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First Republic's Earnings Beat

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First Republic Bank (FRC - Free Report) reported second-quarter 2013 adjusted earnings of 64 cents per share, inching past the Zacks Consensus Estimate by a penny. Moreover, results surpassed the year-ago earnings of 50 cents per share.

Better-than-expected results reflected top-line growth, aided by higher net interest and non-interest income. Increase in loans and deposits were also a positive for the company. However, rise in non-interest expenses reflected undisciplined expense management.

Including certain one-time items, the company reported net income of $113.7 million or 77 cents per share in the quarter, compared with $97.9 million or 60 cents per share in the prior-year quarter.

Total revenues (net of interest expense) were $365.3 million for the quarter, up 12.0% year over year. Excluding the impact of purchase accounting, First Republic’s core revenue came in at $331.8 million, up 20.6% from the prior-year quarter but was below the Zacks Consensus Estimate of $368.0 million.

Quarter in Detail

First Republic’s net interest income (fully tax-equivalent basis) increased 13.7% year over year to $289.2 million. Excluding the impact of purchase accounting, net interest income was $269.6 million, up 13.1% from the year-ago quarter. The increase in net interest income resulted from higher interest income on loans and investments along with reduced interest expenses on deposits and borrowings.

However, net interest margin fell 48 basis points year over year to 3.79%. Excluding the impact of purchase accounting, margin was 3.37%, down 11 basis points year over year.

First Republic’s non-interest income came in at $62.3 million, increasing 70.2% year over year. The increase was primarily attributed to higher investment advisory fees and gain on sale of loans.

Non-interest expenses totaled $200.1 million, up 16.6% year over year. Elevated salaries and employee benefits expense, increased tax credit investments and the cost of growth initiatives led to this rise.

First Republic’s efficiency ratio stood at 54.8% compared with 52.4% in the prior-year quarter. Excluding the impact of purchase accounting, the ratio was 58.9% compared with 60.5% in the prior-year quarter. The increase in efficiency ratio indicates a decline in profitability and vice-versa.

Credit Quality

First Republic’s credit quality was a mixed bag in the quarter under review. Provision for loan losses declined 14.8% year over year to $12.7 million.

However, nonperforming assets to total assets ratio equaled 0.17%, up from 0.10% 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 Jun 30, 2013, up from 0.00% as of Jun 30, 2012. Nonaccrual loans more than doubled on a year-over-year basis to $62.8 million.

Capital Position

During the reported quarter, First Republic’s capital ratios stood at a well-capitalized level. As of Jun 30, 2013, the company’s leverage ratio was 9.83% compared with 9.55% as of Jun 30, 2012.

The Tier 1 risk-based capital ratio was 13.52% compared with 13.68% as of Jun 30, 2012. Further, the estimated Tier 1 common equity ratio was 10.87% as compared with 12.03% in the prior-year quarter. Book value per share came in at $23.50, up from $20.74 in the prior-year quarter.

Net loans came in at $30.3 billion, up 21.2% from the prior-year quarter. Total deposits surged 16.5% from the prior-year quarter to $28.2 billion, mainly due to increased non-interest bearing and interest-bearing checking accounts.

Dividend Update

Concurrent with the earnings release, the bank declared a cash dividend of 12 cents per share. The dividend will be paid on Aug 15, 2013 to shareholders of record as of Aug 1.

Our Viewpoint

Going forward, we expect First Republic’s continued stability and earnings strength to drive growth over the next cycle. Further, the company’s dividend growth story reflects its strong capital position.

Yet, the unsettled economic environment, rising expenses and stringent regulatory issues are matters of concern. First Republic currently carries a Zacks Rank #3 (Hold).

Among other West banks, Bank of Hawaii Corporation (BOH - Free Report) and Zions Bancorp. (ZION - Free Report) are scheduled to report second-quarter earnings on Jul 22, while Wilshire Bancorp Inc. will report on Jul 23.

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