First Republic Bank Reports Third Quarter and Nine Months Results

SAN FRANCISCO, Oct. 25 /PRNewswire-FirstCall/ -- First Republic Bank reports net income available to common stockholders of $15,533,000 for the third quarter of 2006, an increase of 9% compared with the third quarter of 2005. Diluted earnings per share ("EPS") were $0.57, up 6% compared with the third quarter of 2005.

For the first nine months, net income available to common shareholders was $46,274,000 in 2006, an increase of 17% compared with the same period in 2005. Diluted EPS for the first nine months were $1.71, up 11% compared with the same period in 2005.

Third quarter earnings were impacted by continuing net interest margin pressure due to the current interest rate environment as well as expansion expenses, including initial costs relating to the acquisition of Bank of Walnut Creek. Third quarter results included a benefit from a lower tax rate of approximately $0.06 per share, offset by costs from pre-merger integration of $0.01 per share and an increase in occupancy expense of $0.01 per share resulting from a revision in accounting for certain leases.

"Results for the third quarter of 2006 reflect the full cost of our expansions in Boston, Greenwich, the Pacific Northwest and in the San Francisco Bay Area. Our net interest margin continued to decline due to the negative impact of the inverted yield curve," said Jim Herbert, President and Chief Executive Officer of First Republic Bank.

Acquisition of the Bank of Walnut Creek

As previously announced, on October 16, 2006 the Bank completed the acquisition of BWC Financial Corp. and its wholly owned subsidiary, Bank of Walnut Creek. As a result, First Republic has added seven offices in the fast-growing communities of Walnut Creek, Orinda, Danville, San Ramon, Pleasanton, Livermore and San Jose.

In connection with this transaction, First Republic issued approximately 3,750,000 shares of common stock and paid approximately $14.0 million of cash to beneficial holders of equity interests. Total consideration for this acquisition was valued at approximately $165 million.

Summary Financial Information for BWC Financial Corp.

As of September 30, 2006, BWC Financial Corp. had total assets of $542 million, total deposits of $394 million and total stockholders' equity of $57.2 million. There were no nonperforming assets. For the third quarter of 2006, BWC Financial Corp. earned net income of $2,387,000, had a return on average assets of 1.65%, a net interest margin of 5.83% and an efficiency ratio of approximately 50%. First Republic began consolidating the results of Bank of Walnut Creek upon closing.

Cash Dividend Declared

The Bank announced that it has declared a third quarter cash dividend of $0.15 per share of common stock, payable on November 30, 2006 to shareholders of record on November 15, 2006.

Financial Summary -- Loan originations were $1.2 billion for the third quarter of 2006, compared with $1.3 billion for the third quarter of 2005; for the first nine months, loan originations totaled $3.8 billion, compared with $3.5 billion in 2005. -- Bank assets grew to $10.7 billion, a 21% increase over the past year and an annualized rate of increase of 13% during the third quarter. -- Deposits grew to $7.9 billion at September 30, 2006, a 21% increase over the past year and an annualized rate of increase of 12% during the quarter. -- Net interest margin was 2.96% for the quarter, compared with 3.19% for the prior quarter and 3.31% for the third quarter of 2005. -- The operating efficiency ratio was 74.3% for the quarter, compared with 67.1% for the third quarter of 2005 and 70.1% for the past twelve months. -- Total Wealth Management assets were $16.4 billion, up 5% during the quarter and up 21% in the past year. -- Total Bank assets, Wealth Management assets and loans serviced grew to $31.8 billion, up 20% over the last year. -- Total capital at September 30, 2006 was $890.7 million. Growth in Bank Assets

Total assets of the Bank were $10.7 billion at September 30, 2006, an annualized rate of increase of 13% during the quarter and 21% in the past twelve months.

The average annualized principal repayment rate on the Bank's loan portfolio declined to approximately 10% during the third quarter of 2006, compared with 18% during the prior quarter and 17% for all of 2005.

Asset Quality Remains Strong

The Bank's credit quality remains strong. At September 30, 2006, the Bank classified one loan as other real estate owned with a carrying value of $452,000 and total nonaccrual loans were $10.2 million, collectively representing only 0.10% of total assets. The Bank did not record a provision for loan losses in the third quarter of 2006. The Bank's allowance for loan losses was $44.1 million at September 30, 2006, or 0.58% of total loans.

