and General Atlantic LLC.
The Transaction closed on July 1, 2010. On July 1, 2010, First Republic replaced BANA as the direct parent and holder of 100%
of the common stock of the Company. First Republic acquired the common stock of the Company from BANA at net book value. As of July 1, 2010, First Republic has authorized classes of preferred stock in connection with the exchange feature of the
Series A and Series D Preferred Stock. In connection with the Transaction, the Companys board of directors approved and adopted amendments to the Certificates of Designations of the preferred stock, which were effective immediately following
the closing of the Transaction. The amendments updated references to the new parent company and its primary regulator, updated references to the Advisory Agreement and Master Loan Purchase and Servicing Agreement and made other non-substantive and
conforming changes. As a result of the Transaction, during the third quarter of 2010, the Company recorded purchase accounting adjustments to record Mortgage Loans at fair value as of July 1, 2010, with a corresponding adjustment to additional
paid-in capital. The purchase accounting adjustments did not impact cash flows.
As a result of the acquisitions discussed
above, the accompanying financial statements are presented to show the financial results of the Company for the period after the Transaction (Successor Company) (as of and for the quarter ended September 30, 2010), and the period
before the Transaction (Predecessor Company).
8
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 September 30, 2010, the Company has issued 30,538,277 shares of common stock, par value $0.01 per share. First Republic owned all
of the Companys common stock at September 30, 2010. 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.
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 relate to the determination of the allowance for loan losses and measuring loans at fair value in purchase accounting.
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 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 and as of July 1, 2010 in connection with the Transaction. (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 based on the contractual cash flows.
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.
9
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 and the Transaction,
decreases in expected principal cash flows resulting from deteriorations in credit would result in the Company recording a provision for loan losses. There was no provision for loan losses recorded during the first nine months of 2010 or 2009. (See
Note 4, Loans). As a result of the transaction discussed in Note 1, the Companys loans were remeasured at fair value as of July 1, 2010 and there was no allowance for loan losses as of that date.
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 nine months ended September 30, 2010 or 2009.
Recent
Accounting Pronouncement
The following pronouncement has been issued by the FASB, but is not yet effective:
In July 2010, the FASB issued amendments to ASC 310-10, Receivables-Overall. The amendments significantly increase
disclosures about the credit quality of loans and the allowance for credit losses to give financial statement users greater transparency about entities credit risk exposures. The amendments require an entity to disaggregate existing and
provide new disclosures for the allowance for credit losses, impaired loans and troubled debt restructurings. For public entities, the disclosures required as of the balance sheet date are effective for interim or annual reporting periods ending on
or after December 15, 2010, and the disclosures required for activity during the period are effective for interim or annual reporting periods beginning on or after December 15, 2010. The Company is evaluating the impact of adoption of the
new guidance on its disclosures in the financial statements.
Note 3. Purchase Accounting Allocation
Management estimated the fair value of assets and liabilities as of July 1, 2010 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 July 1, 2010, with the net reduction to assets recorded in additional paid-in capital. In addition, the Companys retained earnings as
of July 1, 2010 was reclassified to additional paid-in capital.
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
as
of
July 1, 2010
|
|
|
Purchase
Accounting
Adjustments
|
|
|
Estimated
Fair Value
as of
July 1, 2010
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross principal
|
|
$
|
232,857,000
|
|
|
$
|
|
|
|
$
|
232,857,000
|
|
Net unearned discount
|
|
|
(6,069,000
|
)
|
|
|
754,000
|
|
|
|
(5,315,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
226,788,000
|
|
|
|
754,000
|
|
|
|
227,542,000
|
|
Multifamily mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross principal
|
|
|
20,329,000
|
|
|
|
|
|
|
|
20,329,000
|
|
Net unearned discount
|
|
|
(680,000
|
)
|
|
|
(31,000
|
)
|
|
|
(711,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,649,000
|
|
|
|
(31,000
|
)
|
|
|
19,618,000
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
$
|
246,437,000
|
|
|
$
|
723,000
|
|
|
$
|
247,160,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
$
|
177,539,000
|
|
|
$
|
6,319,000
|
|
|
$
|
183,858,000
|
|
Retained earnings
|
|
|
5,596,000
|
|
|
|
(5,596,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
183,135,000
|
|
|
$
|
723,000
|
|
|
$
|
183,858,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net reduction to the unpaid principal balance of Mortgage Loans was accounted for as a loan purchase
discount, which is accreted into interest income using methods that approximate the interest method over the contractual lives of the loans beginning in the third quarter of 2010. 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. At September 30, 2010 and December 31, 2009, 85% and 72%, respectively, of the Companys single family loan portfolio contains an interest-only payment feature for an
initial period of generally up to ten years.
