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First Republic Reports Strong Second Quarter Results

Our net income, earnings per share, net interest margin and efficiency ratio are significantly impacted by accretion and amortization of the fair value adjustments recorded in purchase accounting. The accretion and amortization affect our net income, earnings per share and certain operating ratios as we accrete loan discounts to interest income; accrete discounts on loan commitments to noninterest income; recognize discounts established in purchase accounting on the sale of loans, which increase gain on sale of loans; amortize premiums on liabilities such as CDs and subordinated notes to interest expense; and amortize intangible assets to noninterest expense. In addition, earnings per share was impacted following the redemption of the FRPCC Series D preferred stock in the second quarter of 2012 due to the $13.2 million difference between the liquidation preference and the carrying value established in purchase accounting.

We believe these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding our performance. Our management uses, and believes that investors benefit from referring to, these non-GAAP measures and ratios in assessing our current operating results and related trends, and when planning and forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, not as a substitute for or preferable to, ratios prepared in accordance with GAAP. In the tables below, we have provided a reconciliation of, where applicable, the most comparable GAAP financial measures and ratios to the non-GAAP financial measures and ratios used in this press release, or a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated:
     

Three Months Ended June 30,

Three Months Ended March 31,

Six Months Ended June 30,
(in thousands, except per share amounts)   2012       2011     2012     2012       2011  
 
Non-GAAP earnings
Net income $ 97,907 $ 84,832 $ 91,758 $ 189,665 $ 173,604
Accretion / amortization added to net interest income (52,169 ) (58,787 ) (46,291 ) (98,460 ) (119,475 )
Discounts recognized in gain on sale of loans - - - - (3,827 )
Accretion added to noninterest income (15 ) (166 ) (69 ) (84 ) (1,220 )
Amortization of intangible assets 5,170 5,760 5,288 10,458 11,677
Add back tax impact of the above items   19,981     22,607     17,456     37,437     47,959  
Non-GAAP net income 70,874 54,246 68,142 139,016 108,718
Dividends on preferred stock (4,091 ) - (2,451 ) (6,542 ) -
Redemption of preferred stock (13,200 ) - - (13,200 ) -
Impact of preferred stock redemption   13,200     -     -     13,200     -  
Non-GAAP net income available to common stockholders $ 66,783   $ 54,246   $ 65,691   $ 132,474   $ 108,718  
 
GAAP earnings per common share - diluted $ 0.60 $ 0.64 $ 0.67 $ 1.27 $ 1.31
Impact of purchase accounting, net of tax (0.20 ) (0.23 ) (0.18 ) (0.38 ) (0.49 )
Impact of preferred stock redemption   0.10     -     -     0.10     -  
Non-GAAP earnings per common share - diluted $ 0.50   $ 0.41   $ 0.49   $ 0.99   $ 0.82  
 
Weighted average diluted common shares outstanding   134,002     133,091     133,621     133,816     132,848  
     

Three Months Ended June 30,

Three Months Ended March 31,

Six Months Ended June 30,
($ in thousands)   2012       2011     2012     2012       2011  
 
Net interest margin

Net interest income
$ 290,597 $ 256,802 $ 281,268 $ 571,865 $ 511,296
Add: Tax-equivalent adjustment   15,943     8,756     15,043     30,986     16,121  
Net interest income (tax-equivalent basis) 306,540 265,558 296,311 602,851 527,417
Less: Accretion / amortization   (52,169 )   (58,787 )   (46,291 )   (98,460 )   (119,475 )
Non-GAAP net interest income (tax-equivalent basis) $ 254,371   $ 206,771   $ 250,020   $ 504,391   $ 407,942  
 
Average interest-earning assets $ 28,594,134 $ 22,628,398 $ 26,888,203 $ 27,741,169 $ 22,301,481
Add: Average unamortized loan discounts   439,947     617,512     481,015     460,481     640,080  
Adjusted average interest-earning assets $ 29,034,081   $ 23,245,910   $ 27,369,218   $ 28,201,650   $ 22,941,561  
 
Net interest margin – reported 4.27 % 4.67 % 4.39 % 4.32 % 4.72 %
Adjusted net interest margin (non-GAAP) 3.48 % 3.54 % 3.64 % 3.56 % 3.54 %
 
 

Three Months Ended June 30,
 

Three Months Ended March 31,
 

Six Months Ended June 30,
($ in thousands)   2012       2011     2012     2012       2011  
 
Efficiency ratio
Net interest income $ 290,597 $ 256,802 $ 281,268 $ 571,865 $ 511,296
Less: Accretion / amortization   (52,169 )   (58,787 )   (46,291 )   (98,460 )   (119,475 )
Adjusted net interest income (non-GAAP) $ 238,428   $ 198,015   $ 234,977   $ 473,405   $ 391,821  
 
Noninterest income $ 36,639 $ 27,197 $ 32,645 $ 69,284 $ 58,263
Less: Accretion of discounts on loan commitments (15 ) (166 ) (69 ) (84 ) (1,220 )
Discounts recognized in gain on sale of loans   -     -     -     -     (3,827 )
Adjusted noninterest income (non-GAAP) $ 36,624   $ 27,031   $ 32,576   $ 69,200   $ 53,216  
 
Total revenue $ 327,236 $ 283,999 $ 313,913 $ 641,149 $ 569,559
Total revenue (non-GAAP) $ 275,052 $ 225,046 $ 267,553 $ 542,605 $ 445,037
 
Noninterest expense $ 171,555 $ 138,829 $ 164,755 $ 336,310 $ 273,818
Less: Intangible amortization   (5,170 )   (5,760 )   (5,288 )   (10,458 )   (11,677 )
Adjusted noninterest expense (non-GAAP) $ 166,385   $ 133,069   $ 159,467   $ 325,852   $ 262,141  
 
Efficiency ratio 52.4 % 48.9 % 52.5 % 52.5 % 48.1 %
Efficiency ratio (non-GAAP) 60.5 % 59.1 % 59.6 % 60.1 % 58.9 %

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