The Bank's single family residential loan portfolio continues to perform well. At September 30, 2006, the single family mortgage loan portfolio of $3.5 billion had a weighted average loan-to-value ratio of approximately 58% at origination and there were only four loans past due more than thirty days.

Capital Strength

The Bank continues to exceed regulatory guidelines required to be considered well-capitalized. At September 30, 2006, total capital was $890.7 million, consisting of common stockholders' equity, noncumulative perpetual preferred stock of the Bank and its subsidiaries, subordinated notes and allowance for loan losses. Total capital increased $69.5 million, or 8%, over the past year. The Bank's ratio of total capital to risk-adjusted assets was 11.21% at September 30, 2006.

Book value per common share was $19.15 at September 30, 2006, up 10% from a year ago.

Continued Deposit Growth

Total deposits grew $225.5 million for the quarter, an annualized rate of 12%. Most of this increase was in retail certificates of deposit. Total deposits have grown 21% in the last twelve months, with 51% of this growth in core liquid accounts. Core liquid accounts, consisting of checking, money market and passbook accounts, were 75% of total deposits at September 30, 2006.

At September 30, 2006, balances in business and personal checking accounts were $2.10 billion, or 27% of total deposits. The average balance of checking accounts was comparable with the prior quarter and 16% above the level for the third quarter of 2005.

Net Interest Income

Net interest income was $70,293,000 for the third quarter of 2006, a decrease of 2% compared with the prior quarter and an increase of 6% compared with the third quarter of 2005. The decrease in the third quarter was primarily related to the inverted yield curve, which caused the cost of borrowings to increase more rapidly than the interest earned on loans and investments. Because the Bank's deposits have not grown as fast as loans and investments over recent months, the Bank has funded much of its asset growth with higher cost, short-term FHLB borrowings. As a result, the Bank's net interest margin was 2.96% for the third quarter of 2006, compared with 3.19% for the prior quarter and 3.33% for all of 2005.

Loans Sold and Serviced

The Bank sold $361.2 million of single family home loans during the third quarter of 2006 and recorded net gains of $3,433,000, compared with sales of $449.6 million and net gains of $1,672,000 for the third quarter of 2005. The increase in gain on loan sales was due to higher gains on loans sold in bulk loan sales in response to improved secondary market conditions.

Total loans serviced for investors were $4.73 billion at September 30, 2006, compared with $4.13 billion a year ago, a 14% increase. The carrying value of mortgage servicing rights ("MSRs") was $27.0 million, or 57 basis points on loans serviced, at September 30, 2006.

Net loan servicing fees were $1,039,000 for the third quarter of 2006 compared with $1,006,000 for the second quarter of 2006 and $639,000 for the third quarter of 2005. The level of net fees in 2006 has resulted from higher average loans serviced, offset in part by amortization of MSRs related to adjustable rate loans. MSRs on investor-owned adjustable-rate mortgages prepaid at a rate of 27% during the third quarter of 2006, compared with 34% during the prior quarter and 31% a year ago. Generally, the prepayment rates on fixed rate loans sold to investors have been below 10% in 2006.

The average annualized prepayment rate on all loans serviced for investors decreased to 14% for the third quarter of 2006, compared with 17% for the prior quarter and 18% for all of 2005.

Wealth Management Grows

Assets managed or administered by the Bank's investment advisors, Trainer, Wortham & Company Incorporated, Froley, Revy Investment Company, and Starbuck, Tisdale & Associates, First Republic Securities Company, First Republic Trust Company and First Republic Wealth Advisors totaled $16.36 billion at September 30, 2006, an increase of 21% compared with $13.57 billion a year ago. Total fees from these wealth management activities increased 7% to $12,887,000 for the third quarter of 2006, compared with $11,994,000 for the third quarter of 2005.

The Bank offers money market mutual funds and conducts its clients' brokerage activities through First Republic Securities Company, a broker- dealer subsidiary. Clients' assets were $3.70 billion at September 30, 2006, a 51% increase compared with a year ago.

The Bank offers personal trust services through First Republic Trust Company. At September 30, 2006, the Trust Company administered $3.31 billion of trust and custody assets, a 48% increase from a year ago.

