8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): June 30, 2010

COLONY FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Maryland	001-34456	27-0419483
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

2450 Broadway, 6th Floor Santa Monica, CA	90404
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (310) 282-8820

Not Applicable

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item. 2.01. Completion of Acquisition or Disposition of Assets.

On June 30, 2010, ColFin FRB Investor, LLC (“FRB Investor”), a joint venture between Colony Financial, Inc. (the “Company”) and investment funds managed by affiliates of Colony Capital, LLC, completed its previously announced acquisition of a 21.8% interest in First Republic Bank from Merrill Lynch Bank & Trust Company, a subsidiary of Bank of America Corporation. The remaining 78.2% interest in First Republic Bank was acquired by a group of third-party investors (the “Third-Party Investors” and, together with FRB Investor, the “Investors”). The amount of consideration paid to Merrill Lynch Bank & Trust Company by the Investors was determined pursuant to arm’s-length negotiations between the parties. The Company’s pro rata share of the total equity investment by FRB Investor was $24.0 million in cash from the proceeds of the Company’s initial public offering, which investment, at the time of acquisition, represented an approximate 5.9% interest in FRB Investor and an approximate 1.3% indirect ownership interest in First Republic Bank.

First Republic Bank is a California-chartered commercial bank and trust company headquartered in San Francisco with deposits insured by the Federal Deposit Insurance Corporation. As of September 30, 2010, First Republic Bank had total assets of approximately $22.0 billion, total deposits of approximately $19.0 billion, total equity of approximately $2.0 billion and wealth management assets of approximately $17.2 billion.

On December 14, 2010, First Republic Bank closed the initial public offering of 12,650,000 million shares of its common stock (including 1,650,000 shares sold in connection with the exercise of the underwriters’ overallotment option). As part of First Republic Bank’s initial public offering, FRB Investor sold 1,948,477 shares of common stock in First Republic Bank, which resulted in aggregate cash proceeds to the Company (before expenses) of approximately $2.75 million. The initial public offering price of First Republic Bank’s shares was determined through negotiations among First Republic Bank, the selling shareholders (including FRB Investor) and representatives of the underwriters. After giving effect to the disposition of shares as part of First Republic Bank’s initial public offering, FRB Investor owns a 19.5% interest in First Republic Bank, and the Company owns an approximate 1.2% indirect interest in First Republic Bank.

Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”), a subsidiary of Bank of America Corporation, and Morgan Stanley & Co. Incorporated (“Morgan Stanley”) served as lead underwriters in connection with First Republic Bank’s initial public offering. Merrill Lynch also served as the lead underwriter in connection with the Company’s initial public offering, which closed in September 2009, and other affiliates of Bank of America Corporation serve as administrative agent and a lender, and an affiliate of Morgan Stanley serves as a lender, under the Company’s credit facility, which was entered into on September 16, 2010.

Item 9.01. Financial Statements and Exhibits.

(a)(1) Financial Statements of Businesses Acquired.

The financial statements of First Republic Bank and FRB Investor, which are required to be filed in connection with the acquisition described in Item 2.01, are attached to this report as Exhibits 99.1, 99.2 and 99.3.

(b)(1) Pro Forma Financial Information.

The pro forma financial information required to be filed in connection with the disposition described in Item 2.01 is attached to this report as Exhibit 99.4.

(d) Exhibits.

Exhibit Number	Description
23.1	Consent of Ernst & Young LLP
23.2	Consent of PriceWaterhouseCoopers LLP
23.3	Consent of KPMG LLP
99.1	Financial statements of ColFin FRB Investor, LLC for the period from October 16, 2009 (inception) to December 31, 2009 and for the nine months ended September 30, 2010 (unaudited)
99.2	Financial statements for First Republic Bank for the three months ended September 30, 2010, six months ended June 30, 2010 and three and nine months ended September 30, 2009 (unaudited)
99.3	Financial statements for First Republic Bank for the years ended December 31, 2009, December 26, 2008 and December 28, 2007
99.4	Pro forma consolidated balance sheet of Colony Financial, Inc. as of September 30, 2010 and pro forma consolidated statements of operations for the nine months ended September 30, 2010 and for the period from June 23, 2009 (Date of Inception) to December 31, 2009 (unaudited)

2

SIGNATURES

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

	COLONY FINANCIAL, INC.
Date: December 20, 2010	By:	/s/    Darren J. Tangen
		Darren J. Tangen
		Chief Financial Officer and Treasurer

3

EXHIBIT INDEX

Exhibit Number	Description
23.1	Consent of Ernst & Young LLP
23.2	Consent of PriceWaterhouseCoopers LLP
23.3	Consent of KPMG LLP
99.1	Financial statements of ColFin FRB Investor, LLC for the period from October 16, 2009 (inception) to December 31, 2009 and for the nine months ended September 30, 2010 (unaudited)
99.2	Financial statements for First Republic Bank for the three months ended September 30, 2010, six months ended June 30, 2010 and three and nine months ended September 30, 2009 (unaudited)
99.3	Financial statements for First Republic Bank for the years ended December 31, 2009, December 26, 2008 and December 28, 2007
99.4	Pro forma consolidated balance sheet of Colony Financial, Inc. as of September 30, 2010 and pro forma consolidated statements of operations for the nine months ended September 30, 2010 and for the period from June 23, 2009 (Date of Inception) to December 31, 2009 (unaudited)

4

EX-23.1

Exhibit 23.1

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-162188) pertaining to the 2009 Non-Executive Director Stock Plan of Colony Financial, Inc. of our report dated December 20, 2010, with respect to the financial statements of ColFin FRB Investor, LLC for the period from October 16, 2009 (inception) through December 31, 2009 included in this Current Report on Form 8-K of Colony Financial, Inc. dated December 20, 2010.

/s/ Ernst & Young LLP

Los Angeles, California

December 20, 2010

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-162188) of Colony Financial, Inc of our report dated September 14, 2010 relating to the financial statements of First Republic Bank, which appears in the Current Report on Form 8-K of Colony Financial, Inc. dated December 20, 2010.

/s/ PricewaterhouseCoopers LLP

San Francisco, CA

December 17, 2010

EX-23.3

Exhibit 23.3

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Colony Financial, Inc.:

We consent to the use of our report dated September 14, 2010, with respect to the combined balance sheet of First Republic Bank (the Bank) as of December 26, 2008 and December 28, 2007, and the related combined statements of income, changes in equity and comprehensive income, and cash flows for the year ended December 26, 2008, the period from September 22, 2007 to December 28, 2007 (the Predecessor II period), and the period from January 1, 2007 to September 21, 2007 (the Predecessor I period), incorporated herein by reference.

(signed) KPMG LLP

San Francisco, California

December 15, 2010

EX-99.1

Exhibit 99.1

REPORT OF INDEPENDENT AUDITORS

The Members of

ColFin FRB Investor, LLC

We have audited the accompanying balance sheet of ColFin FRB Investor, LLC (the “Company”) as of December 31, 2009 and the related statements of operations, members’ equity and cash flows for the period from October 16, 2009 (inception) to December 31, 2009. 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 auditing standards generally accepted in the 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. We were not engaged to perform an audit of the Company’s 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, and evaluating the overall financial statement presentation. We believe that our audit provides 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 ColFin FRB Investor, LLC at December 31, 2009, and the results of its operations and its cash flows for the period from October 16, 2009 (inception) to December 31, 2009, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Los Angeles, California

December 20, 2010

COLFIN FRB INVESTOR, LLC

BALANCE SHEETS

(In thousands)

	September 30, 2010 (Unaudited)		December 31, 2009 (Audited)
ASSETS
Investment in unconsolidated subsidiary	$	420,474		—
Cash and cash equivalents		4	$	5
Total assets	$	420,478	$	5
MEMBERS’ EQUITY	$	420,478	$	5

The accompanying notes are an integral part of these financial statements

COLFIN FRB INVESTOR, LLC

STATEMENTS OF OPERATIONS

(In thousands)

	Nine Months Ended September 30, 2010 (Unaudited)		Period from October 16, 2009 (inception) to December 31, 2009 (Audited)
Income
Equity in income of unconsolidated subsidiary	$	14,478	$	—
Total income		14,478
Expenses
Administrative expenses		213		—
Total expenses		213		—
Net income	$	14,265	$	—

The accompanying notes are an integral part of these financial statements.

COLFIN FRB INVESTOR, LLC

STATEMENTS OF MEMBERS’ EQUITY

(In thousands)

Period from October 16, 2009 (inception) to September 30, 2010

Balance at October 16, 2009 (inception)	$	—
Member contributions		5
Net income		—
Balance at December 31, 2009 (Audited)	$	5
Member contributions		406,208
Net income		14,265
Balance at September 30, 2010 (Unaudited)	$	420,478

The accompanying notes are an integral part of these financial statements

COLFIN FRB INVESTOR, LLC

STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended September 30, 2010 (Unaudited)			Period from October 16, 2009 (inception) to December 31, 2009 (Audited)
Cash Flows from Operating Activities
Net income	$	14,265		$	—
Adjustment to reconcile net income to net cash used in operating activities:					—
Equity in income of unconsolidated subsidiary		(14,478	)		—
Net cash used in operating activities		(213	)		—
Cash Flows from Investing Activities
Contributions to unconsolidated subsidiary		(405,996	)		—
Net cash used in investing activities		(405,996	)		—
Cash Flows from Financing Activities
Contributions from Members		406,208			5
Net cash provided by financing activities		406,208			5
Net (decrease) increase in cash		(1	)		5
Cash, beginning of period		5			—
Cash, end of period	$	4		$	5

The accompanying notes are an integral part of these financial statements.

COLFIN FRB INVESTOR, LLC

NOTES TO FINANCIAL STATEMENTS

For the nine months ended September 30, 2010 and period from October 16, 2009 (inception) to

December 31, 2009

1. Organization and Operations

ColFin FRB Investor, LLC (the “Company”), a Delaware limited liability company, was formed pursuant to a limited liability company agreement dated October 16, 2009, as amended and restated as of September 15, 2010, for the purpose of holding a ownership interest in First Republic Bank (“FRB”), a California corporation. The Company is owned 54.85% by C-VIII FRB Holding, LLC, 39.24% by Colony Distressed Credit Fund, L.P. and 5.91% by CFI FRB Funding, LLC, a wholly-owned subsidiary of Colony Financial, Inc (collectively, the “Members”). The Members are managed by affiliates of Colony Capital, LLC (“Colony Capital”). Profits and losses and cash distributions are allocated to the Members according to their membership interests.

2. Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

The accompanying interim financial statements for the nine months ended September 30, 2010 have been prepared, without audit, in accordance with GAAP and do not include all information and footnotes required for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim period presented. However, the results of operations for the interim period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or any other future period.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Investment in Unconsolidated Subsidiary

The Company holds a 21.8% interest in FRB. The Company has evaluated its investment pursuant to the guidance in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 810, Consolidation (ASC 810) to determine whether FRB is a variable interest entity (VIE) and whether the Company is the primary beneficiary of the VIE. As a result of this analysis, the Company concluded that FRB, as a business, is excluded from the scope of ASC 810. Since the Company has the ability to exercise significant influence over FRB, the Company uses the equity method to account for its investment.

Under the equity method, the Company records its investment at cost and adjusts it for the Company’s proportionate share of net earnings or losses, cash contributions made and distributions received, and other adjustments, as appropriate. Distributions of operating profit from the unconsolidated subsidiary are reported as part of operating cash flows while distributions related to capital transactions, such as a refinancing transaction or sale, are reported as investing activities. FRB’s critical accounting policies are similar to the Company’s and their financial statements are prepared in accordance with GAAP.

Income Taxes

Under federal and state income tax rules, limited liability companies are generally not subject to income taxes. Accordingly, no provision for income taxes is included in the accompanying financial statements. Income or loss is includable in the income tax returns of the Members.

3. Investment in Unconsolidated Subsidiary

On June 30, 2010, the Company acquired a 21.8% interest in FRB from Merrill Lynch Bank & Trust Company, a subsidiary of Bank of America Corporation. The remaining 78.2% interest in FRB was acquired by a group of third-party investors, including management of FRB (together with the Company, the “Investors”). The amount of consideration paid to Merrill Lynch Bank & Trust Company by the Investors was determined pursuant to arm’s-length negotiations between the parties. Summarized financial information for FRB subsequent to acquisition is as follows:

First Republic Bank

Condensed Balance Sheet (in thousands)

	September 30, 2010 (Unaudited)
Assets:
Cash, cash equivalents and investment securities	$	2,985,144
Loans, net of allowance		17,715,506
Other assets		1,253,418
Total Assets	$	21,954,068
Liabilities:
Customer deposits	$	18,694,763
Other liabilities		1,238,566
Total Liabilities		19,933,329
Stockholders’ equity		1,934,169
Noncontrolling interests		86,570
Total Liabilities and Equity	$	21,954,068
Company’s equity	$	420,474

First Republic Bank

Condensed Statement of Operations (in thousands)

	3 months ended September 30, 2010 (Unaudited)
Interest Income/Expense
Interest income	$	263,828
Interest expense		(27,588	)
Provision for credit losses		(4,500	)
Net Interest Income after provision for credit losses		231,740
Noninterest income		19,028
Noninterest expense		(136,203	)
Income before provision for income losses		114,565
Provision for income taxes		46,972
Net income before noncontrolling interests		67,593
Net income attributable to noncontrolling interests		1,198
Net income attributable to FRB	$	66,395
Company’s equity in net income	$	14,478

4. Subsequent Events

The Company has evaluated all subsequent events through December 20, 2010, the date these financial statements were available to be issued for potential recognition or disclosure.

On December 14, 2010, FRB closed the initial public offering of 12,650,000 shares of its common stock. In connection with this offering, the Company sold 1,948,477 shares of common stock, which resulted in aggregate cash proceeds (net of underwriting costs) of approximately $46.6 million and generated a gain of approximately $17.4 million.

EX-99.2

Exhibit 99.2

FIRST REPUBLIC BANK

Financial statements for First Republic Bank for the three months ended September 30, 2010, six months ended

June 30, 2010 and three and nine months ended September 30, 2009 (unaudited)

The following interim financial statements as of September 30, 2010 and for the three months ended September 30, 2010, six months ended June 30, 2010 and three and nine months ended September 30, 2009 are unaudited. However, the financial statements reflect all adjustments (which include only normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented.

FIRST REPUBLIC BANK

BALANCE SHEETS

(Unaudited)

	Successor			Predecessor III
($ in thousands)	September 30, 2010			December 31, 2009
ASSETS
Cash and cash equivalents	$	2,461,276		$	178,553
Investment securities available-for-sale		89,028			3,183
Investment securities held-to-maturity		434,840			—
Loans		17,720,006			18,632,781
Less: Allowance for loan losses		(4,500	)		(45,003	)
Loans, net		17,715,506			18,587,778
Loans held for sale		139,330			14,540
Mortgage servicing rights measured at amortized cost		21,677			—
Mortgage servicing rights measured at fair value		—			24,544
Investments in life insurance		378,448			202,691
Prepaid expenses and other assets		354,243			366,700
Goodwill		24,604			—
Other intangible assets		163,370			—
Premises, equipment and leasehold improvements, net		98,315			92,240
Deferred tax assets		72,764			448,859
Other real estate owned		667			21,462
Total Assets	$	21,954,068		$	19,940,550
LIABILITIES AND EQUITY
Liabilities:
Customer deposits:
Non-interest bearing accounts	$	2,707,234		$	2,665,675
NOW checking accounts		2,417,718			2,842,519
Money Market (MM) checking accounts		2,665,983			1,819,869
MM savings and passbooks		5,029,553			3,928,703
Certificates of deposit		6,144,275			5,925,718
Total customer deposits		18,964,763			17,182,484
Federal Home Loan Bank (FHLB) advances		600,000			130,501
Subordinated notes		69,026			65,897
Debt related to variable interest entity		25,528			—
Parent company borrowing		—			976,090
Other liabilities		274,012			189,671
Total Liabilities		19,933,329			18,544,643
Equity:
First Republic Bank stockholders’ equity:
Common stock, $0.01 par value per share; 400,000,000 shares authorized; 124,133,334 shares issued and outstanding		1,241			—
Additional paid-in capital		1,868,021			—
Retained earnings		66,395			—
Parent company investment		—			1,296,248
Accumulated other comprehensive income (loss), net		(1,488	)		69
Total equity before noncontrolling interests		1,934,169			1,296,317
Noncontrolling interests		86,570			99,590
Total Equity		2,020,739			1,395,907
Total Liabilities and Equity	$	21,954,068		$	19,940,550

See accompanying notes to financial statements.

FIRST REPUBLIC BANK

STATEMENTS OF INCOME

(Unaudited)

	Successor			Predecessor III
($ in thousands)	Three Months Ended Sept. 30, 2010			Three Months Ended Sept. 30, 2009		Six Months Ended June 30, 2010		Nine Months Ended Sept. 30, 2009
Interest income:
Interest on real estate and other loans	$	260,176		$	301,941	$	503,819	$	909,236
Interest on investments		1,939			158		157		509
Interest on cash equivalents		1,713			24		32		74
Interest on loan to Parent company		—			—		4,830		—
Total interest income		263,828			302,123		508,838		909,819
Interest expense:
Interest on customer deposits		23,386			53,441		90,339		175,744
Interest on FHLB advances and other borrowings		3,613			1,351		222		5,913
Interest on subordinated notes		589			1,038		2,082		3,147
Interest on funding from Parent company		—			4,698		2,956		21,862
Total interest expense		27,588			60,528		95,599		206,666
Net interest income		236,240			241,595		413,239		703,153
Provision for credit losses		4,500			30,081		17,352		38,838
Net interest income after provision for credit losses		231,740			211,514		395,887		664,315
Noninterest income:
Investment advisory fees		8,339			6,788		16,442		20,297
Brokerage and investment fees		2,149			2,913		4,681		11,845
Trust fees		1,249			1,221		2,226		4,009
Deposit customer fees		3,671			3,191		7,236		9,109
Loan servicing fees, net		(863	)		1,048		2,749		(1,105	)
Loan and related fees		715			1,044		1,831		3,213
Gain on sale of loans		1,033			1,415		1,290		4,030
Income from investments in life insurance		838			2,150		1,388		6,854
Accretion of discount on unfunded commitments		—			7,083		8,220		21,283
Other income		1,897			1,960		3,395		5,124
Total noninterest income		19,028			28,813		49,458		84,659
Noninterest expense:
Salaries and related benefits		59,016			53,113		112,196		154,671
Occupancy		15,186			11,008		29,404		40,498
Information systems		9,147			8,645		19,124		26,725
Advertising and marketing		5,872			3,172		6,610		12,615
Professional fees		5,774			1,505		5,673		5,538
FDIC and other deposit assessments		8,205			9,391		19,159		33,601
Amortization of intangibles		6,230			—		—		—
Divestiture-related expenses		13,768			—		—		—
Other expenses		13,005			12,187		24,798		39,414
Total noninterest expense		136,203			99,021		216,964		313,062
Income before provision for income taxes		114,565			141,306		228,381		435,912
Provision for income taxes		46,972			59,390		97,138		183,119
Net income before noncontrolling interests		67,593			81,916		131,243		252,793
Less: Net income from noncontrolling interests		1,198			1,198		2,396		3,621
First Republic Bank Net Income	$	66,395		$	80,718	$	128,847	$	249,172
Basic earnings per common share	$	0.53			n/a		n/a		n/a
Diluted earnings per common share	$	0.53			n/a		n/a		n/a

See accompanying notes to financial statements.

FIRST REPUBLIC BANK

STATEMENTS OF CHANGES IN EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

($ in thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings		Parent Company Investment			Accumulated Other Comprehensive Income (Loss)			Total Equity Before Noncontrolling Interests			Noncontrolling Interests			Total Equity
							Predecessor II
Balance at December 26, 2008	$	—	$	—	$	—	$	2,685,788		$	—		$	2,685,788		$	99,590		$	2,785,378
							Predecessor III
Purchase Accounting Adjustments		—		—		—		(1,531,651	)		—			(1,531,651	)		—			(1,531,651	)
Capitalization after purchase accounting adjustments		—		—		—		1,154,137			—			1,154,137			99,590			1,253,727
Capital distributions		—		—		—		(158,899	)		—			(158,899	)		—			(158,899	)
Capital contributions associated with income taxes		—		—		—		19,457			—			19,457			—			19,457
Comprehensive income:
Net income		—		—		—		249,172			—			249,172			3,621			252,793
Other comprehensive income, net of tax:		—		—		—		—			—			—			—			—
Net unrealized gain on securities available-for-sale (net of taxes of $53)		—		—		—		—			80			80			—			80
Total comprehensive income														249,252			3,621			252,873
Dividends to noncontrolling interests		—		—		—		—			—			—			(3,621	)		(3,621	)
Balance at September 30, 2009	$	—	$	—	$	—	$	1,263,867		$	80		$	1,263,947		$	99,590		$	1,363,537
Balance at December 31, 2009	$	—	$	—	$	—	$	1,296,248		$	69		$	1,296,317		$	99,590		$	1,395,907
Capital distributions		—		—		—		(163,046	)		—			(163,046	)		—			(163,046	)
Change in capital allocation for net assets retained by Parent company		—		—		—		(53,736	)		—			(53,736	)		—			(53,736	)
Capital contributions associated with income taxes		—		—		—		57,917			—			57,917			—			57,917
Comprehensive income:
Net income		—		—		—		128,847			—			128,847			2,396			131,243
Other comprehensive income, net of tax:		—		—		—		—			—			—			—			—
Net unrealized gain on securities available-for-sale (net of taxes of $86)		—		—		—		—			110			110			—			110
Total comprehensive income														128,957			2,396			131,353
Dividends to noncontrolling interests		—		—		—		—			—			—			(2,396	)		(2,396	)
Balance at June 30, 2010		—		—		—		1,266,230			179			1,266,409			99,590			1,365,999
							Successor
Purchase Accounting Adjustments		—		—		—		(1,266,230	)		(179	)		(1,266,409	)		(13,020	)		(1,279,429	)
Issuance of common stock		1,241		1,859,921		—		—			—			1,861,162			—			1,861,162
Stock option compensation expense		—		8,100		—		—			—			8,100			—			8,100
Comprehensive income:
Net income		—		—		66,395		—			—			66,395			1,198			67,593
Other comprehensive income, net of tax:		—		—		—		—			—			—			—			—
Net unrealized gain on securities available-for-sale (net of taxes of $11)		—		—		—		—			15			15			—			15
Net unrealized losses on cash flow hedges (net of taxes of $1,111)		—		—		—		—			(1,503	)		(1,503	)		—			(1,503	)
Total comprehensive income														64,907			1,198			66,105
Dividends to noncontrolling interests		—		—		—		—			—			—			(1,198	)		(1,198	)
Balance at September 30, 2010	$	1,241	$	1,868,021	$	66,395	$	—		$	(1,488	)	$	1,934,169		$	86,570		$	2,020,739

See accompanying notes to financial statements.

FIRST REPUBLIC BANK

STATEMENTS OF CASH FLOWS

(Unaudited)

	Successor			Predecessor III
($ in thousands)	Three Months Ended Sept. 30, 2010			Six Months Ended June 30, 2010			Nine Months Ended Sept. 30, 2009
Operating Activities:
Net income before noncontrolling interests	$	67,593		$	131,243		$	252,793
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,500			17,352			38,838
Accretion of loan discounts		(36,000	)		(37,695	)		(196,125	)
Depreciation and amortization		(10,049	)		1,580			(36,892	)
Amortization of net loan fees		(50	)		(2,821	)		(1,900	)
Amortization of mortgage servicing rights		2,050			—			—
Provision for mortgage servicing rights in excess of fair value, net		1,288			—			—
Changes in fair value of mortgage servicing rights		—			2,327			9,270
Net change in loans held for sale		(112,290	)		(13,547	)		(12,151	)
Provision (reversal of provision) for deferred taxes		(8,141	)		48,915			97,115
Net gains on sale of loans		(1,033	)		(1,290	)		(4,030	)
Net losses (gains) on real estate owned		(6	)		583			2,000
Loss on sale of premises, equipment and leasehold improvements, net		13			—			142
Noncash cost of stock plans		8,100			—			—
(Increase) decrease in other assets		(5,408	)		47,773			(83,709	)
Increase (decrease) in other liabilities		60,439			(21,722	)		(32,669	)
Net Cash (Used for) Provided by Operating Activities		(28,994	)		172,698			32,682
Investing Activities:
Loan originations, net of principal collections		(464,730	)		(715,368	)		(1,470,083	)
Loans purchased		(3,591	)		(1,661	)		(2,280	)
Loans sold		46,910			16,800			41,832
Decrease in Parent company lending		—			669,034			—
Purchases of securities available-for-sale		(192,243	)		—			(4,673	)
Proceeds from sales/calls/maturity of securities available-for-sale		103,250			55			1,892
Purchases of securities held-to-maturity		(431,416	)		(1,017	)		—
Proceeds from sales/calls/maturity of securities held-to-maturity		56			11			—
Purchases of FHLB stock		(3,200	)		—			—
Proceeds from redemptions of FHLB stock		—			2,209			—
Purchases of investments in life insurance		(375,000	)		—			—
Proceeds from investments in life insurance		—			1,404			1,789
Purchases of nonmarketable equity investments		(12,963	)		—			—
Additions to premises, equipment and leasehold improvements, net		(6,478	)		(13,864	)		(11,059	)
Proceeds from sales of premises, equipment and leasehold improvements		—			380			—
Proceeds from sales of other real estate owned		936			4,152			—
Net Cash Used for Investing Activities		(1,338,469	)		(37,865	)		(1,442,582	)
Financing Activities:
Net increase in deposits		1,070,838			598,666			3,906,492
Proceeds from issuance of FHLB advances		600,000			—			—
Repayment of FHLB advances		(130,823	)		—			(753,500	)
Decrease in Parent company borrowing		—			(368,611	)		(1,592,671	)
Decrease in debt related to variable interest entity		(7,156	)		—			—
Issuance of common stock		1,861,162			—			—
Capital distributions		—			(105,129	)		(139,442	)
Dividends to noncontrolling interests		(1,198	)		(2,396	)		(3,621	)
Net Cash Provided by Financing Activities		3,392,823			122,530			1,417,258
Increase in Cash and Cash Equivalents		2,025,360			257,363			7,358
Cash and Cash Equivalents at the Beginning of Period		435,916			178,553			169,572
Cash and Cash Equivalents at the End of Period	$	2,461,276		$	435,916		$	176,930
Supplemental Disclosure of Cash Flow Items
Cash paid during period:
Interest	$	50,629		$	96,810		$	257,827
Income taxes	$	—		$	—		$	69,986
Transfer of loans to held for sale	$	46,910		$	13,346		$	8,695
Transfers of repossessed assets from loans to other assets	$	730		$	24,004		$	5,895

See accompanying notes to financial statements.

