First Republic Reports Strong Quarterly Earnings

SAN FRANCISCO, July 16, 2014 /PRNewswire/ -- First Republic Bank (NYSE: FRC) today announced financial results for the quarter ended June 30, 2014.

"We are very pleased with second quarter results.  Asset quality remains excellent and capital is very strong," said Chairman and CEO Jim Herbert.  "As we approach $50 billion in assets, we will incur additional expenses as we build out our infrastructure to meet heightened regulatory standards."

Quarterly Highlights

Financial Results

• Net income was $120.8 million.
• Diluted earnings per share ("EPS") were $0.76. 
• Core net income was $110.9 million, up 15.7% from second quarter 2013. ⁽¹⁾
• Core diluted EPS were $0.69, up 7.8%. ⁽¹⁾
• Loans sold totaled $1.3 billion in the second quarter, compared to $945.4 million for the same period a year ago.
• Book value per share was $26.82, up 14.1% from a year ago.
• Core revenues were up 17.2% over the second quarter of last year. ⁽¹⁾
• Core net interest margin was 3.16%, compared to 3.17% for the prior quarter. ⁽¹⁾

Continued Credit and Financial Strength

• Nonperforming assets continued to be extremely low at 11 basis points of total assets.
• Net charge-offs were less than 1 basis point for the quarter.
• New single family loans originated during the quarter had a weighted average loan-to-value ("LTV") ratio of 61% and borrower average FICO scores of 762.
• New multifamily and commercial real estate loans originated during the quarter had a weighted average LTV ratio of 51% with very strong debt service coverage ratios.
• Tier 1 leverage ratio was 9.73%.

Franchise Development

• Loan originations were $4.7 billion.
• Loans outstanding totaled $36.7 billion, up 3.9% for the quarter.
• Deposits were $35.0 billion, up 4.4% for the quarter.
• Wealth management assets were $48.7 billion, up 7.8% for the quarter and 33.9% from a year ago.

"Wealth management and business banking had a very good quarter, as we continued deepening relationships with our clients," said Katherine August de-Wilde, President of First Republic Bank.  "We are also pleased to have achieved our highest level of loan sales ever in a quarter."

Quarterly Cash Dividend Declared

The Bank declared a cash dividend for the second quarter of $0.14 per share of common stock, which is payable on August 15, 2014 to shareholders of record as of August 1, 2014. 

Strong Asset Quality

The Bank's credit quality remains very strong.  Nonperforming assets were 11 basis points of total assets. 

Net charge-offs were $130,000 for the quarter (under 1 basis point of average loans).

In the second quarter, the Bank recorded a provision for loan losses of $21.8 million.  This provision is related primarily to the continued growth in new loans.  The allowance related to loans originated since our independence on July 1, 2010 totaled $172.8 million, or 0.56% of such loans outstanding. 

Capital Strength

The Bank's Tier 1 leverage ratio was 9.73% at June 30, 2014, compared to 9.85% at March 31, 2014.  The Tier 1 common equity ratio was 10.93% at June 30, 2014.

Growing Book Value

Book value per common share was $26.82 at June 30, 2014, up 2.3% for the quarter and up 14.1% from a year ago. 

Franchise Development

Composition of Loan Originations

Loan originations totaled $4.7 billion for the quarter.  Single family and home equity lines of credit originations were $2.8 billion, or 59% of total originations; 65% of single family home loan originations were for purchases. 

Mortgage Banking Activity

Mortgage banking sales volume and profitability were up compared to the second quarter of last year.  The Bank sold $1.3 billion of primarily intermediate-term, fixed-rate home loans during the quarter and recorded net gains of $14.9 million, or 1.16% of loans sold. 

For the first half of 2014, the Bank sold $1.6 billion of loans, compared to $2.2 billion for the same period last year.  Gains on sale of loans for the first half of 2014 were $17.7 million, compared to $34.8 million for the same period a year ago.

Loans serviced for investors totaled $7.3 billion, up 17.5% from the prior quarter and 20.7% from a year ago primarily due to the increased level of loan sales in 2014.  Net servicing income for the quarter was $2.0 million, compared to $1.3 million for the same quarter last year.  The carrying value of mortgage servicing rights was $36.1 million, or 50 basis points of such loans serviced.

Expansion of Wealth Management

Wealth management revenues totaled $42.5 million for the quarter, up 9.6% compared to the prior quarter and up 28.3% compared to last year's second quarter.

