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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2004

 

Commission File Number: 000-33461

 


 

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 


 

Nevada   91-1971389

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

111 Pine Street, 2nd Floor,

San Francisco, California

  94111
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (415) 392-1400

 


 

Securities registered pursuant to Section 12(b) of the Act:

None

 

Securities registered pursuant to Section 12(g) of the Act:

8.875% Noncumulative Perpetual Series B Preferred Stock

7.25% Noncumulative Perpetual Series D Preferred Stock

 


 

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

 

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of May 3, 2004 was 29,362,633.

 



Table of Contents

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

Item 1.

   Financial Statements (Unaudited)     
     Balance Sheet – March 31, 2004 and December 31, 2003    3
     Statement of Income – Three Months Ended March 31, 2004 and 2003    4
     Statement of Changes in Stockholders’ Equity – Three Months Ended March 31, 2004 and 2003    5
     Statement of Cash Flows – Three Months Ended March 31, 2004 and 2003    6
     Notes to Financial Statements    7

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    11

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    14

Item 4.

   Controls and Procedures    16
PART II – OTHER INFORMATION

Item 1.

   Legal Proceedings    17

Item 2.

   Changes in Securities and Use of Proceeds    17

Item 3.

   Defaults Upon Senior Securities    17

Item 4.

   Submission of Matters to a Vote of Security Holders    17

Item 5.

   Other Information    17

Item 6.

   Exhibits and Reports on Form 8-K    17
SIGNATURES

 

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PART 1 - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

The following interim financial statements are unaudited. However, the financial statements reflect all adjustments (which include only normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of 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 Sheet

(Unaudited)

 

    

March 31,

2004


    December 31,
2003


 

ASSETS

                

Cash and short-term investments on deposit with First Republic Bank

   $ 12,433,000     $ 6,766,000  

Single family mortgage loans

     291,909,000       296,051,000  

Multifamily mortgage loans

     25,704,000       26,454,000  

Less: Allowance for loan losses

     (481,000 )     (481,000 )
    


 


Net loans

     317,132,000       322,024,000  

Accrued interest receivable

     1,543,000       1,593,000  

Prepaid expenses

     22,000       14,000  
    


 


Total assets

   $ 331,130,000     $ 330,397,000  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                

Liabilities:

                

Dividends payable on common stock

   $ —       $ 1,255,000  

Dividends payable on preferred stock

     1,543,000       —    

Payable to First Republic Bank

     21,000       19,000  

Other payables

     37,000       29,000  
    


 


Total liabilities

     1,601,000       1,303,000  
    


 


Stockholders’ equity:

                

Preferred stock, $0.01 par value per share; 10,000,000 shares authorized:

                

10.50% perpetual, exchangeable, noncumulative Series A preferred stock; $1,000 liquidation value per share; 55,000 shares authorized, issued and outstanding

     55,000,000       55,000,000  

8.875% perpetual, exchangeable, noncumulative Series B preferred stock; $25 liquidation value per share; 1,840,000 shares authorized, 1,680,000 shares issued and outstanding

     42,000,000       42,000,000  

5.70% perpetual, convertible, exchangeable, noncumulative Series C preferred stock; $1,000 liquidation value per share; 10,000 shares authorized, 7,000 issued and outstanding

     7,000,000       7,000,000  

7.25% perpetual, exchangeable, noncumulative Series D preferred stock; $25 liquidation value per share; 2,400,000 shares authorized, issued and outstanding

     60,000,000       60,000,000  

Common stock, $0.01 par value, 50,000,000 shares authorized, 29,362,633 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively

     294,000       294,000  

Additional paid-in capital

     165,000,000       165,000,000  

Retained earnings

     235,000       —    

Dividends in excess of retained earnings

     —         (200,000 )
    


 


Total stockholders’ equity

     329,529,000       329,094,000  
    


 


Total liabilities and stockholders’ equity

   $ 331,130,000     $ 330,397,000  
    


 


 

See accompanying notes to financial statements.

 

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FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Majority Owned Subsidiary of First Republic Bank)

 

Statement of Income

(Unaudited)

 

    

Three Months Ended

March 31,


     2004

   2003

Interest income:

             

Interest on loans

   $ 4,053,000    $ 2,811,000

Interest on short-term investments

     17,000      44,000
    

  

Total interest income

     4,070,000      2,855,000

Provision for loan losses

     —        —  
    

  

Total interest income after provision for loan losses

     4,070,000      2,855,000
    

  

Operating expense:

             

Advisory fees payable to First Republic Bank

     19,000      19,000

General and administrative

     53,000      54,000
    

  

Total operating expense

     72,000      73,000
    

  

Net income before preferred stock dividends

     3,998,000      2,782,000

Dividends on preferred stock

     3,563,000      2,475,000
    

  

Net income available to common stockholders

   $ 435,000    $ 307,000
    

  

 

See accompanying notes to financial statements.