First Republic Wealth Advisors continued to add assets for its open architecture platform and for other entities in the Bank's wealth management segment. At September 30, 2006, there were $220.3 million of assets administered under the open architecture platform.

Noninterest Expense and Operating Efficiency

The Bank's total noninterest expense was $68,365,000 for the third quarter of 2006, an increase of 6% compared with the prior quarter and an increase of 21% compared with the third quarter of 2005. Noninterest expense has grown due to the high level of loan originations, the growth in deposits, the cost of additional wealth management personnel, integration costs in connection with the acquisition of BWC Financial Corp. and recent geographic expansion into the Northeast and Northwest including increased occupancy costs -- all related to the expansion of the Bank's franchise.

In particular, our newer offices in Greenwich, Boston, Portland and Seattle are incurring a full level of operating costs, while there were limited but increasing revenues related to these locations. Also, the Bank is expanding its presence in the New York market and during the quarter began to incur costs for two new office locations. Additionally, the Bank has leased office space for future expansion, some of which will be sublet following completion of tenant improvements.

Since June 2006, the management and staff of First Republic have been working closely with Bank of Walnut Creek personnel to plan for the completion of the merger and the conversion of all services and systems as soon as possible thereafter. The goal has been to ensure that customer service continues at an excellent level and that customer retention is facilitated through the prompt delivery of additional products and services. During the third quarter of 2006, First Republic incurred approximately $575,000 of incremental costs to prepare for post merger integration, consisting primarily of fees for consultants to augment First Republic resources. This level of incremental expense is expected to continue in the fourth quarter of 2006, as the goal is to have fully integrated operations by the end of the year.

The Bank's operating efficiency ratio, or recurring noninterest expense as a percentage of net interest income and recurring noninterest income, was 74.3% for the third quarter of 2006, compared with 67.1% for the third quarter of 2005. For the most recent four quarters, the efficiency ratio was 70.1%. The increase in the efficiency ratio is due to expenses increasing while net interest income declined in the third quarter of 2006.

Revised Accounting under SAB No. 108

As previously announced, the Bank will adopt SEC Staff Accounting Bulletin ("SAB") No. 108, in connection with the issuance of its consolidated financial statements for the year ending December 31, 2006. The Bank currently estimates that the adoption of SAB No. 108 will include a reduction in its retained earnings as of January 1, 2006 of approximately $5 million, net of income tax benefits, resulting primarily from adjustments to revise the accounting for leases to record lease expense on a straight-line basis over the lease term. The impact on the third quarter of 2006 from this revision in accounting for leases resulted in an increase in occupancy expense related to the first six months of 2006 by approximately $560,000, or $0.01 per diluted share after the impact of taxes.

Additionally, in connection with implementing SAB No. 108, the Bank changed its practice for recording dividend income on Federal Home Loan Bank stock to recognize dividends when declared. If the Bank had continued to follow its previous practice, interest income for the third quarter of 2006 would have been $250,000 higher.

Income Tax Rate

The Bank provides for income taxes based on an estimate of earnings and tax preference items for the current year. The effective tax rate for 2006 is currently estimated at 25.3%, based on the amount of tax credits expected and the level of tax-exempt income related to investments in municipal securities, bank-owned life insurance contracts and securities that qualify for the federal dividends received deduction.

The Bank's estimated effective tax rate declined to 25.3% for the first nine months of 2006 from 28.9% for the first six months of 2006. This decrease was mainly due to changes in earnings estimates, acquisition expenses expected to be incurred in the fourth quarter related to the Bank of Walnut Creek acquisition and a favorable impact on our tax reserves resulting from the completion of a New York State income tax audit. The reduction in the effective tax rate for the first six months of 2006 decreased the tax expense recorded in the third quarter of 2006 by $1,758,000, or $0.06 per diluted share.

The decrease in the effective tax rate compared with 2005 was primarily due to increases in all categories of tax-advantaged investments described above, as well as California net interest deductions for enterprise zone loans.

