F IRST REPUIlT.I C B ANK It's.1 pnvilq!.' to ~<: r\'(: you 8

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1 F IRST REPUIlT.I C B ANK It's.1 pnvilq!.' to ~<: r\'(: you 8 June 14, 2013 Technical Di rector Fi nancial Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk, CT Via d i rt!ctor@:fllsb. org File Reterence: No. EITf-138 Accmmtingfor Inves/mcllts in Qualified Affordable HOl/sing Projecl.\' Dear Tech nical Director: First Republic Bank ("First Republic" or the "Bank") appreciates the opportunity to comment on the Exposure Drafi: Accolll1lillg f or Jnveslmcnl.\' in Qualified Affordable Housing Projects ("ED"). First Repub lic Bank is a Cali forn ia-c hartered commercial bank and lrust company headq uartered in San Francisco. We specialize in provid ing personali zed, relationship-based private banking, private business banking and private wealth management. At March 3 1, 2013, we had total assets of $3 5 billion, total loans of $28 bi llion, tolal depo:s its of $27 bi llion, tolal equity of $3.5 bi llion and wealth management assets of $35 bi llion. First Republic has invested in funds that provide low-income housing in our ma rkets for many years. AI Marc h 3 1, 2013, we have low-income housing investments of approximately $480 million. We full y support the F ASB's intent to improve the financial reporting associated wi lh in vestments in qualified affordable housing projects by expanding the criteria to qualify for reporting both the tax cred its and the write-down of our investment within income tax expense. However, we believe that the proposal as writlcn is overly complicated and the ene-ctive yield method does not properly reflect the true economics of these Iypes of investments. We strongly bel ieve that an alternat ive method of amortizing, through income tax expense, the cost of our investment relati ve to the man ner in which the tax credits are eamed would be a sign ificant improvement over the ene-ctive yield method. A discussion of our responses to the questi ons presented in the ED is as fo llows: Q uestion I: Do you a gree that an entity should meet the conditions in this propused Update in orde r to elcct to account fo r the investment in a qualified affordable housing project using the effective yield method? tr not. please explain why, Response: We agree w ith the criteria in the EO. I I I I' I N " STREET. SAN r l!,\ NI. IS( ", CAII HlltNl.\ 'Hi li. Tlt l. (-li S).1')':: O R (1\00) 3')':: I AX ( 1( 5) 3,)':: INVtNU.NI ' N II. ~N I I r:\n" I N';,\ 1 I. <. I... hh M I... 11>1 '

2 Question 2: Do you agree that the effeclivc yield method is an appropriate method to account for investments in qualified affordable housing projects'! Jf not, what method of accounting should be used'! Please explain. Response: We futly support the proposed change in the ED to allow an accounting approach in which an entity would report both the write-down of the investment as we ll as the tax credits and other related tax benefits within income tax expense. However, we believe that an approach that amortizes the investment balance, through income t<lx expense, in proportion to the tax credits earned in a given period is a more appropriate method to recognize the financial statement impact of these types of investments instead of the errective yield method as described in the ED. We believe this approach properly aligns the accounting for the investment with in the respecti ve periods in which the m<u ority of the financial benefits are recei ved. As a buyer of low- income housing tax credi t ("LIHTC") investments, the majority of the retullls that we expect to receive are in the fonn of tax credits. We acknowledge that there are other tax benefits associated wit h tax losses from these investments; however, the tax losses merely create temporary differences between book and tax which give rise to a deferred tax asset or liability. Tax credits, on rhe other hand, create permanent book and tax differences that directly reduce an entity' s etlective tax rate in the year in which the tax cred it is received. If a buyer were to consider purchasing a L1HTC investment in the secondary market instead of at the formation of the partnership, the aillount of remaining tax credits from the investment would be the driver of the valuation of the investment. In the example provided in the ED, a full impairment loss wou ld be recognized in the same year in which the final tax credits are recei ved as the investment has no future val ue. As a resu lt, the investment balance remains at zero during those subsequent years, despite tax losses being generated during those periods. This rurther supports our position that the tax credits alone represent the true value orthe in vestment. Etfecti ve Yield Method The effective yield method proposed in the ED amortizes the in vestment by applying a constant yield to a diminishing asset balance, resulting in an ever decreasin g net in come impact. This method also uses an internal rate of return (" IRR") bascd on 15 years or cash flows, while the amortization period is based on 10 years of tax credits. We concur that the investment should be written down to zero once the tax credits are rully utilized in year 10. However, application of the efrecti vc yield method res ults in an acceleration of income in the early years and a deterral of losses to the later years, which docs not correlate to the timing of whe n the tax credits are earned. As illustrated in the example in the ED, the impact to net income is higher during years I through 6 than in years 7 through 10 despite a consistent level of tax credits throughout the Ilrst 10 years. Furthermore, in the year of impairment (year 10), the impact to net income is heaviest even though there is no change whatsoever in the delivery of tax benefits. We believe this pattern of amortization distorts the economics of the in vestment. Page 2 of6