 

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FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Majority Owned Subsidiary of First Republic Bank)

 

Statement of Changes in Stockholders’ Equity

(Unaudited)

 

    

Preferred

Stock


   Common
Stock


   Additional
Paid-in Capital


   Retained
Earnings


    Total

 

Balance as of January 1, 2003

   $ 104,000,000    $ 187,000    $ 105,107,000    $ (200,000 )   $ 209,094,000  

Net income before preferred stock dividends

     —        —        —        2,782,000       2,782,000  

Dividends on preferred stock

     —        —        —        (2,475,000 )     (2,475,000 )
    

  

  

  


 


Balance as of March 31, 2003

   $ 104,000,000    $ 187,000    $ 105,107,000    $ 107,000     $ 209,401,000  
    

  

  

  


 


Balance as of January 1, 2004

   $ 164,000,000    $ 294,000    $ 165,000,000    $ (200,000 )   $ 329,094,000  

Net income before preferred stock dividends

     —        —        —        3,998,000       3,998,000  

Dividends on preferred stock

     —        —        —        (3,563,000 )     (3,563,000 )
    

  

  

  


 


Balance as of March 31, 2004

   $ 164,000,000    $ 294,000    $ 165,000,000    $ 235,000     $ 329,529,000  
    

  

  

  


 


 

See accompanying notes to consolidated financial statements.

 

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FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Majority Owned Subsidiary of First Republic Bank)

 

Statement of Cash Flows

(Unaudited)

 

     Three Months Ended March 31,

 
     2004

    2003

 

Operating Activities:

                

Net income before preferred stock dividends

   $ 3,998,000     $ 2,782,000  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Amortization of premium on loans

     147,000       39,000  

Changes in operating assets and liabilities:

                

Accrued interest receivable

     50,000       6,000  

Prepaid expenses

     (8,000 )     (11,000 )

Payable to First Republic Bank

     2,000       6,000  

Other payables

     8,000       —    
    


 


Net cash provided by operating activities

     4,197,000       2,822,000  
    


 


Investing Activities:

                

Loans acquired from First Republic Bank

     (14,207,000 )     (45,095,000 )

Principal payments on loans

     18,952,000       37,928,000  
    


 


Net cash provided (used) by investing activities

     4,745,000       (7,167,000 )
    


 


Financing Activities:

                

Dividends paid on preferred stock

     (2,020,000 )     (932,000 )

Dividends paid on common stock

     (1,255,000 )     (2,044,000 )
    


 


Net cash used by financing activities

     (3,275,000 )     (2,976,000 )
    


 


Increase (decrease) in cash and cash equivalents

     5,667,000       (7,321,000 )

Cash and cash equivalents at beginning of year

     6,766,000       22,296,000  
    


 


Cash and cash equivalents at end of period

   $ 12,433,000     $ 14,975,000  
    


 


Supplemental disclosure of cash flow information:

                

Preferred stock dividend payable

   $ 1,543,000     $ 1,543,000  

 

See accompanying notes to financial statements.

 

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FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Majority Owned Subsidiary of First Republic Bank)

 

Notes to Financial Statements

March 31, 2004

 

Note 1. Organization and Basis of Presentation

 

First Republic Preferred Capital Corporation (the “Company”) is a Nevada corporation formed by First Republic Bank (the “Bank”) in April 1999 for the purpose of raising capital for the Bank. The Company’s 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 the Bank. The Company expects that all, or substantially all, of its Mortgage Assets will continue to be Mortgage Loans acquired from the Bank. The Company has elected to be taxed as a REIT and intends to make distributions to its shareholders 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. To date, the Company has issued 29,362,633 shares of common stock, par value $0.01 per share. The Bank owns all of the common stock, except for 9,840 shares held by certain of the Bank’s employees and directors. Earnings per share data is not presented, as the Company’s common stock is not publicly traded.

 

These interim statements are intended to be read in conjunction with the financial statements presented in First Republic Preferred Capital Corporation’s Annual Report on Form 10-K as of and for the year ended December 31, 2003. Interim results are not necessarily indicative of results to be expected for the entire year.

