First Republic Reports In-Line Earnings

Zacks

First Republic Bank (FRC) reported first quarter 2013 adjusted earnings of 72 cents per share, in line with the Zacks Consensus Estimate. However, results surpassed the year-ago earnings of 49 cents.

First Republic’s results reflect top-line growth due to higher loans and deposits, offset by increased expenses. Further, deteriorating capital ratios were a headwind.

Taking into consideration the impact of purchase accounting, the company reported net income of $122.3 million or 85 cents per share in the quarter, compared with $91.8 million or 67 cents per share in the prior-year quarter.

First Republic’s total revenue of $396.0 million was up 16% from the prior-year quarter and surpassed the Zacks Consensus Estimate of $354.0 million.

Excluding the impact of purchase accounting, revenues were $336.0 million for the quarter, a 26% increase from the year-ago quarter.

Quarter in Detail

First Republic’s net interest income increased 6% year over year to $298.0 million. Excluding the impact of purchase accounting, net interest income (core net interest income) was $263.8 million, up 12% from $235.0 million in the year-ago quarter. The increase in core net interest income was mainly due to increases in the average balances of loans and investment securities as well as lower deposit costs.

However, net interest margin fell 52 basis points (bps) year over year to 3.87%.

Net loans climbed 20% from the prior-year quarter to $28.0 billion, mainly as a result of higher single family loans, multifamily loans, single family construction loans, commercial business loans, multifamily/commercial construction loans, unsecured loans and lines of credit and other secured loans. Average deposits increased 15% from the prior-year quarter to $26.8 billion, mainly due to non-interest bearing and interest-bearing checking accounts.

First Republic’s non-interest income came in at $72.3 million, increasing 121% year over year. The increase was attributable to higher wealth management fees and gain on sale of loans.

Non-interest expenses totaled $197.4 million, up 20% year over year. The increase was attributable to an increase in personnel costs, increased expenses related to tax credit investments and initiation of the amortization of intangibles from the asset purchase from Luminous.

First Republic’s efficiency ratio declined to 53.3% from 52.5% in the prior-year quarter. The increase in efficiency ratio indicates a decline in profitability.

Credit Quality

First Republic’s credit quality was a mixed bag in the quarter under review. Net charge-offs declined by 51% year over year to $2.7 million.

Non-performing assets to total assets ratio equaled 0.14%, stable compared with the prior quarter but up from 0.11% in the year-ago quarter.

The ratio of net loan charge-offs to average total loans on an annualized basis was 0.00% as of Mar 31, 2013, down from 0.01% both as of Dec 31, 2012 and as of Mar 31, 2011.

Capital Position

During the reported quarter, First Republic’s capital ratios deteriorated to some extent. As of Mar 31, 2013, the company’s leverage ratio was 9.35% compared with 9.48% as of Mar 31 2012. Moreover, the Tier 1 risk-based capital ratio declined 49 bps to 13.52%. Further, the estimated Tier 1 common equity ratio moved down 130 bps to 11.43% as of Mar 31, 2013.

Dividend Update

Concurrent with the earnings release, the bank declared a 20% increase in its quarterly cash dividend to 12 cents per share. The dividend will be paid on May 15, 2013 to shareholders of record as of May 1.

Our Take

Going forward, we expect First Republic’s continued stability and earnings strength to drive growth over the next cycle. Further, the company’s dividend growth story reflects its strong capital position.

Yet, the unsettled economic environment, low interest rate and stringent regulatory issues are the matters of concern.

First Republic currently retains a Zacks Rank #3 (Hold).

Among other regional banks, Columbia Banking System Inc. (COLB) is scheduled to report its earnings on Apr 24, whereas Wilshire Bancorp Inc. (WIBC) is scheduled to report on Apr 23. Another regional bank Western Alliance Bancorporation (WAL) is expected to report on Apr 18.
 

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