FIRST REPUBLIC BANK

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

Note 1. Summary of Significant Accounting Policies

Basis of Presentation and Organization

First Republic Bank (the “Bank” or “First Republic”) operated for over ten years as an FDIC-insured, non-member bank chartered by the State of Nevada (and prior to that as two predecessor depository institutions chartered by the State of California and the State of Nevada, respectively, operating under a single, publicly traded, non-bank holding company which was subsequently merged into its bank subsidiary). On September 21, 2007, First Republic Bank was acquired by Merrill Lynch & Co. (“Merrill Lynch”) and merged into one of Merrill Lynch’s banking subsidiaries, Merrill Lynch Bank & Trust Company, F.S.B. (“MLFSB”). Under the terms of the acquisition, First Republic Bank operated as a separate division within MLFSB and continued to be managed by First Republic Bank’s existing management team. As a division of MLFSB, First Republic Bank maintained its own marketing identity and branch network, with loans, deposits, and other bank products offered to customers under the First Republic Bank brand. On January 1, 2009, Bank of America Corporation (“Bank of America”), the holding company of Bank of America, N.A. (“BANA”), purchased Merrill Lynch and thereby acquired MLFSB. On November 2, 2009, MLFSB was merged into BANA, and First Republic Bank thereby became a division of BANA. MLFSB and BANA are referred to as the “Parent” in the financial statements. As used herein “First Republic” or the “Bank” means, as the context requires:

• First Republic Bank, a Nevada-chartered commercial bank in existence from 1985 until acquired in September 2007 by MLFSB, a banking subsidiary of Merrill Lynch;

• the First Republic Bank division within MLFSB following the September 2007 acquisition;

• the First Republic Bank division within BANA following MLFSB’s merger into BANA, effective as of November 2009 and;

• as described in Note 2, “Business Combinations,” First Republic Bank, a California-chartered commercial bank that acquired the First Republic Bank division of BANA effective upon the close of business on June 30, 2010.

On October 21, 2009, Bank of America announced that it had entered into a definitive agreement to sell substantially all of First Republic’s assets and liabilities (the “Transaction”) to a number of investors, led by First Republic’s existing management, and including investment funds managed by Colony Capital, LLC and General Atlantic, LLC. The Transaction was completed after the close of business on June 30, 2010 and the Bank opened as a California chartered, FDIC-insured commercial bank and trust company on July 1, 2010. See Note 2 for further information on the acquisition.

As a result of the acquisitions discussed above, the accompanying financial statements are presented to show the financial results of the Bank for the period after the Transaction (Successor) (as of and for the quarter ended September 30, 2010), the period after the Bank of America acquisition (Predecessor III) and the period after the Merrill Lynch acquisition and before the Bank of America acquisition (Predecessor II). These periods relate to the accounting periods preceding and succeeding the push-down of Bank of America and Merrill Lynch’s basis, respectively. The period prior to the Merrill Lynch acquisition is Predecessor I. The Predecessor and Successor periods have been separated by vertical lines on the face of the financial statements to highlight the fact that the financial information has been prepared under different historical cost bases of accounting. The accounting policies followed by the Bank in the preparation of its financial statements for the Successor period are materially consistent with those of the Predecessor III period, except for the accounting for mortgage servicing rights (“MSRs”). (See Note 5 for further information on mortgage servicing rights). As a result of the Bank of America acquisition, the Bank changed its fiscal year from the last Friday in December to the last calendar day of the year; the Bank’s activities after its 2008 fiscal year end through December 31, 2008 are included in the Statement of Income for the nine month period ended September 30, 2009. This change caused five additional days of activity to be recorded in 2009, resulting in approximately $4.6 million of additional net income in 2009.

First Republic’s consolidated financial statements as of and for the three months ended September 30, 2010 includes the accounts of First Republic Bank and the majority or wholly owned subsidiaries First Republic Investment Management, Inc.

(“FRIM”), First Republic Wealth Advisors (“FRWA”), First Republic Securities Company (“FRSC”), First Republic Preferred Capital Corporation (“FRPCC”), and First Republic Preferred Capital Corporation II (“FRPCC II”). FRWA was merged into FRIM on September 30, 2010. All significant intercompany balances and transactions have been eliminated.

First Republic’s combined financial statements as of December 31, 2009, for the six months ended June 30, 2010 and the three and nine months ended September 30, 2009 include the carve-out accounts of the First Republic Bank division of MLFSB and BANA and the majority or wholly owned subsidiaries FRIM, FRWA, FRSC, FRPCC, and FRPCC II, in each case using the historical basis of accounting for the results of operations, assets and liabilities of the respective businesses and also include the purchase accounting impact for the Bank of America acquisition. The purpose of the carve-out financial statements is to present fairly the results of operations, financial condition and cash flows of the First Republic Bank division of MLFSB and BANA separately from the results of operations, financial condition and cash flows of MLFSB and BANA as a legal entity for the periods prior to July 1, 2010. The financial statements for the periods prior to July 1, 2010 may not necessarily reflect the results of operations, financial condition and cash flows that the Bank would have achieved had the Bank actually existed on a stand-alone basis during the periods presented. All significant intercompany balances and transactions among the division and entities included in our consolidated financial statements have been eliminated.

FRPCC and FRPCC II have outstanding preferred stock, which is reported as noncontrolling interests in First Republic’s balance sheet and is eligible for treatment as Tier 1 capital under regulatory guidelines. The dividends on these preferred stock issues are reported as net income from noncontrolling interests in First Republic’s statement of income, which is deducted from First Republic’s consolidated net income. The preferred stock dividends paid by FRPCC and FRPCC II are deductible for income tax purposes as long as each of FRPCC and FRPCC II, respectively continues to qualify as a real estate investment trust (a “REIT”).

These interim financial statements should be read in conjunction with First Republic’s 2009 combined Financial Statements and Notes thereto. Certain reclassifications have been made to the 2009 financial statements in order for them to conform to the 2010 presentation. Results for the three months ended September 30, 2010 and six months ended June 30, 2010 should not be considered indicative of results to be expected for the full year.

Nature of Operations

The Bank and its subsidiaries specialize in providing personalized, relationship-based services, including private banking, private business banking, real estate lending and wealth management services, including trust services. The Bank provides its services through preferred banking, lending and wealth management offices in eight major metropolitan areas: San Francisco, Los Angeles, Santa Barbara, Newport Beach, San Diego, New York City, Boston and Portland (Oregon).

First Republic originates real estate secured loans and other loans for retention in its loan portfolio. Real estate secured loans are secured by single family residences, multifamily buildings and commercial real estate properties and loans to construct such properties. Most of the real estate loans that First Republic originates are secured by properties located close to one of its offices in the San Francisco Bay area, the Los Angeles area, San Diego, Boston or the New York City area. First Republic originates business loans, loans secured by securities and other types of collateral and personal unsecured loans primarily to meet the non-mortgage needs of First Republic’s clients.

First Republic offers its clients various wealth management services. First Republic provides investment advisory services through FRIM and FRWA. FRIM earns fee income from the management of equity and fixed income investments for its clients. FRWA earns fee income from providing advisory services to high net worth clients. First Republic Trust Company, a division of First Republic, provides trust services. FRWA was merged into FRIM on September 30, 2010. FRSC is a registered broker-dealer performing short-term investment and brokerage activities for clients. The Bank also conducts foreign exchange activities on behalf of customers.

Supplemental Cash Flow Information

Pursuant to the terms of the Transaction, the following assets and liabilities were transferred to BANA resulting in a reduction to the assets, liabilities and Parent company investment as follows during the six months ended June 30, 2010. The net change in Parent company lending of $1.6 billion during the six months ended June 30, 2010 shown in the table below is primarily related to the Bank’s equity allocation process described in the annual financial statements.

($ in thousands)
Assets:
Parent company lending	$	(1,626,981	)
Loans, net		1,962,301
Investments in life insurance		201,678
FHLB Stock		32,211
Other real estate owned		40,146
Other assets		54,967
Total	$	664,322
Liabilities and Equity:
Parent company borrowing	$	607,479
Other liabilities		3,107
Parent company investment		53,736
Total	$	664,322

Earnings Per Share

The Bank computes earnings per share by dividing net income by the average number of common shares outstanding during the year. The Bank computes diluted earnings per common share by dividing net income by the average number of common shares outstanding during the year, plus the effect of common stock equivalents (stock options) that are dilutive.

The following table presents a reconciliation of the income and share amounts used in the basic and diluted earnings per share computations for the three months ended September 30, 2010.

(in thousands, except per share amounts)	Three Months Ended September 30, 2010
Basic EPS:
Net income available to common stockholders	$	66,395
Shares issued and outstanding		124,133
Net income per share - basic	$	0.53
Diluted EPS:
Net income available to common stockholders	$	66,395
Weighted average shares:
Common shares outstanding		124,133
Dilutive stock options under the treasury stock method		1,725
Adjusted weighted average common shares outstanding		125,858
Net income per share - diluted	$	0.53

Mortgage Servicing Rights

The Bank retains the mortgage servicing rights on substantially all loans sold. The Bank has one class of servicing rights: for loans sold that are secured by real estate. MSRs and other retained interests in loans sold are initially measured at fair value at the date of transfer.

MSRs are reported at the lower of amortized cost or fair value effective July 1, 2010. MSRs are amortized in proportion to and over the period of estimated net servicing income. To calculate the initial fair value of MSRs and, subsequently, to measure impairment, the Bank stratifies MSRs based on one or more of the predominant risk characteristics of the underlying

loans. The Bank evaluates impairment of MSRs for a stratum periodically based on their current fair value, actual prepayment experience and other market factors. If the fair value of MSRs for a stratum is less than the amortized cost, the Bank records a provision for a valuation allowance. Subsequently, the Bank adjusts the valuation allowance for changes in fair value to the extent that fair value does not exceed the amortized cost. The Bank evaluates at least quarterly the recoverability of the valuation allowance on MSRs. If the Bank determines that a portion of the valuation allowance is unrecoverable, primarily due to loan prepayments, the Bank records a direct write-down by reducing both the amortized cost of MSRs for a stratum and the related valuation allowance.

For 2009 and the six months ended June 30, 2010, as a result of the Bank of America acquisition, the Bank elected to report MSRs at fair value with changes in fair value recognized in the income statement.

Accounting Standards Adopted in 2010

• On January 1, 2010, the Bank adopted Accounting Standards Codification (“ASC”) 860, “Transfers and Servicing.” ASC 860 represents a revision to former Financial Accounting Standards Board (“FASB”) Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” ASC 860 expands required disclosures about transfers of financial assets and a transferor’s continuing involvement with transferred assets. It also removes the concept of “qualifying special-purpose entity” from U.S. generally accepted accounting principles (“GAAP”). Adoption of the new guidance did not have a material effect on the Bank’s financial condition, results of operations or cash flows.

• On January 1, 2010, the Bank adopted ASC 810-10, “Consolidations-Overall,” which codified FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)” and updated former FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities.” The revised guidance requires, among other things, that an entity perform both a quantitative and qualitative analysis to determine if it is the primary beneficiary of a variable interest entity (“VIE”) and therefore required to consolidate the VIE. The qualitative analysis includes determining whether an entity has the power to direct the most significant activities of the VIE. The amended guidance also requires consideration of related party relationships in the determination of the primary beneficiary of a VIE and enhanced disclosures about an enterprise’s involvement with a VIE. The adoption of ASC 810-10 did not have an impact on the Bank’s financial position, results of operations or cash flows on the date this guidance became effective.

The Bank’s involvement with VIEs is limited to its mortgage servicing activities and interests purchased in securitizations. The Bank sells loans on a non-recourse basis and in most cases, retains the mortgage servicing rights. For nearly all of the Bank’s servicing activities, the only interest in the VIE is the mortgage servicing rights associated with performing our required servicing functions. The servicing fee is not considered a variable interest.

The Bank has variable interests in several VIEs related to First Republic real estate mortgage investment conduits (“REMICs”) that were formed in 2000 through 2002. The Bank has purchased various tranches of these securitizations. During 2010, the Bank purchased securities in one of the REMICs and, as a result, became the primary beneficiary of that securitization, which resulted in consolidation of the REMIC. The Bank also holds significant variable interests in two other REMICs sponsored by the Bank.

The following table summarizes the assets and liabilities recorded on the Bank’s balance sheet associated with transactions with VIEs as of September 30, 2010:

($ in thousands)	VIEs that we do not consolidate		VIEs that we consolidate		Total
Investment securities held-to-maturity	$	3,712	$	—	$	3,712
Loans		—		32,303		32,303
Mortgage servicing rights		21,677		—		21,677
Total Assets		25,389		32,303		57,692
Liabilities - Debt		—		25,528		25,528
Net assets	$	25,389	$	6,775	$	32,164

The Bank’s exposure to loss with respect to the consolidated VIE is limited to the investment in the securities purchased of approximately $6.8 million. The debt holders of the REMICs have no recourse to the Bank.

• In February 2010, the FASB issued amendments to ASC 855, “Subsequent Events,” to remove the requirement for Securities and Exchange Commission (“SEC”) filers to disclose the date through which an entity evaluated subsequent events. Previously, in May 2009, the FASB issued ASC 855, which provided general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The adoption of the amendments to ASC 855, which became effective upon issuance in February 2010, did not impact the Bank’s financial condition, results of operations or cash flows.

• In January 2010, the FASB issued ASC 820-10, “Fair Value Measurements and Disclosures-Overall.” ASC 820-10 requires additional disclosures about transfers into and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation, including the requirement to provide fair value measurement disclosures for each class of assets and liabilities, and about inputs and valuation techniques used to measure fair value. ASC 820-10 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. The Level 3 disclosures are effective for fiscal years beginning after December 15, 2010. The Bank adopted the Level 1 and Level 2 disclosures regarding transfers, which did not have an impact on the Bank’s financial condition, results of operations or cash flows. Adoption of the Level 3 disclosures is not expected to have a significant impact on the Bank’s financial condition, results of operations or cash flows.

• In April 2010, the FASB issued amendments to ASC 310-30, “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality” and ASC 310-40, “Troubled Debt Restructurings by Creditors.” Under the amendments, a modification of a loan that is part of a pool accounted for under ASC 310-30 should not result in removal of the loan from the pool. In addition, a modification of a loan that is accounted for within a pool under ASC 310-30 is not considered a troubled debt restructuring. ASC 310-30 is effective for any modifications of a loan accounted for within a pool in the first interim or annual reporting period ending after July 15, 2010, and will be applied prospectively. The adoption of the amendments to ASC 310-30 and ASC 310-40 did not have a significant impact on the Bank’s financial condition, results of operations or cash flows.

Recent Accounting Pronouncement

The following pronouncement has been issued by the FASB, but is not yet effective:

• In July 2010, the FASB issued amendments to ASC 310-10, “Receivables-Overall.” The amendments significantly increase disclosures about the credit quality of loans and the allowance for credit losses to give financial statement users greater transparency about entities’ credit risk exposures. The amendments require an entity to disaggregate existing and provide new disclosures for the allowance for credit losses, impaired loans and troubled debt restructurings. For public entities, the disclosures required as of the balance sheet date are effective for interim or annual reporting periods ending on or after December 15, 2010, and the disclosures required for activity during the period are effective for interim or annual reporting periods beginning on or after December 15, 2010. For nonpublic entities, all disclosures are effective for annual reporting periods ending on or after December 15, 2011. The Bank is evaluating the impact of adoption of the new guidance on its disclosures in the financial statements.

Note 2. Business Combinations

The Bank acquired the assets and assumed liabilities of First Republic Bank, which was operating as a division of BANA. The Bank also acquired the common stock of FRIM, FRWA, FRSC, FRPCC and FRPCC II as part of the acquisition.

The purchase price was allocated to the acquired assets and liabilities based on their estimated fair values at July 1, 2010 as summarized in the following table.

($ in thousands)	Carrying Value at July 1, 2010		Purchase Accounting Adjustments			Fair Value at July 1, 2010
Assets:
Cash and cash equivalents	$	435,916	$	—		$	435,916
Investment securities		3,588		(26	)		3,562
Loans, net		17,427,857		(163,741	)		17,264,116
Loans held for sale		27,732		—			27,732
Mortgage servicing rights		13,100		10,271			23,371
Goodwill		—		24,604			24,604
Other intangible assets		—		169,600			169,600
Deferred tax assets		—		63,734			63,734
Other assets		384,195		30			384,225
Total	$	18,292,388	$	104,472		$	18,396,860
Liabilities and Equity:
Customer deposits	$	17,778,797	$	137,229		$	17,916,026
Federal Home Loan Bank advances		130,416		407			130,823
Subordinated notes		65,508		4,164			69,672
Other liabilities		218,077		(24,308	)		193,769
Noncontrolling interests		99,590		(13,020	)		86,570
Total	$	18,292,388	$	104,472		$	18,396,860

The following summarizes the purchase price and goodwill resulting from the acquisition.

($ in thousands)
Fair value of assets acquired	$	18,372,256
Fair value of liabilities assumed		18,310,290
Net assets acquired	$	61,966
Purchase price - fair value of noncontrolling interests	$	86,570
Goodwill resulting from the acquisition	$	24,604

As part of the acquisition, the Bank incurred divestiture related costs associated with the transition to a stand-alone bank while we were a division of BANA. As part of the Transaction, the investors agreed to reimburse BANA for these costs incurred prior to June 30, 2010. The total amount of divestiture related costs that are included in the carrying value of assets acquired that were not capitalized after July 1, 2010 was $8.8 million. The total costs related to the divestiture of $13.8 million were recognized in the Bank’s income statement during the quarter ended September 30, 2010.

Note 3. Investment Securities

The following table presents information related to available-for-sale and held-to-maturity securities at September 30, 2010:

	Successor September 30, 2010
($ in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale:
U.S. Treasury and federal agencies	$	89,002	$	30	$	(4	)	$	89,028
Held-to-maturity:
U.S. States and political subdivisions	$	431,128	$	6,121	$	(587	)	$	436,662
Other residential mortgage-backed securities (“MBS”)		3,712		36		(21	)		3,727
Total	$	434,840	$	6,157	$	(608	)	$	440,389

At September 30, 2010, approximately $89.0 million of investment securities were pledged at the Federal Reserve Bank of San Francisco or a correspondent bank as collateral to secure trust funds and public deposits.

The following table presents information related to available-for-sale securities at December 31, 2009:

	Predecessor III December 31, 2009
($ in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Other residential MBS	$	3,069	$	114	$	—	$	3,183

No securities were sold during the first nine months of 2010 or 2009.

The following table presents gross unrealized losses and fair value of available-for-sale and held-to-maturity securities at September 30, 2010:

	Successor September 30, 2010
	Less than 12 months					12 months or more				Total
($ in thousands)	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses			Fair Value
Available-for-sale:
U.S. Treasury and federal agencies	$	(4	)	$	44,993	$	—	$	—	$	(4	)	$	44,993
Total	$	(4	)	$	44,993	$	—	$	—	$	(4	)	$	44,993
Held-to-maturity:
U.S. States and political subdivisions	$	(587	)	$	71,951	$	—	$	—	$	(587	)	$	71,951
Other residential MBS		(21	)		3,269		—		—		(21	)		3,269
Total	$	(608	)	$	75,220	$	—	$	—	$	(608	)	$	75,220

The following table presents contractual maturities of available-for-sale securities and held-to-maturity securities at September 30, 2010 and available-for-sale securities at December 31, 2009:

	Successor				Predecessor III
	September 30, 2010				December 31, 2009
($ in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Available-for-sale:
Due in one year or less	$	29,998	$	29,997	$	—	$	—
Due after one year through five years		59,004		59,031		—		—
Due after five years through ten years		—		—		—		—
Due after ten years		—		—		—		—
Subtotal		89,002		89,028		—		—
Other residential MBS		—		—		3,069		3,183
Total	$	89,002	$	89,028	$	3,069	$	3,183
Held-to-maturity:
Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years		—		—		—		—
Due after five years through ten years		—		—		—		—
Due after ten years		431,128		436,662		—		—
Subtotal		431,128		436,662		—		—
Other residential MBS		3,712		3,727		—		—
Total	$	434,840	$	440,389	$	—	$	—

Note 4. Loans

Loan Profile

Real estate loans are secured by single family, multifamily and commercial real estate properties and generally mature over periods of up to thirty years. At September 30, 2010, approximately 67% of the total loan portfolio was secured by California real estate, compared to 65% at December 31, 2009. At September 30, 2010, 94% of single family and home equity lines of credit contain an interest-only payment feature, compared to 95% at December 31, 2009. These loans generally have an initial interest-only term of ten years.

The following tables present the major categories of loans outstanding, including those subject to ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” The loans are presented with the contractual balance, any purchase accounting adjustments and net deferred fees and costs:

	Successor September 30, 2010
($ in thousands)	Principal		Net Unaccreted Discount			Net Deferred Fees and Costs			Total
Types of Loans:
Single family (1-4 units)	$	11,195,085	$	(333,103	)	$	2,040		$	10,864,022
Home equity credit lines		1,743,803		(30,503	)		564			1,713,864
Commercial real estate		2,147,625		(186,629	)		(470	)		1,960,526
Multifamily (5+ units) mtgs		1,858,842		(84,278	)		(329	)		1,774,235
Multifamily/commercial construction		126,079		(7,357	)		(114	)		118,608
Single family construction		167,322		(7,042	)		(252	)		160,028
Total real estate mortgages		17,238,756		(648,912	)		1,439			16,591,283
Commercial business loans		882,715		(58,232	)		240			824,723
Other secured		166,344		(11,354	)		(47	)		154,943
Unsecured loans and lines of credit		126,069		(7,990	)		(21	)		118,058
Stock secured		31,039		(73	)		33			30,999
Total other loans		1,206,167		(77,649	)		205			1,128,723
Total loans	$	18,444,923	$	(726,561	)	$	1,644			17,720,006
Less:
Allowance for loan losses										(4,500	)
Loans, net										17,715,506
Real estate loans held for sale										139,330
Total									$	17,854,836
	Predecessor III December 31, 2009
($ in thousands)	Principal		Net Unaccreted Discount			Net Deferred Fees and Costs			Total
Types of Loans:
Single family (1-4 units)	$	10,487,061	$	(363,921	)	$	2,660		$	10,125,800
Home equity credit lines		1,830,043		(121,773	)		1,506			1,709,776
Commercial real estate		2,969,713		(141,288	)		(1,592	)		2,826,833
Multifamily (5+ units) mtgs		2,128,942		(69,366	)		(2,004	)		2,057,572
Multifamily/commercial construction		262,420		(15,646	)		(162	)		246,612
Single family construction		241,858		(898	)		(36	)		240,924
Total real estate mortgages		17,920,037		(712,892	)		372			17,207,517
Commercial business loans		1,086,735		(71,531	)		(2,364	)		1,012,840
Other secured		202,771		(13,012	)		—			189,759
Unsecured loans and lines of credit		173,438		(17,200	)		17			156,255
Stock secured		69,217		(2,807	)		—			66,410
Total other loans		1,532,161		(104,550	)		(2,347	)		1,425,264
Total loans	$	19,452,198	$	(817,442	)	$	(1,975	)		18,632,781
Less:
Allowance for loan losses										(45,003	)
Loans, net										18,587,778
Real estate loans held for sale										14,540
Total									$	18,602,318

The Bank had pledged $12.5 billion and $3.3 billion of loans to secure borrowings from the Federal Home Loan Bank of San Francisco (the “FHLB”) as of September 30, 2010 and December 31, 2009, respectively.

Loans Accounted for Under ASC 310-30

As a result of the Transaction, the Bank identified loans at July 1, 2010 that were within the scope of ASC 310-30. The following table presents the details on credit impaired loans as of July 1, 2010:

($ in thousands)	Successor At July 1, 2010
Contractually required payments, including interest	$	279,360
Nonaccretable difference		(29,540	)
Cash flows expected to be collected	$	249,820
Accretable yield		(30,374	)
Fair value of loans acquired	$	219,446

At July 1, 2010 and September 30, 2010, loans within the scope of ASC 310-30 had an unpaid principal balance of $251.4 million and $250.3 million, respectively, and a carrying value of $219.4 million and $219.7 million, respectively. At December 31, 2009, loans within the scope of ASC 310-30 had an unpaid principal balance of $414.2 million and a carrying value of $374.8 million.

The Bank recorded reductions to the nonaccretable difference of $1.1 million and $2.5 million for the three months ended September 30, 2010 and 2009, respectively, $508,000 for the six months ended June 30, 2010 and $46.9 million for the nine months ended September 30, 2009. These reductions were primarily the result of loan resolutions and write-downs.

The change in accretable yield and allowance for loan losses related to credit impaired loans is presented in the following tables:

	Successor			Predecessor III
($ in thousands)	Three Months Ended Sept. 30, 2010			Three Months Ended Sept. 30, 2009			Six Months Ended June 30, 2010			Nine Months Ended Sept. 30, 2009
Accretable yield:
Balance at beginning of period	$	71,104		$	71,491		$	99,317		$	82,403
Purchase accounting adjustment (1)		(71,104	)		—			—			—
Transfer to BANA		—			—			(25,463	)		—
Balance at July 1, 2010		30,374			—			—			—
Accretion		(3,593	)		(4,881	)		(7,809	)		(15,793	)
Increase in expected cash flows		—			33,754			5,059			33,754
Disposals		—			(14	)		—			(14	)
Balance at end of period	$	26,781		$	100,350		$	71,104		$	100,350
($ in thousands)	Three Months Ended Sept. 30, 2010			Three Months Ended Sept. 30, 2009			Six Months Ended June 30, 2010			Nine Months Ended Sept. 30, 2009
Allowance:
Balance at beginning of period	$	—		$	3,347		$	6,714		$	—
Provision		—			1,922			1,750			5,269
Chargeoffs		—			—			(4,041	)		—
Transfer to BANA		—			—			(4,423	)		—
Balance at end of period	$	—		$	5,269		$	—		$	5,269

(1) On July 1, 2010, the accretable yield related to the Predecessor III acquisition was eliminated due to new purchase accounting adjustments for the Successor acquisition.

At September 30, 2010 and December 31, 2009, loans over 90 days past due and accruing were $5.1 million and $11.3 million, respectively.