11
The following table
presents the unpaid principal balance, net unaccreted purchase accounting discount, unamortized discount or premium on Mortgage Loans acquired from First Republic and carrying value of the Mortgage Loan portfolio at September 30, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
|
|
September 30,
2010
|
|
|
December 31,
2009
|
|
Single family mortgage loans
|
|
|
|
|
|
|
|
|
Unpaid principal balance
|
|
$
|
414,175,000
|
|
|
$
|
251,660,000
|
|
Net unaccreted purchase accounting discount
|
|
|
(5,116,000
|
)
|
|
|
(7,933,000
|
)
|
Unamortized (discount) premium on mortgage loans acquired from First Republic
|
|
|
(5,293,000
|
)
|
|
|
118,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
403,766,000
|
|
|
|
243,845,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily mortgage loans
|
|
|
|
|
|
|
|
|
Unpaid principal balance
|
|
|
20,159,000
|
|
|
|
21,495,000
|
|
Net unaccreted purchase accounting discount
|
|
|
(705,000
|
)
|
|
|
(809,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,454,000
|
|
|
|
20,686,000
|
|
|
|
|
|
|
|
|
|
|
Total carrying value of mortgage loans
|
|
$
|
423,220,000
|
|
|
$
|
264,531,000
|
|
|
|
|
|
|
|
|
|
|
At September 30, 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 September 30, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
Company
|
|
|
Predecessor Company
|
|
|
|
Three Months
Ended
Sept.
30,
2010
|
|
|
Six Months
Ended
June 30,
2010
|
|
|
Nine Months
Ended
Sept. 30,
2009
|
|
|
For the
Year
Ended
December 31,
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
|
|
$
|
372,309,000
|
|
|
$
|
255,930,000
|
|
|
$
|
202,967,000
|
|
|
$
|
199,392,000
|
|
Total Mortgage Loans at end of period
|
|
$
|
423,220,000
|
|
|
$
|
246,437,000
|
|
|
$
|
189,827,000
|
|
|
$
|
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 805, Business Combinations, 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 as of the Bank of America acquisition date or as of the Transaction date described in Note 1; therefore none of the loans were subject to the
accounting guidance under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, at January 1, 2009 or July 1, 2010. In addition, no additional provision for loan losses was required as of
September 30, 2010, December 31, 2009 or September 30, 2009.
12
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; any remaining
amounts were repaid to BANA in April 2010. 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:
|
|
|
|
|
|
|
|
|
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
|
|
As of
September 30,
2010
|
|
|
As of
December 31,
2009
|
|
Cash and cash equivalents deposited with First Republic
|
|
$
|
32,715,000
|
|
|
$
|
31,047,000
|
|
Cash and cash equivalents deposited with BANA
|
|
$
|
|
|
|
$
|
68,000
|
|
Payable to First Republic
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
Payable to BANA
|
|
$
|
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
Company
|
|
|
Predecessor Company
|
|
|
|
Three Months
Ended
September 30,
2010
|
|
|
Three
Months
Ended
September 30,
2009
|
|
|
Six Months
Ended
June
30,
2010
|
|
|
Nine Months
Ended
September 30,
2009
|
|
Mortgage Loans acquired from First Republic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross principal
|
|
$
|
199,498,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net unearned discount
|
|
|
(5,555,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Loans acquired
|
|
$
|
193,943,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
67,000
|
|
|
$
|
349,000
|
|
|
$
|
199,000
|
|
|
$
|
1,183,000
|
|
Loan servicing fee expense
|
|
$
|
234,000
|
|
|
$
|
128,000
|
|
|
$
|
333,000
|
|
|
$
|
397,000
|
|
Advisory fee expense
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
|
$
|
50,000
|
|
|
$
|
75,000
|
|
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. In July 2010, the Company acquired Mortgage Loans with a carrying
value of $193.9 million from First Republic, for which the Company paid approximately $38.9 million in cash and received a capital contribution of $155.0 million.
