First Republic Preferred Capital Corp

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 28, 2007

Commission file number: 000-33461

FIRST REPUBLIC PREFERRED

CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)


Nevada		91-1971389
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

111 Pine Street, 2nd Floor San Francisco, California		94111 (Zip Code)
(Address of principal executive offices)		94111 (Zip Code)

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

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

7.25% Noncumulative Perpetual Series D Preferred Stock

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

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer x (Do not check if a smaller reporting company)		Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the book value per share of such common equity as of June 30, 2007 was $0.

The number of shares outstanding of the registrant’s common stock, par value $.01 per share, as of March 20, 2008 was 30,538,277.

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

TABLE OF CONTENTS


PART I

Item 1.	Business	3
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	19
Item 2.	Properties	19
Item 3.	Legal Proceedings	19
Item 4.	Submission of Matters to a Vote of Security Holders	19

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
Item 6.	Selected Financial Data	22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	23
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 8.	Financial Statements and Supplementary Data	27
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	28
Item 9A(T).	Controls and Procedures	28
Item 9B.	Other Information	28

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	29
Item 11.	Executive Compensation	31
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	31
Item 13.	Certain Relationships and Related Transactions, and Director Independence	32
Item 14.	Principal Accounting Fees and Services	32

PART IV

Item 15.	Exhibits and Financial Statement Schedules	32

SIGNATURES		34

PART I

Information Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect management’s 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:

•

business strategy;

•

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

•

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

Forward-looking statements often include words such as “may,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “continue,” or similar expressions. Statements that contain these words should be read carefully because they discuss future expectations, contain projections of future results of operation or of financial condition or state other forward-looking information. There may be events in the future, however, that cannot be accurately predicted or controlled and that may cause actual results to differ materially from the expectations described in the forward-looking statements. The reader is cautioned that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including, but not limited to, competitive pressure in the mortgage lending industry; changes in the interest rate environment that reduce margins; general economic conditions, either nationally or regionally, that are less favorable than expected, resulting in, among other things, a deterioration in credit quality and an increase in the provision for loan losses; changes in the regulatory environment; changes in business conditions, particularly in San Francisco and Los Angeles counties and the New York area and in the home mortgage lending industry; and changes in the securities markets. Other risks, uncertainties and factors are discussed elsewhere in this report, in other First Republic Preferred Capital Corporation filings with the Securities and Exchange Commission (the “SEC”) and in materials incorporated therein by reference.

Throughout this document, the “Company,” “we,” “our” or “us” refers to First Republic Preferred Capital Corporation, “First Republic” refers to First Republic Bank and the “Bank” refers to Merrill Lynch Bank & Trust Co., FSB.

Item 1.

BUSINESS.

General

First Republic Preferred Capital Corporation (the “Company”) is a Nevada corporation formed by First Republic Bank (“First Republic”), a Nevada chartered commercial bank, in April 1999 for the purpose of raising capital for First Republic. On September 21, 2007, Merrill Lynch & Co., Inc. (“Merrill Lynch & Co.”) acquired all of First Republic’s outstanding shares of common stock. First Republic, which owned 100% of the Company’s outstanding common shares, merged with and into Merrill Lynch Bank & Trust Co., FSB (the “Bank”), a federal stock savings bank and a wholly owned subsidiary of Merrill Lynch & Co. Upon completion of the merger, First Republic became a division of the Bank. On the same date, the Bank became the controlling shareholder and owner of 100% of the Company’s outstanding common shares. As a result of the merger, the Company changed its fiscal year end from December 31 to the last Friday in December. The impact of this change in the reporting period was not material. There were no changes in the Company’s Board of Directors, material agreements or outstanding issues of preferred stock (other than the changes discussed in Note 6, “Preferred Stock,” to the financial statements included elsewhere in this report.)

At December 28, 2007, the Company had issued 30,538,277 shares of common stock, par value $0.01 per share. The Bank owned all of the common stock at December 28, 2007. Earnings per share data is not presented, as the Company’s common stock is not publicly traded.

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 referred to herein as the “Mortgage Assets”). The Mortgage Assets presently held by the Company are loans secured by single family and multifamily real estate properties (“Mortgage Loans”) that were acquired from First Republic. The Company expects that all, or substantially all, of its Mortgage Assets will continue to be Mortgage Loans acquired from First Republic. The Company has elected to be taxed as a REIT and intends to make distributions to its stockholders such that the Company is relieved of substantially all income taxes relating to ordinary income under applicable tax regulations. Accordingly, no provision for income taxes is included in the accompanying financial statements.

General Description of Mortgage Assets

Mortgage Assets . As of December 28, 2007, the Company’s Mortgage Assets consisted of Mortgage Loans originated by First Republic and secured by single family (one-to-four unit) homes and multifamily properties. The aggregate outstanding principal balance of those loans was $277.1 million as of December 28, 2007.

Single Family Mortgage Loans . First Republic originates and may acquire from time to time both conforming and nonconforming single family mortgage loans. Conventional conforming single family mortgage loans comply with the requirements for inclusion in a loan guarantee program sponsored by either Freddie Mac or Fannie Mae. Substantially all of the single family mortgage loans that the Company has acquired from First Republic are nonconforming loans because the original loan principal balances exceed the limits for Freddie Mac or Fannie Mae programs. The Company believes that all of its single family mortgage loans meet the requirements for sale to national private mortgage conduit programs or other investors in the secondary mortgage market.

Each single family mortgage loan is evidenced by a promissory note secured by a mortgage or deed of trust or other similar security instrument creating a first lien on single family (one-to-four unit) residential properties, including shares allocated to a dwelling unit in a residential cooperative housing corporation. Real estate properties underlying single family mortgage loans consist of individual dwelling units, individual cooperative apartment units, individual condominium units, two- to four-family dwelling units, planned unit developments and townhouses. The Company currently expects that most of the single family mortgage loans acquired will be adjustable rate or intermediate fixed rate mortgage loans; however, the Company may also purchase longer-term fixed rate single family mortgage loans.

Multifamily Mortgage Loans. The Company’s multifamily mortgage loans are predominately for established buildings in the urban neighborhoods of San Francisco and Los Angeles and for recently constructed properties in Las Vegas. The buildings used as collateral for the Company’s multifamily loans generally are operating properties with proven occupancy, rental rates and expense levels. The neighborhoods tend to be densely populated, the properties generally are close to employment opportunities and rent levels are appropriate for the target occupants. Typically, the borrowers are property owners who are experienced at managing these properties. The Company’s current policy is not to acquire multifamily mortgage loans if total multifamily mortgage loans, together with commercial mortgage loans, if any, would constitute more than 15% of the Company’s total Mortgage Assets immediately following such acquisition.

Commercial Mortgage Loans . Although the Company currently does not own any commercial mortgage loans, the Company may acquire commercial mortgage loans secured by industrial and warehouse properties, recreational facilities, office buildings, retail space and shopping malls, hotels and motels, hospitals, nursing homes or senior living centers. The Company’s current policy is not to acquire any interest in a commercial mortgage loan if commercial mortgage loans and multifamily mortgage loans together would constitute more than 15% of Mortgage Assets immediately following such acquisition. For a variety of reasons, commercial mortgage loans can be significantly more risky than single family mortgage loans.

Management Policies and Programs

As discussed elsewhere in this report, First Republic administers the Company’s Mortgage Assets. In doing so, First Republic has a high degree of autonomy. The Company’s Board of Directors, however, has adopted certain policies to guide the acquisition and disposition of assets, use of capital and leverage, credit risk management and certain other activities. These policies, which are discussed below, may be amended or revised from time to time at the discretion of the Board of Directors without a vote of the Company’s shareholders.

Asset Acquisition Policies . The Company currently anticipates purchasing Mortgage Assets comprised primarily of single family mortgage loans and multifamily mortgage loans, although the Company may purchase commercial real estate mortgages and other types of Mortgage Assets. Although not required to do so, the Company expects to acquire all or substantially all of these Mortgage Assets from First Republic. As a wholly-owned subsidiary of the Bank, the Company acquires loans from First Republic, a division of the Bank, at prices equal to First Republic’s carrying amount, which generally has approximated their fair values. If a significant difference were to exist between First Republic’s carrying amount and the fair value of the loans at the date of purchase, the Company would record the difference as a capital contribution by the Bank or a capital distribution to the Bank. In the future, the Company would expect the purchase price to approximate the fair value of the loans for recently originated loans; however, the price that the Company pays will not be determined through arm’s-length transactions with unrelated third parties. The Company intends to acquire only performing loans from First Republic. However, neither the Company nor First Republic currently has specific policies with respect to the Company’s acquisition from First Republic of particular loans or pools of loans, other than the Company’s requirement that these assets must be eligible to be held by a REIT. The Company may periodically acquire Mortgage Assets from unrelated third parties. To date, the Company has not entered into any agreements, arrangements or adopted any procedures to purchase Mortgage Assets from unrelated third parties. However, First Republic has purchased Mortgage Assets from unrelated third parties, and these assets are eligible to be purchased by the Company. The Company anticipates purchasing Mortgage Assets from unrelated third parties only if neither First Republic nor any of its affiliates has amounts or types of Mortgage Assets sufficient to meet the Company’s requirements.

In addition, the Company is permitted under the REIT guidelines to invest up to 25% of the total value of its assets in assets eligible to be held by REITs other than those described above. These assets could include shares or interests in other REITs and partnership interests. Since inception, the Company has not acquired any such assets. However, in order to preserve the Company’s status as a REIT under the Internal Revenue Code of 1986, as amended, (the “Internal Revenue Code”), at least 75% of the Company’s total assets must consist of mortgage loans and other qualified assets of the type set forth in Section 856(c)(5)(B) of the Internal Revenue Code. The other qualifying assets include cash, cash equivalents and securities, including shares or interests in other REITs, although the Company currently does not intend to invest in shares or interests in other REITs.

Capital and Leverage Policies . If the Company’s Board of Directors decides that additional funding is required, the Company may seek to raise funds through equity offerings or debt financings. The Company may also seek to retain cash that otherwise would be used to pay dividends, but only after considering the consequences of such action under the provisions of the Internal Revenue Code requiring a REIT to distribute not less than 90% of its REIT taxable income (excluding deductions for any dividends paid and any net capital gains) and taking into account taxes that would be imposed on undistributed taxable income.

The Company has no debt outstanding and currently does not intend to incur any indebtedness. Its articles of incorporation, however, do not contain any limitation on the amount or percentage of debt, funded or otherwise, that the Company may incur. Notwithstanding the foregoing, the terms of the Company’s preferred shares provide that the Company may not incur indebtedness in excess of 25% of total stockholders’ equity without the approval of a majority of the Company’s independent directors. Any debt incurred may include intercompany advances made by the Bank to the Company.

The Company may also issue additional preferred shares. The Company is prohibited, however, from issuing preferred shares ranking senior to its Series A preferred shares or Series D preferred shares without consent of holders of at least two-thirds of each of the respective classes of outstanding preferred shares. The Bank has advised the Company that, at the date of this report, it owns approximately $25.4 million of the Company’s Series A preferred shares and that it may seek to acquire more of those shares. Because the Company’s articles of incorporation do not prohibit or otherwise restrict the Bank or its affiliates from holding or voting the Company’s preferred shares, the Bank may be in a position to significantly affect the outcome of any future vote by the holders of the Company’s preferred shares. In addition, the Company is prohibited from issuing preferred shares ranking either senior or equal to the Series A preferred shares or the Series D preferred shares without the approval of a majority of the Company’s independent directors. The Company currently does not intend to issue any additional series of preferred shares.

Credit Risk Management Policies . The Company intends that each mortgage loan acquired from First Republic or any other party will represent a first lien position and will be originated in the ordinary course of the originator’s real estate lending activities based on the underwriting standards generally applied (at the time of origination) for the originator’s own account. The Company also intends that all Mortgage Assets held will be serviced pursuant to a loan purchase and servicing agreement with First Republic, which requires servicing in conformity with accepted secondary market standards, with any servicing guidelines promulgated by the Company and, in the case of the single family mortgage loans, with Freddie Mac and Fannie Mae guidelines and procedures.

Conflict of Interest Policies . Because of the nature of the Company’s relationship with First Republic, conflicts of interest may arise with respect to certain transactions, including, without limitation, the acquisition of Mortgage Assets from First Republic and the modification of the advisory agreement or the loan purchase and servicing agreement. It is the Company’s policy, and the policy of First Republic, to keep the terms of any financial dealings with First Republic consistent with those available from unrelated third parties in the mortgage lending industry. In addition, neither the advisory agreement nor the loan purchase and servicing agreement, each discussed elsewhere in this report, may be modified or terminated without the approval of a majority of the Company’s independent directors.

Conflicts of interest between the Company and First Republic may arise in connection with making decisions that bear upon the credit arrangements that First Republic may have with a borrower. Conflicts of interest may arise in connection with actions taken by the Bank as the Company’s controlling shareholder. It is the Company’s intention and the intention of First Republic and the Bank that any agreements and transactions between the Company, on the one hand, and First Republic or the Bank, on the other hand, including without limitation the loan purchase and servicing agreement, are fair to both parties and are consistent with market terms for such types of transactions. The loan purchase and servicing agreement provides that First Republic must perform foreclosures and dispositions of Mortgage Loans with a view toward maximizing the recovery by the Company, and that it must service the Mortgage Loans with a view toward the Company’s interests. However, there can be no assurance that any such agreement or transaction in fact will be on terms as favorable to the Company as would have been obtained from unaffiliated third parties.

There are no provisions in the Company’s articles of incorporation limiting any of its officers, directors, security holders or affiliates from having any direct or indirect interest in any Mortgage Assets to be acquired or disposed of by the Company or in any transaction in which the Company has an interest or from engaging in

acquiring, holding or managing such Mortgage Assets. As described elsewhere in this report, the Company expects that First Republic will have direct interests in transactions with the Company, including without limitation, the transfer of Mortgage Assets to the Company. The Company does not currently anticipate, however, that any of its officers or directors will have any interests in such Mortgage Assets.

Insurance Policies . First Republic follows what it believes to be standard practices in the mortgage banking industry by requiring borrowers to obtain and thereafter to maintain insurance covering fire and casualty losses in respect of the mortgaged properties, but not requiring insurance coverage for natural disasters such as earthquakes. The Company believes that the properties underlying Mortgage Loans held are adequately insured against fire and casualty losses.