Nonaccrual loans are presented in the following table for the periods indicated:

	Successor			Predecessor III
($ in thousands)	September 30, 2010			December 31, 2009			September 30, 2009
Nonaccrual loans at period end	$	15,465		$	249,148		$	225,444
Total loans at period end	$	17,720,006		$	18,632,781		$	18,221,374
Nonperforming loans to total loans		0.09	%		1.34	%		1.24	%

The interest income related to nonaccrual loans is presented in the following table for the periods indicated:

	Successor		Predecessor III
($ in thousands)	Three Months Ended Sept. 30, 2010		Three Months Ended Sept. 30, 2009		Six Months Ended June  30, 2010		Nine Months Ended Sept. 30, 2009
Actual interest income recognized	$	—	$	—	$	—	$	—
Interest income under original terms	$	323	$	3,277	$	466	$	10,204

The Bank restructures loans generally because of the borrower’s financial difficulties, by granting concessions to reduce the interest rate, to waive or defer payments or, in some cases, to reduce the principal balance of the loan. Loans that are partially charged off and loans that have been modified in troubled debt restructurings are reported as nonaccrual loans until at least six consecutive payments are received and the loan meets the Bank’s other criteria for returning to accrual or restructured performing status. As of September 30, 2010 and December 31, 2009, troubled debt restructurings were $8.9 million and $109.5 million, respectively.

In April 2010, as part of the agreement to sell First Republic, loans with an unpaid principal balance of $2.1 billion and a carrying value of $2.0 billion were transferred to BANA’s servicing system as BANA retained ownership of these loans. These loans included impaired loans under ASC 310-30 with an unpaid principal balance of $100.0 million and a carrying value of $88.2 million.

The following table presents an analysis of the changes in the allowance for loan losses for the periods indicated:

	Successor			Predecessor III
($ in thousands)	Three Months Ended Sept. 30, 2010			Three Months Ended Sept. 30, 2009			Six Months Ended June 30, 2010			Nine Months Ended Sept. 30, 2009
Allowance for loan losses:
Balance at beginning of period	$	13,795		$	8,854		$	45,003		$	176,679
Purchase accounting adjustment (1) (2)		(13,795	)		—			—			(176,679	)
Transfer to BANA (3)		—			—			(39,164	)		—
Provision charged to expense		4,500			30,081			17,352			38,838
Chargeoffs:
Commercial real estate		—			—			(4,798	)		—
Multifamily		—			—			(748	)		—
Commercial business		—			—			(3,747	)		—
Other loans		—			—			(544	)		—
Total chargeoffs		—			—			(9,837	)		—
Recoveries:
Commercial real estate		—			—			102			—
Commercial business		—			150			135			193
Single family mortgages		—			—			62			—
Other loans		—			89			142			143
Total recoveries		—			239			441			336
Net loan (chargeoffs) recoveries		—			239			(9,396	)		336
Balance at end of period	$	4,500		$	39,174		$	13,795		$	39,174
Average total loans for the period	$	17,468,020		$	17,990,571		$	18,008,755		$	17,358,494
Total loans at period end	$	17,720,006		$	18,221,374		$	17,353,819		$	18,221,374
Ratios:
Net chargeoffs (recoveries) to average total loans (annualized)		0.00	%		(0.01	)%		0.11	%		0.00	%
Allowance for loan losses to:
Total loans		0.03	%		0.21	%		0.08	%		0.21	%
Nonaccruing loans		29.1	%		17.4	%		78.8	%		17.4	%

⁽¹⁾ On July 1, 2010, the Bank’s allowance for loan losses became part of the loan carrying value due to purchase accounting adjustments recorded for the Successor acquisition.

⁽²⁾ On January 1, 2009, the Bank’s allowance for loan losses became part of the loan carrying value due to purchase accounting adjustments recorded for the Predecessor III acquisition.

⁽³⁾ The allowance for loan losses related to a portion of the Bank’s loan portfolio transferred to BANA in April 2010 in connection with the Transaction.

The Bank’s allowance for loan losses that existed at June 30, 2010 and January 1, 2009 became part of the loan carrying value due to purchase accounting adjustments. ASC 310-30 requires impaired loans acquired in a business combination to be recorded at fair value and prohibits the carryover of the allowance for loan losses.

The Bank did not have any impaired loans at September 30, 2010, excluding those within the scope of ASC 310-30 that were acquired on July 1, 2010. Total impaired loans were $158.9 million at December 31, 2009 with a related allowance for loan losses of $28.2 million. The Bank did not recognize any interest income from impaired loans during the six months ended June 30, 2010 and the three and nine months ended September 30, 2009. The average recorded investment in impaired loans was approximately $142.1 million for the six months ended June 30, 2010 and $128.7 million and $98.9 million for the three and nine months ended September 30, 2009, respectively.

Note 5. Mortgage Banking Activity

Prior to July 1, 2010, First Republic measured MSRs at fair value with changes in fair value recognized in the income statement. On July 1, 2010, the Bank adopted the amortized cost method of accounting for MSRs. To value MSRs, the Bank stratifies loans sold each year by property type, loan index for adjustable rate mortgages (“ARMs”) and interest rate for loans fixed for more than three years. Approximately 94% of the loans serviced for others by First Republic at September 30, 2010 are secured by single family residences.

The following table presents information on the level of loans originated, loans sold and gain on sale of loans for each of the past five quarters:

	Successor			Predecessor III
	For the Quarter Ended Sept. 30, 2010			For the Quarter Ended
($ in thousands)				June 30, 2010			Mar. 31, 2010			Dec. 31, 2009			Sept. 30, 2009
Loans originated	$	1,835,573		$	1,384,406		$	1,001,916		$	1,111,640		$	1,337,303
Loans sold:
Flow sales	$	200,018		$	81,419		$	60,392		$	95,010		$	76,210
Bulk sales		—			—			—			5,895			29,925
Total loans sold	$	200,018		$	81,419		$	60,392		$	100,905		$	106,135
Gain on sale of loans:
Amount	$	1,033		$	673		$	617		$	1,506		$	1,415
Percentage of loans sold		0.52	%		0.83	%		1.02	%		1.49	%		1.33	%

Changes in the portfolio of loans serviced for others, activity associated with First Republic’s MSRs and quarterly valuation statistics at each quarter-end or for each of the past five quarters were as follows:

	Successor			Predecessor III
	At or for the Quarter Ended Sept. 30, 2010			At or for the Quarter Ended
($ in thousands)				June 30, 2010			Mar. 31, 2010			Dec. 31, 2009			Sept. 30, 2009
Loans serviced for others:
Beginning balance	$	3,737,046		$	3,869,097		$	3,999,481		$	4,086,843		$	4,199,264
Loans sold		200,018			81,419			60,392			100,905			106,136
Repayments		(267,383	)		(180,043	)		(190,776	)		(188,267	)		(218,557	)
Consolidation of VIE		—			(33,427	)		—			—			—
Ending balance	$	3,669,681		$	3,737,046		$	3,869,097		$	3,999,481		$	4,086,843
MSRs:
Beginning balance	$	23,371		$	24,695		$	24,544		$	24,630		$	25,339
Additions due to new loans sold		1,669			617			536			880			950
Amortization expense		(2,050	)		—			—			—			—
Provision for valuation allowance		(1,288	)		—			—			—			—
Reductions due to repurchases		(25	)		—			—			—			—
Changes in fair value:
Due to changes in valuation model inputs or assumptions		—			(941	)		654			700			(459	)
Other changes in fair value		—			(1,000	)		(1,039	)		(1,666	)		(1,200	)
Total changes in fair value		—			(1,941	)		(385	)		(966	)		(1,659	)
Ending balance	$	21,677		$	23,371		$	24,695		$	24,544		$	24,630
Estimated fair value of MSRs	$	25,821		$	23,371		$	24,695		$	24,544		$	24,630
MSRs as a percent of total loans serviced		0.59	%		0.63	%		0.64	%		0.61	%		0.60	%
Weighted average servicing fee collected for the period		0.27	%		0.26	%		0.26	%		0.27	%		0.26	%
MSRs as a multiple of weighted average servicing fee		2.22	x		2.38	x		2.45	x		2.30	x		2.30	x

The following table presents changes in the valuation allowance for the three months ended September 30, 2010:

($ in thousands)	Successor
Valuation allowance:
Beginning balance	$	—
Provision		1,288
Ending balance	$	1,288

The following table presents servicing fees for the periods indicated:

	Successor			Predecessor III
($ in thousands)	Three Months Ended Sept. 30, 2010			Three Months Ended Sept. 30, 2009			Six Months Ended June 30, 2010			Nine Months Ended Sept. 30, 2009
Contractually specified servicing fees	$	2,476		$	2,706		$	5,076		$	8,164
Late charges & ancillary fees, net of costs	$	(77	)	$	(10	)	$	(74	)	$	268

The following table presents the Bank’s key assumptions used in measuring the fair value of MSRs as of September 30, 2010 and the pre-tax sensitivity of the fair values to an immediate 10% and 20% adverse change in these assumptions.

($ in thousands)	Successor
Fair value of MSRs	$	25,821
Weighted average prepayment speed (CPR)		15.00	%
Impact on fair value of 10% adverse change	$	(1,563	)
Impact on fair value of 20% adverse change	$	(2,990	)
Weighted average discount rate		13.69	%
Impact on fair value of 10% adverse change	$	(1,029	)
Impact on fair value of 20% adverse change	$	(1,979	)

Note 6. Goodwill and Intangible Assets

The gross carrying value of intangible assets and accumulated amortization at September 30, 2010 is presented in the following table:

	Successor
	September 30, 2010
($ in thousands)	Gross Carrying Value		Accumulated Amortization
Amortized intangible assets:
MSRs	$	25,015	$	(2,050	)
Core deposit intangibles		87,550		(4,305	)
Customer relationship intangibles		39,150		(1,925	)
Total amortized intangibles	$	151,715	$	(8,280	)
Goodwill	$	24,604
Trade name	$	42,900

There was no goodwill or other intangible assets as of December 31, 2009.

The following table presents the changes in goodwill during 2010 by business segment:

($ in thousands)	Commercial Banking		Wealth Management		Total
Predecessor III
Balance at December 31, 2009	$	—	$	—	$	—
Successor
Additions due to Successor acquisition		24,604		—		24,604
Balance at September 30, 2010	$	24,604	$	—	$	24,604

The following table presents the estimated future amortization for intangible assets as of September 30, 2010:

	Successor
($ in thousands)	MSRs		Core deposit intangibles		Customer relationship intangibles
October 1-December 31, 2010	$	2,168	$	4,197	$	1,877
2011		6,828		15,701		7,021
2012		3,804		13,965		6,245
2013		2,485		12,228		5,468
2014		1,598		10,492		4,692
2015		1,198		8,755		3,915

Note 7. Derivative Financial Instruments

Management uses derivative instruments, including interest rate swaps and caps, as part of its interest rate risk management strategy. In accordance with ASC 815, “Derivatives and Hedging,” the Bank recognizes all derivatives on the balance sheet at fair value. The Bank accounts for changes in the fair value of a derivative depending on the intended use of the derivative and its resulting designation under specified criteria.

During the quarter ended September 30, 2010, the Bank entered into $500 million of interest rate swaps to convert floating-rate deposits to fixed rates as a cash flow hedge. Prior to June 30, 2010, the Bank did not use any interest rate swaps as part of its interest risk management strategy. The Bank records the effective portion of the change in the fair value initially in accumulated other comprehensive income (“AOCI”) and subsequently in interest expense on deposits when the hedged item affects earnings. The ineffective portion of the change in the fair value of a cash flow hedge, if any, is recognized in earnings. The Bank assesses hedge effectiveness using regression analysis, both at inception of the hedging relationship and on an ongoing basis. There was no ineffectiveness for the cash flow hedging relationship for the quarter ended September 30, 2010. For the quarter ended September 30, 2010, the Bank recognized losses (pre-tax) in AOCI of $2,839,000 and reclassified losses (pre-tax) from AOCI into interest expense on deposits of $225,000 (effective portion). During the next twelve months, the Bank estimates that $2,522,000 will be reclassified as an increase to interest expense.

Derivative assets and liabilities also consist of foreign exchange contracts executed with customers; the Bank offsets the customer exposure to another financial institution counterparty represented by major investment banks and large commercial banks. The Bank does not retain foreign exchange risk. The amounts presented in the table below include the foreign exchange contracts with both the customers and the financial institution counterparties. The Bank uses current market prices to determine the fair value of these contracts.

The Bank also creates derivative instruments when it enters into interest rate lock commitments for single family mortgage loans that will be sold to investors. The Bank’s interest rate risk exposure to these commitments is not significant as these derivatives are economically hedged with forward commitments to sell the loans to investors.

The total notional or contractual amounts and fair values for derivatives were:

	Successor September 30, 2010						Predecessor III December 31, 2009
			Fair value						Fair value
($ in thousands)	Notional or contractual amount		Asset derivatives  (1)		Liability derivatives (2)		Notional or contractual amount		Asset derivatives  (1)		Liability derivatives (2)
Qualifying hedge contracts:
Interest rate contracts	$	500,000	$	—	$	2,614	$	—	$	—	$	—
Total			$	—	$	2,614			$	—	$	—
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	419,832	$	17,979	$	16,730	$	428,326	$	12,747	$	11,458
Interest rate contracts with borrowers	$	132,069		112		99	$	18,003		—		318
Forward loan sale commitments	$	271,130		135		148	$	32,505		658		—
Total			$	18,226	$	16,977			$	13,405	$	11,776

⁽¹⁾ Included in prepaid expenses and other assets on the balance sheet

⁽²⁾ Included in other liabilities on the balance sheet

The credit risk associated with these derivative instruments is the risk of non-performance by the counterparty to the contracts. Management does not anticipate non-performance by any of the counterparties.

Note 8. Common Stockholder’s Equity

As of September 30, 2010, the Bank was authorized to issue 400,000,000 shares of common stock, par value $0.01 per share. On July 1, 2010, the Bank issued 124,133,334 shares at a price of $15.00 per share.

The Bank is subject to various regulatory capital requirements administered by the FDIC. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification will also be subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total Capital and Tier 1 Capital to risk-weighted assets and of Tier 1 Capital to average assets (“Tier 1 Leverage Ratio”). In addition, as a newly chartered institution, the Bank is required to maintain a Tier 1 Leverage Ratio no less than 8% of average assets. Management believes, as of September 30, 2010, that the Bank meets all capital adequacy requirements to which it is subject.

The following table presents the actual capital amounts and ratios of the Bank at September 30, 2010:

	Actual					Minimum for Capital Adequacy Purposes					Minimum to Be Well Capitalized
($ in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Successor
September 30, 2010
Total capital to risk-weighted assets	$	1,852,007		13.73	%	$	1,079,117		8.00	%	$	1,348,896		10.00	%
Tier 1 capital to risk-weighted assets		1,834,253		13.60	%		539,558		4.00	%		809,338		6.00	%
Tier 1 capital to average assets		1,834,253		8.58	%		855,332		4.00	%		1,069,165		5.00	%

Note 9. Stock Compensation Plans

The Bank follows ASC 718, “Compensation – Stock Compensation,” in accounting for its stock compensation plan. Pursuant to ASC 718, the Bank measured the compensation cost of stock options based on the fair value of the options at the grant date and recognizes compensation expense over their requisite service periods.

Under the 2010 Stock Option Plan (“the Stock Option Plan”), the Bank is authorized to grant 16,927,273 shares of common stock. As of September 30, 2010, the Bank has granted stock options to purchase 15,608,282 shares to employees, officers and directors under the Stock Option Plan. Under the Bank’s stock option agreements, the exercise price of each option equals the market price of the Bank’s common stock at the grant date. Generally, stock options vest over a period of up to four years from the grant date and have a maximum contractual life of ten years.

The Bank has granted options that have time vesting requirements, performance vesting criteria and market vesting conditions. The following table summarizes the number of options granted, the exercise price and the fair value by each vesting criteria at September 30, 2010:

	Number of Options Outstanding		Exercise Price		Fair Value
Time		3,236,962	$	15.00	$ 5.24 to $ 5.76
Performance		10,960,714	$	15.00	$ 5.65 to $ 5.76
Market condition		1,410,606	$	15.00	$ 5.99

Of the time vested options, approximately 2.8 million options vest on a monthly basis in equal amounts over a term of 48 months. The remaining time options vest 25% per annum over four years. Performance options vest 25% per annum over four years provided that certain criteria, including return on equity, nonperforming asset ratios and growth in non-certificates of deposit accounts, are achieved. The measurement of the performance criteria occurs at the calendar year-end with vesting generally on June 30 of the following year. Certain time and performance options have accelerated vesting provisions or could change the type of option upon the occurrence of certain events. The options with a market condition will become exercisable based upon achieving a return on investment to the initial investors in the Bank based upon a multiple of the initial investment at certain dates in the future.

The following table presents the assumptions used to value the time and performance stock options using a Black-Scholes option valuation model:

	Time		Performance
Expected volatility		35%		35%
Expected dividends (yield)		—		—
Expected dividends		—		—
Expected term (in years)		5.34 - 6.25		6.05 - 6.25
Risk-free interest rate		1.91% - 2.19%		2.13% - 2.19%

The market condition options were modeled using a simulation model of the stock price over multiple scenarios.

The Bank recorded stock option expense of $8.1 million during the quarter ended September 30, 2010. The unrecognized compensation cost related to stock options granted at September 30, 2010 is $80.0 million. The cost is expected to be recognized over approximately 3.75 years.

Note 10. Fair Value Disclosures

The Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, the Bank may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment, MSRs and real estate owned. These nonrecurring fair value adjustments typically involve application of the lower-of-cost-or market accounting or write-downs of individual assets.

Fair Value Hierarchy

Under ASC 820, “Fair Value Measurements and Disclosures,” the Bank groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

• Level 1 – Valuation is based on quoted prices for identical instruments traded in active markets.

• Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

• Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Under ASC 820, the Bank bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is the Bank’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy of ASC 820.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not recorded at fair value. Although management uses its best judgment in estimating fair value, there are inherent weaknesses in any estimates that are made at a discrete point in time based on relevant market data, information about the financial instruments and other factors. Estimates of fair value of instruments without quoted market prices are subjective in nature and involve various assumptions and estimates that are matters of judgment. Changes in the assumptions used could significantly affect these estimates. The Bank has not adjusted fair values to reflect changes in market conditions subsequent to September 30, 2010 and December 31, 2009; therefore, estimates presented herein are not necessarily indicative of amounts that could be realized in a current transaction.

The estimated fair values presented neither include nor give effect to the values associated with the Bank’s existing client relationships, lending and deposit office networks, or certain tax implications related to the realization of unrealized gains or losses. The fair value summary does not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities.

Methods and assumptions used to estimate the fair value of each major classification of financial instruments were:

Cash and cash equivalents: The current carrying amount approximates estimated fair value.

Investment securities: For securities classified as available-for-sale, the Bank used current market prices, quotations or analysis of estimated future cash flows to determine fair value.

Loans: The carrying amount of loans is net of unamortized deferred loan fees or costs, unamortized premiums or discounts and the allowance for loan losses. To estimate fair value of the Bank’s loans, which are primarily adjustable rate and intermediate fixed rate real estate secured mortgages, the Bank 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 Bank bases the fair value of single family, multifamily and commercial real estate mortgages primarily upon prices of loans with similar terms obtained by or quoted to the Bank, adjusted for differences in loan characteristics and market conditions. The Bank estimates the fair value of other loans based on the current interest rates at which similar loans would be made to borrowers with similar credit characteristics in the Bank’s lending activities. Assumptions regarding liquidity risk and credit risk are judgmentally determined using available internal and market information.

For the fair value of nonaccrual loans and certain other loans, the Bank considers the individual characteristics of the loans, including delinquency status and the results of the Bank’s internal loan grading process.

Loans held for sale: The carrying amount of loans held for sale reflects the lower of cost or market, including net deferred loan fees and costs. The fair value of loans held for sale was derived from quoted market prices of loans with similar terms or actual prices at which loans were committed for sale.

MSRs: The fair value of MSRs related to loans originated and sold by the Bank is based on a present value calculation of expected future cash flows, with assumptions regarding prepayments, discount rates and investment rates adjusted for market conditions.

FHLB stock: FHLB stock has no trading market, is required as part of membership and is redeemable at par; therefore, its fair value is presented at cost.

Investments in life insurance: The carrying amount of investments in life insurance reflects the total cash surrender value of each policy, which approximates fair value.

Other real estate owned: Other real estate owned includes foreclosed properties securing mortgage loans. Other real estate owned is adjusted to fair value less costs to sell upon transfer of the loans to foreclosed assets. Subsequently, other real estate owned is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral, and accordingly, we classify other real estate owned as Level 3.

Customer deposits: The fair value of deposits with no stated term such as demand deposit accounts, NOW accounts, money market accounts and passbook accounts is the carrying amount reported on the balance sheet. The intangible value of long-term relationships with depositors is not taken into account in estimating the fair values disclosed. Management believes that the Bank’s non-term accounts, as a continuing source of less costly funds, provide significant additional value to the Bank that is not reflected in the assigned value. The fair value of deposits with a stated maturity is based on the present value of contractual cash flows discounted by the replacement rates for deposits with similar remaining maturities.

FHLB advances: The estimated fair value of longer-term FHLB advances represents the present value of cash flows discounted using the FHLB’s fixed rate cost of funds curve for advances of the same type and with the same characteristics.

Subordinated notes: The fair value is based on current market prices for traded issues.

Debt related to variable interest entity: The fair value is based on current market prices or quotations.

Commitments to extend credit: The majority of the Bank’s commitments to extend credit carry current market interest rates if converted to loans. Because these commitments are generally unassignable by either the Bank or the borrower, they have value only to the Bank and the borrower. The estimated fair value of the Bank’s commitments to extend credit, including letters of credit, approximates the recorded deferred fee amounts and was not material at September 30, 2010 or December 31, 2009.

Derivative financial instruments: Derivative assets and liabilities consist of interest rate swaps, foreign exchange contracts, interest rate lock commitments and forward loan sale commitments. The Bank uses current market information such as the current yield curve to determine the fair value of interest rate swaps. The Bank uses current market prices to determine the fair value of foreign exchange contracts. The estimated fair values of other derivative assets or liabilities that are created from interest rate lock commitments and forward loan sale commitments are estimated using analysis based on current market prices.

The following represents quarterly required disclosures of the estimated fair value of financial instruments.

	Successor September 30, 2010				Predecessor III December 31, 2009
($ in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Cash and cash equivalents	$	2,461,276	$	2,461,276	$	178,553	$	178,553
Investment securities available-for-sale		89,028		89,028		3,183		3,183
Investment securities held-to-maturity		434,840		440,389		—		—
Loans, net		17,715,506		17,825,984		18,587,778		18,461,023
Loans held for sale		139,330		139,330		14,540		14,540
Mortgage servicing rights		21,677		25,821		24,544		24,544
FHLB Stock		28,200		28,200		59,420		59,420
Investments in life insurance		378,448		378,448		202,691		202,691
Derivative assets		18,226		18,226		13,405		13,405
Liabilities:
Customer deposits		18,964,763		19,002,417		17,182,484		17,231,905
Federal Home Loan Bank advances		600,000		621,829		130,501		130,842
Subordinated notes		69,026		68,967		65,897		70,139
Debt related to variable interest entity		25,528		24,062		—		—
Derivative liabilities		19,591		19,591		11,776		11,776

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis:

	Successor
	Fair Value Measurements on a Recurring Basis September 30, 2010
($ in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale:
U.S. Treasury and federal agencies	$	89,028	$	—	$	—	$	89,028
Derivative assets		—		18,226		—		18,226
Total	$	89,028	$	18,226	$	—	$	107,254
Liabilities:
Derivative liabilities	$	—	$	19,591	$	—	$	19,591
	Predecessor III
	Fair Value Measurements on a Recurring Basis December 31, 2009
($ in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale:
Other residential mortgage backed securities	$	—	$	3,183	$	—	$	3,183
Derivative assets		—		13,405		—		13,405
Mortgage servicing rights		—		—		24,544		24,544
Total	$	—	$	16,588	$	24,544	$	41,132
Liabilities:
Derivative liabilities	$	—	$	11,776	$	—	$	11,776

There were no transfers in or out of Levels 1 and 2 for during the first nine months of 2010 or 2009.

The changes in Level 3 MSRs measured at fair value on a recurring basis are summarized as follows:

	Predecessor III
($ in thousands)	Three Months Ended Sept. 30, 2009			Six Months Ended June  30, 2010			Nine Months Ended Sept.  30, 2009
Beginning balance	$	25,339		$	24,544		$	30,242
Total gains or losses (realized/unrealized) included in earnings		(459	)		(287	)		(5,339	)
Purchases, issuances, and settlements		(250	)		(886	)		(273	)
Ending Balance	$	24,630		$	23,371		$	24,630

The Bank may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments for fair value usually result from application of lower-of-cost-or market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at September 30, 2010 and December 31, 2009, the following table provides the fair value hierarchy and the carrying value of the related individual assets or portfolios at period end.

	Successor
	Fair Value Measurements on a Non-recurring Basis September 30, 2010
($ in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Mortgage servicing rights	$	—	$	—	$	8,506	$	8,506
Total	$	—	$	—	$	8,506	$	8,506
	Predecessor III
	Fair Value Measurements on a Non-recurring Basis December 31, 2009
($ in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Impaired loans	$	—	$	—	$	17,437	$	17,437
Real estate owned		—		—		6,101		6,101
Total	$	—	$	—	$	23,538	$	23,538

The following table presents gains (losses) related to nonrecurring fair value measurements for the periods indicated:

	Successor			Predecessor III
($ in thousands)	Three  Months Ended Sept.  30, 2010			Three  Months Ended Sept.  30, 2009			Six  Months Ended June 30, 2010			Nine Months Ended Sept. 30, 2009
Assets:
Impaired loans	$	—		$	(748	)	$	—		$	(3,548	)
Mortgage servicing rights		(1,288	)		—			—			—
Real estate owned		—			—			(278	)		(2,000	)
Total	$	(1,288	)	$	(748	)	$	(278	)	$	(5,548	)

Note 11. Segments

ASC 280-10, “Segment Reporting,” requires that a public business enterprise report certain financial and descriptive information about its reportable operating segments on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Bank’s two reportable segments are commercial banking and wealth management.

The following tables presents the operating results for the three months ended September 30, 2010, six months ended June 30, 2010 and three and nine months ended September 30, 2009, and goodwill and total assets of the Bank’s two reportable segments at September 30, 2010 and 2009, as well as any reconciling items.

