First Republic Misses Earnings as Expenses Rise, Shares Fall

Shares of First Republic Bank FRC witnessed a steep fall owing to expense worries, following its second-quarter 2014 earnings release. The company reported adjusted earnings per share of 69 cents, missing the Zacks Consensus Estimate of 76 cents. However, it was up from 64 cents earned in the prior-year quarter.

Lower-than-expected results were mainly due to higher interest and non-interest expenses and rise in the provision for loan losses, partly offset by increase in revenues. Credit quality and capital position were mixed bags.

Including certain one-time items, the company reported net income of $120.8 million, up 7.4% from the prior-year quarter. Net income available to common shareholders was $106.9 million, up 4.1% 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 #3 (Hold).

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