Other Policies . The Company does not intend to make direct investments in real estate or to own other interests in real estate, except as a result of foreclosure proceedings related to Mortgage Assets. The Company does not intend to invest in securities such as bonds, preferred stock and common stock or in the securities of or other interests in entities engaged in real estate activities, although the Company is permitted under REIT guidelines to invest up to 25% of its portfolio in eligible real estate securities, including shares or interests in other REITs and partnership interests. The Company intends to operate in a manner that will not subject it to regulation under the Investment Company Act of 1940, as amended (the “Investment Company Act”). Therefore, the Company does not intend to (i) invest in the securities of other issuers for the purpose of exercising control over such issuers, (ii) underwrite securities of other issuers, (iii) actively trade in loans or other investments, (iv) offer securities in exchange for property or (v) make loans to third parties, including, without limitation, its officers, directors or other affiliates.

The Investment Company Act exempts entities that, directly or through majority-owned subsidiaries, are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” These interests are referred to as “Qualifying Interests.” Under current interpretations by the staff of the SEC, in order to qualify for this exemption, the Company, among other things, must maintain at least 55% of its assets in Qualifying Interests and also may be required to maintain an additional 25% in Qualifying Interests or other real estate-related assets. The assets that the Company may acquire therefore may be limited by the provisions of the Investment Company Act. The Company has established a policy of limiting authorized investments that are not Qualifying Interests to no more than 20% of the value of its total assets.

The Company may, under certain circumstances, purchase its preferred shares or common shares in the open market or otherwise. Any action of this type would be taken only in conformity with applicable federal and state laws and the requirements for qualifying as a REIT and only upon approval by the Company’s Board of Directors.

The Company currently intends to make investments and to operate its business at all times in such a manner as to be consistent with the requirements of the Internal Revenue Code to qualify as a REIT. Future economic, market, legal, tax or other considerations, however, may cause the Company’s Board of Directors, subject to approval by a majority of the independent directors, to determine that it is in the Company’s best interests and in the best interest of its shareholders to revoke the Company’s REIT status.

The Company currently does not intend to borrow money or issue securities senior to the preferred shares or otherwise to incur any indebtedness in connection with its operations. However, the Company reserves the right to do so at any time, although under its articles of incorporation, indebtedness in excess of 25% of total stockholders’ equity may not be incurred without the approval of a majority of the independent directors.

The investment and operating policies described above may be revised from time to time at the discretion of the Company’s Board of Directors without a vote of the shareholders.

Description of Loan Portfolio

General. Except for certain home loans purchased by First Republic in 1998, the Mortgage Loans held by the Company were originated by First Republic in the ordinary course of its real estate lending activities. The Mortgage Loans consisted solely of single family mortgage loans through the first quarter of 2003. Beginning in the second quarter of 2003, the Company acquired multifamily mortgages using the proceeds from the Series D Preferred Stock offering. At December 28, 2007, Mortgage Loans totaled $267.5 million, of which $237.4 million were secured by single family real estate properties and $30.1 million were secured by multifamily real estate properties. At December 31, 2006, Mortgage Loans totaled $323.2 million, of which $288.7 million were secured by single family real estate properties and $34.5 million were secured by multifamily properties.

At December 28, 2007, the Mortgage Loans had interest rates generally ranging from 4.45% to 8.38% per annum and a weighted average note rate of 6.12% per annum. The Mortgage Loans were originated between October 1983 and November 2005, and the average original term to stated maturity was approximately 28 years. The weighted average number of years from origination of the loans through December 28, 2007 was approximately 6 years, and the weighted average remaining term was approximately 22 years. At December 31, 2006, the Mortgage Loans had rates generally ranging from 4.31% to 8.35%, a weighted average note rate of 6.10%, a weighted average number of years from origination of 4.8 years and a weighted average remaining term of approximately 23.2 years.

The weighted average “loan-to-value ratio” for Mortgage Loans was approximately 52% at December 28, 2007 and 53% at December 31, 2006. The “loan-to-value ratio” means the ratio (expressed as a percentage) of the current principal amount of a mortgage loan to the lesser of (i) the most recent appraised value of the underlying mortgage property, and (ii) if the mortgage loan was made to finance the acquisition of a property, the purchase price of the mortgaged property.

Interest Rate Types. Mortgage Loans consist of adjustable and fixed interest rate types, which are more fully described below. The interest rate types for adjustable rate mortgage (“ARM”) loans include Monthly Eleventh District Cost of Funds Index (“COFI”) ARM, One-Year Treasury (“CMT”) ARM and LIBOR ARM, intermediate fixed rate types, which are adjustable after an initial period, include 5/1 Year ARM, 7/1 Year ARM, 10/1 Year ARM, and 5/5 Year ARM; and fixed interest rate types include 15-Year Fixed and 30-Year Fixed.

The interest rate on an ARM typically is tied to either the COFI, the CMT or the LIBOR index and is adjustable periodically. A majority of Mortgage Loans have adjustable interest rate types. At December 28, 2007, 76% (by principal balance) of Mortgage Loans were ARMs that bear interest at rates that adjust within one year, and 10% were intermediate fixed rate loans that bear interest rates that are fixed for an initial period and then adjust after the initial period. Generally, ARMs are subject to lifetime interest rate caps and periodic interest rate caps.

The interest rate on an ARM generally includes a “gross margin,” which is a fixed percentage that is added to the loan’s index in order to calculate the interest rate to be paid by the borrower (without taking into account any interest rate caps or minimum interest rates). “Gross margin” is not applicable to longer-term fixed rate mortgage loans.

The interest rate on each type of ARM loan product such as the COFI ARM or the CMT ARM adjusts periodically, subject to lifetime interest rate caps and minimum interest rates, each as specified in the mortgage note relating to the ARM. Each ARM loan bears interest at its initial interest rate until its first rate adjustment date. Effective with each rate adjustment date, the monthly principal and interest payment on substantially all of the ARM loans will be adjusted to an amount that will fully amortize the then-outstanding principal balance of such mortgage loan over its remaining term to stated maturity and that will be sufficient to pay interest at the adjusted interest rate.

For intermediate fixed rate loans that are automatically convertible (5/1 Year ARMs, 7/1 Year ARMs and 10/1 Year ARMs), the interest rate is fixed at an initial rate for a certain amount of years (five, seven or ten years), after which time the loan generally converts to a monthly or One-Year ARM, and the interest rate adjusts annually thereafter as if the mortgage loan were a One-Year ARM with a lifetime interest rate cap. At December 28, 2007, these automatically convertible mortgage loans comprised 9% of Mortgage Loans, compared with 14% at December 31, 2006. In addition, 1% of Mortgage Loans at December 28, 2007 and December 31, 2006 were indexed to the 5-year CMT and reprice every five years.

The Company has purchased from First Republic certain adjustable rate single family home loans that contain provisions for the negative amortization of principal in the event that the amount of interest and principal due is greater than the required monthly payment. The borrower’s ability to make payments is determined based on a rate in excess of the fully accrued interest rate, which is well above the initial rate on the negative amortization loan. The amount of any payment shortfall is added to the principal balance of the loan to be repaid through future monthly payments, which, in turn, could cause increases in the principal amount owed by the borrower over the original amount advanced. At December 28, 2007, loans with the potential for negative amortization were $7.8 million, or 3% of the total loan portfolio, and there were no loans that had increases in principal balance since origination. There was no interest that had been added to the principal of such negative amortization loans at December 28, 2007.

In addition, the Company has purchased from First Republic loans with a period of interest only payments. Underwriting standards for all loans have required a high level of borrower net worth, substantial post-loan liquidity, excellent FICO scores and significant down payments. As of December 28, 2007, approximately $153.6 million of loans, or 62% of the Company’s single family loan portfolio, allowed interest only payments for varying periods. These interest only loans had an average LTV ratio of approximately 54%, based on appraised values at the time of origination. None of the Company’s interest only home loans had an LTV ratio at origination of more than 80%.

Underwriting Standards. First Republic has represented to the Company that all of the Mortgage Loans in the portfolio were originated or subsequently underwritten generally in accordance with the underwriting policies customarily employed by First Republic during the period in which the Mortgage Loans were originated or purchased by First Republic, as applicable.

In the mortgage loan approval process, First Republic assesses both the borrower’s ability to repay the mortgage loan and, in the appropriate cases, the adequacy of the proposed security. A borrower’s credit score is considered but is not the sole determining factor in the decision to approve a loan. Credit policies and procedures are established by the Board of Directors of First Republic, which delegates credit approval to certain executive officers and senior credit officers in accordance therewith.

The approval process for each type of mortgage loan includes on-site appraisals of the properties securing such loans and a review of the applicant’s financial statements and credit, payment and banking history, financial statements of any guarantors, and tax returns of guarantors of commercial mortgage loans. First Republic generally lends up to 80% of the appraised value of single family residential owner-occupied dwellings. The maximum loan-to-value ratio generally applied by First Republic for multifamily mortgage loans has been 75% of the lesser of the appraised value of the property or the sale price and 70% for commercial mortgage loans.

Substantially all fixed-rate mortgage loans originated by First Republic contain a “due-on-sale” clause providing that First Republic may declare a mortgage loan immediately due and payable in the event, among other things, that the borrower sells the property securing the loan without the consent of First Republic. First Republic’s ARMs generally are assumable by a borrower determined to be qualified by First Republic.

Geographic Distribution; Loan Size . At December 28, 2007, approximately 79% of Mortgage Loans, based on the total outstanding principal balance, were secured by properties located in California. Consequently, the Company’s loan portfolio would be particularly affected by adverse developments in California, including

economic, political and business developments and natural catastrophes such as storms or earthquakes, to the extent any such developments may affect the ability or willingness of property owners in that state to make payments of principal and interest on Mortgage Loans. First Republic has historically emphasized and specialized in the origination of loans that are nonconforming as to size.

Insurance . First Republic requires title insurance policies protecting the priority of First Republic’s liens for all Mortgage Loans and fire and casualty insurance for Mortgage Loans. Generally, for any single family mortgage loan in an amount exceeding 80% of the appraised value of the security property, First Republic currently requires mortgage insurance from an independent mortgage insurance company. At the time of origination of the single family mortgage loans, each of the primary mortgage insurance policy insurers was approved by Fannie Mae or Freddie Mac. A standard hazard insurance policy is required to be maintained by the mortgagor with respect to each single family mortgage loan in an amount equal to the maximum replacement cost of the improvements securing such single family mortgage loan or the principal balance of such single family mortgage loan, whichever is less. If the real estate property underlying a single family mortgage loan is located in a flood zone, the loan may also be covered by a flood insurance policy as required by law. The Company does not maintain any special hazard insurance policy or mortgagor bankruptcy insurance with respect to single family mortgage loans, nor is any single family mortgage loan insured by the Federal Housing Administration or guaranteed by the Veterans Administration.

The Company’s Relationship with First Republic

Amended and Restated Master Loan Purchase and Servicing Agreement . The Company acquires Mortgage Loans from First Republic and First Republic services the Mortgage Loans pursuant to an Amended and Restated Master Loan Purchase and Servicing Agreement (the “loan purchase and servicing agreement”). First Republic, as servicer, retains a service fee equal to 0.25% per annum calculated monthly based on the gross average outstanding principal balances of loans in the loan portfolio.

The loan purchase and servicing agreement requires First Republic to service the Mortgage Loans in a manner generally consistent with accepted secondary market practices, with any servicing guidelines promulgated by the Company and, in the case of single family mortgage loans, with Fannie Mae and Freddie Mac guidelines and procedures. The loan purchase and servicing agreement requires First Republic to service the Mortgage Loans with a view toward the Company’s interests. First Republic collects and remits principal and interest payments, administers mortgage escrow accounts, submits and pursues insurance claims, and initiates and supervises foreclosure proceedings on the Mortgage Loans it services. First Republic also provides accounting and reporting services required by the Company for the Mortgage Loans. The loan purchase and servicing agreement requires First Republic to follow collection procedures customary in the industry, including contacting delinquent borrowers and supervising both foreclosures and property disposition in the event of unremedied defaults in accordance with servicing guidelines promulgated by the Company. First Republic may from time to time transfer, assign and sell all of its servicing obligations under the loan purchase and servicing agreement, subject to the Company’s reasonable consent.

First Republic is required to pay all expenses related to the performance of its duties under the loan purchase and servicing agreement. First Republic is required to make advances of the taxes and required insurance premiums that are not collected from borrowers with respect to any mortgage loan serviced by it, unless it determines that such advances are nonrecoverable from the mortgagor, insurance proceeds or other sources with respect to such mortgage loan. If First Republic makes advances, First Republic generally is reimbursed prior to the Company’s receipt of the proceeds of the mortgage loan. First Republic also is entitled to reimbursement for expenses incurred by it in connection with the liquidation of defaulted mortgage loans serviced by it and in connection with the restoration of mortgaged property. First Republic is responsible to the Company for any loss suffered as a result of First Republic’s failure to make and pursue timely claims or as a result of actions taken or omissions made by First Republic that cause the policies to be canceled by the insurer. First Republic may institute foreclosure proceedings, exercise any power of sale contained in any mortgage or deed of trust, obtain a

deed in lieu of foreclosure or otherwise, hold mortgage proceeds for the Company’s benefit and acquire title to mortgaged property underlying a mortgage loan by operation of law or otherwise in accordance with the terms of the loan purchase and servicing agreement. However, First Republic does not have the authority to enter into contracts in the Company’s name.

The Company may terminate the loan purchase and servicing agreement upon the occurrence of one or more events specified in the loan purchasing and servicing agreement. These events relate generally to First Republic’s proper and timely performance of its duties and obligations under the loan purchasing and servicing agreement. The Company may not terminate the loan purchasing and servicing agreement without the approval of a majority of its independent directors.

As is customary in the mortgage loan servicing industry, First Republic is entitled to retain any late payment charges, prepayment fees, penalties and assumption fees collected in connection with the Mortgage Loans serviced by it. First Republic receives any benefit derived from interest earned on collected principal and interest payments between the date of collection and the date of remittance to the Company and from interest earned on tax and insurance impound funds with respect to Mortgage Loans serviced by it.

When any mortgaged property underlying a mortgage loan is conveyed by a mortgagor, First Republic generally enforces any “due-on-sale” clause contained in the mortgage loan, to the extent permitted under applicable law and governmental regulations. The terms of a particular mortgage loan or applicable law, however, may prohibit First Republic from exercising the “due-on-sale” clause under certain circumstances related to the security underlying the mortgage loan and the buyer’s ability to fulfill the obligations under the loan. Upon a formal assumption of a mortgage loan by a permitted transferee, a fee equal to a specified percentage of the outstanding principal balance of the mortgage loan is often required, which First Republic retains as additional servicing compensation.

