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First Republic Earnings Lag by a Penny

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First Republic Bank (FRC - Free Report) reported third-quarter 2013 adjusted earnings of 64 cents per share, missing the Zacks Consensus Estimate by a penny. However, results surpassed the year-ago earnings of 54 cents per share.

Top-line growth, aided by higher net interest and non-interest income was the positive for the quarter. Further, increase in loans and deposits reflected organic growth. However, rise in non-interest expenses reflected undisciplined expense management.

Including certain one-time items, the company reported net income of $112.0 million or 75 cents per share in the quarter, compared with $102.7 million or 72 cents per share in the prior-year quarter.

Total revenues (net of interest expense) were $361.8 million for the quarter, up 5.6% year over year. Excluding the impact of purchase accounting, First Republic’s core revenue came in at $331.2 million, up 12.0% from the prior-year quarter but below the Zacks Consensus Estimate of $376.0 million.

Quarter in Detail

First Republic’s net interest income (fully tax-equivalent basis) increased 11.3% year over year to $299.5 million. Excluding the impact of purchase accounting, net interest income was $277.6 million, up 10.1% from the year-ago quarter. The increase in net interest income resulted from higher interest income on loans and investments.

However, net interest margin fell 63 basis points year over year to 3.50%. Excluding the impact of purchase accounting, margin was 3.15%, down 32 basis points year over year.

First Republic’s non-interest income came in at $53.6 million, increasing 22.7% year over year. The increase was primarily attributed to higher wealth management fees and loan servicing fees.

Non-interest expenses totaled $203.6 million, up 14.2% year over year. Elevated salaries and employee benefits expense and increased tax credit investments primarily led to this rise.

First Republic’s efficiency ratio stood at 56.3% compared with 52.1% in the prior-year quarter. Excluding the impact of purchase accounting, the ratio was 60.1% compared with 58.6% 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 39.4% year over year to $10.0 million.

Nonperforming assets to total assets ratio equaled 0.13%, in line with the year-ago quarter. However, the ratio of net loan charge-offs to average total loans on an annualized basis was 0.04% as of Sep 30, 2013, up from 0.00% in the prior-year period. Nonaccrual loans increased 33.2% on a year-over-year basis to $51.8 million.

Capital Position

During the reported quarter, First Republic’s capital ratios stood at a well-capitalized level. As of Sep 30, 2013, the company’s Tier 1 leverage ratio was 9.18% compared with 9.33% as of Sep 30, 2012.

The Tier 1 risk-based capital ratio was 13.06% compared with 13.57% as of Sep 30, 2012. Further, the estimated Tier 1 common equity ratio was 10.57% as compared with 11.98% in the prior-year quarter. Book value per share came in at $24.13, up from $21.48 in the prior-year quarter.

Net loans came in at $32.3 billion, up 22.3% from the prior-year quarter. Total deposits surged 21.8% from the prior-year quarter to $31.3 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 Nov 15, 2013 to shareholders of record as of Nov 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 #2 (Buy).

Among other West banks, Zions Bancorp. (ZION - Free Report) is scheduled to report its third-quarter earnings on Oct 21, Wilshire Bancorp Inc. on Oct 22, while Bank of Hawaii Corporation (BOH - Free Report) will report on Oct 28.

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