About First Republic Bank

First Republic Bank is a NYSE-traded, private bank and wealth management firm. The Bank and its subsidiaries specialize in providing personalized, relationship-based services, including private banking, private business banking, investment management, trust, brokerage and real estate lending. As of September 30, 2006, the Bank and its subsidiaries had total Bank assets and other managed assets of $31.8 billion. First Republic Bank provides access to its services online and through preferred banking or trust offices in ten major metropolitan areas: San Francisco, Los Angeles, Santa Barbara, Newport Beach, San Diego, Las Vegas, Portland, Seattle, Boston and New York City. More information is available on the Bank's website at http://www.firstrepublic.com/.

Forward-Looking Statements and Additional Information

This press release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in this document that are not historical facts. The words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," or words of similar meaning, or future or conditional verbs, such as "will," "would," "should," "could," or "may," are generally intended to identify forward-looking statements. These forward- looking statements reflect our current views and assumptions and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from the results discussed in these forward- looking statements for the reasons, among others, discussed under the heading "Risk Factors" in the Bank's Annual Report on Form 10-K for the 2005 fiscal year and under the heading "Information Regarding Forward-Looking Statements" in the Bank's Quarterly Report on Form 10-Q for the periods ended June 30, 2006 and March 31, 2006. These factors include: credit, market, operational, liquidity, interest rate and other risks; changes in general business and economic conditions or government fiscal and monetary policies that may significantly affect our earnings, including inflation; business and legal risks that may be uninsured or inadequately insured; the risk that volatility in our mortgage banking business could adversely affect our earnings; the geographic concentration of our loan portfolio that could adversely affect our financial condition; the risk that integrating acquired operations may be more costly or require more time than expected; competition from other financial services companies in our markets that could adversely affect our ability to achieve our financial goals; and changes in the regulation and supervision of the Bank that could adversely affect our business. Given these factors, you should not place undue reliance on the forward-looking statements. Forward- looking statements speak only as of the date they are made and may not be updated to reflect changes that may occur after the date they are made.

Additional information, including the Bank's most recent filings on Forms 10-K and Form 10-Q, is available on the Bank's website at http://www.firstrepublic.com/.

Conference Call Details

First Republic Bank's third quarter 2006 earnings conference call is scheduled for October 25, 2006 at 11:00 AM PDT. Investors may listen to the conference call live on the Bank's website at http://www.firstrepublic.com/. It may be necessary to download audio software to hear the conference call. To do so, investors should click on the Earnings Conference Call link and follow directions. A replay of the webcast will be available on First Republic Bank's website for 30 days. A replay of the conference call will also be available for two weeks by calling (888) 203-1112 for domestic participants and (719) 457-0820 for international participants. The pass code number is 2370574. The Bank's press releases are available after release on the Bank's website at http://www.firstrepublic.com/.

CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME Three Months Ended Nine Months Ended ($ in thousands except September 30, September 30, per share amounts) 2006 2005 2006 2005 Interest income: Interest on real estate and other loans $127,752 $95,097 $351,367 $257,239 Interest on investments 27,312 17,103 75,541 41,941 Total interest income 155,064 112,200 426,908 299,180 Interest expense: Interest on customer deposits 60,007 33,062 161,812 83,241 Interest on FHLB advances and other borrowings 23,497 11,833 48,280 26,186 Interest on subordinated notes 1,267 1,267 3,803 3,803 Total interest expense 84,771 46,162 213,895 113,230 Net interest income 70,293 66,038 213,013 185,950 Provision for loan losses -- 1,000 -- 3,000 Net interest income after provision for loan losses 70,293 65,038 213,013 182,950 Noninterest income: Investment advisory fees 10,390 10,085 31,048 30,089 Brokerage fees 1,472 927 3,820 2,536 Trust fees 1,025 982 3,170 2,814 Loan and related fees 1,576 2,167 5,110 4,838 Loan servicing fees, net 1,039 639 2,495 2,662 Deposit customer fees 1,514 1,179 4,224 3,291 Gain on sale of loans 3,433 1,672 5,323 5,664 Loss on sale of investment securities -- (299) -- (607) Income from investments in life insurance 1,642 1,397 4,844 3,246 Other income 181 207 669 454 Total noninterest income 22,272 18,956 60,703 54,987 Noninterest expense: Salaries and related benefits 34,504 30,253 100,553 84,223 Occupancy 12,042 8,325 30,902 24,172 Advertising and marketing 4,613 3,516 13,452 10,127 Information systems 4,602 3,439 12,680 9,657 Professional fees 1,501 2,063 5,248 6,353 Travel expenses 1,408 1,286 4,417 3,740 Insurance 1,039 892 3,013 2,670 Other expenses 8,656 6,526 24,229 18,885 Total noninterest expense 68,365 56,300 194,494 159,827 Income before minority interest and income taxes 24,200 27,694 79,222 78,110 Minority interest expense 3,271 3,271 9,812 9,812 Income before income taxes 20,929 24,423 69,410 68,298 Provision for income taxes 3,526 8,267 17,526 23,733 Net income 17,403 16,156 51,884 44,565 Dividends on preferred stock 1,870 1,871 5,610 4,942 Net income available to common stockholders $15,533 $14,285 $46,274 $39,623 Other comprehensive income (loss), net of tax: Net income $17,403 $16,156 $51,884 $44,565 Unrealized loss on cash flow hedges -- (31) (34) (72) Unrealized net gain (loss) on securities 1,250 (782) (521) (1,260) Loss on securities included in net income -- 173 -- 352 Comprehensive income $18,653 $15,516 $51,329 $43,585 Earnings per common share - basic $0.60 $0.58 $1.81 $1.63 Earnings per common share - diluted $0.57 $0.54 $1.71 $1.54 Dividends declared per common share $0.15 $0.125 $0.425 $0.35 Weighted average shares - basic 25,808,507 24,622,272 25,634,675 24,240,800 Weighted average shares - diluted 27,402,264 26,405,454 27,108,122 25,896,050 CONSOLIDATED BALANCE SHEET As of September 30, ($ in thousands except per share amounts) 2006 2005 Assets Cash and cash equivalents $162,761 $126,225 Investment securities available-for-sale 1,502,473 1,043,200 Investment securities held-to-maturity 649,954 486,729 Total investments securities 2,152,427 1,529,929 Loans: Single family mortgages 3,502,357 2,976,024 Home equity lines of credit 826,684 770,698 Commercial mortgages 1,208,636 1,030,062 Multifamily mortgages 877,004 636,863 Commercial business loans 557,552 311,905 Construction loans 254,585 245,817 Stock secured loans 79,484 78,654 Other secured loans 108,613 98,761 Unsecured loans and lines 223,913 169,833 Net deferred loan costs 6,102 4,454 Allowance for loan losses (44,054) (38,633) Loans, net 7,600,876 6,284,438 Loans held for sale 150,596 442,378 Investments in life insurance 156,909 100,696 FHLB stock 89,230 71,370 Goodwill 77,418 71,001 Premises, equipment and leasehold improvements, net 66,697 58,709 Other real estate owned 452 -- Other assets 255,858 167,186 Total Assets $10,713,224 $8,851,932 Liabilities and Stockholders' Equity Noninterest-bearing demand accounts $1,172,012 $935,246 NOW checking 927,114 899,774 MMA and passbook 3,767,235 3,325,745 Certificates of deposit 1,992,123 1,323,757 Total customer deposits 7,858,484 6,484,522 FHLB advances 1,898,500 1,518,500 Other liabilities 109,634 66,395 Subordinated notes 63,770 63,770 Total liabilities 9,930,388 