 

The results and operations of the Company and the Bank are subject to various risks, including business, economic, legal and regulatory conditions and factors. Additional information is included in the Company’s Annual Report on Form 10-K under the caption “Risk Factors.”

 

Note 2. Summary of Significant Accounting Policies

 

Mortgage Loans

 

Mortgage Loans are carried at the principal amount outstanding, net of purchase discounts and premiums. Discounts or premiums on Mortgage Loans are accreted or amortized as yield adjustments over the expected lives of the loans using the interest method. Unaccreted or unamortized discounts or premiums on loans sold or paid in full are recognized in income at the time of sale or payoff.

 

The Company has purchased Mortgage Loans from the Bank at the Bank’s carrying amount, which generally has approximated the fair values of the loans purchased. If a significant difference were to exist between the Bank’s carrying amount and the fair value of loans at the date of purchase from the Company, the difference would be recorded as a capital contribution by the Bank or a capital distribution to the Bank and would not be an adjustment to the basis of the loans.

 

Mortgage Loans consisted entirely of single family mortgages through the first quarter of 2003. Beginning in the second quarter of 2003, the Company acquired multifamily mortgages with the proceeds of the Series D preferred stock offering. At March 31, 2004, Mortgage Loans totaled $317.6 million, of which $291.9 million were single family mortgages and $25.7 million were multifamily mortgages. At December 31, 2003, Mortgage Loans totaled $322.5 million, of which $296.1 million were single family mortgages and $26.4 million were multifamily mortgages.

 

Interest income from loans is recognized in the month earned and is net of service fees paid to the Bank. Interest income is not recorded on loans when they become more than 90 days delinquent, except for single family loans that are well secured and in the process of collection, or at such earlier time as management determined that the collectibility of interest is unlikely. When a loan is placed on nonaccrual status, interest income may be recorded

 

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when cash is received if the Company’s recorded investment in such loans is deemed collectible. When, in management’s judgment, the borrower’s ability to make periodic interest and principal payments resumes, the loan is returned to accrual status. There were no nonaccrual or impaired loans as of March 31, 2004 or December 31, 2003. The Company classifies a loan as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.

 

Allowance for Loan Losses

 

In 2002, the Company established an allowance for loan losses of $200,000. In 2003, the Company increased its allowance for loan losses by $281,000, which was the amount of the Bank’s allowance for loan losses associated with the loans the Company acquired using the proceeds from the issuance of the Series D Preferred Shares. 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 Company’s and the Bank’s past loss experience, the Bank’s 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 determines that an additional provision is required, the Company would provide for loan losses by charging current income.

 

Other Real Estate Owned

 

Real estate acquired through foreclosure is recorded at the lower of cost or fair value minus estimated costs to sell. Costs related to holding real estate are recorded 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 cash on hand and short-term investments on deposit at the Bank. As a REIT making sufficient dividend distributions, the Company paid no income taxes for the three months ended March 31, 2004 or 2003.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for losses on loans and the rate at which purchased discounts or premiums are accreted or amortized and recognized in interest income.

 

Note 3. Related Party Transactions

 

Since inception in April 1999, the Company has acquired all of its loans from the Bank. The aggregate cost of these loans acquired by the Company during the first quarter was approximately $14 million in 2004 and $45 million in 2003, including net premiums of $40,000 and $140,000, respectively. All purchases were at a price equal to the Bank’s carrying amount, which approximated the fair value of the loans.

 

The Company has a loan purchase and servicing agreement with the Bank pursuant to which the Bank performs, among other things, servicing of loans held by the Company in accordance with normal industry practice. The Bank charges an annual servicing fee of 0.25% of the outstanding principal balances of the Mortgage Loans that the Bank services. The Company records the servicing fees as a reduction of interest income. Loan servicing fees were $192,000 and $104,000 for the first quarter ended March 31, 2004 and 2003, respectively. In its capacity as servicer, the Bank receives Mortgage Loan payments on behalf of the Company and holds the payments in custodial accounts at the Bank.

 

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The Company entered into an advisory agreement with the Bank under which the Bank administers the day-to-day operations of the Company. The Bank 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; and (iii) monitoring the Company’s compliance with the requirements necessary to qualify as a REIT.

 

The advisory agreement is renewable on an annual basis. In 2003, the Board of Directors of the Company, including a majority of our independent directors, approved an annual fee of $75,000, payable in equal quarterly installments. The Company had $19,000 payable to the Bank for advisory fees at March 31, 2004 and at December 31, 2003.