Amended and Restated Advisory Agreement. The Company has an Amended and Restated Advisory Agreement (the “advisory agreement”) with First Republic pursuant to which First Republic administers the Company’s day-to-day operations. As advisor, First Republic is responsible for: (i) monitoring the credit quality of the Mortgage Assets; (ii) advising the Company with respect to the reinvestment of income from, and principal payments on, the Mortgage Assets, and with respect to the acquisition, management, financing and disposition of the Mortgage Assets; and (iii) monitoring the Company’s compliance with the requirements necessary to qualify as a REIT for federal income tax purposes. First Republic may from time to time subcontract all or a portion of its obligations under the advisory agreement to one or more of its affiliates involved in the business of mortgage finance and the administration of Mortgage Assets. First Republic may, with the approval of a majority of the Company’s Board of Directors as well as a majority of the Company’s independent directors, subcontract all or a portion of its obligations under the advisory agreement to unrelated third parties. First Republic, in connection with the subcontracting of any of its obligations under the advisory agreement, may not be discharged or relieved in any respect from its obligations under the advisory agreement.

First Republic has substantial experience in the mortgage lending industry, both in the origination and in the servicing of Mortgage Loans. At December 28, 2007, First Republic owned approximately $4.92 billion of single family mortgage loans, $1.18 billion of multifamily mortgage loans and $2.07 billion of other loans secured by real estate. In its single family mortgage loan business, First Republic originates loans and then sells or securitizes the loans to investors in the secondary market, while generally retaining the rights to service the loans. At December 28, 2007, in addition to loans serviced for its own portfolio, First Republic serviced mortgage loans having an aggregate principal balance of approximately $4.86 billion.

The advisory agreement had an initial term of one year, and it has been and will be renewed for additional one-year periods unless the Company terminates the advisory agreement, which the Company may do at any time upon 90 days’ prior written notice to First Republic. First Republic cannot refuse the Company’s request to renew the advisory agreement. As long as any of its preferred shares remain outstanding, any decision by the

Company either to renew the advisory agreement or to terminate the advisory agreement must be approved by a majority of the Company’s Board of Directors, as well as by a majority of its independent directors. During 2007, First Republic received an annual advisory fee equal to $100,000 payable in equal quarterly installments with respect to the advisory and management services. For the calendar year 2008, the Company and First Republic have maintained the fee at $100,000, payable in equal quarterly installments. That fee may be increased with the approval of a majority of the Company’s Board of Directors, including a majority of its independent directors.

As a result of the Company’s relationship with First Republic, certain conflicts of interest may arise with respect to transactions, including future acquisitions of Mortgage Assets from First Republic, servicing Mortgage Loans, future dispositions of Mortgage Assets to First Republic, and the renewal, termination or modification of the advisory agreement or the loan purchasing and servicing agreement.

Employees

The Company currently has no employees. The Company does not anticipate that it will require any employees because it has retained First Republic to perform certain functions pursuant to the loan purchase and servicing agreement and the advisory agreement. However, the Company has five executive officers who are described in Item 10 of this report. Currently, each of the Company’s executive officers is an employee and/or director of First Republic. The Company maintains corporate records and audited financial statements that are separate from those of First Republic. Currently, none of the Company’s officers or directors has any direct or indirect pecuniary interest in any Mortgage Asset owned by the Company, and the Company does not expect any of its officers, directors or employees (if any) to have any direct or indirect pecuniary interest in any Mortgage Asset acquired or disposed of in any transaction in which the Company has an interest or will engage in acquiring, holding and managing Mortgage Assets. However, there is no provision in the Company’s articles of incorporation prohibiting such persons from having direct or indirect interests in Mortgage Loans. See “—Management Policies and Programs—Conflict of Interest Policies.”

Competition

The Company does not engage in the business of originating mortgage loans. While the Company intends to acquire additional Mortgage Assets, the Company anticipates that these additional Mortgage Assets will be acquired from First Republic. Accordingly, the Company does not compete or expect to compete with mortgage conduit programs, investment banking firms, savings and loan associations, banks, thrift and loan associations, finance companies, mortgage bankers or insurance companies in acquiring Mortgage Assets. First Republic, from which the Company expects to continue to purchase most or all of its Mortgage Assets in the future, will face competition from these organizations.

Qualification as a REIT

The Company elected to be taxed as a REIT commencing with its initial taxable year ended December 31, 1999 and intends to comply with the provisions of the Internal Revenue Code with respect thereto. The Company qualifies as a REIT if 90% of the Company’s adjusted REIT taxable income (excluding deductions for any dividends paid and any net capital gains) is distributed to stockholders and as long as certain assets, income and stock ownership tests are met. For 2007, 2006 and 2005, all Internal Revenue Code requirements for a REIT were met.

The Bank is the primary holder, owning 100% of the outstanding common shares, and prior to the merger, First Republic was the primary holder. Accordingly, the Company is a “controlled company” within the meaning of the rules of the NASDAQ Stock Market. Beginning in 2004, the dividend on the common stock shares owned by the Bank (in 2007) or by First Republic in 2006, 2005 and 2004 was treated as a consent dividend under Section 565 of the Internal Revenue Code. For each year prior to 2004, the Company has paid 100% of its net earnings as cash dividends to the holders of its common stock.

Available Information

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are accessible on the SEC’s website, www.sec.gov , as soon as reasonably practicable after those reports have been electronically filed or submitted to the SEC.

Item 1A.

RISK FACTORS.

The Company’s results will be affected by factors beyond its control.

The value of the Company’s Mortgage Loans and the amount of cash flow generated by the portfolio will be affected by a number of factors beyond the Company’s control. These factors may include the following:

•

the condition of the national economy and the local economies of the regions in which the Company’s mortgage borrowers live, particularly insofar as they affect interest rates and real estate values;

•

sudden or unexpected changes in economic conditions, including changes that might result from recent or future terrorist attacks and the U.S. response to such attacks;

•

the financial condition of the Company’s borrowers and those borrowers’ ability to make mortgage payments;

•

factors that affect the rates at which obligors on Mortgage Loans may refinance them, including interest rate levels and the availability of credit; and

•

other factors that affect the affordability and value of real estate, including energy costs and real estate taxes.

Current and potential weakness in the economy, in the real estate market and in the capital markets, including specific weakness within the Company’s geographic footprint, may adversely affect us.

If the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations declines, or continues to decline, this could result in, among other things, a deterioration of credit quality or a reduced demand for credit, including a resultant effect on the Company’s loan portfolio and allowance for loan losses. A significant portion of the Company’s residential and multifamily mortgage loan portfolios are comprised of borrowers in California and the Northeastern region of the United States, in which certain markets have been particularly adversely affected by declines in real estate value, declines in home sale volumes, and declines in new home building. These factors could result in loan delinquencies and charge-offs in future periods, which could materially adversely affect our financial condition and results of operations.

During 2007, disruptions in the capital markets substantially limited the ability of mortgage originators, including the Bank, to sell mortgage loans to the capital markets through whole loan sales or securitization. As a result, the Bank experienced a general loss of liquidity in most secondary markets for both its loan and asset-backed securities holdings, and this condition has persisted to the present time. The Company cannot forecast if or when either specific secondary markets or broader market liquidity conditions will see improvement from current stresses.

Declines in interest rates could reduce earnings and affect the Company’s ability to pay dividends.

The Company’s income consists primarily of interest earned on Mortgage Loans and short-term investments. A significant portion of Mortgage Loans bears interest at adjustable rates. If there is a decline in interest rates, the Company will experience a decrease in income available to stockholders. If interest rates decline, the Company may also experience an increase in prepayments on Mortgage Loans and may find it difficult to purchase additional mortgage assets bearing rates sufficient to support the payment of dividends on preferred shares. Because the dividend rates on the preferred shares are fixed, a significant and sustained decline in interest rates could materially adversely affect the Company’s ability to pay dividends on preferred shares.

Although the Company is permitted to do so, it does not currently hedge its interest rate exposure and does not expect to do so.

The Company may not be able to continue to purchase loans at the same volumes or with the same yields as it has historically purchased.

Although not required to do so, to date the Company has purchased all of the loans in its portfolio from First Republic. Almost all of these loans were originated by First Republic. The quantity and quality of future loan originations by First Republic will depend on conditions in the markets in which First Republic operates, particularly real estate values and interest rates. Consequently, the Company cannot provide assurance that First Republic will be able to originate loans at the same volumes or with the same yields as it has historically originated. If the volume of loans originated by First Republic declines or the yields on those loans decline further, the Company would experience a material adverse effect on its business, financial condition and results of operations.

The Company’s loans are concentrated in California and adverse conditions there could adversely affect its operations.

Properties underlying Mortgage Loans were concentrated primarily in California. At December 28, 2007, approximately 79% of Mortgage Loans were secured by properties located in California. Adverse economic, political or business developments or natural hazards may affect California and the ability of property owners there to make payments of principal and interest on the underlying mortgages and the values of those properties. If California’s economic, political or business conditions were to deteriorate substantially and differently from the rest of the United States, the Company would likely experience higher rates of loss and delinquency on Mortgage Loans than if the loans were more geographically diverse. California has experienced dramatic volatility in energy prices, periodic energy supply shortages and a downturn in some technology-oriented industry sectors. These conditions could adversely affect the mortgage loan portfolio and thus the future ability to pay dividends on preferred shares.

The Company may encounter delays and obstacles in liquidating defaulted mortgage loans.

Even assuming that the mortgaged properties underlying the Company’s Mortgage Loans provide adequate security for the Mortgage Loans, the Company could encounter substantial delays in connection with the liquidation of defaulted mortgage loans, with corresponding delays in the receipt of related proceeds. Until the Company receives the proceeds, the Company will be unable to acquire new mortgage loans or other mortgage assets that produce income that can be used to pay dividends to the holders of its preferred shares.

An action to foreclose on a mortgaged property securing a mortgage loan is regulated by state statutes and rules and is subject to many of the delays and expenses of other lawsuits if the borrower or other creditors raise defenses or counterclaims are interposed, sometimes requiring several years to complete. Furthermore, in some states, including California, an action to obtain a deficiency judgment is not permitted following a nonjudicial sale of a mortgaged property. In the event of a default by a mortgagor, these restrictions, among other things, may impede the ability of First Republic to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due on the related mortgage loan. In addition, the servicer will be entitled to deduct from collections received all expenses reasonably incurred in attempting to recover amounts due and not yet repaid on liquidated mortgage loans, including legal fees and costs of legal action, real estate taxes, insurance and maintenance and preservation expenses, thereby reducing amounts available with respect to the mortgage loans.

Certain of the Company’s Mortgage Loans are secured by interests in cooperative associations and their related residences. Most cooperative associations have highly restrictive rules regarding eligibility to purchase shares in the cooperative association and occupy the related residences. These restrictions may have an adverse effect on the time necessary to liquidate the Company’s interest in such cooperative associations and realize the proceeds from the sale of such cooperative residences.

The Company does not have insurance to cover its exposure to borrowers’ defaults and bankruptcies or to hazard losses that are not covered by its standard hazard insurance policies.

The Company generally does not obtain general credit enhancements such as mortgagor bankruptcy insurance or obtain special hazard insurance for Mortgage Assets, other than standard hazard insurance, which, in each case, will only relate to individual mortgage loans. Accordingly, the Company will be subject to risks of borrower defaults and bankruptcies and special hazard losses, such as losses occurring from earthquakes or floods that are not covered by standard hazard insurance. In the event of a default on any mortgage loan held by the Company resulting from declining property values or worsening economic conditions, among other factors, the Company would bear the risk of loss of principal to the extent of any deficiency between (i) the value of the related mortgaged property plus any payments from an insurer (or guarantor in the case of commercial mortgage loans), and (ii) the amount owing on the mortgage loan.

The Company could be held responsible for environmental liabilities of properties it acquires through foreclosure.

If the Company is forced to foreclose on a defaulted mortgage loan to recover its investment, it may be subject to environmental liabilities related to the underlying real property. Hazardous substances or wastes, contaminants, pollutants or sources thereof may be discovered on properties during its ownership or after a sale to a third party. The amount of environmental liability could exceed the value of the real property. There can be no assurance that the Company would not be fully liable for the entire cost of any removal and clean up on an acquired property, that the cost of removal and clean up would not exceed the value of the property or that the Company could recoup any of the costs from any third party. In addition, the Company may find it difficult or impossible to sell the property prior to or following any environmental remediation.

The Company may acquire different kinds of mortgage loans in the future, which could be riskier than the loans it currently holds.

Through the first quarter of 2003, the Company’s Mortgage Loans consisted entirely of single family mortgages. Beginning in the second quarter of 2003, the Company acquired multifamily real estate secured mortgages from First Republic, which can be riskier investments than single family mortgage loans. The Company expects to acquire more multifamily mortgages. Additionally, although there are no current plans to do so, the Company may acquire other types of mortgages that may have shorter maturities and may not be fully amortizing, meaning that they may have significant principal balances or “balloon” payments due on maturity. The properties that secure commercial mortgage loans, particularly industrial and warehouse properties, are generally subject to greater environmental risks than non-commercial properties and the corresponding burdens and costs of compliance with environmental laws and regulations. Also, there may be costs and delays involved in enforcing rights of property owners against tenants in default under the terms of leases with respect to multifamily residential or commercial properties. For example, tenants may seek the protection of bankruptcy laws, which could result in lease terminations.

The Company expects to acquire all mortgage loans from First Republic, and the composition of the loan portfolio will be affected by changes in First Republic’s credit policies.

The Company has acquired Mortgage Loans from First Republic and, although it is not required to do so, it expects to continue to acquire all mortgage loans from First Republic in the future. If First Republic were to relax its credit policies, for example, by lowering the credit quality standards it applies, or increasing the loan-to-value ratios it accepts, the mortgages subsequently purchased would be riskier investments.

The Company is dependent upon First Republic as advisor and servicer.

First Republic is involved in virtually every aspect of the Company’s business. The Company has no employees because it has retained First Republic to perform all necessary functions pursuant to the advisory agreement and the loan purchase and servicing agreement. Accordingly, the Company is dependent for the selection, structuring and monitoring of Mortgage Assets on the officers and employees of First Republic, as

advisor. In addition, the Company is dependent upon the expertise of First Republic, as servicer, for the servicing of the Mortgage Loans. Neither the advisory agreement nor the loan purchasing and servicing agreement resulted from arm’s-length negotiations. The Company also faces significant restrictions on obtaining such services from third parties; the termination of the advisory agreement and the loan purchase and servicing agreement with First Republic requires the affirmative vote of a majority of the Board of Directors, a majority of which is composed of directors and officers of First Republic. With the approval of a majority of independent directors, First Republic, as advisor and servicer, may subcontract all or a portion of its obligations under these agreements to non-affiliates involved in the business of managing mortgage assets. In the event First Republic subcontracts its obligations in such a manner, the Company will be dependent upon the subcontractor to provide services.