3 Application of a Propol1ional A mortization Approach - Tax C redits Only We believe that the book value of our LlHTC investment s hould be amortized at a rate which is in proportion 10 the tax c redils received. This approach would prevent the book value of the in vestment from ever exceeding the value of the total remaining future tax credits at any give n period-end, as was the case in the ED examp le using the elfective y ield method. The example in the ED shows a $25 mi lli on investment balance a t the end of year 9, while only $ 16 million of tax credits remain to be earned. This does not appear to be an appropriale reflection of the inveslment ba lance. A lternatively. using a proportional amql1izaiion approach would properly align the timing o f the write-down of Ihe invest ment with the recognition of related tax benefits in the same periods. Unde r this approach, at any period-end, the balance of our investment would be reflective of the remaining tax c redits to be earned in future periods. The followin g example illustrates the amortization of the LlHTC investm ent in proportion to the receipt of tax credits (using the example facts presented in the ED): Amortize in Prulxlrtion 10 Tax Credib Onty Nco Tax Tax Anxtr1. of Cu rren l Tax Deferred hnp.let o n Net Cash tnvestme nt Cred it Depree. Invcs tnlc;:nt Benefit Tax lknc:lit NCl lncomc Flow Yc:ar S ( IOOJM)() 1, S 16,UU() $ $ to,noo $ $ 1,09 1 $ 10,(MM) 2 KO,()(X) IO,()()O 1,11')) IK,m 3 70,{)()() I K.,)O,) ,90<) 4 60,000 16,t)()() I(),I)()() 1, ,000 )11,909 S 50, ,000 1, , ,(X)() 16,000 7; tk,909 ],(J) I S,9()') 7 30,000 1 (t,(m)() IO,IX)() 1,(1')1 10,000, 20,000 16,000 10,000 1, ,()()O 10,000 1, , ,000 10,000 18,<)0') 1,091 1 (I.C)(X) (2,901)) 2,90'-) " 12 () 13 () (2,')()I) 2,'X)') " IS 7; () $ S $ 100,000 $ S (3,63R) S 100,000 S As seen from the example, no income. is ever accelerated o r deferred during the years o f inveslment and the annual impact to the income statement bears the same rate in which the ta,"i( cred its a re earned. The in vestment would not be impaired at any point because the amortization s peed is directly linkcd to the earning of the tax credits. Usin g this approach, the investment balance w ill never exceed the re main ing lax credits. Page 3 01"6

4 Application of a Proportional Amortization Approach Tax Credits and Other Tax Benefits Another way of apply ing the proportional amortization method would be to include the tax credits and other tax benefits to calculate the amortization amounts. For comparison, we have presented the following example to illustrate the amortization of the L1HTC investment in proportion to the receipt of tax credits and other tax benefits (also using the example facts presented in the ED). Amorti:le in Proportion to Tax C rcdits and Other Tax Bcndits Y.:ar " 12 IJ No< Inv.:s lmt:llt Tax Credit $ ')(U 14 $ [(,.OO() $ 8 \ [41 [(,J)()() 62, , , J5,()()() ,429 7,[ &6 2,1l57 \.429 $ 1(', [6.1)()() [6, ,000 $ Tax Depr.:!:. $ Amort. o f [nvestrnent C'urrem Tax Benclif $ $ ,21l ,429 1, ,429 11(9()<) 11l, ,<J09 109,095 $ 100,000 $ 203,638 $ Detcrred Impact on Tax Benclit Net Incomc Net Cash F[ow $ ([00,000) t ,90') 18,9()<) 2,9()9 2,<)()<) 805 S < 'OS 805 (2.338) 10,429 to,429 10,429 10,429 (1l57) (1l57) (857) (857) (857) (3,638) $ 100,000 $ 103,638 The impact to net income consists of: I) the tax credits, Icss 2) the amortization orthe in vestment, net or its tax benefits. As seen in the above example, net income is negati ve ly impacted in the years after tax credits have been full y utilized. Without the tax credits in years 11 through 15, the amortization expense, net of its tax benefits, will always be negati ve. In comparing these two scenarios, it is our opinion that amortizing the in vestment based solely on the tax credits is the most accurate way to account tor the financial statement impact of a LIHTC in vestment. Question 3: Do you believe that removal of the requiremenl for guaranteed tax credits should change the method used to account for such investmenls from an effective yield method to an approach where the cost of investment is amortized in proportion to tax credits and other lax benefits received and recognized as a component of income taxes attributable (0 continuing operations? Response: We agree that the remova l of the requirement for guaranteed tax credits is appropriate, and that the method of accounting tor such investments should be a proportional amortization approach, as discussed in our response to Question 2 above. Such amortization would then be reported as a component of income tax expense. l'age 4or6

