First Republic Reports Strong Quarterly Results

SAN FRANCISCO, Oct. 15, 2013 /PRNewswire/ -- First Republic Bank (NYSE: FRC) today announced financial results for the third quarter and the nine months ended September 30, 2013.

(Logo:  http://photos.prnewswire.com/prnh/20130906/MM75721LOGO)

"First Republic had a good quarter," said Jim Herbert, Chairman and Chief Executive Officer.  "Year-over-year, core net interest income was up 10% and core diluted EPS were up 19%.  We're quite pleased with our deposit and loan growth, and our asset quality remains excellent."

Quarterly Financial Highlights

Strong Financial Results

• Net income of $112.0 million, up 9.0% from third quarter 2012. 
• Diluted earnings per share ("EPS") of $0.75, up 4.2%.
• Core net income of $96.9 million, up 23.2% from third quarter 2012. ⁽¹⁾
• Core diluted EPS of $0.64, up 18.5%. ⁽¹⁾

Continued Franchise Growth

• Loan originations were $4.9 billion for the quarter, the second highest quarter ever.
• Loans outstanding of $32.7 billion, up 6.3% for the quarter and 21.6% from a year ago.
• Deposits of $31.3 billion, up 10.8% for the quarter and 21.7% compared to a year ago.
• Wealth management assets were $38.2 billion, up 5.2% for the quarter and 56.3% from a year ago.

Continued Strong Asset Quality

• Nonperforming assets were 13 basis points of total assets.

Operating Results

• Core net interest margin was 3.15%, compared to 3.37% for the prior quarter.  Over half of this decline is due to strong deposit growth resulting in elevated cash balances compared to the prior quarter. ⁽¹⁾
• Core efficiency ratio was 60.1%, compared to 58.9% for the prior quarter. ⁽¹⁾

"Wealth management and business banking also had another very good quarter," said Katherine August-deWilde, President and Chief Operating Officer.  "Our relationship-based business model continues to perform very well, and we are adding clients at a rapid rate."

Quarterly Cash Dividend Declared

The Bank declared a cash dividend for the third quarter of $0.12 per share of common stock, which is payable on November 15, 2013 to shareholders of record as of November 1, 2013.

Asset Quality

The Bank's credit quality remains very strong.  Nonperforming assets were 13 basis points of total assets. 

The Bank recorded a provision for loan losses of $10.0 million.  This provision is related primarily to the growth in loans that have been originated since July 1, 2010.  The allowance related to these loans totaled $135.1 million, or 0.52% of such loans outstanding. 

Capital Strength

The Bank's Tier 1 leverage ratio was 9.18% and Tier 1 common equity ratio was 10.57%.

Book Value

Book value per share was $24.13, up 12.3% from a year ago.

Franchise Development

Composition of Loan Originations

Loan originations totaled $4.9 billion for the quarter, of which 47% were attributable to business, multifamily, commercial real estate and other non-single family lending.  Single family loans and home equity lines of credit were $2.6 billion of total originations, including more than 40% for home purchases.

Increased Total Assets

Total assets were $41.0 billion, up 9.8% for the quarter.  Loans increased 6.3% for the quarter and 21.6% compared to a year ago.

Excellent Deposit Growth

Total deposits were up 10.8% compared to the prior quarter and increased 21.7% compared to a year ago.  The contractual rate paid on all deposits increased modestly to 0.28% for the quarter, compared to 0.24% for the prior quarter and 0.29% for the third quarter last year. 

At September 30, 2013, 96% of deposits were core deposits. ⁽²⁾

Continued Expansion of Wealth Management

Total wealth management assets were $38.2 billion, up $1.9 billion, or 5.2%, from the prior quarter and up $6.9 billion, or 22.2%, since year-end.  Such growth in assets under management since year-end was primarily due to net new assets obtained from new and existing clients.  Wealth management assets include investment management assets of $20.1 billion, brokerage assets and money market mutual funds of $12.8 billion, and trust and custody assets of $5.3 billion. 

Wealth management fees earned for the quarter totaled $33.8 million and were up 2.2% compared to the prior quarter and 68.4% compared to the third quarter last year.  The increased fees reflect both growth in assets under management along with fees related to assets of Luminous Capital Holdings, LLC ("Luminous") purchased in December 2012.

Limited Mortgage Banking Activity

Mortgage banking volume and profitability were down significantly compared to the prior several quarters.  The Bank sold only $284 million of primarily longer-term, fixed-rate home loans during the quarter and recorded modest gains of $1.2 million, or 0.43% of loans sold.  Gain on sale of loans contributed less than $0.01 to diluted EPS for the quarter, compared to $0.04 for the second quarter and $0.11 for the first quarter. 