8,133,187 Minority interest in subsidiaries 148,590 148,590 Preferred stock 115,000 115,000 Common stockholders' equity 519,246 455,155 Total stockholders' equity 634,246 570,155 Total Liabilities and Stockholders' Equity $10,713,224 $8,851,932 Number of shares of common stock outstanding 27,108,128 26,221,089 Book value per common share $19.15 $17.36 Tangible book value per common share $16.24 $14.58 Capital Ratios Leverage ratio 6.68% 7.49% Tier 1 risk-based capital ratio 9.69% 11.49% Total risk-based capital ratio 11.21% 13.35% ADDITIONAL FINANCIAL INFORMATION Three Months Ended Nine Months Ended September 30, September 30, 2006 2005 2006 2005 ($ in thousands) Operating Information Loan Origination Volume $1,198,735 $1,326,598 $3,816,675 $3,452,630 Loans Sold or Securitized $361,203 $449,584 $915,328 $1,204,404 Average Bank Assets per Full-time Bank Employee $13,165 $12,420 $12,864 $11,812 Average Bank Assets and Other Assets under Management per Full-time Employee $34,022 $31,836 $33,436 $31,410 Net Income to Average Bank Assets(1) 0.66% 0.75% 0.70% 0.74% Net Income Available to Common Stockholders to Average Common Equity(1) 12.18% 13.07% 12.47% 12.71% Efficiency Ratio(1) 74.3% 67.1% 71.2% 67.5% Yields/Rates(1) Investments 5.73% 5.27% 5.72% 5.30% Loans 6.53% 5.61% 6.34% 5.33% Total interest-earning assets 6.36% 5.55% 6.21% 5.32% Customer deposits 3.07% 2.06% 2.83% 1.83% Borrowings 5.25% 3.57% 4.93% 3.32% Total interest-bearing liabilities 3.50% 2.34% 3.16% 2.07% Net interest spread 2.86% 3.21% 3.05% 3.25% Net interest margin 2.96% 3.31% 3.14% 3.34% (1) Data is annualized. As of September 30, 2006 2005 ($ in thousands) Assets Under Management/Administration, Net of Bank Assets Managed Investment assets under management - Trainer Wortham $4,668,832 $4,103,162 Investment assets under management - Froley Revy 3,473,781 3,734,167 Investment assets under management - Starbuck Tisdale 992,069 983,327 Assets in brokerage accounts and money market mutual funds 3,696,812 2,453,789 Assets administered by First Republic Trust Company 3,309,471 2,239,393 Assets administered by First Republic Wealth Advisors 220,314 52,939 Total Wealth Management assets 16,361,279 13,566,777 Loans serviced for investors 4,727,773 4,130,684 Total fee-based assets $21,089,052 $17,697,461 Asset Quality Information Nonperforming assets: Nonaccrual loans $10,205 $16,575 Other real estate owned 452 -- Total nonperforming assets $10,657 $16,575 Nonperforming assets to total assets 0.10% 0.19% Accruing single family loans past due 90 days or more $-- $6,839 Restructured performing loans $-- $-- AVERAGE BALANCE SHEET Three Months Ended Nine Months Ended September 30, September 30, 2006 2005 2006 2005 ($ in thousands) Assets Interest-earning deposits with other institutions $5,428 $3,871 $5,550 $3,224 Short-term investments 2,619 304 5,065 10,496 Investment securities 2,159,404 1,479,921 1,978,425 1,207,029 Subtotal 2,167,451 1,484,096 1,989,040 1,220,749 Loans 7,472,302 6,063,451 7,015,762 5,795,132 Loans held for sale 255,380 618,991 331,631 602,373 Total interest- earning assets 9,895,133 8,166,538 9,336,433 7,618,254 Noninterest-earning assets 594,223 441,748 568,584 419,123 Total average assets $10,489,356 $8,608,286 $9,905,017 $8,037,377 Liabilities and Stockholders' Equity Customer deposits: Noninterest-bearing demand checking $1,145,726 $914,493 $1,089,436 $829,328 NOW checking 921,179 861,539 972,509 881,956 MMA and passbook 3,745,325 3,297,454 3,733,687 3,186,397 Certificates of deposit 1,930,915 1,303,608 1,843,074 1,198,541 Total customer deposits 7,743,145 6,377,094 7,638,706 6,096,222 FHLB advances and other borrowings 1,808,454 1,392,100 1,349,418 1,142,490 Subordinated notes 63,770 63,770 63,770 63,770 Total borrowings 1,872,224 1,455,870 1,413,188 1,206,260 Total interest-bearing liabilities 9,615,369 7,832,964 9,051,894 7,302,482 Noninterest-bearing liabilities 100,193 74,415 94,831 69,605 Minority interest in subsidiaries 148,590 148,590 148,590 148,590 Stockholders' equity: Preferred stock 115,000 115,000 115,000 101,081 Common stockholders' equity 510,204 437,317 494,702 415,619 Total stockholders' equity 625,204 552,317 609,702 516,700 Total average liabilities and stockholders' equity $10,489,356 $8,608,286 $9,905,017 $8,037,377