5 Question 6: Do you agree that the amentlments ill this proposed Update should prescribe recurring disclosure objectives: that would enable users of financial statements to understand the nature of investments in qualified affordable housing projects and the effect of the measurement of that investment and the related tax credits on the financial position and results of operations of the reporting entity? Alternatively, should the proposed amendments include minimum required disclosures? Response: We bcl ieve that add itional recurring disclosures are appropri ate fo r these types or investments, including: I) Totalta.x credits recognized as a component of tax expense 2) I\mount of investment "amortization" included in tax expense 3) Future obligations to fund LI HTC investments -liabil ity ba lance 4) Rema in ing unamortized Ll IITC invest ments - asset balance Recause of tile significance of these investments to our financial statements, we have provided expanded disclosures in ou r Fonn I O-Q and Form 10-K Management's Discussion and Analys is to incl ude the estimated tax credits that reduced our income tax expense in a given period along with the non-interest expense impact, where the current write-down of the investment is reported. The amou nt of non-interest expense recognized for thc "write-o IT" of these investments has grown considerably over the past few years and without discussing it wi th the re lated tax cred its, our expense trend could be inappropriately linked to " inefficiency" when in fact it is the result of a growing investment base for which we are earning additional tax credits to reduce income tax expense. This simp le mismatch in the lines of our income statement causes confusion among our investor base as to the l3ank's true operating efficiency. Question 7: Do you agree that the amendments in this l)roposed Update should be applied using a retrospective approach'! If not, please explain why. Response: Yes. We believe that linancial statemen ts should be presented on a comparative basis for all periods presented. As noted above in our discussion of Question 2, we believe that the retrospective application of a "proportional amortization" approach wou ld be dramatically less complicated and take significa ntly less time than performing an effective yield computation ror each individual investment. Question 8: Do you agree that early adoption or the proposed amendments should be permitted'! If not, please explain why? Response: Yes. We believe that early adoption of the proposed amcndment should be permitted upon issuance of a fi nal standard as the concepts proposed by the ED wi ll sign ificantly improve fi nancial report ing. Question 10: For prcparers, how much effort would be needed 10 implement the proposed amendments? Response: I\s currently written, we believe that the amollnt of effort to impl ement and maintain the effecti ve yield met hod wou ld be very sign ifica nt as preparers would need to re-eompute the IRR at the investment level each time cash now projections were updated. Any change in the timi ng and amount of cash nows will impact the IRR directly, which would then impact the amortization of the investment balance. In our experience, projected tax losses have fl uctuated ~ i gni fica n t l y, in most cases, since making our initial investments. Page 5 of6

6 1I0wever, irthe FASB were to adopt the " proportional amortization" method based only on the tax credits, we believe that preparers could apply the new standards very e ffi ciently because the timing ortax cred its is much more s table than the timing o r partnership losses. "I he constant true-up of cumulative amortization expense would be minimal. In summary, we commend the F ASH fo r reviewing the accounting for investments in qualified affordable housing projects. We bel ieve that reporting ill.! orthe impacts (tax credits and associated write-down o r the investment) from this type of investment in the income tax expense line will benefit investors, research analysts and prcparcrs. In short, it will improve financial reporting considerably fo r users to better understand the impact of L1H TC investments on an entity's income statement. However, as di scussed above, we believe that a much simpler proportional arn0l1i7..at ion method or recognizing the decrease in the LlHTC investment should be included in the final standard, which w ill greatly simplity the process to report on LIIITC in vestments, and, importantly, will much better reflect the tax benefits reali: cd over the life of the invest ment. We thank you ror the opportunity to comment on this proposal. We would be glad to discuss our opinions with you further should you have any questions or require additional info rmation. Very truly yours, ={lu:jh- d \ Michael J. Romer Senior Vice President and Deputy Chief Financial O l1icer Page () uf6