The Company’s relationship with the Bank and First Republic creates conflicts of interest.

The Bank is the holder of 100% of the common stock of the Company, and First Republic is a division of the Bank. First Republic is, and is expected to continue to be, involved in virtually every aspect of the Company’s operations. First Republic will administer the Company’s day-to-day activities in its role as advisor under the advisory agreement. First Republic also acts as servicer of the Mortgage Loans under the loan purchasing and servicing agreement. In addition, other than the independent directors, all of the Company’s officers and directors are also officers and/or directors of the Bank. Their compensation is paid by the Bank, and they have substantial responsibilities in connection with their work as employees and officers of the Bank. As the holder of 100% of outstanding voting shares of the Company, the Bank has the right to elect all of the directors, including the independent directors.

First Republic has interests that are dissimilar to or in conflict with the Company’s interests. Consequently, conflicts of interest arise with respect to the Company’s transactions with First Republic, including without limitation: acquiring mortgage assets from First Republic; servicing mortgage loans; and renewing, terminating or modifying the advisory agreement or the loan purchase and servicing agreement. It is the Company’s intention and the intention of First Republic that any agreements and transactions between the Company, on the one hand, and First Republic, on the other hand, are fair to both parties and consistent with market terms, including the price to acquire mortgage assets or in connection with servicing Mortgage Loans. There is a requirement in the terms of the preferred shares that a majority of the independent directors must approve certain Company actions to ensure fair dealings between the Company, First Republic and the Bank, although the independent directors are appointed by the Bank. There can be no assurance, however, that such agreements or transactions will be on terms as favorable to the Company as those that could have been obtained from unaffiliated third parties.

Although not required to do so, the Company acquires all mortgage assets from First Republic under a loan purchase and servicing agreement. The Company does not have independent underwriting criteria for the loans that it purchases and relies on First Republic’s underwriting standards for loan originations. Those criteria may change over time. The Board of Directors has adopted certain policies to guide the acquisition and disposition of assets, but these policies may be revised from time to time at the discretion of the Board of Directors without a vote of shareholders. The Company intends to acquire in the future all or substantially all mortgage assets from First Republic on terms that are comparable to those that could be obtained from unrelated third parties, but the Company cannot provide assurance that this will always be the case.

As a result of the Bank being the controlling shareholder of the Company and First Republic being the advisor of the Company, it is possible that, notwithstanding good faith belief to the contrary, the Company in fact pays more for these loans than if acquired from an unaffiliated third party, and loans purchased from First Republic in the future may be of lesser quality than those in the current loan portfolio.

If the Company were to fail to qualify as a REIT, it would be subject to U.S. federal income tax at regular corporate rates.

If the Company were to fail to qualify as a REIT for any taxable year, it would be subject to federal income tax, including any applicable alternative minimum tax, on taxable income at regular corporate rates. As a result, the amount available for distribution to shareholders, including the holders of preferred shares, would be reduced

for the year or years involved, and the Company would not be subject to the REIT requirement to distribute substantially all of its net taxable income. In addition, unless entitled to relief under statutory provisions, the Company would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. The failure to qualify as a REIT would reduce net earnings available for distribution to shareholders, including holders of preferred shares, because of the additional federal tax liability for the year or years involved. Failure to qualify as a REIT would neither by itself give the Company the right to redeem the preferred shares, nor would it give the holders of the preferred shares the right to have their shares redeemed.

Although the Company intends to operate in a manner designed to qualify as a REIT, future economic, market, legal, tax or other considerations, including actions by banking regulators as discussed below, may determine that it is in the best interest of the Company and in the best interest of holders of common shares and preferred shares to revoke the Company’s REIT election. The tax law generally prohibits electing treatment as a REIT for the four taxable years following the year of any such revocation.

Bank regulators may limit the ability to implement the business plan and may restrict the ability to pay dividends.

Because the Company is a subsidiary of the Bank, federal regulatory authorities have the right to examine the Company and its activities and under certain circumstances, to impose restrictions on the Bank or the Company that could impact the Company’s ability to conduct business according to its business plan, which could materially adversely affect the Company’s financial condition and results of operations. Regulatory actions might include the following:

•

If the Bank’s regulators were to determine that the Bank’s relationship to the Company results in an unsafe and unsound banking practice, the regulators could restrict the Company’s ability to acquire or transfer assets, making distributions to shareholders, including dividends on the preferred shares, or redeeming the preferred shares or even require the Bank to sever its relationship with or divest its ownership interest in the Company. These types of actions potentially could have a material adverse effect on the Company’s financial condition and results of operations.

•

Regulators also could prohibit or limit the payment of dividends on the preferred shares if the Bank were to become undercapitalized. Under current regulations and guidelines, the Bank would be deemed undercapitalized if its total risk-based capital ratio were less than 8%, its Tier 1 risk-based capital ratio were less than 4% or its Tier 1 leverage ratio were less than 4%.

•

The Office of Thrift Supervision (“OTS”) could limit or prohibit the payment of dividends on the preferred shares, if it determined that the payment of those dividends constituted a capital distribution by the Bank and that the Bank’s earnings and regulatory capital levels were below specified levels. Under OTS regulations on capital distributions, the ability of the Bank to make a capital distribution varies depending primarily on the Bank’s earnings and regulatory capital levels. Capital distributions are defined to include payment of dividends, share repurchases, cash-out mergers and other distributions charged against the capital accounts of an institution.

•

If regulators were to impose restrictions on payment of dividends, the Company could be prevented from complying with the requirement for continued REIT status to distribute 90% of REIT taxable income (excluding deductions for any dividends paid and any net capital gains) for any calendar year. If, as a result, the Company ceased to qualify as a REIT, it would become subject to corporate level taxation. Such additional taxation would reduce the amount of income available to pay dividends.

If the Company loses its exemption under the Investment Company Act, it could have a material adverse effect on the Company.

The Company believes that it is not, and intends to conduct its operations so as not to be, required to register as an investment company under the Investment Company Act. Under the Investment Company Act, a non-exempt entity that is an investment company is required to register with the SEC and is subject to extensive, restrictive and potentially adverse regulation relating to, among other things, operating methods, management, capital structure, dividends and transactions with affiliates. The Investment Company Act exempts entities that,

directly or through majority-owned subsidiaries, are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate” (“Qualifying Interests”). Under current interpretations of the staff of the SEC, in order to qualify for this exemption, the Company, among other things, must maintain at least 55% of its assets in Qualifying Interests and also may be required to maintain an additional 25% in Qualifying Interests or other real estate related assets. The assets that the Company may acquire therefore may be limited by the provisions of the Investment Company Act. The Investment Company Act does not treat cash and cash equivalents as either Qualifying Interests or other real estate related assets.

Based on the criteria outlined above, the Company believes that at December 28, 2007 its Qualifying Interests comprised well in excess of 80% of the estimated fair market value of its total assets. As a result, the Company believes that it is not required to register as an investment company under the Investment Company Act. The Company does not intend, however, to seek an exemptive order, no-action letter or other form of interpretive guidance from the SEC on this position. If the SEC were to take a different position with respect to whether the Company’s assets constitute Qualifying Interests, the Company could be required either (i) to change the manner in which it conducts its operations to avoid being required to register as an investment company, or (ii) to register as an investment company, either of which could have a material adverse effect on the Company’s ability to make dividend payments and, accordingly, the trading price of its preferred shares. Further, in order to ensure that the Company at all times continues to qualify for the above exemption from the Investment Company Act, the Company may be required at times to adopt less efficient methods of financing certain assets than would otherwise be the case and may be precluded from acquiring certain types of assets whose yield is higher than the yield on assets that could be purchased in a manner consistent with the exemption. The net effect of these factors may be to lower at times the Company’s net interest income. Finally, if the Company were an unregistered investment company, there would be a risk that it would be subject to monetary penalties and injunctive relief in an action brought by the SEC, that it would be unable to enforce contracts with third parties and that third parties could seek to obtain rescission of transactions undertaken during the period the Company was determined to be an unregistered investment company.

If the Company does not distribute 90% of its net taxable income, it may not qualify as a REIT.

In order to qualify as a REIT, the Company generally is required each year to distribute to its shareholders at least 90% of its REIT taxable income, excluding net capital gains. The Company may retain the remainder of its REIT taxable income or all or part of its net capital gain, but will be subject to U.S. federal income tax at regular corporate rates on that income. In addition, the Company is subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions considered as paid by the Company with respect to any calendar year are less than the sum of (i) 85% of the Company’s ordinary income for the calendar year, (ii) 95% of the Company’s capital gains net income for the calendar year and (iii) 100% of any undistributed income from prior periods. Under certain circumstances, federal or state regulatory authorities may restrict the Company’s ability, as a subsidiary of the Bank, to make distributions to its shareholders in an amount necessary to retain its REIT qualification. Such a restriction could result in the Company failing to qualify as a REIT. To the extent the Company’s REIT taxable income may exceed the actual cash received for a particular period, it may not have sufficient liquidity to make distributions necessary to retain its REIT qualification or may need to borrow funds on a short-term basis to meet the REIT distribution requirements even if then prevailing market conditions are not favorable for such a borrowing.

If ownership of the Company becomes concentrated in a small number of individuals, the Company may fail to qualify as a REIT.

To maintain the Company’s status as a REIT, not more than 50% in value of its outstanding shares may be owned, directly or indirectly, by five or fewer individuals, as defined in the Internal Revenue Code to include certain entities, at any time during the last half of each taxable year. The Company believes that it currently satisfies, and expects to continue to satisfy, this requirement because for this purpose its common shares held by the Bank are treated as held by Merrill Lynch & Co., the parent company of the Bank. However, the Company must also have 100 or more shareholders in order to meet the beneficial ownership requirements of a qualified

REIT. The Company may have difficulty monitoring the daily ownership and constructive ownership of its outstanding shares and, therefore, the Company cannot assure that it will continue to meet the beneficial ownership requirement. In addition, while the fact that the Company’s preferred shares may be redeemed or exchanged will not affect the Company’s REIT status prior to any redemption or exchange, the redemption or exchange of all or a part of the preferred shares could adversely affect the Company’s ability to satisfy the beneficial ownership requirements in the future.

Item 1B.

UNRESOLVED STAFF COMMENTS.

Not applicable.

Item 2.

PROPERTIES.

The Company neither owns nor leases any property.

Item 3.

LEGAL PROCEEDINGS.

The Company is not currently involved in nor, to its knowledge, currently threatened with any material legal proceedings.

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders during the fourth quarter of 2007.

PART II

Item 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Common Stock

There is no established trading market for the Company’s common stock, and the common stock is not listed on any exchange or automated quotation system. At December 28, 2007, the Company was authorized to issue 50,000,000 shares of common stock with a par value of $0.01 per share, of which 30,538,277 shares of common stock were outstanding and owned by the Bank. The Company currently expects to pay to holders of its common stock an aggregate amount of dividends equal to not less than 90% of the Company’s REIT taxable income (excluding the deduction for dividends paid on common stock and any net capital gains) in order to remain qualified as a REIT. At the end of each year, the Company has declared dividends on common stock of $5,870,000 for 2007, $4,204,000 for 2006 and $1,924,000 for 2005, which represented 100% of the Company’s REIT taxable income, calculated after the deduction for dividends paid on preferred shares. Dividends on common stock generally cannot be paid, however, for periods in which less than full dividends are paid on the Company’s preferred shares. The dividends paid to the Bank in 2007 and to First Republic in 2006 and 2005 were treated as consent dividends under Section 565 of the Internal Revenue Code.

Series A Preferred Shares

In June 1999, the Company completed a private offering of 55,000 shares of its Perpetual, Exchangeable, Noncumulative Series A Preferred Shares (“Series A Preferred Shares”) and received proceeds of $55 million. First Republic paid all expenses of the offering, including underwriting commissions and discounts. The Series A Preferred Shares have not been registered under the Securities Act or any other applicable securities law. The Series A Preferred Shares may not be resold, pledged or otherwise transferred by the purchaser or any subsequent holder except (A)(i) to a person whom the transferor reasonably believes is a Qualified Institutional Buyer (“QIB”) in a transaction meeting the requirements of Rule 144A under the Securities Act; (ii) to institutional accredited investors (of the type described in Rule 501(a)(1) or (3) under the Securities Act) in transactions exempt from the registration requirements of the Securities Act; or (iii) pursuant to the exemption from

registration under the Securities Act provided by Rule 144 (if available), and (B) in accordance with all applicable securities laws of the states of the United States. The Series A Preferred Shares are not listed on any national securities exchange or quoted on the NASDAQ National Stock Market, Inc. The Series A Preferred Shares are eligible for trading in the Private Offerings, Resales and Trading through Automated Linkages System of the National Association of Securities Dealers (“PORTAL”).

The Company used the proceeds from the offering to fund a dividend distribution to First Republic as the then holder of all of the common stock.

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. Dividends on the Series A Preferred Shares were $5,743,000 for the year ended December 28, 2007 and $5,775,000 for the years ended December 31, 2006 and 2005.

Series B Preferred Shares

In January 2002, the Company issued and sold 1,680,000 shares of its 8.875% Noncumulative Perpetual Series B Preferred Stock (“Series B Preferred Shares”) in a public offering. First Republic paid all expenses of the offering, including underwriting commissions and discounts. The proceeds of $42 million and the additional issuance of 7,460,831 shares of common stock to First Republic were used to acquire from First Republic approximately $80 million of single family mortgage loans and $4 million of short-term investments.

Holders of Series B Preferred Shares are entitled to receive, if, when and as authorized and declared by the Company’s Board of Directors, out of the Company’s assets legally available therefore, cash dividends at an annual rate of 8.875%, or $2.21875 per annum per share, of the $25 liquidation preference per share, and no more. 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.

On November 19, 2007 (“Redemption Date”), the Company redeemed the Series B Preferred Shares at a total redemption price of $42.5 million, which represented $25.00 per share plus accrued and unpaid dividends to the Redemption Date at a rate of $0.296 per share of all the issued and outstanding Series B Preferred Shares.

Series C Preferred Shares

In June 2001, the Company issued and sold 7,000 shares of its 5.7% Noncumulative Series C Exchangeable Preferred Stock (“Series C Preferred Shares”) in a private placement to a single holder and received proceeds of $7 million. First Republic paid all expenses of the offering, including underwriting commissions and discounts. In June 2007, the holder of the Series C Preferred Shares elected to exercise the right to convert all of the shares into common stock of First Republic at a price of $20.38 per share. The conversion was pursuant to the terms set forth in the certificate of designations governing the Series C Preferred Shares. To effect the conversion, the Company issued 1,185,484 shares of its common stock to First Republic, and First Republic issued 343,530 shares of its common stock to the holder of the Company’s Series C Preferred Shares. In addition to receiving shares of First Republic’s common stock, the holder received cash in lieu of any fractional shares and a cash payment from the Company equal to the amount of accrued and unpaid dividends on the Series C Preferred Shares. The former holder of the Series C Preferred Shares has no further rights arising out of the ownership of such shares. The Company reduced its preferred stock balance by the amount of the carrying value of the Series C Preferred Shares and increased common stock and additional paid-in capital. No gain or loss was recognized with respect to the conversion.