	Successor At or for the Three Months Ended September 30, 2010
($ in thousands)	Commercial Banking		Wealth Management			Reconciling Items			Total
Net interest income	$	232,505	$	3,735		$	—		$	236,240
Provision for credit losses		4,500		—			—			4,500
Noninterest income		5,530		14,073			(575	)		19,028
Noninterest expense		117,879		18,899			(575	)		136,203
Income (loss) before provision for income taxes		115,656		(1,091	)		—			114,565
Provision (benefit) for income taxes		47,436		(464	)		—			46,972
Net income (loss) before noncontrolling interests		68,220		(627	)		—			67,593
Less: Net income from noncontrolling interests		1,198		—			—			1,198
First Republic Bank Net Income (Loss)	$	67,022	$	(627	)	$	—		$	66,395
Goodwill	$	24,604	$	—		$	—		$	24,604
Total Assets	$	21,872,042	$	94,198		$	(12,172	)	$	21,954,068
	Predecessor III At or for the Three Months Ended September 30, 2009
($ in thousands)	Commercial Banking		Wealth Management			Reconciling Items			Total
Net interest income	$	240,726	$	869		$	—		$	241,595
Provision for credit losses		30,081		—			—			30,081
Noninterest income		16,148		12,918			(253	)		28,813
Noninterest expense		86,018		13,256			(253	)		99,021
Income before provision for income taxes		140,775		531			—			141,306
Provision for income taxes		59,164		226			—			59,390
Net income before noncontrolling interests		81,611		305			—			81,916
Less: Net income from noncontrolling interests		1,198		—			—			1,198
First Republic Bank Net Income	$	80,413	$	305		$	—		$	80,718
Goodwill	$	—	$	—		$	—		$	—
Total Assets	$	19,477,203	$	21,144		$	(20,396	)	$	19,477,951

	Predecessor III At or for the Six Months Ended June 30, 2010
($ in thousands)	Commercial Banking		Wealth Management		Reconciling Items			Total
Net interest income	$	407,924	$	5,315	$	—		$	413,239
Provision for credit losses		17,352		—		—			17,352
Noninterest income		22,727		27,360		(629	)		49,458
Noninterest expense		185,210		32,383		(629	)		216,964
Income before provision for income taxes		228,089		292		—			228,381
Provision for income taxes		97,014		124		—			97,138
Net income before noncontrolling interests		131,075		168		—			131,243
Less: Net income from noncontrolling interests		2,396		—		—			2,396
First Republic Bank Net Income	$	128,679	$	168	$	—		$	128,847
Goodwill	$	—	$	—	$	—		$	—
Total Assets	$	19,455,510	$	61,723	$	(5,561	)	$	19,511,672
	Predecessor III At or for the Nine Months Ended September 30, 2009
($ in thousands)	Commercial Banking		Wealth Management		Reconciling Items			Total
Net interest income	$	701,638	$	1,515	$	—		$	703,153
Provision for credit losses		38,838		—		—			38,838
Noninterest income		44,175		41,925		(1,441	)		84,659
Noninterest expense		271,758		42,745		(1,441	)		313,062
Income before provision for income taxes		435,217		695		—			435,912
Provision for income taxes		182,824		295		—			183,119
Net income before noncontrolling interests		252,393		400		—			252,793
Less: Net income from noncontrolling interests		3,621		—		—			3,621
First Republic Bank Net Income	$	248,772	$	400	$	—		$	249,172
Goodwill	$	—	$	—	$	—		$	—
Total Assets	$	19,477,203	$	21,144	$	(20,396	)	$	19,477,951

The commercial banking segment represents most of the operations of the Bank, including real estate secured lending, retail deposit gathering, private banking activities, mortgage sales and servicing, and managing the capital, liquidity and interest rate risk.

The wealth management segment consists of the investment management activities of FRIM, which manages assets for individuals and institutions in equities, fixed income and balanced accounts. In addition, the wealth management segment also includes First Republic Trust Company, a division of the Bank that offers personal trust services; FRWA, which offers advisory services to high net worth clients; the Bank’s mutual fund activities; the brokerage activities of FRSC; and the Bank’s foreign exchange activities conducted on behalf of customers. FRWA was merged into FRIM on September 30, 2010.

The reconciling items for revenues include intercompany business referral fees. The reconciling items for assets include subsidiary funds on deposit with the Bank and any intercompany receivable that is reimbursed at least on a quarterly basis.

Note 12. Concentrations

At September 30, 2010, approximately 1% of our deposit accounts hold approximately 34% of our total deposits, compared to 35% at December 31, 2009.

Note 13. Subsequent Events

The Bank evaluated the effects of subsequent events that have occurred subsequent to the quarter ended September 30, 2010, and through November 8, 2010, which is the date the financial statements were available to be issued.

EX-99.3

Exhibit 99.3

FIRST REPUBLIC BANK

Combined Financial Statements

December 31, 2009, December 26, 2008 and December 28, 2007

(With Reports of Independent Registered

Public Accounting Firms Thereon)

FIRST REPUBLIC BANK

TABLE OF CONTENTS

Reports of Independent Registered Public Accounting Firms	3
Combined Statements of Income	5
Combined Balance Sheets	6
Combined Statements of Changes in Equity and Comprehensive Income	7
Combined Statements of Cash Flows	10
Notes to Combined Financial Statements	12

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of First Republic Bank:

In our opinion, the accompanying combined balance sheet and the related combined statement of income, combined statement of changes in equity and comprehensive income and combined statement of cash flows present fairly, in all material respects, the financial position of First Republic Bank (the “Bank”), a carve-out business of Bank of America, N.A., a wholly owned subsidiary of Bank of America Corporation at December 31, 2009, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

San Francisco, California

September 14, 2010

Report of Independent Registered Public Accounting Firm

The Board of Directors

First Republic Bank:

We have audited the accompanying combined balance sheet of First Republic Bank (the Bank) as of December 26, 2008 and December 28, 2007, and the related combined statements of income, changes in equity and comprehensive income, and cash flows for the year ended December 26, 2008, the period from September 22, 2007 to December 28, 2007 (the Predecessor II period), and the period from January 1, 2007 to September 21, 2007 (the Predecessor I period). These financial statements are the responsibility of the Bank’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. The Bank 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 Bank’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 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 Bank as of December 26, 2008 and December 28, 2007, and the results of its operations and its cash flows for the year ended December 26, 2008, the period from September 22, 2007 to December 28, 2007 (the Predecessor II period), and the period from January 1, 2007 to September 21, 2007 (the Predecessor I period) in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

San Francisco, California

September 14, 2010

FIRST REPUBLIC BANK

COMBINED STATEMENTS OF INCOME

	Successor		Predecessor II					Predecessor I
($ in thousands)	Year Ended December 31, 2009		Year Ended December 26, 2008			For the Period from Sept. 22, 2007 to Dec. 28, 2007		For the Period from Jan. 1, 2007 to Sept. 21, 2007
Interest income:
Interest on real estate and other loans	$	1,214,759	$	862,219		$	190,336	$	438,407
Interest on investments		545		5,078			15,475		91,092
Interest on cash equivalents		84		288			27		572
Interest on loans to Parent company		—		31,546			23,964		—
Total interest income		1,215,388		899,131			229,802		530,071
Interest expense:
Interest on customer deposits		223,964		273,036			92,839		226,245
Interest on FHLB advances and other borrowings		6,368		66,431			25,631		56,915
Interest on subordinated notes		4,184		4,138			1,142		3,677
Interest on funding from Parent company		23,927		50,679			—		—
Total interest expense		258,443		394,284			119,612		286,837
Net interest income		956,945		504,847			110,190		243,234
Provision for credit losses		49,462		131,175			2,400		8,067
Net interest income after provision for credit losses		907,483		373,672			107,790		235,167
Noninterest income:
Investment advisory fees		27,888		35,257			11,122		29,395
Brokerage and investment fees		14,827		18,787			3,413		8,085
Trust fees		5,139		5,620			1,327		3,291
Deposit customer fees		12,509		11,023			2,845		7,324
Loan servicing fees, net		627		(775	)		261		3,745
Loan and related fees		4,207		4,071			841		2,694
Gain (loss) on sale of loans		5,536		(1,454	)		301		6,865
Gain (loss) on investment securities		—		28			20,428		(175	)
Income from investments in life insurance		9,904		9,157			2,158		5,719
Accretion of discount on unfunded commitments		26,641		—			—		—
Other income		8,295		7,578			1,526		1,716
Total noninterest income		115,573		89,292			44,222		68,659
Noninterest expense:
Salaries and related benefits		207,870		201,787			53,134		120,466
Occupancy		53,890		57,319			12,383		32,958
Amortization of intangibles		—		42,271			11,818		1,709
Information systems		35,750		33,604			8,474		24,380
Advertising and marketing		17,335		19,683			4,416		11,651
Professional fees		7,919		19,854			1,472		8,134
FDIC and other deposit assessments		43,448		12,937			2,089		5,525
Losses related to investment advisory subsidiary		—		—			—		27,951
Merger-related costs		—		—			—		50,833
Other expenses		51,066		54,983			14,626		41,063
Total noninterest expense		417,278		442,438			108,412		324,670
Income (loss) before provision for income taxes		605,778		20,526			43,600		(20,844	)
Provision (benefit) for income taxes		254,316		5,733			16,156		(13,936	)
Net income (loss) before noncontrolling interests		351,462		14,793			27,444		(6,908	)
Less: Net income from noncontrolling interests		4,819		4,793			1,631		5,237
First Republic Bank Net Income (Loss)	$	346,643	$	10,000		$	25,813	$	(12,145	)

See accompanying notes to combined financial statements.

FIRST REPUBLIC BANK

COMBINED BALANCE SHEETS

	Successor			Predecessor II
($ in thousands)	December 31, 2009			December 26, 2008			December 28, 2007
ASSETS
Cash and cash equivalents	$	178,553		$	169,572		$	194,220
Parent company lending		—			—			2,241,339
Investment securities trading		—			—			17,534
Investment securities available-for-sale		3,183			—			24,460
Loans		18,632,781			17,545,238			11,122,635
Less: Allowance for loan losses		(45,003	)		(176,679	)		(60,914	)
Loans, net		18,587,778			17,368,559			11,061,721
Loans held for sale		14,540			4,325			5,816
Mortgage servicing rights measured at fair value		24,544			—			—
Mortgage servicing rights measured at amortized cost		—			23,307			34,586
Goodwill		—			1,305,780			1,305,780
Other intangible assets		—			206,911			249,182
Investments in life insurance		202,691			194,665			187,022
Prepaid expenses and other assets		366,700			200,912			326,673
Premises, equipment and leasehold improvements, net		92,240			98,689			93,526
Deferred tax assets		448,859			116,191			50,038
Other real estate owned		21,462			5,000			396
Total Assets	$	19,940,550		$	19,693,911		$	15,792,293
LIABILITIES AND EQUITY
Liabilities:
Customer deposits:
Non-interest bearing accounts	$	2,665,675		$	1,887,269		$	1,741,156
NOW checking accounts		2,842,519			1,409,730			1,332,205
Money Market (MM) checking accounts		1,819,869			1,507,513			1,694,407
MM savings and passbooks		3,928,703			2,976,688			3,269,764
Certificates of deposit		5,925,718			4,530,554			3,013,319
Total customer deposits		17,182,484			12,311,754			11,050,851
Parent company borrowing		976,090			3,151,268			—
Federal Home Loan Bank advances		130,501			1,236,257			1,956,338
Subordinated notes		65,897			66,682			67,459
Other liabilities		189,671			142,572			165,995
Total Liabilities		18,544,643			16,908,533			13,240,643
Equity:
Parent company investment		1,296,248			2,685,788			2,451,985
Accumulated other comprehensive income, net		69			—			75
Total equity before noncontrolling interests		1,296,317			2,685,788			2,452,060
Noncontrolling interests		99,590			99,590			99,590
Total equity		1,395,907			2,785,378			2,551,650
Total Liabilities and Equity	$	19,940,550		$	19,693,911		$	15,792,293

See accompanying notes to combined financial statements.

FIRST REPUBLIC BANK

COMBINED STATEMENTS OF CHANGES IN EQUITY AND COMPREHENSIVE INCOME

($ in thousands)	Preferred Stock		Common Stock		Capital in Excess of Par Value			Retained Earnings			Parent Company Investment		Accumulated Other Comprehensive Income			Total Equity Before Noncontrolling Interests			Noncontrolling Interests			Total Equity
					Predecessor I
Balance at December 31, 2006	$	115,000	$	310	$	335,196		$	337,801		$	—	$	(122	)	$	788,185		$	148,590		$	936,775
FIN 48 cumulative effect adjustment		—		—		—			(3,426	)		—		—			(3,426	)		—			(3,426	)
EITF 06-2 cumulative effect adjustment, net of taxes		—		—		—			(2,436	)		—		—			(2,436	)		—			(2,436	)
Stock compensation expense		—		—		41,064			—			—		—			41,064			—			41,064
Excess tax benefits on stock compensation		—		—		8,114			—			—		—			8,114			—			8,114
Exercise of options on 178,455 shares of common stock		—		2		2,263			—			—		—			2,265			—			2,265
Issuance/conversion of 343,530 shares of common stock for subsidiary’s preferred stock		—		4		6,996			—			—		—			7,000			(7,000	)		—
Common stock shares forfeited or withheld for taxes, net of issuances		—		—		(1,778	)		—			—		—			(1,778	)		—			(1,778	)
Dividends on preferred stock		—		—		—			(5,424	)		—		—			(5,424	)		—			(5,424	)
Dividends on common stock		—		—		35			(15,125	)		—		—			(15,090	)		—			(15,090	)
Comprehensive income (loss):
Net income (loss)		—		—		—			(12,145	)		—		—			(12,145	)		5,237			(6,908	)
Other comprehensive income (loss), net of tax:
Net unrealized loss on securities available for sale (net of taxes of $19,460)		—		—		—			—			—		(26,873	)		(26,873	)		—			(26,873	)
Loss on investment securities included in net income (net of taxes of $74)		—		—		—			—			—		101			101			—			101
Total comprehensive income (loss)																	(38,917	)		5,237			(33,680	)
Dividends to noncontrolling interests		—		—		—			—			—		—			—			(5,237	)		(5,237	)
Balance at September 21, 2007		115,000		316		391,890			299,245			—		(26,894	)		779,557			141,590			921,147

(continued on following page)

See accompanying notes to combined financial statements.

FIRST REPUBLIC BANK

COMBINED STATEMENTS OF CHANGES IN EQUITY AND COMPREHENSIVE INCOME

(continued from previous page)

($ in thousands)	Preferred Stock			Common Stock			Capital in Excess of Par Value			Retained Earnings			Parent Company Investment			Accumulated Other Comprehensive Income			Total Equity Before Noncontrolling Interests			Noncontrolling Interests			Total Equity
Balance at September 21, 2007		115,000			316			391,890			299,245			—			(26,894	)		779,557			141,590			921,147
										Predecessor II
Purchase Accounting Adjustments		(115,000	)		(316	)		(391,890	)		(299,245	)		1,936,606			26,894			1,157,049			—			1,157,049
Capitalization after purchase accounting adjustments		—			—			—			—			1,936,606			—			1,936,606			141,590			2,078,196
Redemption of subsidiary’s preferred stock		—			—			—			—			—			—			—			(42,000	)		(42,000	)
Capital contributions/distributions		—			—			—			—			519,413			—			519,413			—			519,413
Capital contributions/distributions associated with income taxes		—			—			—			—			(29,847	)		—			(29,847	)		—			(29,847	)
Comprehensive income:
Net income		—			—			—			—			25,813			—			25,813			1,631			27,444
Other comprehensive income, net of tax:
Net unrealized gain on securities available-for-sale (net of taxes of $50)		—			—			—			—			—			75			75			—			75
Total comprehensive income																				25,888			1,631			27,519
Dividends to noncontrolling interests		—			—			—			—			—			—			—			(1,631	)		(1,631	)
Balance at December 28, 2007		—			—			—			—			2,451,985			75			2,452,060			99,590			2,551,650
Capital contributions/distributions		—			—			—			—			169,371			—			169,371			—			169,371
Capital contributions/distributions associated with income taxes		—			—			—			—			54,432			—			54,432			—			54,432
Comprehensive income:
Net income		—			—			—			—			10,000			—			10,000			4,793			14,793
Other comprehensive income, net of tax:
Net unrealized loss on securities available-for-sale (net of taxes of $39)		—			—			—			—			—			(59	)		(59	)		—			(59	)
Gain on investment securities included in net income (net of taxes of $12)		—			—			—			—			—			(16	)		(16	)		—			(16	)
Total comprehensive income																				9,925			4,793			14,718
Dividends to noncontrolling interests		—			—			—			—			—			—			—			(4,793	)		(4,793	)
Balance at December 26, 2008		—			—			—			—			2,685,788			—			2,685,788			99,590			2,785,378

(continued on following page)

See accompanying notes to combined financial statements.

FIRST REPUBLIC BANK

COMBINED STATEMENTS OF CHANGES IN EQUITY AND COMPREHENSIVE INCOME

(continued from previous page)

($ in thousands)	Preferred Stock		Common Stock		Capital in Excess of Par Value		Retained Earnings		Parent Company Investment			Accumulated Other Comprehensive Income		Total Equity Before Noncontrolling Interests			Noncontrolling Interests			Total Equity
Balance at December 26, 2008		—		—		—		—		2,685,788			—		2,685,788			99,590			2,785,378
							Successor
Purchase Accounting Adjustments		—		—		—		—		(1,531,651	)		—		(1,531,651	)		—			(1,531,651	)
Capitalization after purchase accounting adjustments		—		—		—		—		1,154,137			—		1,154,137			99,590			1,253,727
Capital contributions/distributions		—		—		—		—		(198,918	)		—		(198,918	)		—			(198,918	)
Capital contributions/distributions associated with income taxes		—		—		—		—		(5,614	)		—		(5,614	)		—			(5,614	)
Comprehensive income:
Net income		—		—		—		—		346,643			—		346,643			4,819			351,462
Other comprehensive income, net of tax:
Net unrealized gain on securities available-for-sale (net of taxes of $45)		—		—		—		—		—			69		69			—			69
Total comprehensive income															346,712			4,819			351,531
Dividends to noncontrolling interests		—		—		—		—		—			—		—			(4,819	)		(4,819	)
Balance at December 31, 2009	$	—	$	—	$	—	$	—	$	1,296,248		$	69	$	1,296,317		$	99,590		$	1,395,907

See accompanying notes to combined financial statements.

FIRST REPUBLIC BANK

COMBINED STATEMENTS OF CASH FLOWS

	Successor			Predecessor II						Predecessor I
($ in thousands)	Year Ended December 31, 2009			Year Ended December 26, 2008			For the Period from Sept. 22, 2007 to Dec. 28, 2007			For the Period from Jan. 1, 2007 to Sept. 21, 2007
Operating Activities:
Net income (loss) before noncontrolling interests	$	351,462		$	14,793		$	27,444		$	(6,908	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Provision for credit losses		49,462			131,175			2,400			8,067
Accretion of loan discounts		(260,165	)		(28,388	)		(3,572	)		—
Depreciation and amortization		(39,715	)		14,413			982			22,394
Amortization of intangible assets		—			42,271			11,818			1,709
Amortization of net loan fees		(2,921	)		(2,595	)		(169	)		(1,531	)
Amortization of mortgage servicing rights		—			10,895			3,250			6,066
Provision for mortgage servicing rights in excess of fair value, net		—			1,640			—			—
Changes in fair value of mortgage servicing rights		10,236			—			—			—
Net change in loans held for sale		(10,745	)		(680	)		(1,172	)		73,162
Provision for loans held for sale in excess of fair value, net		—			—			—			18
Provision (reversal of provision) for deferred taxes		142,166			(68,765	)		42,884			(44,225	)
Net (gains) losses on sale of loans		(5,536	)		1,454			(301	)		(6,865	)
Net losses on real estate owned		2,000			—			—			—
Proceeds from sales of trading securities		—			60			820,583			—
Net losses on trading securities		—			—			3,113			—
Net (gains) losses on available-for-sale securities		—			(28	)		(23,541	)		175
Losses related to investment advisory subsidiary		—			—			—			27,951
Losses on non-marketable equity investments		—			—			—			2,958
Loss on sale of premises, equipment and leasehold improvements, net		142			9			161			34
Noncash cost of benefit plans and stock plans		—			—			—			41,064
Excess tax benefits on stock compensation		—			—			—			(1,673	)
(Increase) decrease in other assets		(171,339	)		118,834			70,556			(89,841	)
Increase (decrease) in other liabilities		(26,633	)		(24,520	)		(108,618	)		150,718
Net Cash Provided by Operating Activities		38,414			210,568			845,818			183,273
Investing Activities:
Loan originations, net of principal collections		(1,864,701	)		(6,449,273	)		(1,085,560	)		(2,238,391	)
Loans purchased		(3,643	)		(37,660	)		—			(158,393	)
Loans sold		63,219			78,115			21,798			313,583
Purchases of securities available-for-sale		(4,673	)		—			—			(360,000	)
Proceeds from sales/calls/maturity of securities available-for-sale		1,913			623			1,239,232			569,097
Purchases of securities held-to-maturity		—			—			—			(27,550	)
Proceeds from calls/maturity of securities held-to-maturity		—			—			—			7,771
Purchases of FHLB stock		—			—			—			(38,081	)
Proceeds from redemptions of FHLB stock		—			40,249			6,102			35,382
Proceeds from investments in life insurance		1,789			794			—			—
Payments related to investment advisory interests		—			—			—			(368	)
Purchases of non-marketable equity investments		—			—			—			(16,468	)
Additions to premises, equipment and leasehold improvements, net		(14,618	)		(25,077	)		(8,238	)		(27,599	)
Proceeds from sales of premises, equipment and leasehold improvements		—			—			20			(1,154	)
Proceeds from sales of other real estate owned		100			—			—			—
Decrease (increase) in Parent company lending		—			2,241,339			(2,241,339	)		—
Net Cash Used for Investing Activities		(1,820,614	)		(4,150,890	)		(2,067,985	)		(1,942,171	)

FIRST REPUBLIC BANK

COMBINED STATEMENTS OF CASH FLOWS (continued)

	Successor			Predecessor II						Predecessor I
($ in thousands)	Year Ended December 31, 2009			Year Ended December 26, 2008			For the Period from Sept. 22, 2007 to Dec. 28, 2007			For the Period from Jan. 1, 2007 to Sept. 21, 2007
Financing Activities:
Net change in deposits		4,869,957			1,261,896			1,069,394			1,056,588
(Decrease) increase in FHLB advances and other borrowings		(1,103,500	)		(716,500	)		(300,000	)		659,669
(Decrease) increase in Parent company borrowing		(1,765,925	)		3,151,268			—			—
Repurchases/redemptions of noncontrolling interest in subsidiaries		—			—			(42,000	)		—
Capital (distributions) contributions		(204,532	)		223,803			489,566			—
Dividends to noncontrolling interests		(4,819	)		(4,793	)		(1,631	)		(5,237	)
Proceeds from employee stock purchases		—			—			—			316
Proceeds from common stock options exercised		—			—			—			2,265
Excess tax benefit on stock compensation		—			—			—			1,673
Payment of cash dividends on preferred stock		—			—			—			(5,424	)
Payment of cash dividends on common stock		—			—			—			(15,090	)
Net Cash Provided by Financing Activities		1,791,181			3,915,674			1,215,329			1,694,760
Increase (Decrease) in Cash and Cash Equivalents		8,981			(24,648	)		(6,838	)		(64,138	)
Cash and Cash Equivalents at the Beginning of Period		169,572			194,220			201,058			265,196
Cash and Cash Equivalents at the End of Period	$	178,553		$	169,572		$	194,220		$	201,058
Supplemental Disclosure of Cash Flow Items
Cash paid during period:
Interest	$	314,378		$	395,100		$	135,333		$	263,085
Income Taxes	$	121,543		$	8,620		$	—		$	15,067
Transfer of loans to held for sale	$	29,114		$	38,765		$	6		$	302,523
Transfer of securities to Parent company	$	—		$	41,214		$	6,468		$	—
Issuance of common stock for subsidiary’s preferred stock	$	—		$	—		$	—		$	7,000
Transfers of repossessed assets from loans to other assets	$	20,702		$	5,000		$	—		$	—

See accompanying notes to combined financial statements.

FIRST REPUBLIC BANK

NOTES TO COMBINED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 1. Summary of Significant Accounting Policies

Basis of Presentation and Organization

First Republic Bank operated for over ten years as an FDIC-insured, non-member bank chartered by the State of Nevada (and prior to that as two predecessor depository institutions chartered by the State of California and the State of Nevada, respectively, operating under a single, publicly traded, non-bank holding company which was subsequently merged into its bank subsidiary). On September 21, 2007, First Republic Bank was acquired by Merrill Lynch & Co. (“Merrill Lynch”) and merged into one of Merrill Lynch’s banking subsidiaries, Merrill Lynch Bank & Trust Company, F.S.B. (“MLFSB”). Under the terms of the acquisition, First Republic Bank operated as a separate division within MLFSB and continued to be managed by First Republic Bank’s existing management team. As a division of MLFSB, First Republic Bank maintained its own marketing identity and branch network, with loans, deposits, and other bank products offered to customers under the First Republic Bank brand. On January 1, 2009, Bank of America Corporation (“Bank of America”), the holding company of Bank of America, N.A. (“BANA”), purchased Merrill Lynch and thereby acquired MLFSB. On November 2, 2009, MLFSB was merged into BANA, and First Republic Bank thereby became a division of BANA. As used herein, “First Republic” or the “Bank” means, as the context requires:

• First Republic Bank, a Nevada-chartered commercial bank in existence from 1985 until acquired in September 2007 by MLFSB, a banking subsidiary of Merrill Lynch;

• the First Republic Bank division within MLFSB following the September 2007 acquisition;

• the First Republic Bank division within BANA following MLFSB’s merger into BANA, effective as of November 2009; and

• as described in Note 2, “Recent Developments,” First Republic Bank, a California-chartered commercial bank that acquired the First Republic Bank division of BANA effective upon the close of business on June 30, 2010.

MLFSB and BANA are collectively referred to as the “Parent” in the combined financial statements. The acquisitions of First Republic by Merrill Lynch and Bank of America were accounted for as a business combination. See Note 9, “Goodwill and Intangible Assets” and Note 3, “Purchase Accounting Allocation” for more information. The Merrill Lynch acquisition was accounted for under Statement of Financial Accounting Standard (“FAS”) 141, “Business Combinations,” which was effective at the time of the acquisition. The Bank of America acquisition was accounted for under FAS 141R, “Business Combinations,” which became effective January 1, 2009.

