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First Republic (FRC) Posts In-line Earnings, Shares Fall (Revised)

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Shares of First Republic Bank (FRC) declined 14.9% owing to expense worries, following its second-quarter 2014 earnings release on last Wednesday. The company reported core earnings per share of 69 cents, which excluded the impact of purchase accounting. GAAP earnings per share for the quarter was 76 cents, in line with both the Zacks Consensus Estimate and the prior-year quarter figure.

Results were mainly benefited by increase in revenues, offset by higher non-interest expenses and rise in the provision for loan losses. Credit quality and capital position were mixed bags.

Excluding certain one-time items, net income available to common shareholders was $97.0 million, up 12.6% from the prior-year quarter.

Performance in Detail

Total revenue was $410.1 million, up 12.2% year over year. Excluding the impact of purchase accounting, First Republic’s core revenue came in at $388.8 million, up 17.2% year over year but below the Zacks Consensus Estimate of $404.0 million.

First Republic’s net interest income increased 9.9% year over year to $333.2 million. Excluding the impact of purchase accounting, net interest income was $312.0 million, up 15.7% from the year-ago quarter.

However, core net interest margin fell 21 basis points (bps) year over year to 3.16%. Excluding the impact of purchase accounting, margin was 3.38%, down 41 bps year over year.

The company’s non-interest income came in at $76.8 million, up 23.4% year over year. The rise was primarily owing to an increase in investment advisory fees and gains on sale of loans.

Non-interest expense was $222.7 million, up 17.9% year over year. An increase in salaries and employee benefits, expenses related to technology platform and professional fees primarily led to this rise.

Core efficiency ratio was 56.3% as compared with 55.5% in the prior-year quarter. Excluding the impact of purchase accounting, the ratio was 54.3% as against 51.7% in the prior-year quarter. An increase in efficiency ratio indicates decline in profitability.

Credit Quality

First Republic’s credit quality was mixed in the quarter. On a year-over-year basis, provision for credit losses increased 72.3% to $21.8 million and total nonperforming assets declined 17.0 % to $52.1 million. Further, nonperforming assets to total assets ratio was 0.11%, down from 0.17% in the year-ago quarter. As of Jun 30, 2014, the ratio of net loan charge-offs to average total loans was 0.001%, down from 0.006% the prior-year period.

Asset and Capital Position

First Republic’s capital ratios were a mixed bag too. As of Jun 30, 2014, the company’s Tier 1 leverage ratio was 9.73% versus 9.83% as of Jun 30, 2013.

Tier 1 risk-based capital ratio was 13.74% compared with 13.52% as of Jun 30, 2013. Further, book value per share came in at $26.82, up from $21.59 at the end of the prior-year quarter.

Net loans increased 19.1% year over year to $36.1 billion as of Jun 30, 2014, while total deposits rose 24.1 % to $35.0 billion.

Our Viewpoint

We expect rise in loans and deposits to keep First Republic’s organic growth momentum running. However, higher interest and non-interest expenses remain causes of concern. An unsettled economic environment and stringent regulations are other challenges.

First Republic currently carries a Zacks Rank #5 (Strong Sell).

Other Banks

Among other West banks, Westamerica Bancorp. (WABC) reported in-line earnings of 58 cents per share.

Central Pacific Financial Corp. (CPF) is scheduled to report on Jul 24.

Bank of Commerce Holdings (BOCH) is slated to report on Jul 30.

(We are reissuing this article to correct a mistake. The original article, issued on July 17, 2014, should no longer be relied upon.)

Read the Full Research Report on WABC
Read the Full Research Report on CPF
Read the Full Research Report on FRC
Read the Full Research Report on BOCH

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