As part of the definitive agreement to sell First Republic (see Note 1), BANA agreed to 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, loans with an unpaid principal balance of $4,360,000 that were to be retained by BANA were sold to First Republic at carrying value. First Republic subsequently
transferred these loans to BANA.
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.
13
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 September 30, 2010 and at December 31, 2009.
At September 30, 2010 and at December 31, 2009, First Republic and BANA owned 25,410 shares of the Companys
Series A Preferred Stock, respectively, with a liquidation preference value of $25.4 million; these shares were purchased by First Republic prior to December 31, 2006. For the first nine months of 2010 and 2009, neither First Republic nor BANA
purchased any of the Companys outstanding Series A Preferred Stock. As part of the transaction discussed in Note 1, on July 1, 2010, First Republic acquired these shares of Series A Preferred Stock from BANA.
Note 6. Preferred Stock
At September 30, 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 September 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
|
|
September 30,
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, plus a redemption premium. The redemption premium per share is equal to (i) $35 if the date of
redemption is after June 1, 2009 but on or prior to June 1, 2010; (ii) $28 if the date of redemption is after June 1, 2010 but on or prior to June 1, 2011; (iii) $21 if the date of redemption is after June 1, 2011
but on or prior to June 1, 2012; (iv) $14 if the date of redemption is after June 1, 2012 but on or prior to June 1, 2013; and (v) $7 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.
14
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). On redemption resulting from such event, 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.
From November 2,
2009 to June 30, 2010, since BANA did not have any authorized classes of preferred stock, the automatic exchange feature of the Companys Series A Preferred Stock and Series D Preferred Stock was suspended. As of July 1, 2010, this
automatic exchange feature was reinstated. (See Note 1 for a discussion of the amendments to the Certificates of Designation of preferred stock effective on July 1, 2010.) Except under certain limited circumstances, the holders of the
Companys preferred stock have no voting rights.
Note 7. Common Stock
At September 30, 2010, the Company was authorized to issue 100,000,000 shares of common stock with a par value of $0.01 per share, of
which 30,538,777 shares were outstanding. The Company issued no common stock in the first nine 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.
Note 8. Dividends on Preferred Stock and Common Stock
The following table presents the dividends on preferred stock for the three months ended September 30, 2010 and 2009, the six months ended June 30, 2010 and the nine months ended
September 30, 2009. During the quarter ended September 30, 2010, the Company had accrued dividends on the Series A Preferred Shares and paid dividends on the Series D Preferred Shares. There were no accrued dividends payable on the Series
A or Series D Preferred Stock as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
Company
|
|
|
Predecessor Company
|
|
|
|
Three Months
Ended
September 30,
2010
|
|
|
Three Months
Ended
September 30,
2009
|
|
|
Six Months
Ended
June 30,
2010
|
|
|
Nine Months
Ended
September 30,
2009
|
|
Series A Preferred Stock
|
|
$
|
1,444,000
|
|
|
$
|
1,444,000
|
|
|
$
|
2,888,000
|
|
|
$
|
4,363,000
|
|
Series D Preferred Stock
|
|
|
1,087,000
|
|
|
|
1,087,000
|
|
|
|
2,174,000
|
|
|
|
3,287,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,531,000
|
|
|
$
|
2,531,000
|
|
|
$
|
5,062,000
|
|
|
$
|
7,650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
15
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 were 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 nine months ended September 30, 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 September 30,
2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
|
September 30,
2010
|
|
|
December 31,
2009
|
|
($ in thousands)
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Cash and cash equivalents
|
|
$
|
32,715
|
|
|
$
|
32,715
|
|
|
$
|
31,115
|
|
|
$
|
31,115
|
|
Mortgage loans, net
|
|
$
|
423,220
|
|
|
$
|
421,712
|
|
|
$
|
264,531
|
|
|
$
|
259,640
|
|
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
unpaid principal balance, net of unaccreted purchase accounting discounts and discounts or premiums on loans purchased. 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 September 30, 2010, approximately 76% 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.