As a result of the acquisitions discussed above, the accompanying combined financial statements are presented to show the financial results of the Bank for the period after the Bank of America acquisition (Successor), the period after the Merrill Lynch acquisition and before the Bank of America acquisition (Predecessor II) and the period prior to the Merrill Lynch acquisition (Predecessor I). These periods relate to the accounting periods preceding and succeeding the push-down of Bank of America and Merrill Lynch’s basis, respectively. The Predecessor and Successor periods have been separated by vertical lines on the face of the combined financial statements to highlight the fact that the financial information has been prepared under different historical cost bases of accounting. The accounting policies followed by the Bank in the preparation of its combined financial statements for the Successor period are materially consistent with those of the Predecessor periods, except for the accounting for mortgage servicing rights and the accounting for the Bank of America acquisition. As a result of the Bank of America acquisition, the Bank changed its fiscal year from the last Friday in December to the last calendar day of the year; the Bank’s activities after its 2008 fiscal year end through December 31, 2008 are included in the Statement of Income for 2009. This change caused five additional days of activity to be recorded in 2009, resulting in approximately $4.6 million of additional net income in 2009.

First Republic’s combined financial statements include the carve-out accounts of the First Republic Bank division of MLFSB and BANA and the majority or wholly owned subsidiaries First Republic Investment Management (“FRIM”), First Republic Wealth Advisors (“FRWA”), First Republic Securities Company (“FRSC”), First Republic Preferred Capital Corporation (“FRPCC”), and First Republic Preferred Capital Corporation II (“FRPCC II”), in each case using the historical basis of accounting for the results of operations, assets and liabilities of the respective businesses and also include purchase accounting adjustments for the Merrill Lynch and Bank of America acquisitions. The purpose of the carve-out financial statements is to present fairly the results of operations, financial condition and cash flow of the First Republic Bank division of MLFSB and BANA separately from the results of operations, financial condition and cash flows of MLFSB and BANA as legal entities. The financial statements may not necessarily reflect the results of operations, financial condition and cash flows that the Bank would have achieved had the Bank actually existed on a stand-alone basis during the periods presented. All significant intercompany balances and transactions among the division and entities included in the combined financial statements have been eliminated.

FRPCC and FRPCC II have outstanding preferred stock, which is reported as noncontrolling interests in First Republic’s combined balance sheet. The dividends on these preferred stock issues are reported as net income from noncontrolling interests in First Republic’s combined statement of income, which is deducted from First Republic’s combined net income. The preferred stock dividends paid by FRPCC and FRPCC II are deductible for income tax purposes as long as each of FRPCC and FRPCC II, respectively, continues to qualify as a real estate investment trust (a “REIT”).

Nature of Operations

The Bank and its subsidiaries specialize in providing personalized, relationship-based services, including private banking, private business banking, real estate lending and wealth management services, including trust services. The Bank provides its services through preferred banking, lending and wealth management offices in nine major metropolitan areas: San Francisco, Los Angeles, Santa Barbara, Newport Beach, San Diego, New York City, Boston, Portland and Las Vegas.

First Republic originates real estate secured loans and other loans for retention in its loan portfolio. Real estate secured loans are secured by single family residences, multifamily buildings and commercial real estate properties and loans to construct such properties. Most of the real estate loans that First Republic originates are secured by properties located close to one of its offices in the San Francisco Bay area, the Los Angeles area, San Diego, Boston or the New York City area. First Republic originates business loans, loans secured by securities and other types of collateral and personal unsecured loans primarily to meet the non-mortgage needs of First Republic’s clients.

First Republic offers its clients various wealth management services. First Republic provides investment advisory services through FRIM and FRWA. FRIM earns fee income from the management of equity and fixed income investments for its clients. FRWA earns fee income from providing advisory services to high net worth clients. First Republic Trust Company, a division of First Republic, provides trust services. FRSC is a registered introducing broker-dealer performing short-term investment and brokerage activities for clients. The Bank also conducts foreign exchange activities on behalf of customers.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates subject to change include, but are not limited to: the allowance for loan losses; mortgage servicing rights; purchase accounting; goodwill and related identifiable intangible assets; and deferred income taxes.

Investment Securities

The Bank follows Accounting Standards Codification (“ASC”) 320, “Investments - Debt and Equity Securities,” which addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Debt securities that the Bank has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and reported at amortized cost. Debt securities that the Bank might not hold until maturity and marketable equity securities are classified as securities available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as accumulated other comprehensive income, which is included in equity. At the end of 2007, the Bank had trading securities, which were in process of being liquidated following the Merrill Lynch acquisition. Trading securities are carried at fair value with realized and unrealized gains and losses recorded in the income statement.

Premiums and discounts are amortized or accreted over the contractual life of the security as an adjustment to the yield using the interest method. Unrealized and realized gains and losses on investment securities are computed based on the cost basis of securities specifically identified. At December 31, 2009 and December 26, 2008, the Bank did not own trading securities.

The Bank conducts other-than-temporary impairment (“OTTI”) analysis on a quarterly basis. The initial indicator of OTTI for both debt and equity securities is a decline in market value below the amount recorded for an investment and the severity and duration of the decline.

For a debt security for which there has been a decline in the fair value below amortized cost basis, the Bank recognizes OTTI if the Bank (1) has the intent to sell the security, (2) it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, or (3) the Bank does do not expect to recover the entire amortized cost basis of the security.

Estimating recovery of the amortized cost basis of a debt security is based upon an assessment of the cash flows expected to be collected. If the present value of the cash flows expected to be collected is less than the amortized cost, OTTI is considered to have occurred.

If the Bank intends to sell the security, or if it is more likely than not that the Bank will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the amortized cost basis and fair value of the security. For debt securities that are considered other-than-temporarily impaired that the Bank does not intend to sell or it is more likely than not that the Bank will not be required to sell before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. The measurement of the credit loss component is equal to the difference between the debt security’s cost basis and the present value of its expected future cash flows discounted at the security’s effective yield.

Loans

Loans are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans and premiums or discounts on purchased loans. On September 21, 2007 and on January 1, 2009, loans were re-measured at fair value in connection with the Merrill Lynch and Bank of America acquisitions, respectively. The allowance for loan losses at September 21, 2007 was carried over by the Bank as part of the Merrill Lynch acquisition. As a result of the Bank of America acquisition, the allowance for loan losses was reduced to $0 in accordance with the guidance in ASC 805, “Business Combinations.” Loan discounts were recorded in connection with both acquisitions and are included in the basis of the loans.

Interest income from loans is recognized in the month earned. Loan origination fees and direct loan origination costs are deferred and amortized as a yield adjustment over the contractual lives of the loans using a level yield methodology. Loan discounts established in purchase accounting are amortized as a yield adjustment over the estimated lives of the loans using a level yield methodology based on the contractually required payments receivable in accordance with ASC 310-20, “Nonrefundable Fees and Costs.”

Loans are placed on nonaccrual status when principal or interest payments are more than 90 days past due, except for single family loans that are well secured and in the process of collection, or earlier when management determines that collection of principal or interest is unlikely. When a loan is placed on nonaccrual status, the Bank reverses accrued unpaid interest receivable against interest income and accounts for the loan on the cash or cost recovery method, until it qualifies for return to accrual status. The Bank may return a loan to accrual status when principal and interest payments are current, a satisfactory payment history is established and collectibility improves or the loan otherwise becomes well secured and is in the process of collection.

Allowance for Loan Losses

During 2008, and the periods from September 22, 2007 to December 28, 2007 and January 1, 2007 to September 21, 2007, the Bank provided for loan losses by charging earnings in such amounts as were required to establish an allowance for loan losses at a level that was appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan portfolio. The Bank reviews and adjusts the allowance quarterly. It is the Bank’s policy to promptly charge off balances that are deemed uncollectible. In 2009, the Bank evaluated any allowance for loan losses that would be required on the loans recorded at fair value on January 1, 2009 in connection with the Bank of America acquisition by comparing estimates of losses as compared to the remaining loan discounts established in purchase accounting. In addition, the Bank provided for any loan losses associated with 2009 originations based upon our assessment of credit losses inherent in the portfolio.

The principal sources of guidance on accounting for impairment in a loan portfolio are ASC 450, “Contingencies,” and ASC 310-10-35, “Receivables – Subsequent Measurement.” Under the provisions of ASC 310-10-35, a loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Bank measures impairment of a loan that is collateral dependent based on the fair value of the underlying collateral, net of selling costs. For a loan that is not collateral dependent, the Bank measures impairment using the present value of expected future cash flows, discounted at the instrument’s effective interest rate. If the fair value of the collateral or the present value of expected future cash flows is less than the recorded investment in the loan, the Bank recognizes impairment by recording a charge-off or creating a valuation allowance.

All other loans, including individually evaluated loans determined not to be impaired under ASC 310-10-35, are included in a group of loans that are evaluated for estimated losses under ASC 450. For these non-impaired loans, the Bank segments its portfolio into groups that have similar risk characteristics. For each group, credit losses inherent in the portfolio are estimated based on the Bank and industry historical loss experience, adjusted for changes in trends, conditions and other relevant factors that affect the repayment of the loans as of the evaluation date.

The Bank also maintains an unallocated reserve to provide for probable losses that have been incurred as of the reporting date, but not reflected in the allocated allowance. The unallocated allowance addresses qualitative factors consistent with the Bank’s analysis of the level of risks inherent in the loan portfolio. The unallocated allowance includes the risk of losses attributable to national or local economic or industry trends, the Bank’s lending management and staff, problem loan trends, concentrations of credit, other factors, and imprecision in the analysis process.

Loans Accounted for Under ASC 310-30

Loans acquired with evidence of credit deterioration for which it is probable at purchase that the Bank will be unable to collect all contractually required payments are accounted for under ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” Certain loans acquired in connection with the Bank of America acquisition on January 1, 2009 were in the scope of ASC 310-30. Evidence of credit quality deterioration as of the purchase date may include statistics such as past due status, refreshed borrower credit scores and refreshed loan-to-value (“LTV”) ratio. ASC 310-30 requires that acquired credit-impaired loans be recorded at fair value and prohibits carryover of the related allowance for loan losses.

The initial fair values for loans within the scope of ASC 310-30 are determined by discounting both principal and interest cash flows expected to be collected using an observable discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value. The Bank estimates the cash flows expected to be collected at acquisition using internal credit risk, interest rate and prepayment risk models that incorporate management’s best estimate of key assumptions, such as default rates, loss severity and payment speeds.

Under ASC 310-30, the excess of cash flows at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan in situations where there is a reasonable expectation about the timing and amount of cash flows to be collected. The difference between contractually required payments at acquisition and cash flows expected to be collected, considering the impact of prepayments, is referred to as the nonaccretable difference. Subsequent decreases to expected principal cash flows will result in a charge to provision for credit losses and a corresponding increase to the allowance for loan losses. Subsequent increases in expected principal cash flows will result in recovery of any previously recorded allowance for loan losses, to the extent applicable, and a reclassification from nonaccretable difference to accretable yield for any remaining increase, which will result in an increase in interest income over the remaining life of the loan or pool of loans. There were no loans within the scope of ASC 310-30 at December 26, 2008 or December 28, 2007.

Other Real Estate Owned

Real estate acquired through foreclosure is recorded at the lower of cost or fair value less costs to sell upon transfer of the loans to foreclosed assets. Subsequent declines in value are recorded through an expense to the income statement. The Bank records costs related to holding real estate as expenses when incurred.

Investments in Life Insurance

The Bank initially records investments in bank-owned life insurance at cost and subsequently adjusts the carrying value of the investment quarterly to its cash surrender value. The Bank recognizes the resulting income or loss in noninterest income.

Selling and Servicing Loans

The Bank sells loans on a non-recourse basis to generate servicing income, to provide funds for additional lending and for asset/liability management purposes. Loans that are sold include loans originated for sale to investors under commitments executed prior to origination, existing loans that are sold through bulk sales and loans sold through securitizations. The Bank classifies loans as held for sale when the Bank has the intent to sell, is waiting on a pre-approved investor purchase or is negotiating with a specific investor for the sale of specific loans that meet selected criteria. Loans held for sale include net deferred loan fees or costs and are carried at the lower of aggregate cost or fair value.

The Bank recognizes a sale only when consideration is received and control is transferred to the buyer. The Bank retains the mortgage servicing rights (“MSRs”) on substantially all loans sold. The Bank has one class of servicing rights: for loans sold that are secured by real estate. MSRs and other retained interests in loans sold are initially measured at fair value at the date of transfer.

To determine the fair value of MSRs, the Bank uses a valuation model that calculates the present value of estimated future net servicing income. The Bank uses assumptions in the valuation model that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual service fees and ancillary income.

For 2008, and the periods from September 22, 2007 to December 28, 2007 and January 1, 2007 to September 21, 2007,

MSRs are reported at the lower of amortized cost or fair value. MSRs were amortized in proportion to and over the period of estimated net servicing income. To calculate the initial fair value of MSRs and, subsequently, to measure impairment, the Bank stratified MSRs based on one or more of the predominant risk characteristics of the underlying loans. The Bank evaluated impairment of MSRs for a stratum periodically based on their current fair value, actual prepayment experience and other market factors. If the fair value of MSRs for a stratum was less than the amortized cost, the Bank recorded a provision for a valuation allowance. Subsequently, the Bank adjusted the valuation allowance for changes in fair value to the extent that fair value did not exceed the amortized cost. The Bank evaluated at least quarterly the recoverability of the valuation allowance on MSRs. If the Bank determined that a portion of the valuation allowance was unrecoverable, primarily due to loan prepayments, the Bank recorded a direct write-down by reducing both the amortized cost of MSRs for a stratum and the related valuation allowance.

For 2009, as a result of the Bank of America acquisition, the Bank elected to report MSRs at fair value with changes in fair value recognized in the income statement. Fair value is determined in a manner consistent with the process described above.

Goodwill and Other Identifiable Intangible Assets

As a result of the acquisitions by Merrill Lynch and Bank of America, the Bank applied push-down accounting to allocate the cost of each acquisition to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The Merrill Lynch acquisition was accounted for under FAS 141 while the Bank of America acquisition was accounted for under FAS 141R. Goodwill represents the excess of the cost over the fair value of the net assets of the Bank. In addition, the Bank evaluated whether both identifiable and unidentifiable assets should be recorded in connection with the acquisitions. See Note 3, “Purchase Accounting Allocation” for details on the purchase accounting allocation for the Merrill Lynch and Bank of America acquisitions.

In accordance with ASC 350-20, “Goodwill,” the Bank evaluates goodwill for impairment annually during the third quarter and on an interim basis if events or changes in circumstances indicate that its implied fair value is less than the carrying amount. Such an event or circumstance may include an adverse change in the business climate or market, a legal factor, an action by the regulators, introduction of or an increase in competition, or a loss of key personnel. The Bank tests goodwill by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired and no further analysis is required. If the fair value of the reporting unit is less than its carrying amount, the Bank compares the implied fair value of goodwill to its carrying amount. If the implied fair value of goodwill is less than its carrying amount, goodwill is considered impaired and an impairment loss is recognized. The Bank would measure the impairment loss as the amount by which the carrying amount of goodwill exceeds its implied fair value.

Identifiable intangible assets related to core deposits, wealth management, customer relationships and trade name/trademark are reported as other intangible assets. Core deposits and wealth management customer relationships are amortized over their useful lives not to exceed ten years. The trade name/trademark are considered to have an indefinite useful life. The Bank evaluates these intangible assets for impairment whenever circumstances indicate that the carrying amount may not be recoverable, in accordance with ASC 360-10, “Impairment or Disposal of Long-Lived Assets.” If the carrying amount is not recoverable and exceeds fair value, an impairment loss is recognized.

Premises, Equipment and Leasehold Improvements

Premises, equipment and leasehold improvements are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the assets, which generally range from three to ten years or the lease term.

Income Taxes

The Bank was included in Bank of America’s (2009) and Merrill Lynch’s (2008 and 2007) consolidated U.S. and certain state and local tax returns. For purposes of these financial statements, income taxes have been estimated as if the Bank were filing a separate consolidated U.S. tax return and separate state and local returns. Current income taxes payable or receivable similarly reflect the Bank’s tax attributes as if it were a stand alone entity. The difference between the amount payable or receivable to the Parent and the Bank’s stand alone tax liability as if the Bank filed separate consolidated federal and state tax returns was recorded as an equity contribution or distribution.

Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The Bank records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax assets. The Bank will continue to evaluate the reliability of the deferred tax assets by assessing the need for an amount of the valuation allowance.

A tax position that meets the “more likely than not” recognition threshold is measured to determine the amount of benefits to recognize. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest and penalties are recognized as a component of income tax expense.

Statement of Cash Flows

For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and short-term investments such as federal funds sold with original maturity dates of less than ninety days.

Derivative Instruments and Hedging Activities

The Bank follows ASC 815, “Derivatives and Hedging,” for the accounting and reporting of derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. On the date that the Bank enters into a derivative contract, the Bank designates the derivative contract as either a hedge of the fair value of a recognized asset or liability (“fair value” hedge), a hedge of the variability of cash flows related to a recognized asset or liability (“cash flow” hedge) or a contract that does not qualify for hedge accounting (“freestanding derivative”). The Bank records all derivatives at fair value as either other assets or other liabilities, depending on the rights or obligations under the contracts. The Bank accounts for changes in fair value of a derivative based on the designation, which is determined by its intended use. During the years ended December 31, 2009, December 26, 2008 and the periods from September 22, 2007 to December 28, 2007 and January 1, 2007 to September 21, 2007, there were no derivative instruments in a fair value or cash flow hedging relationship.

The Bank has freestanding derivative assets and liabilities, which consist of foreign exchange contracts executed with customers in which the Bank offsets the customer exposure to another financial institution counterparty. The Bank does not retain foreign exchange risk. The Bank uses current market prices to determine the fair value of these contracts.

The Bank originates certain mortgage loans with the intention of selling these loans to investors. The Bank enters into commitments to originate the loans whereby the interest rate on the loan paid by the borrower is set prior to funding (“interest rate lock commitments”). Such interest rate lock commitments are accounted for as freestanding derivative instruments that do not qualify as hedges. However, the interest rate exposure is economically hedged by the forward loan sale commitment to the investor. The change in fair value of these freestanding derivatives is recognized in earnings. When the Bank funds the loan to the borrower, the Bank records the carrying value of the interest rate lock commitment at the funding date as an adjustment to the carrying value of the loan held for sale.

The Bank does not conduct proprietary trading activities in derivative instruments for its own accounts.

Share Based Compensation

Beginning on September 22, 2007, certain employees of the Bank participated in Merrill Lynch stock plans and upon acquisition by Bank of America on January 1, 2009, began participating in Bank of America stock plans. The stock awards related to these employees and any resulting liability or cost is the responsibility of Merrill Lynch or Bank of America. The Bank was charged for these expenses by the Parent, which are reflected in the Statement of Income.

Investment Advisory, Brokerage and Investment and Trust Fees

Investment advisory fees, brokerage and investment fees, and trust fees are generally based upon the market value of assets under management or administration or the volume of transactions and are recorded on the accrual basis over the period in which the service is provided.

Parent company investment, borrowing and lending

As a division of MLFSB and BANA, the Bank was allocated equity capital equal to approximately 7.0% of its ending tangible assets on a monthly basis plus an amount equal to goodwill and other intangibles. Equity capital consists of Parent company investment and noncontrolling interests. After the allocation of equity capital, any remaining amount of funding (or lending) required is borrowed from (or loaned to) the Parent.

Recent Accounting Pronouncements

During the year ended December 31, 2009, the following accounting pronouncements were adopted by the Bank:

• In June 2009, the Financial Accounting Standards Board (“FASB”) issued ASC 105, “Generally Accepted Accounting Principles.” ASC 105 approved the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative nongovernmental GAAP. All existing accounting standards have been superseded and all other accounting literature not included in the Codification is considered nonauthoritative. The Codification is effective for interim or annual periods ending after September 15, 2009. The adoption of ASC 105 did not impact the Bank’s financial condition, results of operations or cash flows. The Bank has updated references to accounting pronouncements to conform to the Codification.

• In December 2007, the FASB issued ASC 805-10, “Business Combinations – Overall,” which significantly changes the financial accounting and reporting for business combinations. ASC 805-10 requires, for example: (i) assets and liabilities to be measured at fair value as of the acquisition date, (ii) liabilities related to contingent consideration to be remeasured at fair value in each

subsequent reporting period with changes reflected in earnings and not goodwill and (iii) all acquisition-related costs to be expensed as incurred by the acquirer. Bank of America applied ASC 805-10 to its January 1, 2009 acquisition of the Bank, the effects of which are included in the Bank’s financial statements. See Note 3, “Purchase Accounting Allocation.”

• In April 2009, the FASB issued ASC 805-20, “Business Combinations - Identifiable Assets and Liabilities, and Any Noncontrolling Interests” to require assets acquired and liabilities assumed in a business combination that arise from contingencies to be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, companies should typically account for the acquired contingencies using existing guidance. This guidance is effective for new acquisitions consummated on or after January 1, 2009. Bank of America applied this guidance to its January 1, 2009 acquisition of the Bank. The adoption of ASC 805-20 did not have an impact on the Bank’s financial position, results of operations or cash flows.

• In December 2007, the FASB issued ASC 810-10, “Consolidation-Overall,” which became effective January 1, 2009. ASC 810-10 requires that noncontrolling interests in subsidiaries be classified as a separate component of equity in the combined financial statements. Following adoption, the Bank presents noncontrolling interests in subsidiaries as a separate component of equity in the combined balance sheets, and the net income attributable to noncontrolling interests separately on the combined statements of income. The preferred stock issued by FRPCC and FRPCC II are considered noncontrolling interests in the combined financial statements. The expanded presentation and disclosure requirements of ASC 810-10 have been applied for the current period and retrospectively for prior periods presented.

• In April 2009, the FASB issued ASC 320-10-35, “Investments—Debt and Equity Securities—Subsequent Measurement” to amend the OTTI guidance for debt securities. The “intent and ability” indicator for recognizing OTTI was modified, and the trigger used to assess the collectibility of cash flows changed from “probable that the investor will be unable to collect all amounts due” to “the entity does not expect to recover the entire amortized cost basis of the security.” The new guidance changes the total amount recognized in earnings when there are credit losses associated with an impaired debt security and management asserts that is does not have the intent to sell the security and it is more likely than not that it will not have to sell the security before recovery of its cost basis. In those situations, impairment shall be separated into (a) the amount representing a credit loss and (b) the amount related to other factors. The amount of impairment related to credit losses shall be recognized in earnings. The new guidance is effective for interim and annual reporting periods ending after June 15, 2009, and became effective for the Bank in 2009. Adoption of the new guidance did not have an impact on the Bank’s financial condition, results of operations or cash flows.

• In April 2009, the FASB issued ASC 820-10, “Fair Value Measurements and Disclosures—Overall” to provide additional guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased and for identifying transactions that are not orderly. Several factors are identified that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for an asset or liability. If the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity, transactions or quoted prices may not be determinative of fair value (for example, there may be increased instances of transactions that are not orderly), further analysis of the transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value. The new guidance is effective for interim and annual reporting periods ending after June 15, 2009, and became effective for the Bank in 2009. Adoption of the new guidance did not have an impact on the Bank’s financial condition, results of operations or cash flows.

• In May 2009, the FASB issued ASC 855, “Subsequent Events.” ASC 855 defines subsequent events as events or transactions that occur after the balance sheet date, but before the financial statements are issued or available to be issued. Under ASC 855, subsequent events are categorized as two types: recognized or nonrecognized. ASC 855 provides authoritative guidance for accounting for and disclosure of subsequent events. Nonpublic entities are required to disclose the date through which an entity has evaluated subsequent events and whether that date is when the financial statements were issued or available to be issued. The new guidance is effective for interim and annual reporting periods ending after June 15, 2009, and became effective for the Bank in 2009. Adoption of ASC 855 did not have a significant impact on the Bank’s financial condition, results of operations or cash flows.

• Effective January 1, 2009, the Bank adopted the expanded disclosure requirements for derivative instruments and hedging activities under ASC 815-10-50, “Derivatives and Hedging—Disclosures.” The expanded disclosures address how derivative instruments are used, how derivatives and the related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. In addition, companies are required to disclose the fair values of derivative instruments and their gains and losses in a tabular format. Adoption of the new guidance did not have an impact on the Bank’s financial condition, results of operations or cash flows.

Note 2. Recent Developments

On October 21, 2009, Bank of America announced that it had entered into a definitive agreement to sell substantially all of First Republic’s assets and liabilities (the “Transaction”) to a number of investors, led by First Republic’s existing management, and including investment funds managed by Colony Capital, LLC and General Atlantic LLC (collectively, the “Purchasers”). The Transaction was completed after the close of business on June 30, 2010. Following the completion of the Transaction, the Bank began operation as a California-chartered, FDIC-insured, non-member bank under the name “First Republic Bank.”

Pursuant to the purchase agreement executed in connection with the Transaction, BANA retained approximately $2.0 billion of loans and approximately $42 million of real estate owned that were selected by the Purchasers as of October 21, 2009. These loans and real estate owned were transferred to BANA’s operating systems in April 2010. Additionally, approximately $500 million of assets related to bank-owned life insurance, deferred tax assets and other assets and the deposits in Las Vegas, Nevada were transferred to BANA in April 2010 and the Las Vegas branch closed on April 30, 2010. The assets, liabilities and resulting income and expense retained by BANA are included in the combined financial statements through the date they were transferred to BANA as these assets and liabilities reflect the historical business operations of the Bank. The following table presents the book value of the assets, liabilities and noncontrolling interests acquired from BANA as of July 1, 2010.

($ in thousands)
Assets:
Cash and cash equivalents	$	435,916
Investment securities		4,331
Loans, net		17,394,431
Loans held for sale		27,732
Mortgage servicing rights		13,100
Other assets		384,259
Total	$	18,259,769
Liabilities and Equity:
Customer deposits	$	17,778,797
Federal Home Loan Bank advances		130,416
Other liabilities		185,458
Subordinated notes		65,508
Noncontrolling interests		99,590
Total	$	18,259,769

The Bank is in process of completing the fair value analysis in order to record the acquired assets, liabilities and noncontrolling interests at fair value in accordance with ASC 805.

Note 3. Purchase Accounting Allocation

Bank of America Acquisition (Successor)

On January 1, 2009, Bank of America purchased Merrill Lynch and thereby acquired MLFSB, of which First Republic was then a division. On November 2, 2009, MLFSB was merged into BANA, and the Bank thereby became a division of BANA.

As part of the acquisition, certain fair value adjustments to the assets and liabilities of First Republic were recorded as shown in the table below as a result of applying push-down accounting. As a result of its acquisition, Bank of America management determined that no goodwill or other intangible assets should be recorded at First Republic on January 1, 2009. All previously recorded goodwill or other intangible assets were reduced to $0 when Bank of America applied its push-down accounting to First Republic.