Series D Preferred Shares

In June 2003, the Company completed a public offering and received proceeds of $60 million from the issuance of 2,400,000 shares of its 7.25% Noncumulative Perpetual Series D Preferred Stock (“Series D Preferred Shares”). First Republic paid all expenses of the offering, including underwriting commissions and discounts. The Series D Preferred Shares are quoted on the NASDAQ National Market under the symbol “FRCCO.” In connection with this transaction, the Company issued, and First Republic purchased, $60 million of additional common stock. 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, non-cumulative 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. Dividends on the Series D Preferred Shares were $4,326,000 for the year ended December 28, 2007 and $4,350,000 for the years ended December 31, 2006 and 2005.

The Company used the proceeds from the issuance of the Series D Preferred Shares and the additional issuance of common stock to acquire from First Republic approximately $87 million of single family loans, $30 million of multifamily loans and $3 million of short-term investments.

The following table presents the high and low sales prices for the Series D Preferred Shares for each quarter in 2007 and 2006:


	2007				2006
Quarter	High		Low		High		Low
First	$	25.82	$	24.95	$	25.45	$	24.36
Second	$	25.59	$	24.95	$	25.45	$	24.01
Third	$	25.29	$	24.00	$	25.50	$	24.38
Fourth	$	24.90	$	19.51	$	25.94	$	25.05

Except under certain limited circumstances, holders of the Company’s preferred shares have no voting rights.

Item 6.

SELECTED FINANCIAL DATA.

The following table presents certain financial data for each year ended December 28, 2007, and December 31, 2006, 2005, 2004 and 2003. The selected data presented below under the captions “Selected Balance Sheet Data” and “Selected Financial Information” are derived from the Company’s financial statements. The financial statements as of and for the year ended December 28, 2007 have been audited by Deloitte & Touche LLP, and the financial statements as of and for the years ended December 31, 2006, 2005, 2004 and 2003 have been audited by KPMG LLP; each firm is an independent registered public accounting firm. This selected financial data is qualified in its entirety by, and should be read in connection with, the financial statements, including the notes thereto, included in Item 8 of this report and management’s discussion and analysis of the Company’s financial condition and results of operation in Item 7 of this report.


	As of or For the Year Ended
($ in thousands)	December 28, 2007			December 31,
($ in thousands)	December 28, 2007			2006			2005			2004			2003
Selected Balance Sheet Data
Assets:
Cash and short-term investments	$	22,196		$	12,813		$	17,250		$	4,476		$	6,766
Single family mortgage loans		237,382			288,725			283,530			288,211			296,051
Multifamily mortgage loans		30,124			34,491			31,249			37,517			26,454
Less: allowance for loan losses		(481	)		(481	)		(481	)		(481	)		(481	)
Other assets		1,441			1,685			1,472			1,436			1,607

Total Assets	$	290,662		$	337,233		$	333,020		$	331,159		$	330,397

Liabilities:
Dividends payable on common stock	$	—		$	—		$	—		$	1		$	1,255
Other payables		94			111			102			141			48

Total Liabilities		94			111			102			142			1,303

Stockholders’ equity:
Series A Preferred Shares		55,000			55,000			55,000			55,000			55,000
Series B Preferred Shares		—			42,000			42,000			42,000			42,000
Series C Preferred Shares		—			7,000			7,000			7,000			7,000
Series D Preferred Shares		60,000			60,000			60,000			60,000			60,000
Common stock		305			294			294			294			294
Additional paid-in capital		175,463			173,028			168,824			166,923			165,000
Dividends in excess of retained earnings		(200	)		(200	)		(200	)		(200	)		(200	)

Total Stockholders’ Equity		290,568			337,122			332,918			331,017			329,094

Total Liabilities and Stockholders’ Equity	$	290,662		$	337,233		$	333,020		$	331,159		$	330,397


Selected Asset Quality Information
Nonperforming loans	$	—		$	—		$	—		$	—		$	—
Other real estate owned	$	—		$	—		$	—		$	—		$	—
Loans 90+ days past due and on accrual status	$	—		$	—		$	—		$	—		$	—
Nonperforming assets as a percent of total assets		—	%		—	%		—	%		—	%		—	%
Loans 90+ days past due and on accrual status, as a percent of total assets		—	%		—	%		—	%		—	%		—	%

Selected Financial Information
Interest income:
Interest on loans	$	18,313		$	18,470		$	16,327		$	16,398		$	13,502
Interest on short-term investments		1,354			264			182			89			152

Total interest income		19,667			18,734			16,509			16,487			13,654
Provision for loan losses		—			—			—			—			—
Other income		58			—			—			—			—
Operating expenses		315			278			333			311			274

Net income		19,410			18,456			16,176			16,176			13,380
Dividends on preferred sock		13,540			14,252			14,252			14,252			12,125

Net income available to common stockholders	$	5,870		$	4,204		$	1,924		$	1,924		$	1,255

Ratio of earnings to fixed charges	$	1.43x		$	1.30x			1.13x			1.13x			1.10x

Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

Critical Accounting Policies

The discussion and analysis of the Company’s financial condition and results of operation are based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to allowance for loan losses, credit risks, estimated loan lives, interest rate risk, investments, and contingencies and litigation. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of the Company’s 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 Company’s loan portfolio could have a material adverse affect on the Company’s financial condition and results of operations.

Results of Operations

Overview

Net income was $19,410,000 for 2007 and $18,456,000 for 2006 and $16,176,000 for 2005. The results for 2007 compared with 2006 and 2005 reflected an increase in interest income due to higher interest rates. The increase in market rates of interest during 2007 resulted in higher average loan yields for 2007 compared with 2006 and 2005. The ratio of earnings to fixed charges was 1.43x for 2007 and 1.30x for 2006 and 1.13x for 2005. Preferred stock dividend payments were 100% of fixed charges.

Total Interest Income

Total interest income increased in 2007 compared with 2006 and 2005 primarily due to higher loan and investment yields. The following table presents the average balances and yields on the Company’s interest-earning assets for the periods indicated:


	For the Year Ended
	December 28, 2007						December 31, 2006						December 31, 2005
($ in thousands)	Average Balance		Interest Income		Yield		Average Balance		Interest Income		Yield		Average Balance		Interest Income		Yield
Loans	$	304,270	$	18,313	6.02	%	$	328,835	$	18,470	5.61	%	$	326,174	$	16,327	5.01	%
Short-term investments		31,564		1,354	4.29			6,927		264	3.81			6,979		182	2.61

Total interest-earning assets	$	335,834	$	19,667	5.86	%	$	335,762	$	18,734	5.57	%	$	333,153	$	16,509	4.96	%

Interest income on Mortgage Loans decreased in 2007, compared with 2006, due to lower average balances as cash was accumulated to redeem to the Series B Preferred Shares. The decrease was offset by an increase in the average yield. The average yield on loans increased 41 basis points. For 2006, interest income and the

average yield on Mortgage Loans increased compared with 2005. Loan yields began to increase in the second half of 2004 as the Federal Reserve Bank raised the federal funds rate from 1.25% in June 2004 to 5.25% in June 2006. Beginning in September 2007, the federal funds rate was lowered, and in December 2007, the federal funds rate was 4.25%. The weighted average coupon rate on Mortgage Loans increased to 6.12% at December 28, 2007 from 6.10% at December 31, 2006 and 5.30% at December 31, 2005. In addition to interest rate increases, the yield on Mortgage Loans increased due to a change in the portfolio mix from intermediate fixed and fixed rate loans to adjustable rate mortgage loans (“ARMs”), which bear interest rates indexed to rates that rose over the period. See “Quantitative and Qualitative Disclosures about Market Risks.”

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 $752,000 in 2007, $804,000 in 2006 and $788,000 in 2005. The decrease in loan servicing fees for 2007 was consistent with the decrease in the average loan balance. Beginning in the fourth quarter of 2007, interest income on mortgage loans included discount accretion related to the valuation of loans for purchase accounting. Net discount accretion was $117,000 for 2007, compared with net premium amortization of $(235,000) for 2006 and for 2005.

Interest income on short-term investments increased in 2007, compared with 2006 and 2005, due to higher interest rates and higher average investment balances. The average yield on the Company’s interest-bearing money market account increased 48 basis points in 2007 compared with 2006 and 168 basis points compared with 2005 as interest rates began to rise in mid-2004.

Interest income is affected by changes in both volume and interest rates. Volume changes are caused by increases or decreases during the year in the level of average interest-earning assets. Rate changes result from increases or decreases in the yields earned on assets. The following table presents for each of the last two years a summary of the changes in interest income resulting from changes in the volume of average asset balances and changes in the average yields compared with the preceding year. If significant, the change in interest income due to both volume and rate has been prorated between the volume and the rate variances based on the dollar amount of each variance.


	2007 vs. 2006								2006 vs. 2005
($ in thousands)	Volume			Rate		Total			Volume			Rate		Total
Loans	$	(1,447	)	$	1,290	$	(157	)	$	137		$	2,006	$	2,143
Short-term investments		1,042			48		1,090			(1	)		83		82

Total increase (decrease)	$	(405	)	$	1,338	$	933		$	136		$	2,089	$	2,225

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 Company’s behalf. Advisory fees for 2007, 2006, and 2005 were $100,000 per annum. For 2008, advisory fees will be $100,000 per annum. The amount of annual advisory fees is approved by the Company’s Board of Directors.

General and administrative expenses consisted primarily of audit fees, rating agency fees, exchange listing fees and other stockholder costs. Total general and administrative expenses were $215,000 in 2007, $178,000 in 2006 and $233,000 in 2005. Audit fees were $82,000 in 2007, $70,000 in 2006 and $77,000 in 2005.

Financial Condition

Short-term Investments on Deposit with First Republic

At December 28, 2007 and December 31, 2006, short-term investments on deposit consisted entirely of a money market account held at First Republic.

Mortgage Loans

The loan portfolio at December 28, 2007 and December 31, 2006 consisted of both single family and multifamily mortgage loans acquired from First Republic. The Company anticipates that in the future it will continue to acquire all of its loans from First Republic.

A loan is placed on nonaccrual status when any installment of principal or interest is over 90 days past due, except for any single family loan that is well secured and in the process of collection, or when the Company determines that the ultimate collection of all contractually due principal or interest is unlikely. The Company classifies a loan as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan purchase and servicing agreement.

At December 28, 2007 and December 31, 2006, there were no nonaccrual loans, impaired loans, or loans that were troubled debt restructurings. In addition, at December 28, 2007 and December 31, 2006, there were no accruing loans that were contractually past due more than 90 days.

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 Company’s Mortgage Loans.

The Company’s Mortgage Loans are concentrated in California, and adverse conditions there could adversely affect the Company’s operations. The following table presents an analysis of Mortgage Loans at December 28, 2007 by major geographic location:


($ in thousands)	San Francisco Bay Area			New York/New England			Los Angeles County			San Diego County			Other California Areas			Other			Las Vegas, Nevada			Total
($ in thousands)	San Francisco Bay Area			New York/New England			Los Angeles County			San Diego County			Other California Areas			Other			Las Vegas, Nevada			Amount			%
Single family	$	133,635		$	29,710		$	23,836		$	7,724		$	19,646		$	21,378		$	1,453		$	237,382		89	%
Multifamily		22,618			865			3,391			625			2,625			—			—			30,124		11

Total	$	156,253		$	30,575		$	27,227		$	8,349		$	22,271		$	21,378		$	1,453		$	267,506		100	%

Percent by location		58	%		12	%		10	%		3	%		8	%		8	%		1	%		100	%

At December 28, 2007, approximately 79% of Mortgage Loans were secured by properties located in California. The weighted average loan to value ratio on Mortgage Loans was approximately 52%, based upon the appraised values of the properties at the time the loans were originated.

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 intends to fund the acquisition of additional Mortgage Loans with the proceeds from principal payments on Mortgage Loans. Proceeds from interest payments will be reinvested until used for the payment of operating expenses and dividends. The Company does not anticipate that it will have any other material capital expenditures. The cash generated from interest and principal payments on Mortgage Assets is expected to provide sufficient funds for operating requirements and dividend payments in accordance with the requirements to be taxed as a REIT for the foreseeable future.

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk Management

The Company services fixed-rate dividend obligations to preferred stockholders and operating expenses by the collection of interest income from Mortgage Loans. To meet dividend payments, the Company has historically maintained an average interest-earning asset balance of approximately two times the liquidation preference of its outstanding preferred shares. The Company’s earnings to fixed charges ratio was 1.43x for 2007, compared with 1.30x for 2006 and 1.13x for 2005. The increase in the ratio in 2007 was due primarily to the conversion of the Series C and the redemption of the Series B Preferred Stock.

Since mid-2004, interest rates have moved up from 40-year historical lows. The average yield on average interest-earning assets rose to 5.86% for 2007, up 29 basis points from 5.57% for 2006, and up 90 basis points from 4.96% for 2005. The increase in the yield for 2007 compared with 2006 and 2005 was due to rising interest rates and a change in the portfolio mix to higher-yielding loans. The portfolio mix at December 28, 2007 changed over the past year as the level of ARMs increased and the level of intermediate fixed rate loans and fixed rate loans decreased. ARMs grew to 76% of Mortgage Loans at December 28, 2007 from 72% at December 31, 2006. The weighted average coupon rate at December 28, 2007 for ARMs decreased 5 basis points from a year ago, compared with a 8 basis point increase in the weighted average coupon rate for intermediate fixed rate loans and a 1 basis point decrease for fixed loans. The weighted average remaining maturity of Mortgage Loans was 22.4 years at December 28, 2007 and 23.2 years at December 31, 2006. The Company manages the loan portfolio to generate adequate cash flow to service its current and projected dividend requirements and considers conditions in the interest rate environment and the secondary market in selecting loans for purchase.

For ARMs, the timing of changes in average yields depends on the underlying interest rate index, the timing of changes in the index, and the frequency of adjustments to the loan rate. The weighted average coupon rate for ARMs was 6.30% at December 28, 2007, down 5 basis points from 6.35% at December 31, 2006 due to the drop in short-term rates. The decrease in ARM loan yields was mitigated by a significant volume of ARM loans indexed to COFI. COFI is a lagging index that tends to respond more slowly to changes in the general interest rate environment than a market rate index. At December 28, 2007, ARM loans indexed to COFI were 78% of total ARMs, or 59% of Mortgage Loans, and 79% of total ARMs at December 31, 2006, or 56% of Mortgage Loans.