Note 11. Subsequent Events
The Company evaluated the effects of events that have occurred subsequent to the quarter ended September 30, 2010, and through the
date of filing with the SEC.
16
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The
following discussion is presented on the combined basis of the Successor and Predecessor periods for the nine months ended September 30, 2010. We believe that the discussion on a combined basis is more meaningful as it allows the results of
operations for an entire period to be analyzed to the comparable periods.
This discussion summarizes the significant factors
affecting the financial condition of the Company as of September 30, 2010 and results of operations for the three and nine months ended September 30, 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.
|
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 law or 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.
17
History
Bank of America Acquisition
On January 1, 2009, Merrill Lynch was acquired by Bank of America. The Company continued to operate as a subsidiary of MLFSB until November 2, 2009 when we became a subsidiary of BANA. Bank of
America applied purchase accounting in the acquisition of Merrill Lynch and the Companys assets and liabilities were recorded at fair value on January 1, 2009. As a result, the allowance for loan losses was eliminated; and new fair values
on loans were established as of the effective date of the acquisition. The resulting discounts on loans were accreted to interest income over the lives of the loans.
Acquisition of the First Republic Business
After the close of business on
June 30, 2010, the current First Republic Bank acquired substantially all of the assets and assumed substantially all of the liabilities of the First Republic division of BANA, including the stock of the Company. As a result, the Companys
assets and liabilities were recorded at fair value on July 1, 2010. The resulting discounts on loans are accreted to interest income over the lives of the loans.
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 and as of July 1, 2010 as a result of the Transaction 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 Note 3, Purchase Accounting Allocation, of the Notes to
Financial Statements.)
Results of Operations
Overview
Net income was $4,333,000 and $11,406,000 for the third quarter
and first nine months of 2010, compared with $3,299,000 and $10,641,000 for the same periods in 2009. The increase in the third quarter of 2010, compared with the same period in 2009 was primarily due to an increase in interest income resulting from
higher average loan balances, partially offset by lower yields. The ratio of earnings to fixed charges was 1.71x and 1.50x for the third quarter and first nine months of 2010, and 1.30x and 1.39x for the same periods in 2009. The increase in the
third quarter of 2010 compared to the same period in 2009 is due to higher interest income resulting from higher average loan balances. Preferred stock dividend payments were 100% of fixed charges. The ratio of earnings to fixed charges has
increased over time as the Company has redeemed or converted prior issues of preferred stock without a cash dividend to its parent or the repurchase of common stock held by its parent.
18
Total Interest Income
Total interest income increased in the third quarter and in the first nine months of 2010 compared with the same periods
in 2009. The increase in both periods of 2010 compared with the same periods in 2009 is primarily due to higher average loan balances, partially offset by lower average short-term investments and lower yields on interest-earning assets. The
following table presents the average balances and yields on the Companys interest-earning assets for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
($ in thousands)
|
|
Average
Balance
|
|
|
Interest
Income
|
|
|
Yield
|
|
|
Contractual
Yield
|
|
|
Average
Balance
|
|
|
Interest
Income
|
|
|
Yield
|
|
|
Contractual
Yield
|
|
Loans
|
|
$
|
372,309
|
|
|
$
|
4,375
|
|
|
|
4.69
|
%
|
|
|
4.09
|
%
(1)
|
|
$
|
193,239
|
|
|
$
|
3,026
|
|
|
|
6.30
|
%
|
|
|
3.93
|
%
(1)
|
Short-term investments
|
|
|
33,357
|
|
|
|
67
|
|
|
|
0.80
|
|
|
|
0.80
|
|
|
|
102,331
|
|
|
|
349
|
|
|
|
1.37
|
|
|
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
