First Republic Reports Strong Second Quarter 2016 Results

SAN FRANCISCO, July 14, 2016 /PRNewswire/ -- First Republic Bank (NYSE: FRC) today announced financial results for the quarter ended June 30, 2016.

"We are quite pleased with the strength and consistency of second quarter results," said Jim Herbert, Chairman and CEO.  "Earnings, credit quality and capital levels remain very strong."

Quarterly Highlights ⁽¹⁾

Financial Results

• Compared to last year's second quarter:
  • Revenues were $535.1 million, up 17.5%.
  • Net income was $165.0 million, up 25.6%.
• Diluted earnings per share ("EPS") of $0.97.
  (Includes $0.08 per share positive impact from the adoption of new accounting guidance for share-based compensation.) ⁽¹⁾
• Loan originations totaled $6.5 billion, our strongest quarter ever.
• Loans sold totaled $920.8 million.
• Net interest margin was 3.21%, compared to 3.20% for the prior quarter.
• Core net interest margin was 3.16%, compared to 3.14% for the prior quarter. ⁽²⁾
• Efficiency ratio was 59.8%.

Continued Financial and Credit Strength

• Common Equity Tier 1 ratio was 10.74%.
• Total equity has grown 19.8% from a year ago.
• Tangible book value per share was $32.53, up 13.8% from a year ago.
• Nonperforming assets were a low 9 basis points of total assets.
• Net charge-offs were $1.0 million for the quarter, or only 1 basis point of average loans.

Franchise Development

• Loans outstanding, excluding loans held for sale, totaled $47.6 billion, up 16.0% from a year ago.
• Deposits were $51.2 billion, up 22.1% from a year ago.
• Wealth management assets were $75.8 billion, up 31.7% from a year ago.
• Wealth management revenues were $70.6 million, up 27.4% from a year ago.

"Revenues grew 17.5% from a year ago, driven by strong performance across all lines of business," said Chief Financial Officer Mike Roffler.  "Net interest margin was stable and our efficiency ratio improved."

Quarterly Cash Dividend Declared

The Bank declared a cash dividend for the second quarter of $0.16 per share of common stock, which is payable on August 11, 2016 to shareholders of record as of July 28, 2016. 

Strong Asset Quality

Credit quality remains very strong.  Nonperforming assets were only 9 basis points of total assets at June 30, 2016. 

The Bank had net charge-offs for the quarter of only $1.0 million, while adding $14.2 million to its allowance for loan losses due to continued loan growth.

Continued Capital Strength

Total equity has grown 19.8% from a year ago.

During the second quarter, the Bank issued 2.9 million shares of new common stock, which added approximately $202 million to common equity.

The Bank's Common Equity Tier 1 ratio was 10.74% at June 30, 2016, up from 10.61% last quarter and 10.87% a year ago. 

Tangible Book Value Growth

Tangible book value per common share was $32.53 at June 30, 2016, up 13.8% from a year ago.

Continued Franchise Development

Loan Originations

Loan originations totaled a record $6.5 billion for the quarter, compared to $5.8 billion for the second quarter a year ago, up 11.3%.

Loans outstanding, excluding loans held for sale, totaled $47.6 billion at June 30, 2016, up 7.9% for the first six months of 2016 and up 16.0% compared to a year ago.

Deposit Growth

Total deposits increased to $51.2 billion, up 6.8% for the first six months of 2016 and up 22.1% compared to a year ago. 

At June 30, 2016, checking accounts totaled 63.4% of deposits.

The average rate paid on deposits was 0.13% for both the second quarter and the prior quarter.

Investments

Total investments at June 30, 2016 were $11.6 billion, up 10.9% for the first six months of 2016 and up 49.3% compared to a year ago. 

High-quality liquid assets totaled $6.3 billion at June 30, 2016, up 8.2% for the first six months of 2016 and up 53.2% compared to a year ago.  Such assets represent 9.7% of total assets at June 30, 2016.

Mortgage Banking Activity

During the second quarter, the Bank sold $920.8 million of loans and recorded a gain on sale of $822,000, compared to loan sales of $887.2 million and a gain on sale of $3.5 million during the second quarter of last year.

Loans serviced for investors at quarter-end totaled $11.1 billion, up 5.0% for the first six months of 2016 and up 7.3% from a year ago.  Net loan servicing fees for the quarter were $3.5 million, up 20.2% from a year ago.

Continued Expansion of Wealth Management

Wealth management revenues totaled $70.6 million for the quarter, up 27.4% compared to last year's second quarter.  Such revenues represented 13% of total revenues for the quarter.

Total wealth management assets were $75.8 billion at June 30, 2016, up 4.9% for the first six months of 2016 and up 31.7% compared to a year ago. 

The growth in wealth management assets for the quarter was primarily due to net new assets from both existing and new clients.  Wealth management assets include investment management assets of $38.3 billion, brokerage assets and money market mutual funds of $30.3 billion, and trust and custody assets of $7.3 billion.

Income Statement and Key Ratios

Highlights

Strong Revenue Growth

Total revenues were $535.1 million for the quarter, up 17.5% compared to last year's second quarter.

Continued Net Interest Income Growth

Net interest income was $441.6 million for the quarter, up 17.7% compared to last year's second quarter, resulting primarily from growth in average earning assets.

Net Interest Margin

The Bank's net interest margin was 3.21% for the second quarter, compared to 3.20% for the prior quarter. 