 

During 2001, the Bank purchased 13,500 shares of the Company’s outstanding Series A Preferred Shares, with a liquidation preference value of $13.5 million. During 2002, the Bank purchased 1,500 shares of outstanding Series A Preferred Shares, with a liquidation preference value of $1.5 million. During 2003, the Bank purchased 10,260 shares of outstanding Series A Preferred Shares with a liquidation preference value of $10.3 million, and in March 2004, the Bank purchased 100 shares of outstanding Series A Preferred Shares with a liquidation preference value of $100,000. Accordingly, at March 31, 2004, the Bank owned 25,360 shares of the Company’s Series A Preferred Shares, with a liquidation preference value of $25.4 million.

 

Note 4. Preferred Stock

 

As of March 31, 2004, the Company was authorized to issue 10,000,000 shares of preferred stock. The Company has issued each of the following series of preferred stock, par value $0.01 per share.

 

    

March 31,

2004


   December 31,
2003


Series A - 55,000 shares authorized, issued and outstanding

   $ 55,000,000    $ 55,000,000

Series B - 1,840,000 shares authorized, 1,680,000 issued and outstanding

     42,000,000      42,000,000

Series C - 10,000 shares authorized, 7,000 issued and outstanding

     7,000,000      7,000,000

Series D - 2,400,000 shares authorized, issued and outstanding

     60,000,000      60,000,000
    

  

Total preferred stock

   $ 164,000,000    $ 164,000,000
    

  

 

The Series A Preferred Shares, Series B Preferred Shares, Series C Preferred Shares and Series D Preferred Shares are collectively referred to as the “Preferred Shares.”

 

In June 1999, the Company issued 55,000 shares of Series A Preferred Stock. Proceeds from this issuance were $55 million, including underwriting fees contributed by the Bank. The Series A Preferred Shares are not redeemable prior to June 1, 2009. Holders of the Series A Preferred Shares are entitled to receive, if authorized and declared by the Board of Directors of the Company, noncumulative dividends at a rate of 10.5% per annum or $105 per annum per share. Dividends on the Series A Preferred Shares, if authorized and declared, are payable semiannually in arrears on June 30 and December 30 of each year.

 

In June 2001, the Company issued 7,000 Series C Preferred Shares. Proceeds from this issuance were $7 million, including issuance costs contributed by the Bank. The Series C Preferred Shares are not redeemable prior to June 16, 2007. The Series C Preferred Shares are convertible into common stock of the Bank at a price of $30.56 per share. The single holder of the Series C Preferred Shares is entitled to receive, if authorized and declared by the Board of Directors of the Company, noncumulative dividends at a rate of 5.7% per annum or $57 per annum per share. Dividends on the Series C Preferred Shares, if authorized and declared, are payable semiannually in arrears on June 30 and December 30 of each year.

 

In January 2002, the Company issued 1,680,000 Series B Preferred Shares. Proceeds from this issuance were $42 million, including underwriting fees contributed by the Bank. The Series B Preferred Shares are not redeemable prior to December 30, 2006. Holders of the Series B Preferred Shares are entitled to receive, if authorized and declared by the Board of Directors of the Company, noncumulative dividends at a rate of 8.875% per annum or $2.21875 per annum per share. Dividends on the Series B Preferred Shares are payable quarterly in arrears on March 30, June 30, September 30, and December 30 of each year.

 

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In June 2003, the Company issued 2,400,000 Series D Preferred Shares. Proceeds from this issuance were $60 million, including underwriting fees contributed by the Bank. The Series D Preferred Shares are not redeemable prior to June 27, 2008. Holders of the Series D Preferred Shares are entitled to receive, if authorized and declared by the Board of Directors of the Company, noncumulative dividends at a rate of 7.25% per annum or $1.8125 per annum per share. Dividends on the Series D Preferred Shares are payable quarterly in arrears on March 30, June 30, September 30, and December 30 of each year.

 

Upon the occurrence of an adverse change in relevant tax laws, the Company will have the right to redeem the Preferred Shares, in whole (but not in part). The liquidation preference for both the Series A Preferred Shares and the Series C Preferred Shares is $1,000 per share plus the semiannual dividend thereon accrued through the date of redemption for the dividend period in which the redemption occurs. The liquidation preference for each of the Series B Preferred Shares and the Series D Preferred Share is $25 per share plus the quarterly dividend thereon accrued through the date of redemption for the dividend period in which the redemption occurs. The Preferred Shares will be exchanged into preferred shares of the Bank upon the occurrence of certain events. The exchange rate for both the Series A Preferred Shares and the Series C Preferred Shares is 1:1. The exchange rate for each of the Series B Preferred Shares and Series D Preferred Shares is 1:1/40. Except under certain limited circumstances, the holders of the Preferred Shares have no voting rights.