405,666
|
|
|
$
|
4,442
|
|
|
|
4.37
|
%
|
|
|
3.82
|
%
|
|
$
|
295,570
|
|
|
$
|
3,375
|
|
|
|
4.59
|
%
|
|
|
3.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
($ in thousands)
|
|
Average
Balance
|
|
|
Interest
Income
|
|
|
Yield
|
|
|
Contractual
Yield
|
|
|
Average
Balance
|
|
|
Interest
Income
|
|
|
Yield
|
|
|
Contractual
Yield
|
|
Loans
|
|
$
|
295,149
|
|
|
$
|
11,421
|
|
|
|
5.16
|
%
|
|
|
4.06
|
%
(1)
|
|
$
|
202,967
|
|
|
$
|
9,681
|
|
|
|
6.35
|
%
|
|
|
4.51
|
%
(1)
|
Short-term investments
|
|
|
39,292
|
|
|
|
266
|
|
|
|
0.91
|
|
|
|
0.91
|
|
|
|
92,151
|
|
|
|
1,183
|
|
|
|
1.71
|
|
|
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
334,441
|
|
|
$
|
11,687
|
|
|
|
4.66
|
%
|
|
|
3.70
|
%
|
|
$
|
295,118
|
|
|
$
|
10,864
|
|
|
|
4.90
|
%
|
|
|
3.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net of servicing fees retained by First Republic
|
Interest income on Mortgage Loans increased in the third quarter and first nine months of 2010, compared with the same periods in 2009, primarily due to higher average loan balances, partially offset by
lower yields. Approximately $193.9 million of Mortgage Loans were purchased from First Republic in July 2010, and approximately $79.1 million of Mortgage Loans were purchased from First Republic in December 2009.
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 $234,000 and $567,000 for the third quarter and first nine months of 2010 and $128,000 and
$397,000 for the same periods 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 from the loan discounts established in purchase accounting and from loan discounts associated with purchased loans from First Republic, which
partially offset the changes in the average net coupon rate on loans. The average yield on loans, including accretion of loan discounts, was 4.69% and 5.16% for the third quarter and first nine months of 2010, compared with 6.30% and 6.35% for the
same periods in 2009. The average net coupon rate without loan discount accretion was 4.09% and 4.06% for the third quarter and first nine months of 2010, compared with 3.93% and 4.51% for the same periods in 2009. Net discount accretion was
$466,000 and $2,160,000 for the third quarter and first nine months of 2010, compared with $1,038,000 and $2,440,000 for the same periods in 2009. The total net unaccreted purchase accounting discount was $5.8 million at September 30, 2010,
compared with $8.7 million at December 31, 2009 and $9.9 million at September 30, 2009. The discount on loans purchased from First Republic was $5.3 million at September 30, 2010.
The weighted average net coupon rate on Mortgage Loans was 4.14% at September 30, 2010, 3.92% at December 31, 2009 and 3.99% at
September 30, 2009. The increase in the average net coupon rate at September 30, 2010 compared to December 31, 2009 is primarily due to an increase in interest rates on adjustable rate mortgage (ARM) loans indexed to the
Monthly Eleventh District Cost of Funds Index (COFI), partially offset by the decline in the average net coupon rate on intermediate fixed rate loans. Refer to Item 3, Quantitative and Qualitative Disclosures about Market
Risk.
19
Interest income on
short-term investments decreased in the third quarter and first nine months of 2010, compared with the same periods in 2009, due to lower average investment balances and lower yields. The average yields on short-term investments for the third
quarter and first nine months of 2010 decreased to 0.80% and 0.91%, respectively, compared with 1.37% and 1.71% for the same periods in 2009. The average yield on short-term investments has declined over the first nine months of 2009 and the first
nine months of 2010 due to lower market rates of interest.
Operating Expense
The Company incurs advisory fee expenses payable to First Republic pursuant to an advisory agreement with First Republic for services that
First Republic renders on the Companys behalf. Advisory fees were $100,000 per annum for 2010 and 2009, or $25,000 per quarter.
General and administrative expenses were $84,000 and $206,000 for the third quarter and first nine months of 2010 and $51,000 and $148,000 for the same periods in 2009. These expenses consisted primarily
of audit fees, directors fees, regulatory costs and other stockholder costs.