Total wealth management assets were $48.7 billion, up 7.8% for the quarter and up $7.1 billion, or 17.1%, since year-end.  This growth in wealth management assets since year-end was primarily due to net new assets obtained from new and existing clients.  Wealth management assets include investment management assets of $25.1 billion, brokerage assets and money market mutual funds of $17.2 billion, and trust and custody assets of $6.3 billion.

Excellent Deposit Results

Total deposits increased to $35.0 billion, up 4.4% for the quarter and up 24.1% compared to a year ago.  At June 30, 2014, 53% of deposits were checking accounts.

The average contractual rate paid on all deposits declined to 0.19% for the quarter, compared to 0.21% for the prior quarter.

Income Statement and Key Ratios

Quarterly Highlights

Revenue Growth

Total revenues were $410.1 million, a 7.4% increase from the prior quarter and a 12.2% increase over the second quarter last year.

Core revenues were $388.8 million, a 7.3% increase from the prior quarter and a 17.2% increase over the second quarter last year. ⁽¹⁾

Net Interest Income Growth

Net interest income was $333.2 million, a 3.9% increase from the prior quarter and a 9.9% increase over the second quarter last year.  

Core net interest income was $312.0 million, up 3.6% from the prior quarter and up 15.7% over the second quarter last year. ⁽¹⁾ 

Net Interest Margin

The Bank's net interest margin was 3.38%, compared to 3.37% for the prior quarter.   

The core net interest margin was 3.16%, compared to 3.17% for the prior quarter. ⁽¹⁾

Noninterest Income

Noninterest income was $76.8 million, a 25.9% increase compared to the prior quarter primarily due to an increase in gain on sale of loans.  Noninterest income increased 23.4% over the second quarter last year, primarily due to increases in investment advisory fees and gain on sale of loans.

Noninterest Expense and Efficiency Ratio 

Noninterest expense was $222.7 million, a 2.4% increase over the prior quarter and a 17.9% increase from the second quarter a year ago.  The increase in noninterest expense from the prior quarter is attributable to substantially increased professional fees due to regulatory compliance activities, higher advertising and higher information systems costs.

The Bank's efficiency ratio was 54.3%, compared to 57.0% for the prior quarter and 51.7% for the second quarter a year ago. 

The Bank's core efficiency ratio was 56.3%, compared to 58.9% for the prior quarter and 55.5% for the second quarter a year ago. ⁽¹⁾

Year-to-Date Highlights

Revenues

Total revenues for the first six months of the year were $791.8 million, a 7.6% increase from the same period last year.

Core revenues were $751.0 million, a 12.4% increase from last year. ⁽¹⁾

Net Interest Income

Net interest income was $653.9 million, an 8.8% increase from last year.  

Core net interest income was $613.1 million, up 15.0% from last year. ⁽¹⁾ 

Noninterest Income

Noninterest income was $137.9 million, a 2.5% increase compared to last year.  Noninterest income increased due to increases in investment advisory fees of $16.9 million and loan servicing fees of $2.4 million, partially offset by a decrease in gain on sale of loans of $17.1 million.

Noninterest Expense and Efficiency Ratio 

Noninterest expense was $440.2 million, a 17.3% increase over last year.  The increase in noninterest expense is primarily attributable to increased costs related to regulatory compliance, including salaries, professional fees and higher information systems costs.

The Bank's efficiency ratio was 55.6%, compared to 51.0% last year. 

The Bank's core efficiency ratio was up to 57.5%, compared to 54.8% last year. ⁽¹⁾

Income Tax Rate

The Bank's effective tax rate for the six months ended June 30, 2014 was 27.0% and represents the current estimated tax rate for the full year 2014.  By comparison, the effective tax rate was 30.4% for 2013.  The decrease in the effective tax rate results from the steady increase in tax-exempt securities, bank-owned life insurance, tax credit investments and tax-advantaged loans.

⁽¹⁾  "Core" measures are non-GAAP financial measures that exclude the impact of purchase accounting.  See non-GAAP reconciliation under section "Use of Non-GAAP Financial Measures."

