First Republic (FRC) Q3 Earnings Beat on Higher Revenues - Analyst Blog

Improved top line drove First Republic Bank (FRC) to deliver a positive earnings surprise in third-quarter 2014. The company reported core earnings per share of 81 cents, outpacing the Zacks Consensus Estimate of 79 cents.  Core earnings excluded the impact of purchase accounting and included 10 cents per share of gain on investment securities. The figure also compared favorably with the prior-year core earnings of 63 cents per share.

GAAP earnings per share for the quarter came in at 86 cents compared with the prior-year quarter figure of 74 cents per share.

Results were mainly benefited by increased revenues, offset by higher non-interest expenses and rise in the provision for loan losses. Improved credit quality and a strong capital position were among the positives.

Core net income available to common shareholders was $128.2 million, up 32.5% from the prior-year quarter.

Quarter in Detail

Core revenue was $423.2 million, up 27.8% year over year, slightly below the Zacks Consensus Estimate of $424.0 million. Excluding gain on sales of investment securities, First Republic's core revenue came in at $399.6 million, up 20.5% year over year.

First Republic's core net interest income increased 15.3% year over year to $320.2 million. However, core net interest margin fell 6 basis points (bps) year over year to 3.09%.

The company's non-interest income came in at $104.7 million, up from $53.6 million in the prior-year quarter. Excluding gain on sales of investment securities, non-interest income increased 50.2% year over year to $81.1 million.  The rise was primarily owing to higher investment advisory fees, foreign exchange fees and gains on sale of loans

Notably, the bank's repositioning of its investment portfolio resulted in gain on sales of investment securities in the reported quarter.

Non-interest expense was $238.4 million, up 24.4% year over year. An increase in salaries and employee benefits, expenses related to the technology platform and professional fees primarily led to this rise.

Core efficiency ratio was 55.4% compared with 56.5% in the prior-year quarter. A decline in efficiency ratio indicates improved profitability. Excluding gain on sales of investment securities, the core efficiency ratio was 58.7% for the reported quarter.

As of Sep 30, 2014, net loans increased 12.6% year over year to $36.3 billion, while total deposits rose 13.8% to $35.6 billion.

First Republic's total wealth management assets were $51.4 billion as of Sep 30, 2014, compared to $38.2 billion as of Sep 30, 2013. Wealth management assets include investment management assets, brokerage assets, money market mutual funds, trust and custody assets.

Credit Quality

First Republic's credit quality improved partially in the quarter. On a year-over-year basis total nonperforming assets declined 9.1 % to $50.2 million. Further, nonperforming assets to total assets ratio was 0.11%, down from 0.13% in the year-ago quarter.

As of Sep 30, 2014, the ratio of net loan recoveries to average total loans was 0.00%, compared with net loan charge offs to average total loans of 0.16% in the prior-year period. However, provision for credit losses increased 34.8% year over year to $13.5 million.

Capital Position

First Republic's capital ratios improved during the quarter. As of Sep 30, 2014, the company's Tier 1 leverage ratio was 9.51% versus 9.18% as of Sep 30, 2013.

Tier 1 risk-based capital ratio was 13.83% compared with 13.06% as of Sep 30, 2013. Further, book value per share increased 13.9% year over to $27.48.

Our Viewpoint

Results reflect a decent quarter for First Republic. We expect rise in loans and deposits to keep First Republic's organic growth momentum going. Further, we remain optimistic about the company's prospects as its total assets are expected to reach at least $50 billion by 2015.  

However, higher expenses remain a cause of concern. An unsettled economic environment and stringent regulations are the other challenges.

First Republic currently carries a Zacks Rank #2 (Buy).

Other Banks

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

Zions Bancorporation (ZION) is slated to report on Oct 20, while SVB Financial Group (SIVB) is scheduled to report on Oct 23.

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