Financial Condition
Cash and Cash Equivalents
At September 30, 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 September 30, 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 and that substantially all such loans will be secured by single family homes.
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 September 30, 2010, approximately $351.1 million of loans, or 85% of the Companys single family loan portfolio, allowed interest-only payments. These
loans generally have an initial interest-only term of 10 years and had a weighted average remaining interest-only term of 7.5 years at September 30, 2010. These interest-only loans had an average loan-to-value (LTV) ratio at
September 30, 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%. At September 30, 2010, loans with the
potential for negative amortization were $3.7 million, or 0.9% of the total loan portfolio, and there were no loans that had increases in principal balance since origination. There was no interest that had been added to the principal of such
negative amortization loans at September 30, 2010.
A loan is placed on nonaccrual status when any installment of
principal or interest is over 90 days past due, except for any single family loan that is well secured and in the process of collection or when the Company determines that the ultimate collection of all contractually due principal or interest is
unlikely. The Company classifies a loan as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan purchase and servicing
agreement. Refer to Note 4, Loans, of the Notes to Financial Statements for a discussion of the Companys nonaccrual loans and allowance for loan losses.
20
Vintage Analysis
The following table presents a vintage analysis of Mortgage Loans (by carrying value) at September 30, 2010 by year of origination:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
Loan Type
|
|
Year
Originated
|
|
|
Balance
|
|
|
% of
Total
Loans
|
|
|
Average
FICO
|
|
|
Average
LTV
|
|
Single family mortgage loans
|
|
|
2009
|
|
|
$
|
261,094
|
|
|
|
61
|
%
|
|
|
765
|
|
|
|
56
|
%
|
|
|
|
2005
|
|
|
|
11,768
|
|
|
|
3
|
|
|
|
760
|
|
|
|
69
|
|
|
|
|
2004
|
|
|
|
32,851
|
|
|
|
8
|
|
|
|
773
|
|
|
|
58
|
|
|
|
|
2003
|
|
|
|
33,483
|
|
|
|
8
|
|
|
|
765
|
|
|
|
55
|
|
|
|
|
2002
|
|
|
|
24,786
|
|
|
|
6
|
|
|
|
767
|
|
|
|
56
|
|
|
|
|
2001
|
|
|
|
7,123
|
|
|
|
1
|
|
|
|
754
|
|
|
|
52
|
|
|
|
|
2000 and prior
|
|
|
|
32,661
|
|
|
|
8
|
|
|
|
736
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
403,766
|
|
|
|
95
|
|
|
|
763
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily mortgage loans
|
|
|
2004
|
|
|
|
4,205
|
|
|
|
1
|
|
|
|
|
|
|
|
50
|
|
|
|
|
2003
|
|
|
|
9,670
|
|
|
|
2
|
|
|
|
|
|
|
|
49
|
|
|
|
|
2002
|
|
|
|
3,748
|
|
|
|
1
|
|
|
|
|
|
|
|
61
|
|
|
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 and prior
|
|
|
|
1,831
|
|
|
|
1
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
19,454
|
|
|
|
5
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
|
|
|
$
|
423,220
|
|
|
|
100
|
%
|
|
|
|
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As shown in the table above, 61% of the Mortgage Loans at September 30, 2010 were originated
in 2009. 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. The weighted average LTV ratio on total Mortgage Loans was approximately
55%, based upon the appraised values of the properties at the time the loans were originated.
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
or geographic region. 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 September 30, 2010 by major geographic location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
San
Francisco
Bay Area
|
|
|
New York/
New
England
Area
|
|
|
Los
Angeles
Area
|
|
|
San
Diego
Area
|
|
|
Other
California
Areas
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
Amount
|
|
|
%
|
|
Single family
|
|
$
|
234,492
|
|
|
$
|
79,229
|
|
|
$
|
51,691
|
|
|
$
|
12,113
|
|
|
$
|
2,958
|
|
|
$
|
23,283
|
|
|
$
|
403,766
|
|
|
|
95
|
%
|
Multifamily
|
|
|
14,738
|
|
|
|
834
|
|
|
|
1,494
|
|
|
|
605
|
|
|
|
1,783
|
|
|
|
|
|
|
|
19,454
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
249,230
|
|
|
$
|
80,063
|
|
|
$
|
53,185
|
|
|
$
|
12,718
|
|
|
$
|
4,741
|
|
|
$
|
23,283
|
|
|
$
|
423,220
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent by location
|
|
|
59
|
%
|
|
|
19
|
%
|
|
|
13
|
%
|
|
|
3
|
%
|
|
|
1
|
%
|
|
|
5
|
%
|
|
|
100
|
%
|
|
|
|
|
At September 30, 2010, approximately 76% of Mortgage Loans were secured by properties located
in California.