For intermediate fixed and fixed rate loans, the balance at December 28, 2007 was $63.2 million, or 24% of total Mortgage Loans, down from $91.7 million at December 31, 2006, or 28% of total Mortgage Loans. The weighted average coupon rate for intermediate fixed rate loans was 5.37% at December 28, 2007, up 8 basis points from 5.29% at December 31, 2006. The weighted average coupon rate for fixed rate loans was 5.68% at December 28, 2007 and 5.69% at December 31, 2006. A portion of the repayments of intermediate fixed and fixed rate loans were reinvested in ARMs.

The following table presents an analysis of Mortgage Loans at December 28, 2007 by interest rate type:


($ in thousands)	Balance		Net Coupon ^(1) (2)		Months to Next Reset ⁽¹⁾	% of Total Loans
ARM loans:
COFI	$	158,533	6.34	%	1	59	%
CMT		24,033	6.45		7	9
LIBOR		21,692	5.83		2	8

Total ARMs		204,258	6.30		2	76

Intermediate fixed:
12 months to 36 months		13,745	5.14		24	5
37 months to 60 months		6,569	5.90		47	2
Greater than 60 months		6,114	5.29		70	3

Total intermediate fixed		26,428	5.37		40	10

Total adjustable rate loans		230,686	6.19		6	86
Fixed rate loans		36,820	5.68			14

Total loans	$	267,506	6.12	%		100	%

⁽¹⁾	Weighted average.

⁽²⁾	Net of servicing fees retained by First Republic.

The following table presents maturities or interest rate adjustments based upon the contractual maturities or adjustment dates as of December 28, 2007:


($ 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	$	22,196		$	—		$	—		$	—		$	—		$	—		$	22,196
Loans, net		195,569			19,843			27,530			13,638			10,445			—			267,025
Other assets		—			—			—			—			—			1,441			1,441

Total assets	$	217,765		$	19,843		$	27,530		$	13,638		$	10,445		$	1,441		$	290,662

Other liabilities	$	—		$	—		$	—		$	—		$	—		$	94		$	94
Stockholders’ equity		—			—			—			—			—			290,568			290,568

Total liabilities and equity	$	—		$	—		$	—		$	—		$	—		$	290,662		$	290,662

Repricing gap—positive (negative)	$	217,765		$	19,843		$	27,530		$	13,638		$	10,445		$	(289,221	)

Cumulative repricing gap:
Dollar amount	$	217,765		$	237,608		$	265,138		$	278,776		$	289,221

Percent of total assets		75	%		82	%		91	%		96	%		99	%

The Company has not engaged in business activities related to foreign currency transactions or commodity-based instruments and has not made any investments in equity securities subject to price fluctuations.

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See Financial Statements table of contents on page F-2.

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

On September 27, 2007, the Company filed a Current Report on Form 8-K disclosing a change in the Company’s principal accountant. There have been no disagreements with the Company’s accountants on any matter of accounting principles, practices or financial statement disclosures since the Company’s inception in April 1999.

Item 9A(T). CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

As required by SEC rules, the Company carried out an evaluation of the effectiveness of the design and operation of its “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act as of the end of the period covered by this report. The Company’s management, including the Company’s 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 Company’s disclosure controls and procedures, as of December 28, 2007, were effective for providing reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Our management assessed the effectiveness of our internal control over financial reporting as of December 28, 2007. Using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the Internal Control-Integrated Framework . Our management has concluded that, as of December 28, 2007, our internal control over financial reporting is effective based on these criteria. This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities Exchange Commission that permit the company to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended December 28, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.

OTHER INFORMATION.

Not applicable.

PART III

Item 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Directors and Executive Officers

As the holder of all of the Company’s common stock, the Bank has the right to elect the Company’s directors, including the independent directors. The Company’s Board of Directors currently consists of eight members, including three independent directors. The Company currently has five officers, four of whom are also directors, and it estimated that they will spend between 5% and 10% of their time managing the Company’s business. The Company has no employees and does not anticipate requiring employees.

The Company’s directors and executive officers are listed below. Each director or executive officer has served in his/her capacity since the Company’s inception in April 1999, except for Ms. Chan, who was appointed in September 2004, Mr. Merrill, who was elected in December 2004 and Ms. Moulds, who was elected in March 2005.


Name	Age	Position and Offices Held
James J. Baumberger	65	President, Director
Thomas A. Cunningham ⁽¹⁾	73	Director
Jerry Lykins ⁽¹⁾	72	Director
Barrant V. Merrill	77	Director
Linda G. Moulds ⁽¹⁾	57	Director
Edward J. Dobranski	57	Vice President, General Counsel, Director
Julie N. Miyachi	50	Vice President, Operations, Director
Willis H. Newton, Jr.	58	Vice President, Chief Financial Officer, Treasurer, Director
May Chan	35	Assistant Vice President, Corporate Secretary

⁽¹⁾	Independent Director and Audit Committee Member.

The following is a summary of the experience of the Company’s executive officers and directors:

Mr. Baumberger currently serves on First Republic’s advisory board. He was employed by First Republic and its predecessors from 1990 until December 31, 2007 and served as a director from 1994 to 2007. From December 1993 until October 1996, Mr. Baumberger was President of First Republic Savings Bank, an FDIC insured financial institution. Mr. Baumberger has been involved in banking and real estate lending in the Las Vegas, Nevada area for more than forty years.

Mr. Cunningham is retired. From 1986 to 1994, he was President of the California Thrift Guarantee Corporation. Previously Mr. Cunningham held senior executive positions in several banking institutions. He was a member of the U.S. Marine Corp. until 1971. From 1988 to 1998, Mr. Cunningham served as a director of First Republic and one of its predecessor financial institutions.

Mr. Lykins is a retired mortgage banker. His career included executive and operational management responsibilities in both California and Nevada for Mason McDuffie. From 1994 until 1998, Mr. Lykins was a director of First Republic and one of its predecessor financial institutions.

Mr. Merrill is the Managing Partner of Sun Valley Partners. From 1985 to 2004, Mr. Merrill was a director of First Republic and its legal predecessors. Previously, he was a General Partner of Dakota Partners and Chairman of Pershing & Co., Inc., a division of Donaldson, Lufkin & Jenrette.

Ms. Moulds was Vice President, Secretary and Controller of First Republic from 1985 to 1996 and was a director of First Republic from 1997 to 1998. Previously, Ms. Moulds was Secretary and Controller of San Francisco Bancorp and a director of First United Thrift and Loan.

Mr. Dobranski has served as Executive Vice President, General Counsel and Secretary since joining First Republic in 1992. Prior to that, Mr. Dobranski practiced banking, real estate and corporate law through positions held with the federal government, in private practice and as Corporate Counsel.

Ms. Miyachi is Vice President in the Finance department and has been with First Republic since 1994. In such capacity, she has assisted executive management of First Republic in complex analysis of business operations. Ms. Miyachi has over twenty-four years experience with the accounting, reporting, analysis and planning of mortgage-oriented financial institutions.

Mr. Newton is Executive Vice President and Chief Financial Officer of First Republic and has held such position since August 1988. Previously, Mr. Newton was Vice President and Controller of Homestead Financial and was a Certified Public Accountant with KPMG LLP for nine years.

Ms. Chan joined First Republic in 2003 as the Director of Corporate Tax. Prior to that, Ms. Chan was with KPMG LLP for nine years, five of which were in the tax department.

Independent Directors

The terms of the preferred shares require that, as long as any preferred shares are outstanding, certain actions by the Company need to be approved by a majority of the Company’s independent directors. In order to be considered “independent” for this purpose, a director must not be or have been in the last three years one of the Company’s officers or employees or a director, officer or employee of First Republic or an affiliate of First Republic. Members of the Company’s Board of Directors elected by holders of preferred shares will not be deemed to be independent directors for purposes of approving actions requiring the approval of a majority of the independent directors. Mr. Cunningham (Chairman), Mr. Lykins and Ms. Moulds are currently the Company’s independent directors.

If at the time of any of the Company’s annual shareholder meetings, the Company has failed to pay or declare and set aside for payment a full quarterly dividend during any of the four preceding quarterly dividend periods on any series of the Company’s preferred shares, the number of directors then constituting the Company’s Board of Directors will be increased by two, and the holders of the Company’s outstanding series of preferred shares voting as a single class at that meeting will be entitled to elect the two additional directors to serve on the Board of Directors. Any member of the Board of Directors elected by holders of the preferred shares will not be deemed an independent director for purposes of the actions requiring the approval of a majority of the independent directors.

Audit Committee

The Company’s Board of Directors has established an audit committee that reviews the engagement and independence of the Company’s independent registered public accounting firm. The audit committee also reviews the adequacy of the Company’s internal accounting controls. The audit committee is comprised of the Company’s three independent directors: Mr. Cunningham, Mr. Lykins and Ms. Moulds, each of which is an audit committee financial expert.

Compensation of Directors

The independent directors receive no annual compensation; however, the Company pays each director a fee of $1,250 for attending each regularly scheduled Board meeting (in person or by telephone) and a fee ranging from $750 to $1,000 for attending (in person or by telephone) any additional meetings.

Code of Ethics

The executive officers of the Company are employees of First Republic and are subject to a code of ethics. First Republic and its subsidiaries adopted this code of ethics in accordance with corporate governance regulations to cover the activities of the Company’s officers, including its principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. The code of ethics is posted on First Republic’s website at www.firstrepublic.com and a copy will be made available in print, without charge, to any stockholder of the Company who requests it by contacting investorrelations@firstrepublic.com.

Item 11.

EXECUTIVE COMPENSATION.

The Company does not pay any compensation to its officers, and it is estimated that none of its officers spend greater than 10% of their time managing the Company’s business. See also “Item 10—Compensation of Directors.”

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

During January 2005, the Company offered to repurchase the 9,840 shares of common stock not held by the Bank. As of December 28, 2007, all shares were repurchased, including 80 shares owned by Messrs. Baumberger, Dobranski, Merrill, Newton and Ms. Miyachi. The following table sets forth, as of February 13, 2008, the number and percentage of outstanding shares of common shares, Series A Preferred Shares and Series D Preferred Shares beneficially owned by (i) all persons known by the Company to own more than five percent of such shares; (ii) each of the Company’s directors; (iii) each of the Company’s executive officers; and (iv) all of the Company’s executive officers and directors as a group. The persons or entities named in the table have sole voting and sole investment power with respect to each of the shares beneficially owned by such person or entity. The calculations were based on a total of 30,538,277 Common Shares, 55,000 Series A Preferred Shares and 2,400,000 Series D Preferred Shares outstanding as of December 28, 2007.


	Common Shares			Series A Preferred Shares			Series D Preferred Shares
	(Number of Shares and Percentage of Outstanding Shares)
Name and Address of Beneficial Owner	Number	%		Number	%		Number	%
Merrill Lynch Bank & Trust, Co., FSB	30,538,277	100	%	25,410	46.2	%	—	—

Executive Officers and Directors:
James J. Baumberger ^{(2) (3)}	—	—		—	—		12,000	0.5	%
Thomas A. Cunningham ⁽³⁾	—	—		—	—		—	—
Jerry Lykins ⁽³⁾	—	—		—	—		16,475	0.7	%
Barrant V. Merrill ⁽³⁾	—	—		—	—		—	—
Linda G. Moulds ⁽³⁾	—	—		—	—		—	—
Edward J. Dobranski ^{(2) (3)}	—	—		—	—		—	—
Julie N. Miyachi ^{(2) (3)}	—	—		—	—		1,900	0.1	%
Willis H. Newton, Jr. ^{(2) (3)}	—	—		—	—		—	—
May Chan	—	—		—	—		—	—

All Executive Officers and Directors as a group (9 persons)	—	—		—	—		30,375	1.3	%

⁽¹⁾	Unless otherwise indicated, the address of each beneficial owner is c/o First Republic Preferred Capital Corporation, 111 Pine Street, San Francisco, California 94111

⁽²⁾	Executive Officer

⁽³⁾

Director

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Transactions with Management and Others

Please see the discussion in Item 1 of this report under the heading “The Company’s Relationship with First Republic.”

Certain Business Relationships

All of the Company’s executive officers are also officers or employees of First Republic.

Indebtedness of Management

None of the Company’s directors, officers, or any of their immediate family or other affiliates, is indebted to the Company since the beginning of the year ended December 28, 2007, in an amount in excess of $120,000.

Director Independence

Please see the discussion in Item 10 of this report under the heading “Independent Directors.”

Item 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES.

The following table presents fees for professional audit services rendered and fees billed for other services rendered by Deloitte & Touche LLP and KPMG LLP for the audit of the Company’s annual financial statements for 2007 and 2006.


	2007		2006
Audit fees	$	112,500	$	69,500
Tax fees		—		5,000

Total fees	$	112,500	$	74,500

The Audit Committee implemented a policy in May 2003 to have all future auditing services and permitted non-audit services of its independent registered public accounting firm pre-approved by the Audit Committee, including fees and terms. Following the implementation of this policy, the Audit Committee has pre-approved all of the engagements and fees for the audit of the Company.

PART IV

Item 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)	Financial Statements.

(1)

Financial Statements:

Please see Financial Statements table of contents on page F-2 of this report.

(2)

Financial Statement Schedules:

Financial statement schedules are omitted because either the required information is not present in amounts sufficient to require submission of the schedules of the information required is included in the financial statements and notes thereto.

(3)

Exhibits:

The majority of the following exhibits were previously filed as exhibits to other reports or registration statements filed by the Company and are incorporated herein by reference to such reports or registration statements as indicated parenthetically below.

EXHIBIT INDEX


Exhibit No.		Description
3.1		Articles of Incorporation of First Republic Preferred Capital Corporation, including any amendments thereto (incorporated herein by reference to Exhibit 3.1 of Form 10-K filed on March 16, 2007).

3.2		Certificate of Designations of First Republic Preferred Capital Corporation relating to the Noncumulative Series A Preferred Shares (incorporated herein by reference to Exhibit 3.1 of Form 10-Q filed on November 14, 2007).

3.3		Code of Bylaws of First Republic Preferred Capital Corporation (incorporated herein by reference to Exhibit 3.5 of Form S-11 filed on October 31, 2001).

3.4		Certificate of Designations of First Republic Preferred Capital Corporation relating to the Noncumulative Series D Preferred Shares (incorporated herein by reference to Exhibit 3.3 of Form 10-Q filed on November 14, 2007).