 

Note 5. Common Stock

 

As of March 31, 2004, the Company was authorized to issue 50,000,000 shares of common stock with a par value of $0.01 per share. At March 31, 2004, there were 29,362,633 shares outstanding. The Company initially issued 10,000,000 shares to the Bank. In June 2003, January 2002, and June 2001, the Company issued 10,658,330, 7,460,831 and 1,243,472 shares of common stock, respectively, and used the proceeds to acquire Mortgage Assets from the Bank.

 

Holders of common stock are entitled to receive dividends if and when authorized and declared by the Board of Directors, out of funds legally available therefor after all preferred dividends have been paid for the full year. As of March 31, 2004, no common stock dividends have been declared for the year 2004.

 

Note 6. Dividends on Preferred Stock and Common Stock

 

Dividends on the Preferred Shares, are payable if, when and as authorized by the Company’s Board of Directors. If the Board of Directors does not authorize a dividend on any of the Preferred Shares for any respective dividend period, holders of each class of Preferred Shares will not be entitled to be paid that dividend later or to recover any unpaid dividend whether or not funds are, or subsequently become, available. The Board of Directors, in its business judgment, may determine that it would be in the best interest of the Company to pay less than the full amount of the stated dividend on each series of Preferred Shares for any dividend period. However, to remain qualified as a REIT, the Company must distribute annually at least 90% of its “REIT taxable income” (excluding deductions for any dividends paid and any capital gains) to stockholders, and, generally, the Company cannot pay dividends on the common stock for periods in which less than full dividends are paid on each series of Preferred Shares.

 

For the quarter ended March 31, 2004, the Company paid quarterly dividends of $932,000 to holders of the Series B Preferred Shares and $1,088,000 to the holders of the Series D Preferred Shares. For the same quarter, the Company accrued dividends payable of $1,443,000 and $100,000 for the Series A and Series C Preferred Shares, respectively.

 

The Company expects to pay the holders of common stock an amount of dividends that when aggregated with the dividends paid to holders of the Preferred Shares is not less than 90% of the Company’s “REIT taxable income” (excluding deductions for any dividends paid and any net capital gains) in order to remain qualified as a REIT. The Company has not declared dividends to the holders of its common stock for the periods from January 1 to March 31 of 2004 or 2003.

 

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Note 7. Concentration of Credit Risk

 

The Company presently holds Mortgage Loans secured primarily by real estate properties located in the state of California (70% in total). Future economic, political, or other developments in the state could adversely affect the value of the Mortgage Loans.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Introduction

 

This discussion summarizes the significant factors affecting the financial condition and results of operations of the Company during the three months ended March 31, 2004. This discussion is provided to increase the understanding of, and should be read in conjunction with, the unaudited financial statements, accompanying notes, and tables included in this quarterly report.

 

Information Regarding Forward-Looking Statements

 

This 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. These statements involve known and unknown risks, uncertainties and other factors that may cause the 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 the following:

 

business strategy;

 

estimates regarding our capital requirements and our need for additional financing; and

 

plans, objectives, expectations and intentions contained in this report that are not historical facts.

 

You can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,” “potential,” “continue,” and similar expressions intended to identify forward-looking statements. Statements that contain these words should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial condition or state other “forward-looking” information. There may be events in the future, however, that cannot be accurately predicted or controlled, and that may cause actual results to differ materially from the expectations described in the forward-looking statements. 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 possible loan losses; changes in the regulatory environment; changes in business conditions, particularly in San Francisco and Los Angeles counties and in the home mortgage lending industry; and changes in the securities markets. Other risks, uncertainties and factors are discussed elsewhere in this report, in other First Republic Preferred Capital Corporation’s filings with the SEC or in materials incorporated therein by reference.

 

Throughout this document, “Company,” “we,” “our,” and “us” refers to First Republic Preferred Capital Corporation and “Bank” refers to First Republic Bank.

