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First Republic Beats Estimates

Zacks Equity Research

First Republic Bank (FRC) reported its third quarter 2012 adjusted earnings of 54 cents per share, substantially lagging the Zacks Consensus Estimate of 71 cents. However, results surpassed the earnings per share of 42 cents reported in the prior-year quarter.

First Republic’s results reflected growth in its top line. Further, an increase in its loans and deposits were the positives for the quarter. However, increasing expenses remained a cause of concern.

Taking into consideration the impact of purchase accounting, the company reported net income of $102.7 million or 72 cents per share in the quarter, compared with $87.8 million or 66 cents per share in the prior-year quarter.

First Republic’s total revenue of $342.7 million in the reported quarter increased 15% from the prior-year quarter. Moreover, it surpassed the Zacks Consensus Estimate of $337.0 million.

Quarter in Detail

First Republic’s net interest income hiked 11% compared with the prior-year quarter to $298.8 million. Excluding the impact of purchase accounting, net interest income (contractual net interest income) stood at $252.2 million for the third quarter of 2012, up 22% compared with the prior-year quarter. The increase in contractual net interest income was mainly attributable to improvement in the average balances of loans and investment securities along with lower deposit costs.

However, net interest margin fell 35 basis points (bps) year over year to 4.13%.

Net loans surged 27% compared with the prior-year quarter, mainly as a result of hike in single family loans, single family construction loans, commercial business loans, multifamily/commercial construction loans, unsecured loans and lines of credit and other unsecured loans. Average deposits increased 18% from the prior-year quarter, mainly due to non-interest bearing and interest bearing checking accounts.

First Republic’s non-interest income came in at $43.8 million, up 45% year over year. The hike was attributable to increases in fees of investment advisory, trust and foreign exchange as well as gain on sale of loans, partially mitigated by a drop in net loan servicing fees.

Non-interest expenses totaled $178.4 million, up 23% year over year. The increase was attributable to increased number of employees, occupancy costs, costs associated with investments in technology and tax credit investments.

First Republic’s efficiency ratio declined to 52.1% from 48.5% in the prior-year quarter. The increase in efficiency ratio indicates a decline in profitability.

Credit Quality

First Republic’s credit quality deteriorated in the quarter under review. Net charge-offs increased substantially on a sequential basis and 29.7% year over year to $0.6 million.

Nonperforming assets to total assets ratio equaled 0.13% in the reported quarter, rising from 0.10% in the prior quarter and 0.12% in the year-ago quarter.

The ratio of net loan charge-offs to average total loans on an annualized basis was 0.01% as of September 30, 2012, in line with the prior-year quarter.

Capital Position

During the reported quarter, First Republic’s capital levels remained stable. As of September 30, 2012, the company’s leverage ratio was 9.33% compared with 8.95% as of September 30. 2011. Moreover, the Tier 1 risk-based capital ratio dropped 24 bps to 13.57%. However, the estimated Tier 1 common equity ratio moved down 138 bps to 11.98% as of September 30, 2012.

Dividend Update

Concurrent with the earnings release, the bank has declared a quarterly cash dividend on its common shares of 10 cents per share. The dividend will be paid on November 15, 2012 to shareholders of record as on November 1, 2012.

Our Take

Going forward, we believe First Republic’s continued stability and strength of our earnings, including mortgage banking results, could drive growth over the next cycle. Moreover, its top-line growth remains a positive. Further, the company’s record of regular dividend payment 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 #3 Rank, which translates into a short-term Hold rating. One of its peers, Preferred Bank (PFBC) retains a Zacks #2 Rank (a short-term Buy rating).

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