($ in thousands)	Carrying Value at January 1, 2009		Purchase Accounting Adjustments			Estimated Fair Value at January 1, 2009
Assets:
Cash and cash equivalents	$	169,572	$	—		$	169,572
Loans, net		17,368,559		(739,771	)		16,628,788
Loans held for sale		4,325		—			4,325
Mortgage servicing rights		23,307		6,935			30,242
Other intangible assets		206,911		(206,911	)		—
Other assets		615,457		461,995			1,077,452
Goodwill		1,305,780		(1,305,780	)		—
Total	$	19,693,911	$	(1,783,532	)	$	17,910,379
Liabilities and Equity:
Customer deposits	$	12,311,754	$	(364	)	$	12,311,390
Federal Home Loan Bank advances		1,236,257		30,062			1,266,319
Other liabilities		142,572		127,625			270,197
Subordinated notes		66,682		—			66,682
Parent company borrowing		3,151,268		(409,204	)		2,742,064
Equity before noncontrolling interests		2,685,788		(1,531,651	)		1,154,137
Noncontrolling interests		99,590		—			99,590
Total	$	19,693,911	$	(1,783,532	)	$	17,910,379

Merrill Lynch & Co. Acquisition (Predecessor II)

On September 21, 2007, Merrill Lynch purchased First Republic and First Republic became a division of MLFSB. As part of the acquisition, certain fair value adjustments to the assets and liabilities of First Republic were recorded as shown in the table below as a result of applying push-down accounting. Goodwill was recorded for the excess of the cost over the fair value of the net assets of the Bank. In addition, the Bank recorded certain intangible assets associated with the core deposits, wealth management customer revenues and trademark/trade name of First Republic.

($ in thousands)	Carrying Value at September 21, 2007		Purchase Accounting Adjustments			Estimated Fair Value at September 21, 2007
Assets:
Cash and cash equivalents	$	201,058	$	—		$	201,058
Investment securities		2,091,857		(4,163	)		2,087,694
Loans, net		10,238,122		(242,590	)		9,995,532
Loans held for sale		4,718		(27	)		4,691
Mortgage servicing rights		27,202		10,332			37,534
Other intangible assets		10,355		250,645			261,000
Other assets		760,611		9,305			769,916
Goodwill		160,565		1,145,215			1,305,780
Total	$	13,494,488	$	1,168,717		$	14,663,205
Liabilities and Equity:
Customer deposits	$	9,978,996	$	3,448		$	9,982,444
Federal Home Loan Bank advances and other borrowings		2,250,000		7,315			2,257,315
Other liabilities		280,575		(3,001	)		277,574
Subordinated notes		63,770		3,906			67,676
Equity before noncontrolling interests		779,557		1,157,049			1,936,606
Noncontrolling interests		141,590		—			141,590
Total	$	13,494,488	$	1,168,717		$	14,663,205

Merger Related Expenses

Merger related expenses associated with the Merrill Lynch acquisition are recorded in the combined statement of income in the period from January 1, 2007 to September 21, 2007. These charges represent costs associated with the acquisition and do not represent ongoing costs of the Bank. Merger related expenses consist primarily of $33.7 million for the cost of stock based compensation that had accelerated vesting and $17.1 million for transaction costs (including legal, accounting and investment banking fees).

Note 4. Investment Securities

The Bank’s investment securities were classified as either available-for-sale or trading at December 31, 2009 and December 28, 2007. The Bank did not own any securities at December 26, 2008. The following tables present information related to available-for-sale securities:

	Successor December 31, 2009
($ in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Other residential mortgage-backed securities (“MBS”)	$	3,069	$	114	$	—	$	3,183

	Predecessor II December 28, 2007
($ in thousands)	Cost		Gross unrealized gains		Gross unrealized losses			Fair value
U.S. Treasury and federal agencies	$	10,569	$	93	$	—		$	10,662
Residential agency MBS		9,557		37		(20	)		9,574
Other debt securities		4,209		15		—			4,224
Total	$	24,335	$	145	$	(20	)	$	24,460

As a result of the Merrill Lynch acquisition, on September 22, 2007, the Bank reclassified held-to-maturity securities with a fair value of $816.3 million to available-for-sale or trading. At December 28, 2007, approximately $20.1 million of investment securities were pledged at the Federal Reserve Bank of San Francisco or a correspondent bank as collateral to secure trust funds and public deposits.

The following table presents gross unrealized losses and fair value of available-for-sale securities:

	Predecessor II December 28, 2007
	Less than 12 months					12 months or more				Total
($ in thousands)	Gross unrealized losses			Fair value		Gross unrealized losses		Fair value		Gross unrealized losses			Fair value
Residential agency MBS	$	(20	)	$	5,997	$	—	$	—	$	(20	)	$	5,997

Sales of Investment Securities

The following table presents gross realized gains and losses from sales of securities available-for-sale:

	Predecessor II					Predecessor I
($ in thousands)	Year Ended December 26, 2008		September 22 - December 28, 2007			January 1- September 21, 2007
Gross realized gains	$	28	$	24,516		$	1
Gross realized losses		—		(475	)		(132	)
Net realized gains (losses)	$	28	$	24,041		$	(131	)

There were no sales of securities in 2009.

For the period from September 22, 2007 through December 28, 2007, the Bank recognized $500 thousand of OTTI on available-for-sale securities that was recorded in earnings.

The following table presents interest and dividend income on investments:

	Successor		Predecessor II				Predecessor I
($ in thousands)	Year Ended December 31, 2009		Year Ended December 26, 2008		For the Period from Sept. 22, 2007 to Dec. 28, 2007		For the Period from Jan. 1, 2007 to Sept. 21, 2007
Interest on taxable securities	$	420	$	184	$	9,479	$	58,790
Interest on tax-exempt securities		—		—		4,119		23,284
Dividend income on investment securities and FHLB stock		125		4,894		1,877		9,018
Total	$	545	$	5,078	$	15,475	$	91,092

The following table presents contractual maturities of available-for-sale debt securities:

	Successor December 31, 2009				Predecessor II December 28, 2007
($ in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	—	$	—	$	9,093	$	9,152
Due after one year through five years		—		—		1,476		1,510
Due after five years through ten years		—		—		—		—
Due after ten years		—				4,209		4,224
Subtotal		—		—		14,778		14,886
MBS		3,069		3,183		9,557		9,574
Total	$	3,069	$	3,183	$	24,335	$	24,460

Note 5. Loans

Real estate loans are secured by single family, multifamily and commercial real estate properties and generally mature over periods of up to thirty years. At December 31, 2009, approximately 65% of the total loan portfolio was secured by California real estate, compared to 62% at December 26, 2008 and 60% at December 28, 2007. At December 31, 2009 and December 26, 2008, 95% of single family and home equity lines of credit contain an interest-only payment feature compared to 93% at December 28, 2007, respectively. These loans generally have an initial interest-only term of ten years.

The following tables present the major categories of loans outstanding, including those subject to ASC 310-30. The loans are presented with the contractual balance, any purchase accounting adjustments and net deferred fees and costs:

	Successor December 31, 2009
($ in thousands)	Principal		Net Unaccreted Discount			Net Deferred Fees and Costs			Total
Types of Loans:
Single family (1-4 units)	$	10,487,061	$	(363,921	)	$	2,660		$	10,125,800
Home equity credit lines		1,830,043		(121,773	)		1,506			1,709,776
Commercial real estate		2,969,713		(141,288	)		(1,592	)		2,826,833
Multifamily (5+ units) mtgs		2,128,942		(69,366	)		(2,004	)		2,057,572
Multifamily/commercial construction		262,420		(15,646	)		(162	)		246,612
Single family construction		241,858		(898	)		(36	)		240,924
Total real estate mortgages		17,920,037		(712,892	)		372			17,207,517
Commercial business loans		1,086,735		(71,531	)		(2,364	)		1,012,840
Other secured		202,771		(13,012	)		—			189,759
Unsecured loans and lines of credit		173,438		(17,200	)		17			156,255
Stock secured		69,217		(2,807	)		—			66,410
Total other loans		1,532,161		(104,550	)		(2,347	)		1,425,264
Total loans	$	19,452,198	$	(817,442	)	$	(1,975	)		18,632,781
Less:
Allowance for loan losses										(45,003	)
Loans, net										18,587,778
Real estate loans held for sale										14,540
Total									$	18,602,318
	Predecessor II December 26, 2008
($ in thousands)	Principal		Net Unaccreted Discount			Net Deferred Fees and Costs			Total
Types of Loans:
Single family (1-4 units)	$	8,895,395	$	(163,571	)	$	16,647		$	8,748,471
Home equity credit lines		1,671,221		(18,743	)		(8	)		1,652,470
Commercial real estate		2,835,378		(14,762	)		(3,844	)		2,816,772
Multifamily (5+ units) mtgs		1,916,801		(9,825	)		(2,299	)		1,904,677
Multifamily/commercial construction		173,482		(309	)		(1	)		173,172
Single family construction		400,175		(789	)		(14	)		399,372
Total real estate mortgages		15,892,452		(207,999	)		10,481			15,694,934
Commercial business loans		1,220,435		(2,408	)		(3,202	)		1,214,825
Other secured		241,995		(162	)		—			241,833
Unsecured loans and lines of credit		319,701		(18	)		40			319,723
Stock secured		73,921		(14	)		—			73,907
Lease financing		16		—			—			16
Total other loans		1,856,068		(2,602	)		(3,162	)		1,850,304
Total loans	$	17,748,520	$	(210,601	)	$	7,319			17,545,238
Less:
Allowance for loan losses										(176,679	)
Loans, net										17,368,559
Real estate loans held for sale										4,325
Total									$	17,372,884

	Predecessor II December 28, 2007
($ in thousands)	Principal		Net Unaccreted Discount			Net Deferred Fees and Costs			Total
Types of Loans:
Single family (1-4 units)	$	5,236,172	$	(179,108	)	$	2,250		$	5,059,314
Home equity credit lines		1,024,747		(23,730	)		(2	)		1,001,015
Commercial real estate		1,839,569		(18,525	)		(949	)		1,820,095
Multifamily (5+ units) mtgs		1,194,698		(11,652	)		(170	)		1,182,876
Multifamily/commercial construction		141,500		(268	)		(13	)		141,219
Single family construction		320,333		(2,504	)		(13	)		317,816
Total real estate mortgages		9,757,019		(235,787	)		1,103			9,522,335
Commercial business loans		1,052,500		(840	)		(553	)		1,051,107
Other secured		185,205		(155	)		—			185,050
Unsecured loans and lines of credit		254,557		801			18			255,376
Stock secured		82,303		(587	)		—			81,716
Lease financing		27,051		—			—			27,051
Total other loans		1,601,616		(781	)		(535	)		1,600,300
Total loans	$	11,358,635	$	(236,568	)	$	568			11,122,635
Less:
Allowance for loan losses										(60,914	)
Loans, net										11,061,721
Real estate loans held for sale										5,816
Total									$	11,067,537

The Bank had pledged $3.3 billion, $3.1 billion and $3.3 billion of loans to secure borrowings from the Federal Home Loan Bank of San Francisco (the “FHLB”) as of December 31, 2009, December 26, 2008, and December 28, 2007, respectively.

At December 31, 2009 and January 1, 2009, loans within the scope of ASC 310-30 had an unpaid principal balance of $414.2 million and $515.6 million, respectively, and a carrying value of $374.8 million and $452.4 million, respectively. There were no loans within the scope of ASC 310-30 at December 26, 2008 or December 28, 2007. The following table provides details on the credit impaired loans acquired:

($ in thousands)	Successor At January 1, 2009
Contractually required payments, including interest	$	594,679
Nonaccretable difference		(59,908	)
Cash flows expected to be collected	$	534,771
Accretable yield		(82,403	)
Fair value of loans acquired	$	452,368

The change in accretable yield and allowance for loan losses related to credit impaired loans is presented in the following table:

($ in thousands)	Successor At or for the Year Ended December 31, 2009
Balance, beginning of year	$	82,403
Additions		—
Disposals		(123	)
Accretion		(20,539	)
Increase in expected cash flows		37,576
Balance, end of year	$	99,317
Allowance, beginning of year	$	—
Provision		11,807
Chargeoffs		(5,093	)
Balance, end of year	$	6,714

At December 31, 2009, December 26, 2008 and December 28, 2007, loans over 90 days past due and accruing were $11.3 million, $5.7 million and $19.7 million, respectively.

Nonaccrual loans and the related interest income information are presented as follows:

	Successor			Predecessor II						Predecessor I
($ in thousands)	At or for the Year Ended Dec. 31, 2009			At or for the Year Ended Dec. 26, 2008			At Dec. 28, 2007 or for the period Sept. 22 - Dec. 28, 2007			At Sept. 21, 2007 or for the period Jan. 1 - Sept. 21, 2007
Nonaccrual loans:
Balance at period end	$	249,148		$	130,984		$	54,950		$	50,289
Actual interest income recognized	$	—		$	—		$	174		$	130
Interest income under original terms	$	6,534		$	2,353		$	1,270		$	372
Total loans at period end	$	18,632,781		$	17,545,238		$	11,122,635		$	10,297,234
Nonperforming loans to total loans		1.34	%		0.75	%		0.49	%		0.49	%

The Bank restructures loans generally because of the borrower’s financial difficulties, by granting concessions to reduce the interest rate, to waive or defer payments or, in some cases, to reduce the principal balance of the loan. Loans that are partially charged off and loans that have been modified in troubled debt restructurings are reported as nonaccrual loans until at least six consecutive payments are received and the loan meets the Bank’s other criteria for returning to accrual or restructured performing status. As of December 31, 2009 and December 28, 2007, balances related to troubled debt restructurings included in the above table were $109.5 million and $3.2 million, respectively. There were no troubled debt restructurings as of December 26, 2008 or September 21, 2007.

The following table presents an analysis of the changes in the allowance for loan losses for the periods indicated:

	Successor			Predecessor II						Predecessor I
($ in thousands)	At or for the Year Ended Dec. 31, 2009			At or for the Year Ended Dec. 26, 2008			At Dec. 28, 2007 or for the period Sept. 22 - Dec. 28, 2007			At Sept. 21, 2007 or for the period Jan. 1 - Sept. 21, 2007
Allowance for loan losses:
Balance at beginning of period	$	176,679		$	60,914		$	59,112		$	51,706
Purchase accounting adjustment (1)		(176,679	) (1)		—			—			—
Provision charged to expense		49,462			131,175			2,400			8,067
Chargeoffs:
Home equity credit lines		—			(416	)		—			—
Commercial real estate		(2,273	)		—			—			—
Multifamily/commercial construction		—			(9,400	)		—			—
Commercial business		(1,531	)		(2,088	)		(359	)		(621	)
Other loans		(1,289	)		(357	)		(322	)		(219	)
Total chargeoffs		(5,093	)		(12,261	)		(681	)		(840	)
Recoveries:
Multifamily		—			—			—			313
Commercial real estate		1			126			—			146
Commercial business		453			94			34			25
Other loans		180			181			49			62
Total recoveries		634			401			83			546
Net loan chargeoffs		(4,459	)		(11,860	)		(598	)		(294	)
Reclassification to other liabilities		—			(3,550	)		—			(367	)
Balance at end of period	$	45,003		$	176,679		$	60,914		$	59,112
Average total loans for the period	$	17,623,345		$	14,456,638		$	10,831,549		$	8,833,602
Total loans at period end	$	18,632,781		$	17,545,238		$	11,122,635		$	10,297,234
Ratios:
Net chargeoffs to average total loans (annualized)		0.03	%		0.08	%		0.02	%		0.00	%
Allowance for loan losses to:
Total loans		0.24	%		1.01	%		0.55	%		0.57	%
Nonaccruing loans		18.1	%		134.9	%		110.9	%		117.5	%

⁽¹⁾ On January 1, 2009, the Bank’s allowance for loan losses became part of the loan carrying value due to purchase accounting adjustments.

The Bank’s allowance for loan losses became part of the loan carrying value due to purchase accounting adjustments recorded in 2009 as a result of the Bank of America acquisition. See Note 3, “Purchase Accounting Allocation.” ASC 310-30 requires impaired loans acquired in a business combination to be recorded at fair value and prohibits the carryover of the allowance for loan losses. The net purchase accounting discount was determined by discounting cash flows expected to be collected using an observable discount rate for similar instruments. Subsequent decreases to expected principal cash flows result in a charge to provision for credit losses.

Impaired loans, which were nonperforming at December 31, 2009 (excluding loans accounted for under ASC 310-30), were $158.9 million with a related allowance for loan losses of $28.2 million. Total impaired loans were $102.3 million at December 26, 2008 and $49.8 million at December 28, 2007 with a related allowance for loan losses of $36.6 million and $9.8 million, respectively. The Bank recognized interest income from impaired loans of $1 thousand in 2009, none for 2008, $174 thousand for September 22 through December 28, 2007 and $121 thousand for January 1 through September 21, 2007, which were recognized using the cash received method. The average recorded investment in impaired loans was approximately $113.0 million for 2009, $71.5 million for 2008 and $33.6 million for 2007.

Note 6. Mortgage Banking Activity

The recorded value of MSRs is amortized in proportion to, and over the period of, estimated net servicing income for the year ended December 26, 2008 and for the periods from September 22, 2007 to December 28, 2007 and January 1, 2007 to September 21, 2007. In 2009, MSRs are recorded at fair value with changes in fair value recognized in the income statement. To value MSRs, the Bank stratifies loans sold each year by property type, loan index for ARMs and interest rate for loans fixed for more than three years.

The following table presents information on the level of loans originated, loans sold and gain on sale of loans for the periods indicated:

	Successor			Predecessor II						Predecessor I
($ in thousands)	For the Year Ended December 31, 2009			For the Year Ended December 26, 2008			September 22 - December 28, 2007			January 1 - September 21, 2007
Loans originated	$	5,311,801		$	9,691,355		$	1,933,306		$	4,903,901
Loans sold:
Flow sales	$	479,855		$	123,002		$	35,890		$	180,053
Bulk sales		35,821			186,120			—			571,759
Total loans sold	$	515,676		$	309,122		$	35,890		$	751,812
Gain (loss) on sale of loans:
Amount	$	5,536		$	(1,454	)	$	301		$	6,865
Percentage of loans sold		1.07	%		(0.47	%)		0.84	%		0.91	%

The following table presents changes in the portfolio of loans serviced for others and changes in the book value of the Bank’s MSRs and valuation statistics for the periods indicated:

	Successor			Predecessor II						Predecessor I
($ in thousands)	At or for the Year Ended Dec. 31, 2009			At or for the Year Ended Dec. 26, 2008			At Dec. 28, 2007 or for the period Sept. 22 - Dec. 28, 2007			At Sept. 21, 2007 or for the period Jan. 1 - Sept. 21, 2007
Loans serviced for others:
Beginning balance	$	4,313,659		$	4,863,870		$	5,016,818		$	4,979,693
Loans sold		515,676			309,122			35,890			751,812
Repayments		(829,854	)		(858,491	)		(185,910	)		(559,035	)
Loans repurchased		—			(842	)		(2,928	)		(155,652	)
Ending balance	$	3,999,481		$	4,313,659		$	4,863,870		$	5,016,818
MSRs:
Beginning balance	$	23,307		$	34,586		$	27,202		$	28,445
Purchase accounting adjustment		6,935			—			10,332			—
Additions due to new loans sold		4,538			1,259			317			5,968
Changes in fair value:
Due to changes in valuation model inputs or assumptions		(4,639	)		—			—			—
Other changes in fair value		(5,597	)		—			—			—
Total changes in fair value		(10,236	)		—			—			—
Amortization expense		—			(10,895	)		(3,250	)		(6,066	)
Provision for valuation allowance		—			(1,640	)		—			—
Reductions due to repurchases		—			(3	)		(15	)		(1,145	)
Ending balance	$	24,544		$	23,307		$	34,586		$	27,202
Estimated fair value of MSRs	$	24,544		$	30,242		$	37,021		$	39,300
MSRs as a percent of total loans serviced		0.61	%		0.54	%		0.71	%		0.54	%
Weighted average servicing fee collected for the period		0.26	%		0.26	%		0.26	%		0.27	%
MSRs as a multiple of weighted average servicing fee		2.35	x		2.07	x		2.74	x		2.01	x

The following table presents changes in the valuation allowance for the periods indicated:

	Successor			Predecessor II						Predecessor I
($ in thousands)	At or for the Year Ended Dec. 31, 2009			At or for the Year Ended Dec. 26, 2008			At Dec. 28, 2007 or for the period Sept. 22 - Dec. 28, 2007			At Sept. 21, 2007 or for the period Jan. 1 - - Sept. 21, 2007
Valuation allowance:
Beginning balance	$	18		$	—		$	42		$	50
Provision		—			1,640			—			—
Reduction due to permanent impairment		—			(1,622	)		—			(8	)
Reversal due to purchase accounting adjustment		(18	)		—			(42	)		—
Ending balance	$	—		$	18		$	—		$	42

The following table presents servicing fees for the periods indicated:

	Successor		Predecessor II				Predecessor I
($ in thousands)	For the Year Ended December 31, 2009		For the Year Ended December 26, 2008		September 22 - December 28, 2007		January 1 - September 21, 2007
Contractually specified servicing fees	$	10,863	$	11,759	$	3,511	$	9,810
Late charges & ancillary fees	$	300	$	886	$	70	$	877

The following table presents the Bank’s key assumptions used in measuring the fair value of MSRs as of December 31, 2009, December 26, 2008 and December 28, 2007 and the pre-tax sensitivity of the fair values to an immediate 10% and 20% adverse change in these assumptions:

	Successor			Predecessor II
($ in thousands)	December 31, 2009			December 26, 2008			December 28, 2007
Fair value of MSRs	$	24,544		$	30,242		$	37,021
Weighted average prepayment speed (CPR)		19.08	%		19.00	%		23.06	%
Impact on fair value of 10% adverse change	$	(1,661	)	$	(1,568	)	$	(1,488	)
Impact on fair value of 20% adverse change	$	(3,186	)	$	(2,995	)	$	(2,131	)
Weighted average discount rate		13.61	%		14.93	%		15.00	%
Impact on fair value of 10% adverse change	$	(937	)	$	(1,166	)	$	(1,359	)
Impact on fair value of 20% adverse change	$	(1,805	)	$	(2,241	)	$	(2,618	)

The sensitivity analysis above is hypothetical and should be used with caution. In particular, the effect of a variation in a particular assumption on the fair value of MSRs is calculated independent of changes in any other assumption; in practice, changes in one factor may result in changes in another factor, which may magnify or counteract the sensitivities. Further changes in fair value based on a single variation in assumptions generally cannot be extrapolated because the relationship of the change in a single assumption to the change in fair value may not be linear.

Note 7. Prepaid Expenses and Other Assets

The Bank’s prepaid expenses and other assets consisted of the following:

	Successor		Predecessor II
($ in thousands)	December 31, 2009		December 26, 2008		December 28, 2007
Prepaid FDIC insurance assessment	$	118,349	$	—	$	—
Interest receivable		77,599		68,872		54,282
Mutual fund settlement receivable		70,126		21,439		51,510
FHLB Stock, at cost		59,420		59,420		95,173
Foreign exchange derivatives		12,747		6,032		2,962
Receivable from Parent		—		—		71,786
Other assets		21,166		29,295		37,765
Other prepaid expenses		7,293		15,854		13,195
Total	$	366,700	$	200,912	$	326,673

Note 8. Premises, Equipment and Leasehold Improvements

Premises, equipment and leasehold improvements are summarized below:

	Successor			Predecessor II
($ in thousands)	December 31, 2009			December 26, 2008			December 28, 2007
Land, buildings and improvements	$	966		$	900		$	1,010
Furniture, equipment and software		29,408			36,400			27,269
Leasehold improvements		76,135			81,606			69,495
Construction-in-progress		6,126			4,818			—
Total	$	112,635		$	123,724		$	97,774
Less: accumulated depreciation and amortization		(20,395	)		(25,035	)		(4,248	)
Premises, equipment and leasehold improvements, net	$	92,240		$	98,689		$	93,526

Depreciation and amortization expense was $20.4 million, $20.7 million, $4.2 million and $10.7 million in 2009, 2008, September 22, 2007 to December 28, 2007 and January 1, 2007 to September 21, 2007, respectively. Rent and related occupancy expense, net of sublease income, was $23.3 million in 2009, $28.0 million in 2008, $6.3 million for the period from September 22 through December 28, 2007, and $17.3 million for the period from January 1, 2007 through September 21, 2007.

Future minimum rental payments required under operating leases, net of sublease income, including the Bank’s office facilities, that have initial or remaining noncancelable terms in excess of one year were as follows:

	Successor
($ in thousands)	December 31, 2009
Operating leases:
2010	$	24,245
2011		21,453
2012		22,182
2013		20,958
2014		20,788
Thereafter		73,972
Total	$	183,598

Note 9. Goodwill and Intangible Assets

The gross carrying value of intangible assets and accumulated amortization was:

	Predecessor II
	December 26, 2008					December 28, 2007
($ in thousands)	Gross Carrying Value		Accumulated Amortization			Gross Carrying Value		Accumulated Amortization
Amortized intangible assets:
MSRs	$	37,470	$	(14,145	)	$	37,836	$	(3,250	)
Core deposit intangibles		194,400		(47,777	)		194,400		(10,468	)
Customer relationship intangibles		38,700		(6,312	)		38,700		(1,350	)
Total amortized intangibles	$	270,570	$	(68,234	)	$	270,936	$	(15,068	)
Goodwill	$	1,305,780				$	1,305,780
Trade name	$	27,900				$	27,900

There was no goodwill or other intangible assets as of December 31, 2009.

The following table presents the changes in goodwill for the periods indicated.

($ in thousands)	Commercial Banking			Wealth Management			Total Combined
Predecessor I
Balance at December 31, 2006	$	110,902		$	72,538		$	183,440
Deferred payments		—			1,690			1,690
Impairment charge		—			(15,700	)		(15,700	)
Reduction due to sale of subsidiary		—			(9,729	)		(9,729	)
Other		864			—			864
Balance at September 21, 2007		111,766			48,799			160,565
Predecessor II
Reversal due to Merrill Lynch acquisition		(111,766	)		(48,799	)		(160,565	)
Additions due to Merrill Lynch acquisition		1,252,865			52,915			1,305,780
Balance at December 28, 2007 and December 26, 2008		1,252,865			52,915			1,305,780
Successor
Reversal due to Bank of America acquisition		(1,252,865	)		(52,915	)		(1,305,780	)
Balance as of December 31, 2009	$	—		$	—		$	—

The Bank is required to test goodwill for impairment at least annually at the reporting unit level. The Bank did not recognize any impairment in 2008 or 2007 based on the results of the annual tests.