 

Results of Operations

 

Overview

 

Net income before preferred stock dividends was $3,998,000 for the first quarter of 2004, compared with $2,782,000 for the first quarter of 2003. The increase was primarily due to an increase in average interest-earning assets, resulting in higher total interest income. However, the drop in interest rates during the past year resulted in lower average yields compared with the first quarter of 2003. The ratio of earnings to fixed charges was 1.12x for each quarter ended March 31, 2004 and 2003. Dividend payments were 100% of fixed charges.

 

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Total Interest Income

 

The following table presents the average balances and yields on the Company’s interest-earning assets for the periods indicated:

 

     Three Months Ended March 31,

 
     2004

    2003

 

(Dollars in thousands)

 

   Average
Balance


   Interest
Income


   Yield

    Average
Balance


   Interest
Income


   Yield

 

Loans

   $ 322,289    $ 4,053    5.03 %   $ 197,062    $ 2,811    5.71 %

Short-term investments

     7,702      17    0.87 %     12,647      44    1.38 %
    

  

        

  

      

Total interest-earning assets

   $ 329,991    $ 4,070    4.93 %   $ 209,709    $ 2,855    5.45 %
    

  

        

  

      

 

The Bank retains an annual servicing fee of 25 basis points on the gross average outstanding principal balance of the Company’s loan portfolio that the Bank services, which reduces the interest income that the Company receives. For the quarter ended March 31, 2004 and 2003, loan servicing fees were $192,000 and $104,000, respectively.

 

The average yield on interest-earning assets declined to 4.93% for the first quarter of 2004, compared with 5.45% for the first quarter of 2003. Loan portfolio yields were 5.03% and 5.71%, respectively. The declines in yields reflect the decline in the overall rate environment over the last several years.

 

The average balance of short-term investments was $7.7 million and $12.6 million for the first quarter of 2004 and 2003, respectively. The average yield on the interest-bearing money market account dropped to 0.87% for the first quarter of 2004 from 1.38% for the first quarter of 2003.

 

Operating Expense

 

The Company incurs advisory fee expenses payable to the Bank. The Company has an advisory agreement with the Bank for services that the Bank renders on its behalf for which it is paid $75,000 per annum. Advisory fees for each quarter ended March 31, 2004 and 2003 were $19,000.

 

Other operating expenses were primarily related to exchange listings and other shareholder costs, audit fees and rating agency fees. Collectively, these fees and other operating expenses were $53,000 and $54,000 for the first quarter ended March 31, 2004 and 2003, respectively.

 

Financial Condition

 

Interest-bearing Deposits with the Bank

 

At March 31, 2004 and December 31, 2003, interest-bearing deposits consisted entirely of a money market account held at the Bank. Generally, the balance in this account reflects principal and interest received on the mortgage loan portfolio.

 

Mortgage Loans

 

The loan portfolio at March 31, 2004 and December 31, 2003 consisted of both single family and multifamily mortgage loans acquired from the Bank. The Company anticipates that in the future it will continue to acquire all of its loans from the Bank.

 

A loan is placed on nonaccrual status when any installment of principal or interest is over 90 days past due, except for single family loans that are 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.

 

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As of March 31, 2004 and December 31, 2003, there were no nonaccrual loans, impaired loans, or loans that were troubled debt restructurings. In addition, at March 31, 2004 and December 31, 2003, there were no accruing loans that were contractually past due more than 90 days.

 

The following table presents information with respect to the Company’s allowance for loan losses:

 

    

Three Months Ended

March 31,


   

Year Ended
December 31,

2003


 
     2004

    2003

   

Allowance for Loan Losses:

                        

Balance, beginning of period

   $ 481,000     $ 200,000     $ 200,000  

Transfer from the Bank

     —         —         281,000  

Chargeoffs

     —         —         —    

Recoveries

     —         —         —    
    


 


 


Balance, end of period

   $ 481,000     $ 200,000     $ 481,000  
    


 


 


Average loans for the period

   $ 322,289,000     $ 197,062,000     $ 272,541,000  

Total loans at period end

   $ 317,613,000     $ 195,007,000     $ 322,505,000  

Ratio of allowance for loan losses to total loans

     0.15 %     0.10 %     0.15 %

 

During 2003, the Company recorded a transfer to the allowance for loan losses of $281,000, which was the amount of the Bank’s allowance for loan losses associated with the loans that the Company acquired upon the issuance of the Series D Preferred Shares. As of March 31, 2004, the Company’s allowance for loan losses was 0.15% of total loans.

 

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 Company’s performance to both positive and negative developments affecting a particular industry. The balance sheet exposure to geographic concentrations directly affects the credit risk of the loans within the loan portfolio.