The carrying value of mortgage servicing rights was $29.9 million, or 50 basis points of such loans serviced.  Loans serviced for investors was $6.0 billion, up 39.3% from a year ago due to the increased level of loan sales in recent quarters. 

Income Statement and Key Ratio Summary

Revenue Growth

Total revenues were $361.8 million for the quarter, compared to $342.7 million for the third quarter last year, a 5.6% increase.  Total revenues in the prior quarter were $365.3 million.

Core revenues were $331.2 million for the quarter, compared to $331.8 million for the prior quarter.  The decline was due to the reduction in mortgage banking income, mostly offset by core net interest income growth.  Core revenues were up 12.0% over the third quarter last year. ⁽¹⁾

Net Interest Income Growth

Net interest income was $308.2 million for the quarter, compared to $303.1 million for the prior quarter and $298.8 million for the third quarter last year.

Core net interest income was up 3.0% to $277.6 million for the quarter, compared to $269.6 million for the prior quarter and up 10.1% compared to $252.2 million for the third quarter last year. ⁽¹⁾ 

Net Interest Margin

The Bank's net interest margin was 3.50% for the quarter, compared to 3.79% for the prior quarter and 4.13% for the third quarter a year ago. 

Core net interest margin was 3.15% for the quarter, compared to 3.37% for the prior quarter and 3.47% for the third quarter a year ago. ⁽¹⁾ 

The decline in core net interest margin was significantly impacted by elevated cash balances due to strong deposit growth.  The increase in cash balances quarter-over-quarter caused approximately 14 basis points, more than half, of the decline in core net interest margin. ⁽¹⁾

Noninterest Income

Noninterest income for the quarter was $53.6 million, down $8.6 million compared to the prior quarter and up $9.8 million from the third quarter a year ago.  

The decline in noninterest income from the prior quarter is related primarily to lower gain on sale of loans.  The increase compared to the third quarter last year was primarily due to increases in wealth management fees and loan servicing fees.

Noninterest Expense and Efficiency Ratio

Noninterest expense for the quarter was $203.6 million, compared to $200.1 million for the prior quarter, up only 1.8%.  Noninterest expense was up 14.2% over the third quarter last year. 

The Bank's efficiency ratio was 56.3% for the quarter, compared to 54.8% for the prior quarter and 52.1% for the third quarter a year ago.

The Bank's core efficiency ratio was 60.1% for the quarter, compared to 58.9% for the prior quarter and 58.6% for the third quarter a year ago. ⁽¹⁾

Income Tax Rate

The Bank's effective tax rate for the nine months ended September 30, 2013 was 25.5%, and represents the current estimated tax rate for the full year 2013.  By comparison, the effective tax rate was 30.4% for 2012.  The continued decline in 2013 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⁾  See non-GAAP reconciliation under section "Use of Non-GAAP Financial Measures."
⁽²⁾  Core deposits exclude CDs greater than $250,000.

Conference Call Details

First Republic Bank's third quarter 2013 earnings conference call is scheduled for October 15, 2013 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 #73932970.  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 15, 2013, at 12:00 p.m. PT / 3:00 p.m. ET, through October 23, 2013, 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 #73932970.  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

First Republic Bank (NYSE:FRC) is a full-service bank specializing in private banking and private business banking.  The Bank's wealth management affiliates offer trust, investment consulting and advisory services.  Founded in 1985, First Republic specializes in exceptional, relationship-based service offered through preferred banking or wealth management offices primarily in San Francisco, Palo Alto, Los Angeles, Santa Barbara, Newport Beach, San Diego, Portland, Boston, Greenwich, Palm Beach 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 September 30, 2013 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; accrete discounts on loan commitments to noninterest income; amortize premiums on liabilities such as CDs and subordinated notes to interest expense; and amortize intangible assets to noninterest expense.  In addition, earnings per share for the nine months ended September 30, 2012 were impacted following the redemption of the First Republic Preferred Capital Corporation ("FRPCC") Series D preferred stock in the second quarter of 2012 due to the $13.2 million difference between the liquidation preference and the carrying value established in purchase accounting.

In December 2012, First Republic completed the purchase of substantially all of the assets of Luminous.  The amortization of intangible assets from this transaction is not an adjustment in the calculation of the Bank's non-GAAP measures in 2013.

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 and when planning and forecasting future periods.  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:

SOURCE First Republic Bank