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.
21
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 1.71x for the third quarter of 2010,
compared with 1.30x for the third 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 22 basis points to 4.37% for the third quarter of 2010, compared with 4.59% for the third quarter of 2009. The decrease in yield was primarily due to declining market rates of
interest. The yield on loans decreased 161 basis points in the third quarter of 2010 compared to the same period in 2009 primarily due to a reduction in the accretion of loan discounts. The average net contractual yield increased 16 basis points in
the third quarter of 2010, compared with the same period in 2009. The loan portfolio mix by interest rate type at September 30, 2010 was less adjustable compared with September 30, 2009 due to loans purchased in December 2009 and July
2010. ARM loans were 33% of Mortgage Loans at September 30, 2010 and 81% at September 30, 2009. The weighted average coupon rate for ARMs at September 30, 2010 remained relatively consistent compared with a year ago, compared with a
127 basis point decrease in the weighted average coupon rate for intermediate fixed rate loans and an 8 basis point increase for fixed rate loans. The weighted average remaining contractual maturity of Mortgage Loans was 25.5 years at
September 30, 2010 and 20.7 years at September 30, 2009.
For ARMs, the timing of changes in the average net coupon
rate 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 net coupon rate for ARMs was 3.59% at September 30, 2010 compared to 3.60% at
September 30, 2009.
For intermediate fixed and fixed rate loans, the balance at September 30, 2010 was $285.2
million, or 67% of total Mortgage Loans, compared with $36.9 million at September 30, 2009, or 19% of total Mortgage Loans. The weighted average net coupon rate for intermediate fixed rate loans was 4.30% at September 30, 2010, down 127
basis points from 5.57% at September 30, 2009. The decline in the intermediate fixed rate yield was due to the purchase of approximately $79.1 million of loans in December 2009 and $193.9 million of loans in July 2010 that had an average net
coupon rate of 4.38% and 4.21%, respectively, which was lower than the average net coupon rate of the existing portfolio. The weighted average net coupon rate for fixed rate loans was 5.77% at September 30, 2010, up slightly from 5.69% at
September 30, 2009.
22
The following table
presents an analysis of Mortgage Loans at September 30, 2010 by interest rate type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Balance
|
|
|
Net
Coupon
(1)
(2)
|
|
|
Months
to Next
Reset
(1)
|
|
|
% of
Total
Loans
|
|
ARM loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COFI
|
|
$
|
112,845
|
|
|
|
3.78
|
%
|
|
|
1
|
|
|
|
27
|
%
|
CMT
|
|
|
14,568
|
|
|
|
2.65
|
|
|
|
5
|
|
|
|
3
|
|
Prime
|
|
|
821
|
|
|
|
6.88
|
|
|
|
11
|
|
|
|
|
|
LIBOR
|
|
|
9,763
|
|
|
|
2.54
|
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ARMs
|
|
|
137,997
|
|
|
|
3.59
|
|
|
|
2
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate fixed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months to 36 months
|
|
|
2,430
|
|
|
|
5.29
|
|
|
|
29
|
|
|
|
1
|
|
37 months to 60 months
|
|
|
263,025
|
|
|
|
4.29
|
|
|
|
48
|
|
|
|
62
|
|
Greater than 60 months
|
|
|
275
|
|
|
|
6.25
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intermediate fixed
|
|
|
265,730
|
|
|
|
4.30
|
|
|
|
48
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable rate loans
|
|
|
403,727
|
|
|
|
4.06
|
|
|
|
32
|
|
|
|
96
|
|
Fixed rate loans
|
|
|
19,493
|
|
|
|
5.77
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
423,220
|
|
|
|
4.14
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Net of servicing
fees retained by First Republic
|
The following table presents maturities or interest rate adjustments based