During the first quarter of 2007, one of the Bank’s investment advisory subsidiaries had been advised of the termination of one of its largest and longest in tenure relationships and of the probable termination of assets managed under a subadvisory contract. Collectively, these two relationships represented approximately $2.0 billion of assets under management and approximately 50% of this subsidiary’s investment advisory fees at the time. In light of these events, the Bank performed a valuation analysis in the first quarter of 2007 and, as a result, recorded a $15.7 million non-cash impairment charge in the first quarter of 2007 to reduce the carrying value of the goodwill attributed to the purchase of this subsidiary. On June 28, 2007,

the Bank sold this subsidiary to its principal officers and recorded a loss on sale of subsidiary of $12.2 million and a related tax benefit of $11.7 million. The operating results of this subsidiary are included in the wealth management segment through the closing date in 2007.

Note 10. Customer Deposits

Demand deposit checking accounts for business clients did not bear interest at December 31, 2009, December 26, 2008 and December 28, 2007. Negotiable Order of Withdrawal (“NOW”) checking accounts provide unlimited check writing to consumer clients and bear a minimum balance interest rate of 0.05% at December 31, 2009, December 26, 2008 and December 28, 2007. Passbook and money market accounts that have no contractual maturity paid interest compounded daily at rates ranging from 0.10% to 1.29% per annum at December 31, 2009, 0.10% to 3.20% per annum at December 26, 2008 and 0.10% to 4.88% at December 28, 2007.

Certificates of deposit bear interest at varying rates based on money market conditions, generally ranging from 0.20% to 2.47% at December 31, 2009, 1.49% to 3.20% at December 26, 2008 and 3.92% to 4.74% at December 28, 2007. At December 31, 2009, the annual contractual maturities of the Bank’s certificates of deposit were as follows:

($ in thousands)	Successor December 31, 2009
Certificates of deposit:
2010	$	3,761,414
2011		1,595,809
2012		272,312
2013		110,260
2014		180,882
Thereafter		5,041
Total	$	5,925,718

At December 31, 2009, December 26, 2008 and December 28, 2007 certificates of deposit of $100 thousand or more totaled $4.0 billion, $2.9 billion and $1.9 billion respectively. At December 31, 2009, certificates of deposit over $250 thousand totaled $1.8 billion.

The following table presents interest expense on customer deposits for the periods indicated:

	Successor		Predecessor II				Predecessor I
($ in thousands)	Year Ended December 31, 2009		Year Ended December 26, 2008		September 22 - December 28, 2007		January 1 - September 21, 2007
NOW checking	$	4,644	$	3,403	$	1,200	$	3,407
Money market checking accounts		19,501		44,895		17,663		44,283
Money market savings and passbooks		48,022		99,243		38,204		94,434
Certificates of deposit		151,797		125,495		35,772		84,121
	$	223,964	$	273,036	$	92,839	$	226,245

Note 11. Federal Home Loan Bank Advances

Prior to the Merrill Lynch acquisition, the Bank was an approved member of the FHLB. FHLB advances are either adjustable rate in nature or fixed for a specific term. Amounts presented below represent contractual amounts due under the borrowing arrangements. Purchase accounting adjustments are amortized and recorded as a reduction to interest expense over the contractual life of the advance using a level yield methodology. The following table presents information related to FHLB advances:

	Successor					Predecessor II
	December 31, 2009					December 26, 2008					December 28, 2007
($ in thousands)	Amount		Rate			Amount		Rate			Amount		Rate
Advances maturing in:
Less than one year	$	—		—		$	1,103,500		4.89	%	$	216,500		4.90	%
1 to 2 years		—		—			—		—			1,603,500		4.91	%
2 to 3 years		60,000		0.66	%		—		—			—		—
3 to 4 years		70,000		0.35	%		60,000		3.25	%		—		—
4 to 5 years		—		—			70,000		3.09	%		60,000		5.44	%
Thereafter		—		—			—		—			70,000		4.64	%
Subtotal		130,000		0.49	%		1,233,500		4.71	%		1,950,000		4.92	%
Purchase accounting adjustment		501					2,757					6,338
Total	$	130,501		0.49	%	$	1,236,257		4.70	%	$	1,956,338		4.90	%

The Bank is required to own FHLB stock at least equal to 4.7% of outstanding FHLB advances. The Bank records FHLB stock at cost. The Bank owned FHLB stock of $59.4 million at December 31, 2009 and December 26, 2008 and $95.2 million at December 28, 2007.

Note 12. Subordinated Notes

The carrying value of the Bank’s subordinated notes is as follows:

	Successor		Predecessor II
($ in thousands)	December 31, 2009		December 26, 2008		December 28, 2007
Outstanding amount	$	63,770	$	63,770	$	63,770
Purchase accounting adjustment		2,127		2,912		3,689
Total carrying value	$	65,897	$	66,682	$	67,459

These notes carry a contractual interest rate of 7.75% and mature on September 15, 2012. Purchase accounting adjustments are amortized and recorded as a reduction to interest expense over the contractual life of the subordinated notes using a level yield methodology.

Note 13. Noncontrolling Interests

The Bank formed FRPCC, which is an SEC registrant, in April 1999 and FRPCC II in September 2001, each of which is a REIT for federal income tax purposes. Each REIT has issued preferred stock, which the Bank reports as noncontrolling interests within total equity in the Bank’s combined balance sheet. The Bank records dividends paid to other owners of the REITs’ preferred stock as noncontrolling interests on the statement of income. Under banking regulations, the REITs’ preferred stock is treated as Tier 1 Capital subject to a cap of 25% of the Bank’s total Tier 1 Capital, with any excess amount treated as Tier 2 Capital. Under certain adverse or regulatory circumstances, each series of the REITs’ preferred stock is exchangeable into preferred stock issued by the Bank at the direction of regulators.

FRPCC completed a $55.0 million initial private offering of 10.50% noncumulative perpetual exchangeable Series A preferred stock (“Series A Preferred Stock”) in June 1999 and a $7.0 million private placement of 5.7% noncumulative perpetual exchangeable Series C preferred stock (“Series C Preferred Stock”) in June 2001. In June 2007, the Series C Preferred Stock was converted at the option of the holder into 343,530 shares of the Bank’s common stock at a conversion price of $20.38 per share. If declared, dividends on the Series A Preferred Stock are payable semiannually.

FRPCC completed a $42.0 million public offering of 8.875% noncumulative perpetual exchangeable Series B preferred stock (“FRPCC Series B Preferred Stock”) in January 2002 and a $60.0 million public offering of 7.25% noncumulative perpetual exchangeable Series D preferred stock (“Series D Preferred Stock”) in June 2003. The FRPCC Series B Preferred Stock and the Series D Preferred Stock have a liquidation value of $25 per share, and, if declared, dividends are payable quarterly on the liquidation value. On November

19, 2007, the FRPCC Series B Preferred Stock was redeemed at a total redemption price of $42.5 million, which represented $25 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 shares of FRPCC Series B Preferred Stock. The Series D Preferred Stock is traded on the Nasdaq National Market under the symbols “FRCCO.” At December 31, 2009, FRPCC had total assets of approximately $296.6 million, consisting primarily of single family mortgage loans.

In August 2003, FRPCC II completed a $10.0 million private placement of 8.75% noncumulative perpetual exchangeable Series B preferred stock (“FRPCC II Series B Preferred Stock”). The FRPCC II Series B Preferred Stock has a liquidation value of $25 per share and, if declared, dividends are payable quarterly. At December 31, 2009, FRPCC II had total assets of approximately $1.1 billion, consisting primarily of multifamily and commercial real estate mortgage loans and cash equivalents.

At December 31, 2009, Bank of America owned $25.4 million of FRPCC’s Series A Preferred Stock, which reduces the outstanding balance of noncontrolling interests presented in the combined financial statements. There were no purchases of any of FRPCC’s Series A Preferred Stock during 2009, 2008 or 2007 by the Parent or the Bank. The Bank reduces noncontrolling interests for the total amount purchased. Dividends paid to the holders of the REITs’ preferred stock, excluding the Bank, were $8.4 million in 2009, $8.3 million 2008 and $11.8 million in 2007. The dividends paid on the REITs’ preferred stock reduce the Bank’s taxable income by the amount of the dividends.

Dividends on FRPCC’s common stock were $121 thousand in 2009, $4.4 million for 2008 and $5.9 million for 2007. Dividends on FRPCC II’s common stock were $47.4 million for 2009, $56.8 million for 2008 and $61.2 million for 2007. The dividends paid to the Parent for 2009, 2008 and 2007 were treated as consent dividends by the Parent under Section 565 of the Internal Revenue Code. The consent dividends accounted for 100% of the Parent’s federal taxable income from FRPCC and FRPCC II.

Note 14. Derivative Financial Instruments

Management has historically used derivative instruments, including interest rate swaps and caps, as part of its interest rate risk management strategy. In accordance with ASC 815, “Derivatives and Hedging,” the Bank recognizes all derivatives on the balance sheet at fair value. The Bank accounts for changes in the fair value of a derivative depending on the intended use of the derivative and its resulting designation under specified criteria. The Bank did not have any interest rate swaps or caps used as part of its interest rate risk management strategy during 2009, 2008 or 2007.

Derivative assets and liabilities consist of foreign exchange contracts executed with customers; the Bank offsets the customer exposure to another financial institution counterparty represented by major investment banks and large commercial banks. The Bank does not retain foreign exchange risk. The amounts presented in the table below include the foreign exchange contracts with both the customers and the financial institution counterparties. The Bank uses current market prices to determine the fair value of these contracts.

The Bank also creates derivative instruments when it enters into interest rate lock commitments for single family mortgage loans that will be sold to investors. The Bank’s interest rate risk exposure to these commitments is not significant as these derivatives are economically hedged with forward commitments to sell the loans to investors.

The total notional or contractual amounts and fair values for derivatives were:

	Successor
	December 31, 2009
	Notional or contractual amount		Fair value
($ in thousands)			Asset derivatives  (1)		Liability derivatives  (2)
Foreign exchange contracts	$	428,326	$	12,747	$	11,458
Interest rate contracts with borrowers		18,003		—		318
Forward loan sale commitments		32,505		658		—
Total	$	478,834	$	13,405	$	11,776

	Predecessor II
	December 26, 2008						December 28, 2007
($ in thousands)	Notional or contractual amount		Fair value				Notional or contractual amount		Fair value
			Asset derivatives  (1)		Liability derivatives  (2)				Asset derivatives  (1)		Liability derivatives  (2)
Foreign exchange contracts	$	114,583	$	6,032	$	5,892	$	175,914	$	2,962	$	2,817
Interest rate contracts with borrowers		15,627		49		—		1,867		—		5
Forward loan sale commitments		19,951		—		87		7,753		53		—
Total	$	150,161	$	6,081	$	5,979	$	185,534	$	3,015	$	2,822

⁽¹⁾ Included in prepaid expenses and other assets on the balance sheet

⁽²⁾ Included in other liabilities on the balance sheet

The credit risk associated with these derivative instruments is the risk of non-performance by the counterparty to the contracts. Management does not anticipate non-performance by any of the counterparties.

Note 15. Income Taxes

At December 31, 2009, December 26, 2008 and December 28, 2007, the amount of current taxes payable, which is included in other liabilities, was $15.3 million, $14.5 million and $13.8 million, respectively. Current taxes payable were recorded based on the Bank’s tax allocation arrangement with the Parent and then adjusted to reflect current taxes payable determined on a separate company stand alone basis. The adjustments to reflect income taxes on a separate company stand alone basis were recorded as either capital contributions or capital distributions.

The following table presents the components of the Bank’s provision for income taxes for each of the periods indicated:

	Successor		Predecessor II						Predecessor I
($ in thousands)	For the Year Ended Dec. 31, 2009		For the Year Ended Dec. 26, 2008			Sept. 22 - Dec. 28, 2007			Jan. 1 - Sept. 21, 2007
Federal:
Current	$	81,675	$	56,183		$	(27,105	)	$	20,992
Deferred		101,868		(51,905	)		39,351			(32,837	)
Subtotal		183,543		4,278			12,246			(11,845	)
State:
Current		30,475		18,315			377			9,297
Deferred		40,298		(16,860	)		3,533			(11,388	)
Subtotal		70,773		1,455			3,910			(2,091	)
Total income tax expense (benefit)	$	254,316	$	5,733		$	16,156		$	(13,936	)

The following table presents a reconciliation between the effective income tax rate and the federal statutory rate for the periods indicated:

	Successor			Predecessor II						Predecessor I
	For the Year Ended Dec. 31, 2009			For the Year Ended Dec. 26, 2008			Sept. 22 - Dec. 28, 2007			Jan. 1 - Sept. 21, 2007
Expected statutory rate		35.0	%		35.0	%		35.0	%		35.0	%
State taxes, net of federal benefits		7.5	%		4.7	%		6.9	%		5.2	%
Tax-exempt income		0.0	%		0.0	%		(2.8	)%		33.0	%
Bank owned life insurance		(0.6	)%		(15.5	)%		(1.7	)%		9.6	%
Tax credits		0.0	%		0.0	%		0.0	%		11.9	%
Dividends received deduction		0.0	%		(0.4	)%		(0.4	)%		6.7	%
Non-deductible expenses		0.0	%		0.0	%		0.0	%		(28.8	)%
Other, net		0.1	%		4.2	%		0.0	%		(5.7	)%
Effective tax rate		42.0	%		28.0	%		37.0	%		66.9	%

The effective income tax rate decreased in 2008 and then increased in 2009 mainly due to the variance in pre-tax income in relation to the amount of tax advantaged investments in municipal securities, bank owned life insurance and tax credit investments.

The following table presents the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities for the periods indicated:

	Successor			Predecessor II
($ in thousands)	December 31, 2009			December 26, 2008			December 28, 2007
Deferred tax assets:
Allowance for loan losses	$	19,156		$	74,962		$	25,789
Accrued compensation		13,573			10,460			7,389
Loan discount		376,678			89,295			99,484
Restricted stock		11,842			8,252			1,016
Depreciation		4,640			4,626			4,637
Capital loss carryforward		6,808			6,790			9,840
Tax credits and NOLs		3,331			3,331			8,127
Other: state taxes		11,308			7,092			—
Other deferred tax assets		8,897			15,673			18,885
Total gross deferred tax assets		456,233			220,481			175,167
Less: valuation allowance		(807	)		(807	)		(807	)
Net deferred tax assets	$	455,426		$	219,674		$	174,360
Deferred tax liabilities:
FHLB stock dividend income	$	(5,848	)	$	(5,781	)	$	(6,905	)
Mortgage servicing rights		(378	)		(4,912	)		(8,910	)
Other intangible assets		—			(87,740	)		(105,260	)
Other deferred tax liabilities		(341	)		(5,050	)		(3,247	)
Total gross deferred tax liabilities		(6,567	)		(103,483	)		(124,322	)
Net deferred tax assets	$	448,859		$	116,191		$	50,038

The net deferred tax asset represents recoverable taxes. The Bank believes a valuation allowance of $807 thousand is needed for 2009, 2008 and 2007 related to the realization of a capital loss carryforward. Management believes it is more likely than not that the remaining deferred tax assets will be realized based on projected future income, including income that may be generated as a result of certain tax planning strategies, together with tax effects of the deferred tax liabilities.

The Bank is under income tax examinations by the State of California for tax years 2000 to 2002 and by the State of New York for tax years 2005 to September 21, 2007. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the periods indicated below were as follows:

	Successor		Predecessor II				Predecessor I
($ in thousands)	For the Year Ended Dec. 31, 2009		For the Year Ended Dec. 26, 2008		Sept. 22 - Dec. 28, 2007		Jan. 1 - Sept. 21, 2007
Balance at beginning of period	$	8,349	$	8,349	$	8,239	$	8,239
Additions based on tax positions related to the current year		—		—		110		—
Reductions for tax positions of prior years		—		—		—		—
Balance at end of period	$	8,349	$	8,349	$	8,349	$	8,239

As the Bank has previously reported, the California Franchise Tax Board issued in December 2003 an announcement challenging the tax treatment of certain dividend deductions involving REITs. As a result of such announcement, the Bank has not recognized any California income tax benefits from 2003 to 2009 of a type that had been recognized in 2002 and part of 2001 related to one of the Bank’s REIT subsidiaries. The State of California has commenced an audit of the Bank’s tax returns for the years 2000 to 2002. The Bank intends to defend aggressively its claims for the California tax benefits taken in 2002 and part of 2001 and as yet unrecorded tax benefits available for subsequent years. The California audit is currently in the protest stage. At December 31, 2009, the Bank’s total exposure on this position upon an unfavorable outcome was $9.1 million, net of federal tax benefits; such amount will increase over time as a result of continuing interest and penalties.

During the fourth quarter of 2006, the Internal Revenue Service began an examination of the Bank’s 2004 federal consolidated income tax return. The audit concluded in March 2008 and no changes were made to the originally filed return. During the second quarter of 2009, the State of New York began an examination of the Bank’s 2005 to September 21, 2007 state income tax returns. The audit was concluded in August 2010 with an estimated preliminary liability less than $50 thousand.

The Bank recognized approximately $504 thousand, $497 thousand, $290 thousand and $846 thousand of interest and penalties (recorded in the income tax expense line) related to uncertain tax positions during the periods ended December 31, 2009, December 26, 2008, December 28, 2007 and September 21, 2007, respectively. The Bank has accrued current taxes payable of approximately $15.3 million, $14.5 million, $13.8 million and $13.3 million related to uncertain tax positions as of December 31, 2009, December 26, 2008, December 28, 2007 and September 21, 2007, respectively. All tax liabilities in existence before June 30, 2010 remain with Bank of America as part of the Transaction.

The Bank continues to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected tolling of the statute of limitations in various taxing jurisdictions. Considering these facts, the Bank does not currently believe there is a reasonable possibility of any significant change to our total unrecognized tax benefits within the next twelve months.

Note 16. Equity and Parent company borrowing

The Bank was a division of MLFSB from September 21, 2007 through November 2, 2009. From November 2, 2009 until June 30, 2010, the Bank was a division of BANA. As a division of MLFSB and BANA, the Bank was allocated equity capital equal to approximately 7.0% of its ending tangible assets on a monthly basis plus an amount equal to goodwill and other intangibles. Equity capital consists of Parent company investment and noncontrolling interests, which represent perpetual preferred stock issued by FRPCC and FRPCC II in the amount of $99.6 million. After the allocation of equity capital, any remaining amount of funding (or lending) required is borrowed from (or loaned to) the Parent. The interest rate charged (earned) on these Parent company borrowings (loans) is equal to 1-month LIBOR plus 1.50% and the expense (income) is calculated on a monthly basis based on the average borrowing (or lending) during the month.

Following the completion of the Transaction described in Note 2, the Bank became an independent commercial bank and is subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation (“FDIC”). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s combined financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Utilizing the 7% equity capital allocation from the Parent, the Bank’s capital amounts and ratios are presented in the following table for the prior three balance sheet dates:

	Actual					Minimum for Capital Adequacy Purposes					Minimum to Be Well Capitalized
($ in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Successor
December 31, 2009
Total capital to risk-weighted assets	$	1,467,200		9.86	%	$	1,190,091		8.00	%	$	1,487,614		10.00	%
Tier 1 capital to risk-weighted assets		1,395,838		9.38	%		595,046		4.00	%		892,568		6.00	%
Tier 1 capital to average assets		1,395,838		7.15	%		780,519		4.00	%		975,649		5.00	%
Predecessor II
December 26, 2008
Total capital to risk-weighted assets	$	1,495,004		10.54	%	$	1,134,357		8.00	%	$	1,417,946		10.00	%
Tier 1 capital to risk-weighted assets		1,272,687		8.98	%		567,178		4.00	%		850,768		6.00	%
Tier 1 capital to average assets		1,272,687		7.21	%		706,032		4.00	%		882,540		5.00	%
Predecessor II
December 28, 2007
Total capital to risk-weighted assets	$	1,113,523		10.65	%	$	836,493		8.00	%	$	1,045,617		10.00	%
Tier 1 capital to risk-weighted assets		996,563		9.53	%		418,247		4.00	%		627,370		6.00	%
Tier 1 capital to average assets		996,563		7.26	%		549,272		4.00	%		686,590		5.00	%

The Parent allocated certain costs to the Bank as part of the Parent’s internal accounting process in 2009 and 2008. The amount of costs allocated in the Bank’s Statement of Income was approximately $4.3 million in 2009 and $9.8 million in 2008. There were no allocations of costs from the Parent during the period September 22, 2007 to December 28, 2007.

Note 17. Commitments and Contingencies

At December 31, 2009, December 26, 2008 and December 28, 2007, the Bank had conditional commitments to originate loans of $155.1 million, $359.4 million and $509.8 million, respectively, and to disburse additional funds on existing loans and lines of credit of $3.7 billion, $4.2 billion and $3.8 billion, respectively. In addition, the Bank had undisbursed standby letters of credit of $182.0 million, $189.6 million and $154.9 million at December 31, 2009, December 26, 2008 and December 28, 2007, respectively. The Bank’s commitments to originate loans are agreements to lend to a client as long as there is no violation of any of several credit or other established conditions. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn, the total commitment amounts do not necessarily represent future cash requirements.

The Bank has been named as a defendant in legal actions arising in the ordinary course of business, none of which, in the opinion of management, is material.

Note 18. Stock Compensation Plans

Prior to the Merrill Lynch acquisition, the Bank followed ASC 718, “Compensation – Stock Compensation,” in accounting for its stock compensation plans. Pursuant to ASC 718, the Bank measured the compensation cost of stock options as well as restricted stock based on the fair value of the options or shares at the grant date and recognized compensation expense over their remaining requisite service periods. As a result of the Merrill Lynch acquisition, all outstanding stock awards became fully vested on September 21, 2007 and resulted in the acceleration of all compensation costs associated with these awards to the period from January 1, 2007 to September 21, 2007 due to the change in control provisions of the plans. All outstanding stock awards were either settled at September 21, 2007 or were converted into an equivalent number of stock options based upon the conversion factors in the Merrill Lynch acquisition.

Fixed Stock Options

The Bank had granted fixed stock options under both the 1998 Stock Option Plan and the Amended and Restated Employee Stock Option Plan (the “Stock Option Plans”). Under the Stock Option Plans, options to purchase 1,791,591 shares had been granted to employees, officers and directors at December 31, 2006, of which 1,731,816 shares were exercisable. Under the Bank’s stock option agreements, the exercise price of each option equals or exceeds the market price of the Bank’s common stock at the grant date. Generally, stock options vest over a period of up to five years from the grant date and have a maximum contractual life of ten years.

The following table presents a summary of the Bank’s fixed stock option activity for the period from January 1, 2007 to September 21, 2007:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Fixed Options:
Outstanding at December 31, 2006		1,791,591		$	12.03
Exercised		(178,455	)		12.66
Forfeited		(150	)		22.54
Outstanding and exercisable at September 21, 2007		1,612,986		$	11.95		1.8 years	$	19,279,000

During the period from January 1, 2007 to September 21, 2007, there were no options granted, and the total intrinsic value of options exercised was $7.3 million. As a result of the acquisition, the Bank recognized approximately $108 thousand of compensation expense associated with the accelerated vesting of stock options. The outstanding options at the acquisition date were converted into Merrill Lynch stock options based on the terms of the acquisition.

For options exercised during the period from January 1, 2007 to September 21, 2007, the Bank received cash of $2.3 million and realized excess tax benefits for the tax deductions of $2.2 million.

Employee Stock Purchase Plan

Under the Amended and Restated Employee Stock Purchase Plan (the “Purchase Plan”), the Bank was authorized to sell an aggregate total of 954,810 shares of common stock to its full-time employees, nearly all of whom are eligible to participate. Generally, employees are eligible to participate in the Purchase Plan after one year of employment. Beginning in 2006, under the terms of the Purchase Plan, employees can purchase shares of the Bank’s common stock at 95% of the closing price on the last day of each semimonthly payroll period, subject to an annual limitation of common stock valued at $25 thousand. Under the Purchase Plan, the Bank sold 6,322 shares to employees during the period from January 1, 2007 to September 21, 2007. The Bank does not recognize any compensation cost for the Purchase Plan since it meets the criteria under ASC 718 for the plan to be considered noncompensatory.

Restricted Stock Plans

Under the Bank’s 2000 Restricted Stock Plan, the Bank was authorized to issue an aggregate total of 191,250 shares of restricted stock to certain officers, all of which were awarded in 2000. The shares were restricted as to the vesting of the shares. The restrictions lapse over a seven-year period beginning on December 31, 2002. The Bank was recognizing the cost of these restricted shares at $13.86 per share over the eight-year period from the grant date until final vesting on December 31, 2008. Additionally, the Bank was recognizing over this period the cost of a related cash payment of $5.86 per share to these officers, which represents the estimated tax benefits to the Bank at the grant date.

Under the Bank’s 2003 Restricted Stock Plan, the Bank was authorized to issue an aggregate 2,112,500 shares of restricted stock to eligible employees, officers and directors. The shares are restricted only as to the vesting of the shares. The restrictions on the shares generally lapse over five or seven year periods. Restricted shares awarded to certain executive officers contain both service and performance conditions, and the performance condition was considered probable of achievement. Therefore, related compensation costs were recognized over the requisite service period.

The following table presents a summary of the activity for the Bank’s restricted stock plans for the period from January 1, 2007 to September 21, 2007:

	Shares			Weighted Average Fair Value
Restricted Stock:
Nonvested at December 31, 2006		1,286,489		$	32.55
Granted		105,300			44.80
Vested		(1,387,589	)		33.46
Forfeited		(4,200	)		36.53
Nonvested at September 21, 2007		—		$	—

As a result of the Merrill Lynch acquisition, all shares of restricted stock became vested, resulting in the recognition of approximately $33.6 million of accelerated compensation costs. The total grant date fair value of shares vested was $46.4 million during the period from January 1, 2007 to September 21, 2007. The shares of restricted stock were converted to Merrill Lynch stock based on the terms of the acquisition.

In connection with the restricted stock plans, the Bank generally is entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares. Such incremental tax deduction is recorded as an increase in stockholders’ equity when such shares vest.