 

At March 31, 2004, 53% of the Company’s loans were secured by properties located in the San Francisco Bay Area, 20% in New York and contiguous states, 10% in Los Angeles County, 7% in other parts of California, and 10% in other parts of the United States. At March 31, 2004, the weighted average loan-to-value ratio on the Mortgage Loans was approximately 55%, based on the appraised values of the properties at the time the loans were originated.

 

The following table presents an analysis of Mortgage Loans at March 31, 2004 by major geographic location:

 

(Dollars in thousands)

 

   San Francisco
Bay Area


    Greater
New York
City Area


    Los Angeles
County


    Other
California
Areas


    Las Vegas
Nevada


    Other

    Total

 

Single family loans

   $ 147,697     $ 61,287     $ 31,331     $ 20,633     $ 650     $ 30,311     $ 291,909  

Multifamily loans

     20,614       857       1,787       2,034       412       —         25,704  
    


 


 


 


 


 


 


Total

   $ 168,311     $ 62,144     $ 33,118     $ 22,667     $ 1,062     $ 30,311     $ 317,613  
    


 


 


 


 


 


 


Percent by location

     53 %     20 %     10 %     7 %     —   %     10 %     100 %

 

Liquidity and Capital Resources

 

The Company’s principal liquidity needs are to pay dividends and to fund the acquisition of additional Mortgage Assets as borrowers repay Mortgage Loans. The Company will continue to fund the acquisition of additional Mortgage Loans with the proceeds of principal repayments on its current portfolio of Mortgage Loans. Proceeds

 

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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 will provide sufficient funds for operating requirements and dividends payments in accordance with the requirements to be taxed as a REIT for the foreseeable future.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk Management

 

The Company services fixed-rate dividend obligations to preferred stockholders and operating expenses by the collection of interest income from its Mortgage Loans. To facilitate meeting dividend payments, the Company has maintained an average interest-earning asset balance of approximately two times the liquidation preference of outstanding preferred shares. The Company’s earnings to fixed charges ratio was 1.12x for the first quarter of 2004, compared with 1.10x for 2003 and 1.12x for the first quarter of 2003.

 

With the interest rate environment declining over the last year to 40-year historical lows, the yields on average interest-earning assets have dropped. The declines in yields are primarily the result of increased prepayment of higher-yielding assets with the proceeds of the prepaid Mortgage Loans reinvested in lower-yielding Mortgage Loans. The weighted average yield on average interest-earning assets was 4.93% for the first quarter of 2004, compared with 5.01% for 2003 and 5.45% for the first quarter of 2003.

 

At March 31, 2004, 27% of the Mortgage Loans were adjustable rate loans, 53% were intermediate fixed rate loans and 20% were fixed rate loans. The weighted average coupon rate for each loan type was 4.64%, 5.43% and 5.83%, respectively, and the weighted average remaining maturity was 24.2 years. At March 31, 2003, 34% were adjustable rate loans, 45% were intermediate fixed rate loans and 21% were fixed rate loans. The weighted average coupon rate for each loan type was 4.70%, 6.46% and 6.93%, respectively, and the weighted average remaining maturity was 24.2 years.

 

For adjustable rate Mortgage Loans, the timing of changes in average yields depends on the underlying interest rate index, the timing of changes in the index, and the frequency of adjustments to the loan rate. The drop in the weighted average coupon rate of adjustable rate loans slowed to 6 basis points from 4.70% at March 31, 2003 to 4.64% at March 31, 2004. The decline in adjustable rate loan yields was mitigated by a significant volume of adjustable rate loans indexed to the 11th District Cost of Funds Index (“COFI”). COFI is a lagging index that tends to respond more slowly to changes in the general interest rate environment than a market rate index. At March 31, 2004, adjustable rate loans indexed to COFI were 55% of total adjustable rate mortgages (“ARM”), or 15% of total Mortgage Loans.

 

For intermediate fixed and fixed rate loans, the gross principal outstanding at March 31, 2004 was $232.0 million, or 73% of total loans. The weighted average coupon rate for intermediate fixed rate loans declined 103 basis points to 5.43% at March 31, 2004 from 6.46% at March 31, 2003. The weighted average coupon rate for fixed rate loans declined 110 basis points to 5.83% at March 31, 2004 from 6.93% at March 31, 2003. Repayments of intermediate fixed and fixed rate loans during the past year were a significant portion of the total repayment proceeds. The high level of repayments was the result of low interest rates. The Company reinvested these repayment proceeds in lower-yielding Mortgage Loans.