upon contractual repricing and maturities, adjusted for estimated prepayments, as of September 30, 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
|
|
$
|
32,715
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
32,715
|
|
Loans, net
|
|
|
158,899
|
|
|
|
25,368
|
|
|
|
70,933
|
|
|
|
164,452
|
|
|
|
3,568
|
|
|
|
|
|
|
|
423,220
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,532
|
|
|
|
1,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
191,614
|
|
|
$
|
25,368
|
|
|
$
|
70,933
|
|
|
$
|
164,452
|
|
|
$
|
3,568
|
|
|
$
|
1,532
|
|
|
$
|
457,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,502
|
|
|
$
|
1,502
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
455,965
|
|
|
|
455,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
457,467
|
|
|
$
|
457,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repricing gap positive (negative)
|
|
$
|
191,614
|
|
|
$
|
25,368
|
|
|
$
|
70,933
|
|
|
$
|
164,452
|
|
|
$
|
3,568
|
|
|
$
|
(455,935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative repricing gap:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar amount
|
|
$
|
191,614
|
|
|
$
|
216,982
|
|
|
$
|
287,915
|
|
|
$
|
452,367
|
|
|
$
|
455,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total assets
|
|
|
41.9
|
%
|
|
|
47.4
|
%
|
|
|
62.9
|
%
|
|
|
98.9
|
%
|
|
|
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.
23
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 September 30, 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 September 30, 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.
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.
24
Item 6. Exhibits.
|
3.1
|
Articles of Incorporation of First Republic Preferred Capital Corporation, as amended (incorporated herein by reference to Exhibit 3.1 on Form 8-K filed on July 2,
2010).
|
|
3.2
|
Amended and Restated Bylaws of First Republic Preferred Capital Corporation (incorporated herein by reference to Exhibit 3.2 on Form 8-K filed on July 2, 2010).
|
|
3.3
|
Amended and Restated Certificate of Designations of the 10.5% Noncumulative Series A Preferred Stock (incorporated herein by reference to Exhibit 3.3 on Form 8-K filed
on July 2, 2010).
|
|
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 July 2, 2010).
|
|
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.
|
25
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: November 12, 2010
|
|
|
|
By:
|
|
/s/ WILLIS H. NEWTON, JR.
|
|
|
|
|
|
|
|
|
Willis H. Newton, Jr.
|
|
|
|
|
|
|
|
|
Vice President,
|
|
|
|
|
|
|
|
|
Chief Financial Officer,
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
(Principal Financial Officer)
|
|
|
|
|
Date: November 12, 2010
|
|
|
|
By:
|
|
/s/ MICHAEL J. ROFFLER
|
|
|
|
|
|
|
|
|
Michael J. Roffler
|
|
|
|
|
|
|
|
|
Vice President,
|
|
|
|
|
|
|
|
|
Treasurer
|
|
|
|
|
|
|
|
|
(Principal Accounting Officer)
|
26
INDEX TO EXHIBITS
|
|
|
Exhibit
Number
|
|
Exhibit Title
|
3.1
|
|
Articles of Incorporation of First Republic Preferred Capital Corporation, as amended (incorporated herein by reference to Exhibit 3.1 on Form 8-K filed on July 2,
2010).
|
|
|
3.2
|
|
Amended and Restated Bylaws of First Republic Preferred Capital Corporation (incorporated herein by reference to Exhibit 3.2 on Form 8-K filed on July 2, 2010).
|
|
|
3.3
|
|
Amended and Restated Certificate of Designations of the 10.5% Noncumulative Series A Preferred Stock (incorporated herein by reference to Exhibit 3.3 on Form 8-K filed on July 2,
2010).
|
|
|
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
July 2, 2010).
|
|
|
12
|
|
Statement of computation of ratios of earnings to fixed charges.
|
|
|
31.1
|
|
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2
|
|
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.2
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
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