Merrill Lynch/Bank of America Stock Awards

Beginning on September 22, 2007, certain employees of the Bank participated in Merrill Lynch stock plans and upon acquisition by Bank of America on January 1, 2009, began participating in Bank of America stock plans. The Bank was charged for the share based compensation in its Statement of Income for awards made to Bank employees under these plans. The total share based compensation expense charged to the Bank by the Parent was $8.4 million in 2009, $17.5 million in 2008, and $2.5 million for the period from September 22, 2007 through December 28, 2007.

Note 19. Employee Benefit Plans

The Bank’s Cash or Deferred Plan (the “401k Plan”) is a qualified plan under section 401(k) of the Internal Revenue Code of 1986, as amended. Prior to the Merrill Lynch acquisition, under the 401k Plan, the Bank matched, with contributions from net income, up to 5% of each participant’s compensation subject to certain limitations. The Bank’s contributions to the 401k Plan were $1.2 million and $3.3 million for September 22, 2007 to December 28, 2007 and January 1, 2007 to September 21, 2007, respectively. At December 31, 2009, 2008 and 2007, total assets in the Bank’s 401k Plan were approximately $51.8 million, $44.4 million and $74.8 million, respectively. The 401k assets are invested by plan participants in a family of investment funds. As a result of the Merrill Lynch acquisition, and then on January 1, 2009, the Bank of America acquisition date, employees of the Bank participate in the plans of the Parent. There were no contributions to the Bank’s 401k Plan subsequent to December 31, 2007. The Bank recorded in its income statement the impact of matching contributions to the Merrill Lynch and Bank of America 401k Plan allocated by the Parent in the amount of $2.4 million and $2.5 million for the years ended December 31, 2009 and December 26, 2008, respectively.

The Bank established an Employee Stock Ownership Plan (“ESOP”) in 1985 that enables eligible employees to own common stock of the Bank. The Bank did not contribute to the ESOP during the period

from January 1, 2007 to September 21, 2007. Shares in the ESOP were converted from Bank common stock to Merrill Lynch common stock at the merger date of September 21, 2007 and later to Bank of America common stock on January 1, 2009. Employees may make withdrawals from their ESOP accounts under certain circumstances, upon reaching a minimum age or following a minimum number of years of service. At December 31, 2009, all shares of Bank of America common stock held by the ESOP were distributed to participants. At December 31, 2008, the ESOP held 51,232 shares of Merrill Lynch common stock allocated to participants, which had a fair value of approximately $596 thousand. At December 31, 2007, the ESOP held 101,065 shares of Merrill Lynch common stock allocated to participants, which had a fair value of approximately $5.4 million.

In 1998, the Bank adopted a Deferred Compensation Plan under which eligible officers and employees may defer receipt of compensation earned in future years until a later time, as elected by the participants. The deferred amounts earn interest at a market rate set each year. Amounts may be deferred for a period of from one year until retirement, at which time distributions may be made in installments for up to ten years. Any deferred amounts will be paid to the participant immediately upon death, disability, or the termination of employment for any reason other than retirement. At December 28, 2007, the aggregate amount deferred in all participants’ accounts was $5.7 million. During the period from January 1, 2007 to September 21, 2007, total compensation payments of $1.1 million were deferred into cash balances.

Effective January 1, 2006, participants in the Deferred Compensation Plan also have the option to transfer their deferred compensation into a family of investment funds. On the date of receipt of the deferred compensation as elected by the participants, the participants are entitled to the balance in each of their respective investment fund account, including any return on investments. During the period from January 1, 2007 to September 21, 2007, total compensation payments of $672 thousand were deferred into the family of investment funds. Subsequent to the Merrill Lynch acquisition, the Bank did not have a Deferred Compensation Plan.

In addition, in 1998, the Bank’s stockholders approved the Deferred Equity Unit Plan (the “DEU Plan”), under which eligible employees, officers and outside directors may defer receipt of compensation earned in 1999 and future years until a later time, as elected by the participants. The deferred amounts were converted into Deferred Equity Units (“DEUs”) payable in shares of the Bank’s common stock at a later date. The number of DEUs awarded to a participant was determined by dividing the amount of compensation deferred by the market price of the common stock at the time the compensation was payable; dividends payable on DEUs were reinvested into additional DEUs at the date of payment. Deferral elections and distributions under the DEU Plan were generally the same as described above for the Deferred Compensation Plan except that DEUs were settled in shares of common stock, or cash under certain circumstances. The DEU Plan also provides that unvested shares of restricted stock and shares to be received under nonqualified stock options held by outside directors and employees may be converted into DEUs.

Under the DEU Plan, eligible employees and directors deferred total compensation payments of $198 thousand and acquired 3,715 DEUs during the period from January 1, 2007 to September 21, 2007. As of September 21, 2007, there were 318,715 units outstanding under the DEU Plan, which were paid out as a result of the Merrill Lynch acquisition in an amount of $17.5 million, which was recorded as part of the purchase price. The DEU plan was discontinued as a result of the Merrill Lynch acquisition.

During 2004, the Bank implemented a Supplemental Executive Retirement Plan (“SERP”), with five of its executives. The SERP provides for cash payments to the signatories at predetermined future dates beginning in 2014. As a result of the Merrill Lynch acquisition, the SERP liability was increased to reflect full vesting of the benefit due to the change in control. The SERP liability was increased by $2.2 million to $3.5 million at September 21, 2007. The SERP liability was $4.0 million, $3.8 million and $3.5 million at December 31, 2009, December 26, 2008 and December 28, 2007, respectively.

Generally, employees are eligible to participate in the Bank’s 401k Plan and ESOP after six months of full-time employment and in the Purchase Plan and both deferred plans after one year of full-time employment. Since inception, the Bank has not offered any other employee benefit plans and, at December 31, 2009, has no requirement to accrue additional expenses for any pension or other post-employment benefits.

Note 20. Fair Values of Assets and Liabilities

The Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale, MSRs and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, the Bank may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and real estate owned. These nonrecurring fair value adjustments typically involve application of the lower-of-cost-or market accounting or write-downs of individual assets.

Fair Value Hierarchy

Under ASC 820, “Fair Value Measurements and Disclosures,” the Bank groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

• Level 1 – Valuation is based on quoted prices for identical instruments traded in active markets.

• Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

• Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Under ASC 820, the Bank bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is the Bank’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy of ASC 820.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not recorded at fair value. Although management uses its best judgment in estimating fair value, there are inherent weaknesses in any estimates that are made at a discrete point in time based on relevant market data, information about the financial instruments and other factors. Estimates of fair value of instruments without quoted market prices are subjective in nature and involve various assumptions and estimates that are matters of judgment. Changes in the assumptions used could significantly affect these estimates. The Bank has not adjusted fair values to reflect changes in market conditions subsequent to December 31, 2009, December 26, 2008 and December 28, 2007; therefore, estimates presented herein are not necessarily indicative of amounts that could be realized in a current transaction.

The estimated fair values presented neither include nor give effect to the values associated with the Bank’s existing client relationships, lending and deposit office networks, or certain tax implications related to the realization of unrealized gains or losses. The fair value summary does not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities.

Methods and assumptions used to estimate the fair value of each major classification of financial instruments were:

Cash and cash equivalents: The current carrying amount approximates estimated fair value.

Investment securities: For securities classified as available-for-sale, the Bank used current market prices, quotations or analysis of estimated future cash flows to determine fair value.

Loans: The carrying amount of loans is net of unamortized deferred loan fees or costs, unamortized premiums or discounts and the allowance for loan losses. To estimate fair value of the Bank’s loans, which are primarily adjustable rate and intermediate fixed rate real estate secured mortgages, the Bank 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 Bank bases the fair value of single family, multifamily and commercial real estate mortgages primarily upon prices of loans with similar terms obtained by or quoted to the Bank, adjusted for differences in loan characteristics and market conditions. The Bank estimates the fair value of other loans based on the current interest rates at which similar loans would be made to borrowers with similar credit characteristics in the Bank’s lending activities. Assumptions regarding liquidity risk and credit risk are judgmentally determined using available internal and market information.

For the fair value of nonaccrual loans and certain other loans, the Bank considers the individual characteristics of the loans, including delinquency status and the results of the Bank’s internal loan grading process.

Loans held for sale: The carrying amount of loans held for sale reflects the lower of cost or market, including net deferred loan fees and costs. The fair value of loans held for sale was derived from quoted market prices of loans with similar terms or actual prices at which loans were committed for sale.

MSRs: The fair value of MSRs related to loans originated and sold by the Bank is based on a present value calculation of expected future cash flows, with assumptions regarding prepayments, discount rates and investment rates adjusted for market conditions.

FHLB stock: FHLB stock has no trading market, is required as part of membership and is redeemable at par; therefore, its fair value is presented at cost.

Investments in life insurance: The carrying amount of investments in life insurance reflects the total cash surrender value of each policy, which approximates fair value.

Other real estate owned: Other real estate owned includes foreclosed properties securing mortgage loans. Other real estate owned is adjusted to fair value less costs to sell upon transfer of the loans to foreclosed assets. Subsequently, other real estate owned is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral, and accordingly, the Bank classifies other real estate owned as Level 3.

Customer deposits: The fair value of deposits with no stated term such as demand deposit accounts, NOW accounts, money market accounts and passbook accounts is the carrying amount reported on the combined balance sheet. The intangible value of long-term relationships with depositors is not taken into account in estimating the fair values disclosed. Management believes that the Bank’s non-term accounts, as a continuing source of less costly funds, provide significant additional value to the Bank that is not reflected in the assigned value. The fair value of deposits with a stated maturity is based on the present value of contractual cash flows discounted by the replacement rates for securities with similar remaining maturities.

FHLB advances: The estimated fair value of longer-term FHLB advances represents the present value of cash flows discounted using the FHLB’s fixed rate cost of funds curve for advances of the same type and with the same characteristics.

Subordinated notes: The fair value is based on current market prices for traded issues.

Commitments to extend credit: The majority of the Bank’s commitments to extend credit carry current market interest rates if converted to loans. Because these commitments are generally unassignable by either the Bank or the borrower, they have value only to the Bank and the borrower. The estimated fair value of the Bank’s commitments to extend credit, including letters of credit, approximates the recorded deferred fee amounts and was not material at December 31, 2009, December 26, 2008 and December 28, 2007.

Derivative financial instruments: Derivative assets and liabilities consist of foreign exchange contracts executed with customers which the Bank offsets the customer exposure to another financial institution counterparty. The Bank does not retain foreign exchange risk. The Bank uses current market prices to determine the fair value of these contracts. The estimated fair values of other derivative assets or liabilities that are created from interest rate lock commitments and forward loan sale commitments are estimated using analysis based on current market prices.

The following table presents the estimated fair values of financial instruments for the periods indicated:

	Successor				Predecessor II
	December 31, 2009				December 26, 2008				December 28, 2007
($ in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Cash and cash equivalents	$	178,553	$	178,553	$	169,572	$	169,572	$	194,220	$	194,220
Investment securities trading		—		—		—		—		17,534		17,534
Investment securities available for sale		3,183		3,183		—		—		24,460		24,460
Loans, net		18,587,778		18,461,023		17,368,559		16,542,080		11,061,721		11,036,321
Loans held for sale		14,540		14,540		4,325		4,325		5,816		5,816
Mortgage servicing rights		24,544		24,544		23,307		30,242		34,586		37,021
FHLB Stock		59,420		59,420		59,420		59,420		95,173		95,173
Investments in life insurance		202,691		202,691		194,665		194,665		187,022		187,022
Derivative assets		13,405		13,405		6,081		6,081		3,015		3,015
Liabilities:
Customer deposits		17,182,484		17,231,905		12,311,754		12,330,015		11,050,851		11,051,084
Federal Home Loan Bank advances		130,501		130,842		1,236,257		1,258,560		1,956,338		1,962,519
Subordinated notes		65,897		70,139		66,682		59,183		67,459		66,839
Derivative liabilities		11,776		11,776		5,979		5,979		2,822		2,822

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis.

	Successor
	Fair Value Measurements on a Recurring Basis December 31, 2009
($ in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale:
Other residential MBS	$	—	$	3,183	$	—	$	3,183
Derivative assets		—		13,405		—		13,405
Mortgage servicing rights		—		—		24,544		24,544
Total	$	—	$	16,588	$	24,544	$	41,132
Liabilities:
Derivative liabilities	$	—	$	11,776	$	—	$	11,776

	Predecessor II
	Fair Value Measurements on a Recurring Basis December 26, 2008
($ in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Derivative assets	$	—	$	6,081	$	—	$	6,081
Liabilities:
Derivative liabilities	$	—	$	5,979	$	—	$	5,979
	Predecessor II
	Fair Value Measurements on a Recurring Basis December 28, 2007
($ in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Trading securities	$	—	$	17,534	$	—	$	17,534
Investment securities available-for-sale:
U.S. Treasury and federal agencies		10,662		—		—		10,662
Residential agency MBS		—		9,574		—		9,574
Other debt securities		—		4,224		—		4,224
Derivative assets		—		3,015		—		3,015
Total	$	10,662	$	34,347	$	—	$	45,009
Liabilities:
Derivative liabilities	$	—	$	2,822	$	—	$	2,822

There were no transfers in or out of Levels 1 and 2 for the year ended December 31, 2009, December 26, 2008 and December 28, 2007.

The changes in Level 3 MSRs measured at fair value on a recurring basis are summarized as follows:

($ in thousands)	At or for the Year Ended Dec. 31, 2009
Beginning balance	$	30,242
Total gains or losses (realized/unrealized)included in earnings		(4,639	)
Purchases, issuances, and settlements		(1,059	)
Ending balance	$	24,544

The Bank may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments for fair value usually result from application of lower-of-cost-or market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis in 2009, 2008 and 2007 that were still held in the balance sheet at each respective year end, the following tables provide the fair value hierarchy and the carrying value of the related individual assets or portfolios at year end.

	Successor
	Fair Value Measurements on a Non-recurring Basis At or for the Year Ended December 31, 2009
($ in thousands)	Level 1		Level 2		Level 3		Total		Gains (Losses)
Assets:
Impaired loans	$	—	$	—	$	17,437	$	17,437	$	(8,337	)
Other real estate owned		—		—		6,101		6,101		(3,922	)
Total	$	—	$	—	$	23,538	$	23,538	$	(12,259	)
	Predecessor II
	Fair Value Measurements on a Non-recurring Basis At or for the Year Ended December 26, 2008
($ in thousands)	Level 1		Level 2		Level 3		Total		Gains (Losses)
Assets:
Mortgage servicing rights	$	—	$	—	$	23,307	$	23,307	$	(1,622	)
Other real estate owned		—		—		5,000		5,000		(2,219	)
Total	$	—	$	—	$	28,307	$	28,307	$	(3,841	)

Note 21. Segments

ASC 280-10, “Segment Reporting,” requires that a public business enterprise report certain financial and descriptive information about its reportable operating segments on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Bank’s two reportable segments are commercial banking and wealth management.

The following tables present the operating results, goodwill and total assets of the Bank’s two reportable segments, as well as any reconciling items to combined totals, for the periods indicated:

	Successor At or for the Year Ended December 31, 2009
($ in thousands)	Commercial Banking		Wealth Management		Reconciling Items			Total Combined
Net interest income	$	956,868	$	77	$	—		$	956,945
Provision for credit losses		49,462		—		—			49,462
Noninterest income		57,426		59,914		(1,767	)		115,573
Noninterest expense		361,878		57,167		(1,767	)		417,278
Income before provision for income taxes		602,954		2,824		—			605,778
Provision for income taxes		253,116		1,200		—			254,316
Net income before noncontrolling interests		349,838		1,624		—			351,462
Less: Net income from noncontrolling interests		4,819		—		—			4,819
First Republic Bank Net Income	$	345,019	$	1,624	$	—		$	346,643
Goodwill	$	—	$	—	$	—		$	—
Total Assets	$	19,933,882	$	23,466	$	(16,798	)	$	19,940,550

	Predecessor II At or for the Year Ended December 26, 2008
($ in thousands)	Commercial Banking			Wealth Management			Reconciling Items			Total Combined
Net interest income	$	504,597		$	250		$	—		$	504,847
Provision for credit losses		131,175			—			—			131,175
Noninterest income		22,227			69,203			(2,138	)		89,292
Noninterest expense		371,481			73,095			(2,138	)		442,438
Income (loss) before provision for income taxes		24,168			(3,642	)		—			20,526
Provision (benefit) for income taxes		7,281			(1,548	)		—			5,733
Net income (loss) before noncontrolling interests		16,887			(2,094	)		—			14,793
Less: Net income from noncontrolling interests		4,793			—			—			4,793
First Republic Bank Net Income (Loss)	$	12,094		$	(2,094	)	$	—		$	10,000
Goodwill	$	1,252,865		$	52,915		$	—		$	1,305,780
Total Assets	$	19,602,536		$	110,882			(19,507	)	$	19,693,911
	Predecessor II September 22 to December 28, 2007
($ in thousands)	Commercial Banking			Wealth Management			Reconciling Items			Total Combined
Net interest income	$	110,154		$	36		$	—		$	110,190
Provision for credit losses		2,400			—			—			2,400
Noninterest income		26,700			18,125			(603	)		44,222
Noninterest expense		92,404			16,611			(603	)		108,412
Income before provision for income taxes		42,050			1,550			—			43,600
Provision for income taxes		15,497			659			—			16,156
Net income before noncontrolling interests		26,553			891			—			27,444
Less: Net income from noncontrolling interests		1,631			—			—			1,631
First Republic Bank Net Income	$	24,922		$	891		$	—		$	25,813
Goodwill	$	1,252,865		$	52,915		$	—		$	1,305,780
Total Assets	$	15,746,787		$	59,375		$	(13,869	)	$	15,792,293
	Predecessor I January 1 to September 21, 2007
($ in thousands)	Commercial Banking			Wealth Management			Reconciling Items			Total Combined
Net interest income	$	243,132		$	102		$	—		$	243,234
Provision for credit losses		8,067			—			—			8,067
Noninterest income		25,101			46,319			(2,761	)		68,659
Noninterest expense		257,243			70,188			(2,761	)		324,670
Income (loss) before provision for income taxes		2,923			(23,767	)		—			(20,844	)
Provision (benefit) for income taxes		(3,835	)		(10,101	)		—			(13,936	)
Net income (loss) before noncontrolling interests		6,758			(13,666	)		—			(6,908	)
Less: Net income from noncontrolling interests		5,237			—						5,237
First Republic Bank Net Income (Loss)	$	1,521		$	(13,666	)	$	—		$	(12,145	)
Goodwill	$	111,766		$	48,799		$	—		$	160,565
Total Assets	$	13,487,863		$	18,409		$	(11,784	)	$	13,494,488

The commercial banking segment represents most of the operations of the Bank, including real estate secured lending, retail deposit gathering, private banking activities, mortgage sales and servicing, and managing the capital, liquidity and interest rate risk.

The wealth management segment consists of the investment management activities of FRIM, which manages assets for individuals, and institutions in convertible securities, equities, fixed income and balanced accounts. In addition, the wealth management segment also includes First Republic Trust Company, a division of the Bank that offers personal trust services; FRWA, which offers advisory services to high net worth clients; the Bank’s mutual fund activities; the brokerage activities of FRSC; and the Bank’s foreign exchange activities conducted on behalf of customers.

The reconciling items for revenues include intercompany business referral fees. The reconciling items for assets include subsidiary funds on deposit with the Bank and any intercompany receivable that is reimbursed at least on a quarterly basis.

Note 22. Subsequent Events

The Bank evaluated the effects of subsequent events that have occurred subsequent to the year ended December 31, 2009, and through September 14, 2010, which is the date our financial statements were available to be issued. Refer to Note 2, “Recent Developments,” for a discussion of the transaction to sell First Republic, which closed after the close of business on June 30, 2010.

EX-99.4

Exhibit 99.4

COLONY FINANCIAL, INC.

Pro forma consolidated balance sheet of Colony Financial, Inc. as of September 30, 2010 and pro forma consolidated statements of operations for the nine months ended September 30, 2010 and for the period from June 23, 2009

(Date of Inception) to December 31, 2009 (unaudited)

COLONY FINANCIAL, INC.

PRO FORMA CONSOLIDATED BALANCE SHEET

(In thousands, except share and per share data)

(Unaudited)

	As Reported		Pro Forma
	September 30, 2010		Disposition Adjustments			Adjusted September 30, 2010
ASSETS
Investments in unconsolidated joint ventures	$	244,254	$	(1,728	)(a)	$	242,526
Cash and cash equivalents		33,343		2,754	(a)		36,097
Loans receivable, net		14,719					14,719
Other assets		3,393					3,393
Total assets	$	295,709	$	1,026		$	296,735
LIABILITIES AND EQUITY
Liabilities:
Accrued and other liabilities	$	1,860	$			$	1,860
Due to affiliate		1,439					1,439
Dividends payable		3,658					3,658
Deferred underwriting discounts and commissions payable to underwriters		5,750					5,750
Deferred underwriting discounts and commissions reimbursable to Manager		5,750					5,750
Total liabilities		18,457		—			18,457
Commitments and contingencies
Equity:
Stockholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, none outstanding		—					—
Common stock, $0.01 par value, 450,000,000 shares authorized, 14,631,000 shares issued and outstanding		146					146
Additional paid-in capital		275,291					275,291
Retained earnings		350		1,026	(a)		1,376
Accumulated other comprehensive income		1,292					1,292
Total stockholders’ equity		277,079		1,026			278,105
Noncontrolling interest		173					173
Total equity		277,252		1,026			278,278
Total liabilities and equity	$	295,709	$	1,026		$	296,735

See notes to unaudited pro forma consolidated financial statements.

COLONY FINANCIAL, INC.

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

	Nine Months Ended September 30, 2010
				Pro Forma
	As Reported			Acquisition Adjustments			Disposition Adjustments			Adjusted
Income
Equity in income of unconsolidated joint ventures	$	16,209			1,661	(b)		(181	)(d)(e)	$	17,689
Interest income		1,294									1,294
Total income		17,503			1,661			(181	)		18,983
Expenses
Base management fees		2,437			210	(c)					2,647
Investment expenses		344									344
Interest expense		50									50
Administrative expenses		2,666									2,666
Administrative expenses reimbursed to affiliate		839									839
Total expenses		6,336			210			—			6,546
Foreign exchange loss, net of gain on foreign currency hedge of $18		(52	)								(52	)
Income before income taxes		11,115			1,451			(181	)		12,385
Income tax provision		(256	)								(256	)
Net income		10,859			1,451			(181	)		12,129
Net income attributable to noncontrolling interest		14						—			14
Net income attributable to common stockholders	$	10,845			1,451			(181	)	$	12,115
Net income per share:
Basic	$	0.74								$	0.83
Diluted	$	0.73								$	0.81
Weighted average number of common shares outstanding:
Basic		14,625,000									14,625,000
Diluted		14,912,500									14,912,500

See notes to unaudited pro forma consolidated financial statements.

COLONY FINANCIAL, INC.

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

	Period from June 23, 2009 (Date of Inception) to December  31, 2009
				Pro Forma
	As Reported			Acquisition Adjustments			Disposition Adjustments			Adjusted
Income
Equity in income of unconsolidated joint ventures	$	663			2,393	(f)		(172	)(h)	$	2,884
Interest income		428									428
Total income		1,091			2,393			(172	)		3,312
Expenses
Base management fees		196			198	(g)					394
Investment expenses		175									175
Administrative expenses		816									816
Administrative expenses reimbursed to affiliate		302									302
Total expenses		1,489			198			—			1,687
Net (loss) income		(398	)		2,195			(172	)		1,625
Net income attributable to noncontrolling interest		2									2
Net (loss) income attributable to common stockholders	$	(400	)		2,195			(172	)	$	1,623
Net (loss) income per share:
Basic	$	(0.06	)							$	0.23
Diluted	$	(0.06	)							$	0.23	(i)
Weighted average number of common shares outstanding:
Basic		6,963,000									6,963,000
Diluted		6,963,000									7,099,000	(i)

See notes to unaudited pro forma consolidated financial statements.

COLONY FINANCIAL, INC.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

1. Pro Forma Adjustments

On June 30, 2010, ColFin FRB Investor, LLC (“FRB Investor”), an unconsolidated joint venture in which Colony Financial, Inc. (the “Company”) holds a 5.91% ownership interest, completed its previously announced acquisition of a 21.8% interest in First Republic Bank from Merrill Lynch Bank & Trust Company, a subsidiary of Bank of America Corporation. On December 14, 2010, First Republic Bank closed the initial public offering of 12,650,000 shares of its common stock (including 1,650,000 shares sold in connection with the exercise of the underwriters’ overallotment option). As part of First Republic Bank’s initial public offering, FRB Investor sold 1,948,477 shares of common stock in First Republic Bank.

The unaudited pro forma consolidated financial statements give effect to the acquisition of an approximate 1.3% indirect interest in First Republic Bank by the Company through its investment in FRB Investor on June 30, 2010 and the subsequent disposition of 7.2% of its investment on December 14, 2010. The Company’s pro forma balance sheet as of September 30, 2010 include adjustments to reflect the disposition as if it had occurred at that date. The statements of operations for the nine months ended September 30, 2010 and the period from June 23, 2009 (date of inception) to December 31, 2009 include adjustments to reflect the acquisition and disposition as if each had occurred at the beginning of each period presented. The following pro forma adjustments are included:

(a) Represents the Company’s share of proceeds, reduction in investment in unconsolidated joint venture and gain on sale of approximately $2.7 million, $1.7 million and $1.0 million, respectively, resulting from the sale of approximately 1.9 million shares of First Republic Bank’s common stock by FRB Investor in connection with the closing of First Republic Bank’s initial public offering on December 14, 2010.

(b) Represents recognition of the Company’s share of First Republic Bank’s net income for the six months ended June 30, 2010.

(c) Represents additional base management fee the Company would have incurred for the six months ended June 30, 2010.

(d) Represents the reduction of the Company’s share of First Republic Bank’s net income for the nine months ended September 30, 2010 resulting from the sale.

(e) Does not include the non-recurring gain on sale of $1.0 million from disposition of interest in First Republic Bank.

(f) Represents the Company’s share of First Republic Bank’s net income for the period from June 23, 2009 (date of inception) to December 31, 2009.

(g) Represents additional base management fee the Company would have incurred for the period from June 23, 2009 (date of inception) to December 31, 2009.

(h) Represents the reduction of the Company’s share of First Republic Bank’s net income for the period from June 23, 2009 (date of inception) to December 31, 2009 resulting from the sale.

(i) Reflects the dilutive effect of common share equivalents outstanding related to common stock issuable to the Company’s Manager for reimbursement of underwriting discounts and commissions. Such shares were excluded in the historical diluted weighted average shares as the effect of their inclusion would have been antidilutive due to the reported net loss for the period from June 23, 2009 (date of inception) to December 31, 2009.