4.1		Specimen certificate representing Noncumulative Series D shares (incorporated herein by reference to Exhibit 4 of Form S-11 filed on June 16, 2003).

10.1		Amended and Restated Master Loan Purchase and Servicing Agreement between First Republic Preferred Capital Corporation and First Republic Bank (incorporated herein by reference to Exhibit 10.1 of Form S-11 filed on December 7, 2001).

10.2		Amended and Restated Advisory Agreement between First Republic Preferred Capital Corporation and First Republic Bank (incorporated herein by reference to Exhibit 10.2 of Form S-11 filed on December 7, 2001).

12*		Statement regarding calculation of ratio of earnings to fixed charges.

31.1*		Certification pursuant to 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(a), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification pursuant to 18 U.S.C. Section 1350(a), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

By:

/s/ WILLIS H. NEWTON, JR.

Willis H. Newton, Jr.

Vice President,

Chief Financial Officer,
Treasurer and Director
(Principal Financial Officer)

March 27, 2008

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Title	Date

/s/ JAMES J. BAUMBERGER (James J. Baumberger)	President, Director	March 27, 2008

/s/ THOMAS A. CUNNINGHAM (Thomas A. Cunningham)	Director	March 27, 2008

/s/ JERRY LYKINS (Jerry Lykins)	Director	March 27, 2008

/s/ BARRANT V. MERRILL (Barrant V. Merrill)	Director	March 27, 2008

/s/ LINDA G. MOULDS (Linda G. Moulds)	Director	March 27, 2008

/s/ EDWARD J. DOBRANSKI (Edward J. Dobranski)	Vice President, General Counsel, Director	March 27, 2008

/s/ JULIE N. MIYACHI (Julie N. Miyachi)	Vice President, Operations, Director	March 27, 2008

/s/ WILLIS H. NEWTON, JR. (Willis H. Newton, Jr.)	Vice President, Chief Financial Officer, Treasurer, Director	March 27, 2008

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Wholly Owned Subsidiary of Merrill Lynch Bank & Trust Co., FSB)

Financial Statements

December 28, 2007 and December 31, 2006

(With Report of Independent Registered Public Accounting Firm Thereon)

F-1

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

TABLE OF CONTENTS


		Page

Reports of Independent Registered Public Accounting Firms		F-3

Balance Sheet s		F-5

Statements of Income		F-6

Statements of Changes in Stockholders’ Equity		F-7

Statements of Cash Flows		F-8

Notes to Financial Statements		F-9

All other schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedules or the information required is included in the financial statements and notes thereto.

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of

First Republic Preferred Capital Corporation

San Francisco, California

We have audited the accompanying balance sheet of First Republic Preferred Capital Corporation (a wholly owned subsidiary of Merrill Lynch Bank & Trust Co., FSB) (the “Company”) as of December 28, 2007, and the related statements of income, changes in stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such 2007 financial statements present fairly, in all material respects, the financial position of First Republic Preferred Capital Corporation as of December 28, 2007, and the results of its operations and its cash flows for year ended December 28, 2007, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, on September 21, 2007, Merrill Lynch & Co., Inc. (“Merrill Lynch & Co.”) acquired all of First Republic Bank’s outstanding shares of common stock. First Republic Bank, which owned 100% of the Company’s outstanding common shares, merged with and into Merrill Lynch Bank & Trust Co., FSB, a federal stock savings bank and a wholly owned subsidiary of Merrill Lynch & Co. Upon completion of the merger, First Republic Bank became a division of Merrill Lynch Bank & Trust Co., FSB. On the same date, Merrill Lynch Bank & Trust Co., FSB became the controlling shareholder and owner of 100% of the Company’s outstanding common shares.

/s/ Deloitte & Touche LLP

San Francisco, California

March 27, 2008

F-3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

First Republic Preferred Capital Corporation:

We have audited the accompanying balance sheet of First Republic Preferred Capital Corporation (the Company) as of December 31, 2006, and the related statements of income, changes in stockholders’ equity, and cash flows for the years in the two-year period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of First Republic Preferred Capital Corporation as of December 31, 2006, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

San Francisco, California

March 15, 2007

F-4

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Wholly Owned Subsidiary of Merrill Lynch Bank & Trust Co., FSB)

BALANCE SHEETS


	December 28, 2007			December 31, 2006
ASSETS
Cash and cash equivalents	$	22,196,000		$	12,813,000

Single family mortgage loans		237,382,000			288,725,000
Multifamily mortgage loans		30,124,000			34,491,000

Total mortgage loans (Note 4)		267,506,000			323,216,000

Less: Allowance for loan losses		(481,000	)		(481,000	)

Mortgage loans, net		267,025,000			322,735,000

Accrued interest receivable		1,383,000			1,683,000
Prepaid expenses		58,000			2,000

Total Assets	$	290,662,000		$	337,233,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Payable to First Republic (Note 5)	$	25,000		$	25,000
Other payables		69,000			86,000

Total Liabilities		94,000			111,000

Stockholders’ equity (Notes 6 and 7):
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 at December 31, 2006		—			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 shares issued and outstanding at December 31, 2006		—			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; 30,538,277 and 29,352,873 shares issued and outstanding at December 28, 2007 and December 31, 2006, respectively		305,000			294,000
Additional paid-in capital		175,463,000			173,028,000
Dividends in excess of retained earnings		(200,000	)		(200,000	)

Total Stockholders’ Equity		290,568,000			337,122,000

Total Liabilities and Stockholders’ Equity	$	290,662,000		$	337,233,000

See accompanying notes to financial statements.

F-5

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Wholly Owned Subsidiary of Merrill Lynch Bank & Trust Co., FSB)

STATEMENTS OF INCOME


	Three Months Ended December 28, 2007		Nine Months Ended September 30, 2007		Year Ended December 31,
	Three Months Ended December 28, 2007		Nine Months Ended September 30, 2007		2006		2005
Interest income:
Interest on loans	$	4,461,000	$	13,852,000	$	18,470,000	$	16,327,000
Interest on interest-earning deposit with First Republic		434,000		920,000		264,000		182,000

Total interest income		4,895,000		14,772,000		18,734,000		16,509,000

Other income		—		58,000		—		—

Operating expense:
Advisory fees payable to First Republic (Note 5)		25,000		75,000		100,000		100,000
General and administrative		49,000		166,000		178,000		233,000

Total operating expense		74,000		241,000		278,000		333,000

Net income		4,821,000		14,589,000		18,456,000		16,176,000
Dividends on preferred stock (Note 8)		2,972,000		10,568,000		14,252,000		14,252,000

Net income available to common stockholders	$	1,849,000	$	4,021,000	$	4,204,000	$	1,924,000

See accompanying notes to financial statements.

F-6

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Wholly Owned Subsidiary of Merrill Lynch Bank & Trust Co., FSB)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


	Preferred Stock			Common Stock		Additional Paid-in Capital			Retained Earnings			Total
Balance as of December 31, 2004	$	164,000,000		$	294,000	$	166,923,000		$	(200,000	)	$	331,017,000
Net income		—			—		—			16,176,000			16,176,000
Dividends paid on preferred stock		—			—		—			(14,252,000	)		(14,252,000	)
Repurchase shares of common stock		—			—		(23,000	)		—			(23,000	)
Consent dividends on common stock		—			—		1,924,000			(1,924,000	)		—

Balance as of December 31, 2005		164,000,000			294,000		168,824,000			(200,000	)		332,918,000
Net income		—			—		—			18,456,000			18,456,000
Dividends paid on preferred stock		—			—		—			(14,252,000	)		(14,252,000	)
Consent dividends on common stock		—			—		4,204,000			(4,204,000	)		—

Balance as of December 31, 2006		164,000,000			294,000		173,028,000			(200,000	)		337,122,000
Conversion of 7,000 shares of Series C preferred stock into common stock of First Republic		(7,000,000	)		—		—			—			(7,000,000	)
Redemption of 1,680,000 shares of Series B preferred stock		(42,000,000	)		—		—			—			(42,000,000	)
Issuance of 1,185,484 shares of common stock to First Republic		—			11,000		6,989,000			—			7,000,000
Push down accounting adjustment (Note 2)		—			—		(10,424,000	)		—			(10,424,000	)
Net income		—			—		—			19,410,000			19,410,000
Dividends paid on preferred stock		—			—		—			(13,540,000	)		(13,540,000	)
Consent dividends on common stock		—			—		5,870,000			(5,870,000	)		—

Balance as of December 28, 2007	$	115,000,000		$	305,000	$	175,463,000		$	(200,000	)	$	290,568,000

See accompanying notes to financial statements.

F-7

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Wholly Owned Subsidiary of Merrill Lynch Bank & Trust Co., FSB)

STATEMENTS OF CASH FLOWS


	For the Year Ended
	December 28, 2007			December 31,
	December 28, 2007			2006			2005
Operating activities:
Net income	$	19,410,000		$	18,456,000		$	16,176,000
Adjustments to reconcile net income to net cash provided by operating activities:
(Discount accretion) premium amortization on loans		(117,000	)		235,000			235,000
Decrease (increase) in accrued interest receivable		300,000			(214,000	)		(38,000	)
(Increase) decrease in prepaid expenses		(56,000	)		1,000			2,000
Increase in payable to First Republic		—			—			6,000
(Decrease) increase in other payables		(17,000	)		9,000			(46,000	)

Net cash provided by operating activities		19,520,000			18,487,000			16,335,000

Investing activities:
Loans acquired from First Republic		(22,693,000	)		(76,092,000	)		(73,563,000	)
Principal payments on loans		68,096,000			67,420,000			84,278,000

Net cash provided by (used for) investing activities		45,403,000			(8,672,000	)		10,715,000

Financing activities:
Dividends paid on preferred stock		(13,540,000	)		(14,252,000	)		(14,252,000	)
Dividends paid on common stock		—			—			(1,000	)
Redemption of Series B preferred stock		(42,000,000	)		—			—
Repurchase of common stock		—			—			(23,000	)

Net cash used for financing activities		(55,540,000	)		(14,252,000	)		(14,276,000	)

Increase (decrease) in cash and cash equivalents		9,383,000			(4,437,000	)		12,774,000
Cash and cash equivalents at beginning of year		12,813,000			17,250,000			4,476,000

Cash and cash equivalents at end of year	$	22,196,000		$	12,813,000		$	17,250,000

Supplemental disclosure of cash flow information:
Consent dividends on common stock	$	5,870,000		$	4,204,000		$	1,924,000

Supplemental schedule of noncash financing activities:
Conversion of Series C preferred stock into common shares of First Republic	$	7,000,000		$	—		$	—

See accompanying notes to financial statements.

F-8

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Wholly Owned Subsidiary of Merrill Lynch Bank & Trust Co., FSB)

NOTES TO FINANCIAL STATEMENTS

December 28, 2007

Note 1. Organization and Basis of Presentation

First Republic Preferred Capital Corporation (the “Company”) is a Nevada corporation formed by First Republic Bank (“First Republic”) in April 1999 for the purpose of raising capital for First Republic. The Company’s principal business is acquiring, holding, financing and managing assets secured by real estate mortgages and other obligations secure 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.

On September 21, 2007, Merrill Lynch & Co., Inc. (“Merrill Lynch & Co.”) acquired all of First Republic’s outstanding shares of common stock. First Republic, which owned 100% of the Company’s outstanding common shares, merged with and into Merrill Lynch Bank & Trust Co., FSB, a federal stock savings bank and a wholly owned subsidiary of Merrill Lynch & Co. Upon completion of the merger, First Republic became a division of Merrill Lynch Bank & Trust Co., FSB. On the same date, Merrill Lynch Bank & Trust Co., FSB (hereinafter referred to as the “Bank”) became the controlling shareholder and owner of 100% of the Company’s outstanding common shares. As a result of the merger, the Company changed its fiscal year end from December 31 to the last Friday in December. The impact of this change in the reporting period was not material. There were no changes in the Company’s Board of Directors, material agreements or outstanding issues of preferred stock (other than the changes discussed in Note 6, “Preferred Stock.”)

The acquisition of First Republic was accounted for under the purchase method of accounting, as required by Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” The purchase price of First Republic was allocated to the assets and liabilities of First Republic based on their estimated fair values. The portion of the purchase price of First Republic allocable to the Company has been “pushed down” and allocated to the Company’s assets and liabilities based on their estimated fair values. (See Note 2, “Purchase Accounting.”) Since push down accounting has resulted in a change in basis of the Company’s assets and liabilities, a vertical black line appears on the Statement of Income to distinguish between the Company’s results of operations prior to the change of control and after the change of control.

At December 28, 2007, the Company has issued 30,538,277 shares of common stock, par value $ 0.01 per share. The Bank owns all of the common stock. Earnings per share data is not presented, as the Company’s common stock is not publicly traded.

F-9

Note 2. Purchase Accounting

As a result of the allocation of the purchase price of First Republic, fair value adjustments have been pushed down to the Company’s assets and liabilities resulting in an adjustment to Mortgage Loans based on their estimated fair values, the same basis as in consolidation with the Bank. The following table presents the push down accounting adjustments to recognize assets and liabilities at their estimated fair values as of the acquisition date; the offset was recognized in additional paid-in capital:


	Carrying Value as of September 21, 2007		Push Down Accounting Adjustments			Estimated Fair Value as of September 21, 2007
Assets
Single family mortgage loans	$	257,744,000	$	(10,256,000	)	$	247,488,000
Multifamily mortgage loans		30,516,000		(168,000	)		30,348,000

Total mortgage loans	$	288,260,000	$	(10,424,000	)	$	277,836,000

Liabilities and Stockholder’s Equity
Additional paid-in capital	$	180,016,000	$	(10,424,000	)	$	169,592,000

Management estimated the fair value of assets and liabilities as of the merger date to be equal to their carrying values with the exception of Mortgage Loans. Due to the limited period of time during the third quarter of 2007 from the merger date to the end of the quarter, management of the Company and First Republic estimated the fair value of Mortgage Loans as of September 21, 2007 by grouping the loans according to interest rate type, applying interest rates as of September 21, 2007 and considering other factors such as prevailing market conditions. During the fourth quarter of 2007, management refined the analysis on an individual loan basis, resulting in a change to the initial estimated fair value of Mortgage Loans by $2,036,000. The net reduction to the carrying value of Mortgage Loans will be accounted for as a loan purchase discount and accreted into interest income beginning in the fourth quarter of 2007 and over the remaining life of the related loans. The push down accounting adjustments did not impact cash flows.

Note 3. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses.

Mortgage Loans

The Company has purchased Mortgage Loans from First Republic at First Republic’s carrying amount, which generally has approximated the fair value of the loans at the date of purchase. If a significant difference were to exist between First Republic’s carrying amount and the fair value of loans at the date of purchase, the Company would record the difference as a capital contribution by First Republic or a capital distribution to First Republic.

