First Republic Reports Strong Quarterly Earnings

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

"We are very pleased with the third quarter," said Chairman and CEO Jim Herbert.  "Core EPS, even after excluding a one-time gain on the sales of investment securities, were our second highest ever.  Loan volume during the quarter was quite strong and asset quality remained excellent."

Quarterly Highlights

Financial Results

• Net income was $136.0 million.
• Diluted earnings per share ("EPS") were $0.86.
• Gain on sale of investments from portfolio repositioning of $23.6 million ($0.10 per share after-tax impact on both GAAP and core EPS). ⁽¹⁾
• Core net income was $128.2 million. ⁽¹⁾
• Core diluted EPS were $0.81, including $0.10 per share of gain on investment securities. ⁽¹⁾
• Loan originations totaled $4.7 billion, our third-highest quarter ever.
• Loans sold totaled $1.8 billion, our highest ever.
• Core revenues, after excluding gain on investment securities of $23.6 million, were up 20.5% from the third quarter of last year. ⁽¹⁾
• Core net interest margin was 3.09%, compared to 3.16% for the prior quarter. ⁽¹⁾
• Core efficiency ratio was 55.4% (58.7% after excluding gain on investment securities). ⁽¹⁾
• Book value per share was $27.48, up 13.9% from a year ago.

Continued Credit and Financial Strength

• Nonperforming assets continued to be extremely low at 11 basis points of total assets.
• New single family loans originated during the quarter had a weighted average loan-to-value ("LTV") ratio of 60% and an average borrower FICO score of 761.
• New multifamily and commercial real estate loans originated during the quarter had a weighted average LTV ratio of 55% with very strong debt service coverage ratios.
• Tier 1 leverage ratio was 9.51%.

Franchise Development

• Loans outstanding, excluding loans held for sale, totaled $36.7 billion, up 9.6% annualized from year-end.
• Deposits were $35.6 billion, up 14.7% annualized from year-end. Checking balances were up 27.1% annualized since year-end and represented 55% of total deposits.
• Wealth management assets were $51.4 billion, up 31.5% annualized from year-end.

"Demand for our high-quality loans in the secondary market resulted in record loan sales for the quarter," said President Katherine August-deWilde.  "Growth in wealth management assets was also very strong."

Quarterly Cash Dividend Declared

The Bank declared a cash dividend for the third quarter of $0.14 per share of common stock, which is payable on November 13, 2014 to shareholders of record as of October 30, 2014. 

Strong Asset Quality

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

Net recoveries were $223,000 for the quarter.

In the third quarter, the Bank recorded a provision for loan losses of $13.5 million.  The allowance related to loans originated since our re-establishment as an independent bank on July 1, 2010 totaled $187.7 million, or 0.60% of such loans outstanding. 

Capital Strength

The Bank's Tier 1 leverage ratio was 9.51% at September 30, 2014, compared to 9.73% at June 30, 2014.  The Tier 1 common equity ratio was 11.07% at September 30, 2014.

Growing Book Value 

Book value per common share was $27.48 at September 30, 2014, up 2.5% for the quarter and up 13.9% 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 $2.6 billion, or 55% of total originations.  Over 61% of the quarter's single family home loan originations were for purchases. 

Mortgage Banking Activity

Loan sales volume and profitability were up compared to the third quarter of last year.  The Bank sold a record $1.8 billion of primarily intermediate-term, fixed-rate home loans during the quarter and recorded a gain on sale of $13.7 million.  The margin on such loan sales was 0.67%, excluding the impact of purchase accounting. 

For the nine months ended September 30, 2014, the Bank sold $3.4 billion of loans, compared to $2.4 billion for the same period last year.  Gain on sale of loans for the nine months ended September 30, 2014 was $31.4 million, compared to $36.0 million for the same period a year ago.  Strong demand for the Bank's high-quality single family loans has continued in the secondary market during the third quarter of 2014.  These loan sales are used in the ordinary course of business to help provide a full range of lending options for clients, manage asset growth and manage interest rate risk.

Loans serviced for investors totaled $8.9 billion, up 21.6% from the prior quarter and 48.7% from a year ago primarily due to the increased level of loan sales in 2014.