 

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Table of Contents

The following table presents the outstanding loan portfolio at March 31, 2004 by interest rate type:

 

(Dollars in thousands)

 

  

Balance


  

Net

Coupon (1)(2)


   

Months to

Next Reset (1)


  

Percentage

of Portfolio


 
          

ARM loans:

                        

COFI

   $ 47,033    4.54 %   2    15 %

CMT

     30,375    4.62     6    10  

Prime

     6,065    6.00     1    2  

LIBOR

     2,120    3.59     3    —    
    

             

Total ARMs

     85,593    4.64     3    27  
    

             

Intermediate fixed:

                        

12 months to 36 months

     27,857    6.25     26    9  

37 months to 60 months

     114,343    5.26     45    36  

Greater than 60 months

     27,186    5.30     89    8  
    

             

Total intermediate fixed

     169,386    5.43     49    53  
    

             

Total adjustable rate loans

     254,979    5.16     33    80  

Fixed rate loans

     62,634    5.83          20  
    

             

Total loans

   $ 317,613    5.29 %        100 %
    

             


(1) Weighted average.
(2) Net of servicing fees retained by the Bank.

 

The following table presents principal balances outstanding, net of amortized principal payments, by maturity dates or interest rate adjustments as of March 31, 2004:

 

(Dollars in thousands)

 

  

0-6 Months


   

7-12 Months


   

1-3 Years


   

3-5 Years


   

Over

5 Years


   

Not Rate

Sensitive


   

Total


Cash and investments

   $ 12,433     $ —       $ —       $ —       $ —       $ —       $ 12,433

Loans

     77,115       15,027       41,409       108,584       75,478       —         317,613

Other assets

     —         —         —         —         —         1,084       1,084
    


 


 


 


 


 


 

Total assets

   $ 89,548     $ 15,027     $ 41,409     $ 108,584     $ 75,478     $ 1,084     $ 331,130
    


 


 


 


 


 


 

Other liabilities

   $ —       $ —       $ —       $ —       $ —       $ 1,601     $ 1,601

Stockholders’ equity

     —         —         —         —         —         329,529       329,529
    


 


 


 


 


 


 

Total liabilities and equity

   $ —       $ —       $ —       $ —       $ —       $ 331,130     $ 331,130
    


 


 


 


 


 


 

Repricing GAP-positive (negative)

   $ 89,548     $ 15,027     $ 41,409     $ 108,584     $ 75,478     $ (330,046 )      
    


 


 


 


 


 


     

Cumulative repricing GAP:

                                                      

Dollar amount

   $ 89,548     $ 104,575     $ 145,984     $ 254,568     $ 330,046                
    


 


 


 


 


             

Percent of total assets

     27.0 %     31.6 %     44.1 %     76.9 %     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.

 

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Table of Contents

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s chief executive officer and chief financial officer, in connection with Bank personnel, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by the Quarterly Report on Form 10Q and have concluded that, based on such evaluation, the Company’s disclosure controls and procedures were adequate and effective to ensure the material information relating to the company was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

 

Changes in Internal Controls

 

There were no changes in the Company’s internal controls over financial reporting identified in connection with the evaluation of such internal controls that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

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Table of Contents

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Not Applicable

 

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

 

Not Applicable

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not Applicable

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Not Applicable

 

ITEM 5. OTHER INFORMATION

 

Not Applicable

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

a.   Exhibits    
    12   Statement regarding calculation of earnings to fixed charges.
    31.1   Certification pursuant to 15 U.S.C. 7m(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    31.2   Certification pursuant to 15 U.S.C. 7m(a), 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.
b.   Reports on Form 8-K
    Not Applicable.

 

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Table of Contents

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

 

Date: May 6, 2004

 

By:

 

/s/ JAMES J. BAUMBERGER


        James J. Baumberger
       

President and Director

       

(Principal Executive Officer)

Date: May 6, 2004

 

By:

 

/s/ WILLIS H. NEWTON, JR.


        Willis H. Newton, Jr.
       

Vice President,

       

Chief Financial Officer,

       

Treasurer and Director

       

(Principal Financial Officer)

 

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Table of Contents

INDEX TO EXHIBITS

 

Exhibit Number

 

Exhibit Title


12   Statement regarding calculation of earnings to fixed charges.
31.1   Certification pursuant to 15 U.S.C. 7m(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification pursuant to 15 U.S.C. 7m(a), 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.

 

 

19