Mortgage Loans are carried at the principal amount outstanding, net of purchase discounts and premiums. In accordance with SFAS No. 141, “Business Combinations,” Mortgage Loans were revalued to reflect their estimated fair values as of the merger date. Discounts or premiums on Mortgage Loans are accreted or amortized as yield adjustments over the contractual lives of the loans using methods that approximate the interest method. The unaccreted discount or unamortized premium on a loan paid in full is recognized in income at the time of payoff.

The Company recognizes interest income, net of servicing fees paid to First Republic, in the month earned. The Company places a loan on nonaccrual status, and interest income is not recorded on the loan, when the loan becomes

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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 Company’s recorded investment in such loan 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. The Company classifies a loan as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Allowance for Loan Losses

The Company maintains an allowance for loan losses that can be reasonably anticipated based upon specific conditions at the time. The Company considers a number of factors, including the Company’s and First Republic’s past loss experience, First Republic’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 were to determine 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, less estimated costs to sell such real estate. The Company records costs related to holding real estate as expenses when incurred. The Company has not owned any real estate since inception.

Income Taxes

The Company has elected to be taxed as a REIT and believes it complies with the provisions of the Internal Revenue Code with respect thereto. Accordingly, the Company will not be subject to federal income tax on that portion of its income that is distributed to shareholders as long as certain asset, income and stock ownership tests are met.

Statements of Cash Flows

For the purpose of reporting cash flows, cash and cash equivalents include cash and an interest-earning deposit with First Republic. As a REIT making sufficient dividend distributions, the Company paid no income taxes for each year ended December 28, 2007, December 31, 2006 or December 31, 2005.

Recent Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. There was no impact of the adoption of FIN 48 to the Company’s financial statements.

In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and expands quantitative and qualitative disclosures. SFAS No. 157 applies when other accounting pronouncements require fair value measurements and does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 with early adoption permitted provided that the entity has not yet issued financial statements for that fiscal year, including any interim periods. The provisions of SFAS No. 157 are to be applied prospectively, with limited retrospective application for certain financial instruments. Merrill Lynch & Co. early adopted the provisions of SFAS No. 157 in the first quarter of 2007. As a result of the acquisition by Merrill Lynch & Co., the Company was required to

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adopt SFAS No. 157 in the third quarter of 2007. However, the Company has no assets or liabilities that are measured at fair value under applicable accounting pronouncements. The Company’s assets or liabilities that were adjusted to their estimated fair values as a result of the acquisition are not included in the scope of the disclosure requirements under SFAS No. 157.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment to FASB Statement No. 115.” SFAS No. 159 allows an entity to elect to measure certain financial assets and liabilities at fair value upon initial recognition or upon occurrence of an event that results in a new basis of accounting. The fair value election, if made, shall be applied on an instrument by instrument basis and is irrevocable. Upon adoption of SFAS No. 159, a cumulative effect adjustment to the opening balance of retained earnings would be made to record existing assets or liabilities at fair value. At each subsequent reporting date, changes in the fair value of those assets and liabilities would be recognized in earnings. SFAS No. 159 does not affect existing guidance for fair value measurement and does not eliminate existing disclosure requirements relating to fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007 provided that the entity makes that choice in the first 120 days of that fiscal year, has not yet issued financial statements for any interim period of the fiscal year of adoption and also elects to apply the provisions of SFAS No. 157. Merrill Lynch & Co. early adopted the provisions of SFAS No. 159. As a result of the acquisition by Merrill Lynch & Co., the Company was required to adopt SFAS No. 159 in the third quarter of 2007. However, the Company did not elect the fair value option for any of its financial assets and liabilities.

Note 4. Loans

The Company’s Mortgage Loans are secured by single family and multifamily real estate properties located primarily in California. The Mortgage Loans generally mature over periods of up to thirty years. The following table presents the Mortgage Loan portfolio at December 28, 2007 and December 31, 2006:


	December 28, 2007		December 31, 2006
	December 28, 2007		December 31, 2006
Single family mortgage loans	$	237,382,000	$	288,725,000
Multifamily mortgage loans		30,124,000		34,491,000

Total mortgage loans	$	267,506,000	$	323,216,000

There were no nonaccrual loans and no impaired loans at December 28, 2007 or December 31, 2006. The following table presents information with respect to the Company’s allowance for loan losses for each of the last three years:


	For the Year Ended
	December 28, 2007			December 31,
	December 28, 2007			2006			2005
Allowance for loan losses
Balance at the beginning of year	$	481,000		$	481,000		$	481,000
Provision charged to expense		—			—			—
Chargeoffs		—			—			—
Recoveries		—			—			—

Balance at the end of year	$	481,000		$	481,000		$	481,000


Average Mortgage Loans for the period	$	304,270,000		$	328,835,000		$	326,174,000
Total Mortgage Loans at December 31	$	267,506,000		$	323,216,000		$	314,779,000
Ratio of allowance for loan losses to total loans		0.18	%		0.15	%		0.15	%

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There have been no changes to the Company’s allowance for the past three years because the size and composition of the loan portfolio has been relatively unchanged. As of December 28, 2007, the Company’s allowance for loan losses was 0.18% of total loans.

Note 5. Related Party Transactions

The Company’s related party transactions include the acquisition of Mortgage Loans from First Republic, loan servicing fees paid to First Republic and advisory fees paid to First Republic. The following table presents the Company’s related party transactions for the years ended December 28, 2007, December 31, 2006, and December 31, 2005:


	For the Year Ended
	December 28, 2007		December 31,
	December 28, 2007		2006		2005
Mortgage Loans acquired from First Republic:
Principal	$	22,666,000	$	75,845,000	$	73,373,000
Premium		27,000		247,000		190,000

Total Mortgage Loans acquired		22,693,000		76,092,000		73,563,000
Loan servicing fee expense		752,000		804,000		788,000
Advisory fee expense	$	100,000	$	100,000	$	100,000

Since inception, the Company has acquired all Mortgage Loans from First Republic at a price equal to First Republic’s carrying value of the loans, which approximated the fair value of Mortgage Loans.

First Republic retains loan servicing fees on the Company’s 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. The loan purchase and servicing agreement is renewable on an annual basis. Pursuant to the agreement, First Republic charges an annual servicing fee of 0.25% of the gross average outstanding principal balances of Mortgage Loans that First Republic services. The Company records the loan servicing fees as a reduction of interest income.

The Company pays advisory fees to First Republic under an advisory agreement pursuant to which First Republic administers the day-to-day operations of the Company. First Republic is responsible for: (i) monitoring the credit quality of the Mortgage Assets held by the Company; (ii) advising the Company with respect to the reinvestment of income from, and principal payments on, the Mortgage Assets, and with respect to the acquisition, management, financing and disposition of the Mortgage Assets; (iii) monitoring the Company’s 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 2007, 2006 and 2005, payable in equal quarterly installments. The Company had advisory fees payable to First Republic of $25,000 at December 28, 2007 and at December 31, 2006.

At December 28, 2007, the Bank owned 25,410 shares of the Company’s Series A Preferred Shares, with a liquidation preference value of $25.4 million. At December 31, 2006, these shares were owned by First Republic. During 2007, 2006 and 2005, neither the Bank nor First Republic purchased any of the Company’s outstanding Series A Preferred Shares.

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Note 6. Preferred Stock

At December 28, 2007, the Company was authorized to issue 10,000,000 shares of preferred stock, of which 2,455,000 shares were outstanding. The Company has issued and outstanding shares for each of the following series of preferred stock, par value $0.01 per share at December 28, 2007 and December 31, 2006:


	December 28, 2007		December 31, 2006
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 at December 31, 2006		—		42,000,000
Series C—10,000 shares authorized, 7,000 issued and outstanding at December 31, 2006		—		7,000,000
Series D—2,400,000 shares authorized, issued and outstanding		60,000,000		60,000,000

Total preferred stock	$	115,000,000	$	164,000,000

In June 1999, the Company issued 55,000 shares of Series A Preferred Shares. The Company’s proceeds from this issuance were $55 million; First Republic paid all expenses of the offering, including underwriting commissions and discounts. The Series A Preferred Shares are not redeemable 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. The Company’s proceeds from this issuance were $7 million; First Republic paid all expenses of the offering, including underwriting commissions and discounts. In June 2007, the holder of the Series C Preferred Shares elected to exercise the right to convert all of the shares into common stock of First Republic at a price of $20.38 per share. The conversion was pursuant to the terms set forth in the certificate of designations governing the Series C Preferred Shares. To effect the conversion, the Company issued 1,185,484 shares of its common stock to First Republic, and First Republic issued 343,530 shares of its common stock to the holder of the Company’s Series C Preferred Shares. In addition to receiving shares of First Republic’s common stock, the holder received cash in lieu of any fractional shares and a cash payment from the Company equal to the amount of accrued and unpaid dividends on the Series C Preferred Shares. The former holder of the Series C Preferred Shares has no further rights arising out of the ownership of such shares. The Company reduced its preferred stock balance by the amount of the carrying value of the Series C Preferred Shares and increased common stock and additional paid-in capital. No gain or loss was recognized with respect to the conversion.

In January 2002, the Company issued 1,680,000 Series B Preferred Shares. The Company’s proceeds from this issuance were $42 million; First Republic paid all expenses of the offering, including underwriting commissions and discounts. On November 19, 2007 (“Redemption Date”), the Company redeemed the Series B Preferred Shares at a total redemption price of $42.5 million, which represented $25.00 per share plus accrued and unpaid dividends to the Redemption Date at a rate of $10.296 per share of all the issued and outstanding Series B Preferred Shares.

In June 2003, the Company issued 2,400,000 Series D Preferred Shares. The Company’s proceeds from this issuance were $60 million; First Republic paid all expenses of the offering, including underwriting commissions and discounts. The Series D Preferred Shares are 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, if authorized and declared, are payable quarterly in arrears on March 30, June 30, September 30, and December 30 of each year. The first dividend payment date for the Series D Preferred Shares was September 30, 2003.

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

Note 7. Common Stock

At December 28, 2007, the Company was authorized to issue 50,000,000 shares of common stock with a par value of $0.01 per share, of which 30,538,277 shares were outstanding. In June 2007, the Company issued 1,185,484 shares of common stock to First Republic in connection with the conversion of the Company’s Series C Preferred Shares. The Company issued no common stock in 2006 or in 2005. In January 2005, the Company tendered an offer to repurchase the 9,840 shares that were issued to 123 current and former employees of First Republic. As of December 28, 2007, all individuals had accepted the offer of $2.50 per share, or $200 for each owner.

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 therefore 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 that the Company paid in 2007, 2006 and 2005:


	2007		2006		2005
Series A Preferred Shares	$	5,743,000	$	5,775,000	$	5,775,000
Series B Preferred Shares		3,293,000		3,728,000		3,728,000
Series C Preferred Shares		178,000		399,000		399,000
Series D Preferred Shares		4,326,000		4,350,000		4,350,000

Total	$	13,540,000	$	14,252,000	$	14,252,000

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

The Company expects to pay the holders of common stock an amount of dividends that when aggregated with the dividends paid to holders of the preferred shares is not less than 90% of the Company’s “REIT taxable

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income” (excluding deductions for any dividends paid and any net capital gains) in order to remain qualified as a REIT. The Company declared dividends on its common stock of $5,870,000 for 2007, $4,204,000 for 2006 and $1,924,000 for 2005. The dividends on the common stock shares owned by the Bank in 2007 and by First Republic in 2006 and 2005 were treated as a consent dividend under Section 565 of the Internal Revenue Code.

Note 9. Fair Value of Financial Instruments

The following table presents the carrying amounts and fair values of the Company’s financial instruments as of December 28, 2007 and December 31, 2006:


	December 28, 2007				December 31, 2006
($ in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and interest-earning deposit	$	22,196	$	22,196	$	12,813	$	12,813
Mortgage loans, net	$	267,025	$	261,841	$	322,735	$	323,165

The following methods and assumptions were used to estimate the fair value of each type of financial instrument:

Cash and Interest-earning Deposit : The carrying value approximates the estimated fair value.

Mortgage Loans : The carrying amount of Mortgage Loans is net of the allowance for loan losses. To estimate the fair value of Mortgage Loans, the Company segments each loan collateral type into categories based on fixed or adjustable interest rate terms (index, margin, current rate and time to next adjustment), maturity, estimated credit risk, and accrual status.

The Company based the fair value of single family and multifamily mortgages loans primarily upon prices of loans with similar terms obtained by or quoted to the Company, adjusted for differences in loan characteristics and market conditions.

Note 10. Concentration of Credit Risk


($ in thousands)	San Francisco Bay Area			New York/New England			Los Angeles County			San Diego County			Other California Areas			Other			Las Vegas, Nevada			Total
($ in thousands)	San Francisco Bay Area			New York/New England			Los Angeles County			San Diego County			Other California Areas			Other			Las Vegas, Nevada			Amount			%
Single family	$	133,635		$	29,710		$	23,836		$	7,724		$	19,646		$	21,378		$	1,453		$	237,382		89	%
Multifamily		22,618			865			3,391			625			2,625			—			—			30,124		11

Total	$	156,253		$	30,575		$	27,227		$	8,349		$	22,271		$	21,378		$	1,453		$	267,506		100	%

Percent by location		58	%		12	%		10	%		3	%		8	%		8	%		1	%		100	%

At December 28, 2007, approximately 79% of Mortgage Loans were secured by real estate properties located primarily in California. Future economic, political or other developments in California could adversely affect the value of Mortgage Loans.

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Note 11. Quarterly Data (Unaudited)

The following table presents the Company’s summary unaudited financial information on a quarterly basis for 2007 and 2006. Since push down accounting resulted in a change in basis of the Company’s assets and liabilities, a vertical black line appears in the quarterly data table to distinguish between the Company’s results of operations prior to the change of control and after the change of control.


	2007								2006
($ in thousands)	Fourth Quarter		Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter		Second Quarter		First Quarter
Interest income	$	4,895	$	4,845	$	4,939	$	4,988	$	5,020	$	4,776	$	4,537	$	4,401
Provision for loan losses		—		—		—		—		—		—		—		—
Other income		—		—		58		—		—		—		—		—
Operating expense		74		84		86		71		71		67		71		69

Net income		4,821		4,761		4,911		4,917		4,949		4,709		4,466		4,332
Preferred stock dividends		2,972		3,464		3,541		3,563		3,563		3,563		3,563		3,563

Net income available to common stockholders	$	1,849	$	1,297	$	1,370	$	1,354	$	1,386	$	1,146	$	903	$	769