Expansion of Wealth Management

Wealth management revenues totaled $44.7 million for the quarter, up 5.3% compared to the prior quarter and up 32.1% compared to last year's third quarter.

Total wealth management assets were $51.4 billion, up 5.6% for the quarter and up 31.5% annualized since year-end.  The growth in wealth management assets was primarily due to net new assets from both existing and new clients.  Wealth management assets include investment management assets of $26.3 billion, brokerage assets and money market mutual funds of $19.0 billion, and trust and custody assets of $6.1 billion.

Deposit Results

Total deposits increased to $35.6 billion, up 1.6% for the quarter and up 14.7% annualized since year-end.  At September 30, 2014, 55% of deposits were checking accounts.

The average contractual rate paid on all deposits was 0.19% for the quarter, which was the same as the prior quarter.

Income Statement and Key Ratios

Quarterly Highlights

Revenue Growth

Total revenues were $440.7 million.  Excluding gain on sales of investment securities of $23.6 million, revenues were $417.1 million, an increase of 1.4% from the prior quarter and 15.1% over the third quarter last year.

Core revenues were $423.2 million.  Excluding gain on sales of investment securities, core revenues were $399.6 million, an increase of 2.5% from the prior quarter and 20.5% over the third quarter last year. ⁽¹⁾

Net Interest Income Growth

Net interest income was $336.0 million, a 0.8% increase from the prior quarter and a 9.0% increase over the third quarter last year.  

Core net interest income was $320.2 million, up 2.6% from the prior quarter and up 15.3% over the third quarter last year. ⁽¹⁾ 

Net Interest Margin

The Bank's net interest margin was 3.25%, compared to 3.38% for the prior quarter.   

The core net interest margin was 3.09%, compared to 3.16% for the prior quarter. ⁽¹⁾  The decrease was primarily the result of a decrease in contractual loan yields, along with higher average cash balances.

Noninterest Income

Noninterest income was $104.7 million.  Excluding gain on sales of investment securities, noninterest income was $81.1 million, an increase of 4.1% compared to the prior quarter and 50.2% compared to the third quarter a year ago.  The increase compared to the prior quarter was primarily due to an increase in investment advisory fees.  The increase over the third quarter last year was primarily due to increases in gain on sale of loans, investment advisory fees and foreign exchange fees.

The gain on sales of investment securities in the third quarter of 2014 was primarily the result of the Bank's repositioning of its investment portfolio.  The proceeds from these sales were reinvested in securities considered to be "High-Quality Liquid Assets" from a regulatory perspective, which further enhanced our on-balance sheet liquidity.

Noninterest Expense and Efficiency Ratio 

Noninterest expense was $238.4 million, a 7.0% increase over the prior quarter and a 24.4% increase from the third quarter a year ago.  The increase in noninterest expense from the prior quarter is primarily attributable to increased professional fees, salaries and information systems costs in connection with the Bank's investments to address enhanced regulatory standards, compliance and related infrastructure build-out as the Bank prepares to grow past $50 billion in total assets.

The Bank's efficiency ratio was 54.1%, compared to 54.3% for the prior quarter and 53.0% for the third quarter a year ago. 

The Bank's core efficiency ratio was 55.4%, compared to 56.3% for the prior quarter and 56.5% for the third quarter a year ago. ⁽¹⁾  Excluding gain on sales of investment securities, the core efficiency ratio was 58.7% for the third quarter.

Income Tax Rate

The Bank's effective tax rate for the nine months ended September 30, 2014 was 27.4% 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 third quarter 2014 earnings conference call is scheduled for October 16, 2014 at 7:00 a.m. PT / 10:00 a.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 #8777040.  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 October 16, 2014, at 10:30 a.m. PT / 1:30 p.m. ET, through October 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 #8777040.  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, our progress in preparing for enhanced regulatory requirements, 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.

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, yield on average loans, cost of average deposits, net interest margin and the efficiency ratio. 

Our net income, earnings per share, yield on average loans, cost of average deposits, 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; recognize discounts established in purchase accounting on the sale of loans, which increase gain on sale of loans; amortize premiums on 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

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