Conference Call Details

First Republic Bank's second quarter 2014 earnings conference call is scheduled for July 16, 2014 at 11:00 a.m. PT / 2:00 p.m. ET.  To listen to the live call by telephone, please dial (855) 224-3902 approximately 10 minutes prior to the start time (to allow time for registration) and use conference ID #64597321.  International callers should dial (734) 823-3244.  The call will also be broadcast live over the Internet and can be accessed in the Investor Relations section of First Republic's website at www.firstrepublic.com.  To listen to the live webcast, please visit the site at least 15 minutes prior to the start of the call to register, download and install any necessary audio software.  A replay of the call will also be available for 90 days on the website.  For those unable to participate in the live presentation, a replay will be available beginning July 16, 2014, at 2:00 p.m. PT / 5:00 p.m. ET, through July 24, 2014, at 8:59 p.m. PT / 11:59 p.m. ET.  To access the replay, dial (855) 859-2056 (U.S.) and use conference ID #64597321.  International callers should dial (404) 537-3406 and enter the same conference ID number.  The Bank's press releases are available after release on the Bank's website at www.firstrepublic.com.

About First Republic Bank

Founded in 1985, First Republic and its subsidiaries offer private banking, private business banking and private wealth management, including investment, trust and brokerage services.  First Republic specializes in delivering exceptional, relationship-based service, with a solid commitment to responsiveness and action.  Services are offered through preferred banking or wealth management offices primarily in San Francisco, Palo Alto, Los Angeles, Santa Barbara, Newport Beach, San Diego, Portland, Boston, Palm Beach, Greenwich and New York City.  First Republic offers a complete line of banking products for individuals and businesses, including deposit services, as well as residential, commercial and personal loans.  For more information, visit www.firstrepublic.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Statements in this press release that are not historical facts are hereby identified as "forward-looking statements" for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934.  Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking.  These statements are often, but not always, made through the use of words or phrases such as "anticipates," "believes," "can," "could," "may," "predicts," "potential," "should," "will," "estimates," "plans," "projects," "continuing," "ongoing," "expects," "intends" and similar words or phrases and include statements about economic performance in our markets, growth in our loan originations and wealth management assets, and our projected tax rate.  Accordingly, these statements are only predictions and involve estimates, known and unknown risks, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them.  Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: our ability to compete for banking and wealth management customers; earthquakes and other natural disasters in our markets; changes in interest rates; our ability to maintain high underwriting standards; economic conditions in our markets; conditions in financial markets and economic conditions generally; regulatory restrictions on our operations and current or future legislative or regulatory changes affecting the banking and investment management industries.  For a discussion of these and other risks and uncertainties, see First Republic's FDIC filings, including, but not limited to, the risk factors in First Republic's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.  These filings are available in the Investor Relations section of our website.  All forward-looking statements are necessarily only estimates of future results, and there can be no assurance that actual results will not differ materially from expectations, and, therefore, you are cautioned not to place undue reliance on such statements.  Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

The following table presents loans sold and gain on sale of loans for the periods indicated:

The following table presents loan originations, by product type, for the periods indicated:

The following table separates our loan portfolio as of June 30, 2014 between loans acquired on July 1, 2010 and loans originated since July 1, 2010:

Purchase Accounting Accretion and Amortization

The following table presents the impact of purchase accounting from the Bank's re-establishment as an independent institution for the periods indicated:

Use of Non-GAAP Financial Measures

Our accounting and reporting policies conform to generally accepted accounting principles in the United States ("GAAP") and the prevailing practices in the banking industry.  However, due to the application of purchase accounting from the Bank's re-establishment as an independent institution, management uses certain non-GAAP measures and ratios that exclude the impact of these items to evaluate our performance, including net income, earnings per share, net interest margin and the efficiency ratio. 

Our net income, earnings per share, net interest margin and efficiency ratio were significantly impacted by accretion and amortization of the fair value adjustments recorded in purchase accounting from the Bank's re-establishment as an independent institution.  The accretion and amortization affect our net income, earnings per share and certain operating ratios as we accrete loan discounts to interest income; amortize premiums on liabilities such as CDs to interest expense; and amortize intangible assets to noninterest expense.

We believe these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding our performance.  Our management uses, and believes that investors benefit from referring to, these non-GAAP measures and ratios in assessing our operating results and related trends.  However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with GAAP.  In the tables below, we have provided a reconciliation of, where applicable, the most comparable GAAP financial measures and ratios to the non-GAAP financial measures and ratios, or a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated:

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SOURCE First Republic Bank