First Republic Beats Earnings on Strong Revs - Analyst Blog

First Republic Bank FRC reported first-quarter 2014 adjusted earnings of 67 cents per share, beating the Zacks Consensus Estimate of 64 cents. However, the reported figure compared unfavorably with 72 cents per share earned in the year-ago quarter.

Better-than-expected results were mainly driven by revenue growth, partially offset by a rise in expenses. Capital strength and solid franchise development were the other tailwinds.

Including certain one-time items, the company reported net income of $114.7 million, down 6.4% from the prior-year quarter. Net income available to the common shareholders was $100.8 million, down 12.2% from the prior-year quarter.

Performance in Detail

Total revenue was $362.2 million, up 7.8% year over year. Excluding the impact of purchase accounting, First Republic's core revenue came in at $381.7 million, up 3.1% year over year but below the Zacks Consensus Estimate of $382.0 million.

First Republic's net interest income increased 7.6% year over year to $320.7 million. Excluding the impact of purchase accounting, net interest income was $301.2 million, up 14.2% from the year-ago quarter.

However, core net interest margin fell 25 basis points (bps) year over year to 3.17%. Excluding the impact of purchase accounting, margin was 3.37%, down 50 bps year over year.

The company's non-interest income came in at $61.0 million, down 15.6% year over year. The decline was primarily owing to a significant fall in proceeds from the sale of loans.

Non-interest expense was $213.4 million, up 17.4% 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 stood at 58.9% as compared with 54.1% in the prior-year quarter. Excluding the impact of purchase accounting, the ratio was 57.0% as against 50.4% 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 under review. On a year-over-year basis, the provision for credit losses increased 9.5% to $7.1 million and total nonperforming assets rose 10.9 % to $55.3 million.
Further, nonperforming assets to total assets ratio was 0.12%, down from 0.14% in the year-ago quarter. As of Dec 31, 2013, the ratio of net loan charge-offs to average total loans was 0.01%, up from 0.00% the prior-year period.

Asset and Capital Position

During the reported quarter, First Republic's capital ratios were a mixed bag. As of Mar 31, 2014, the company's Tier 1 leverage ratio was 9.85% versus 9.36% as of Mar 31, 2013.

Tier 1 risk-based capital ratio was 14.07% compared with 13.53% as of Mar 31, 2013. Further, book value per share came in at $26.21, up from $22.97 at the end of the prior-year quarter.

Net loans increased 22.9% year over year to $34.4 billion as of Mar 31, 2014, while total deposits rose 25.0 % to $33.6 billion.

Dividend Update

First Republic announced an increase in its quarterly cash dividend for the first quarter to 14 cents per share, which is payable on May 15, 2014 to shareholders of record as of May 1, 2014.

Our Viewpoint

We expect First Republic's growth gaining momentum owing to its balance sheet strength. Moreover, rise in loans and deposits indicate the company's good organic growth prospects.

However, higher interest expenses and non-interest expenses are causes of concern. An unsettled economic environment and stringent regulations are the other challenges.

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

Among other Western banks, BBCN Bancorp, Inc. BBCN is scheduled to report first-quarter results on Apr 21, while SVB Financial Group SIVB and City National Corporation CYN are expected to report on Apr 24.