The core net interest margin was 3.16% for the quarter, compared to 3.14% for the prior quarter.  The increase from the prior quarter was primarily due to lower average cash balances. ⁽²⁾

Noninterest Income

Noninterest income was $93.5 million for the quarter, up 16.5% compared to the second quarter a year ago, which was primarily from increased wealth management revenues.

Efficiency Ratio

The Bank's efficiency ratio was 59.8% for the quarter, compared to 61.4% for the prior quarter and 57.8% for the second quarter a year ago.

Noninterest expense was $320.1 million for the quarter, up 21.7% from the second quarter of last year.  The increase was primarily due to increased salaries and benefits from the continued expansion of the franchise, along with growth across all areas of the Bank.

Income Tax Rate ⁽¹⁾

In accordance with the amendments to ASC 718, which the Bank adopted effective January 1, 2016, the effective tax rate for the quarter is inclusive of excess tax benefits recognized during the period.  As a result, such excess tax benefits reduced the Bank's effective tax rate for the second quarter of 2016 to 17.8%, from 24.5%.  See "Adoption of Amendments to ASC 718" for additional information.

__________

⁽¹⁾ On March 30, 2016, the Financial Accounting Standards Board issued amendments to Accounting Standards Codification ("ASC") 718, "Compensation—Stock Compensation," which simplifies certain aspects of accounting for share-based compensation.  This guidance is effective January 1, 2017, with early adoption permitted.  During the second quarter of 2016, the Bank elected to adopt this guidance, with such guidance retroactively effective as of January 1, 2016.  See "Adoption of Amendments to ASC 718" for additional information.
⁽²⁾ Core net interest margin is a non-GAAP financial measure that excludes the positive impact of purchase accounting and also the one-time special dividend from the FHLB in the second quarter of 2015.  See non-GAAP reconciliation under section "Use of Non-GAAP Financial Measures."

Conference Call Details

First Republic Bank's second quarter 2016 earnings conference call is scheduled for July 14, 2016 at 7:00 a.m. PT / 10:00 a.m. ET.  To access the event by telephone, please dial (855) 224-3902 approximately 10 minutes prior to the start time (to allow time for registration) and use conference ID #40786516.  International callers should dial (734) 823-3244 and enter the same conference ID number. 

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 10 minutes prior to the start of the call to register, download and install any necessary audio software.

For those unable to join the live presentation, a replay of the call will be available beginning July 14, 2016, at 10:00 a.m. PT / 1:00 p.m. ET, through July 21, 2016, at 8:59 p.m. PT / 11:59 p.m. ET.  To access the replay, dial (855) 859-2056 and use conference ID #40786516.  International callers should dial (404) 537-3406 and enter the same conference ID number.  A replay of the webcast also will be available for 90 days following, accessible in the Investor Relations section of First Republic Bank's website at www.firstrepublic.com.

The Bank's press releases are available after release in the Investor Relations section of First Republic 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, as amended.  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, and our compliance with, any 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 materially from those discussed in the forward-looking statements include, but are not limited to: our ability to deal with significant competition for banking and wealth management customers; our projections for certain financial items; expectations concerning the bank and wealth management industries; earthquakes and other natural disasters in our markets; interest rate and credit risk; our plans or objectives for future operations, products or services; our ability to maintain and follow high underwriting standards; economic conditions generally and in our markets; economic and market conditions affecting the valuation of our investment securities portfolio; our geographic concentration; our opportunities for growth; expectations about the performance of any new offices; demand for our products and services; projections about loan premiums and discounts; our future provisions for loan losses; projections about future levels of loan originations or loan repayments; projections regarding costs; our regulatory compliance and future regulatory requirements; the phase-in of the Basel III Capital Rules; legislative and regulatory actions affecting us and the financial services industry; new accounting standards; future FDIC special assessments or changes to regular assessments; and our ability to successfully execute on initiatives relating to enhancements of our technology.  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.  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.  Due to the application of purchase accounting from the Bank's re-establishment as an independent institution, management has historically used certain non-GAAP (i.e., core) measures and ratios that excluded the impact of these net positive purchase accounting items to evaluate our performance, including net income, earnings per share, revenues, yield on average loans, cost of average deposits, net interest margin and the efficiency ratio.  However, because of the diminishing impact of these positive purchase accounting items, beginning in 2016, only the yield on average loans and net interest margin continue to be presented on a non-GAAP, or core, basis.  

The accretion and amortization of the fair value adjustments recorded in purchase accounting from the Bank's re-establishment as an independent institution affect our net interest margin and yield on average loans as we accrete loan discounts to interest income and amortize premiums on CDs to interest expense.  

In addition, in the second quarter of 2015, the Bank received a one-time special dividend of $9.1 million from the FHLB.  Management has also excluded the positive impact of this item from the non-GAAP net interest margin.

We believe these two non-GAAP measures, when taken together with the corresponding GAAP measures, 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 should be considered in addition to, and not as a substitute for or preferable to, the measurements prepared in accordance with GAAP.  In the tables below, we have provided a reconciliation of, where applicable, the most comparable GAAP financial measures to the non-GAAP financial measures, or a reconciliation of the non-GAAP calculation of the financial measure:

Adoption of Amendments to ASC 718

The Bank adopted the amendments to ASC 718, retroactively effective as of January 1, 2016.  Previously, excess tax benefits resulting from the exercise or vesting of share-based awards were recorded directly to additional paid-in capital.  Under this new guidance, such excess tax benefits are recorded as a reduction in provision for income taxes in the quarter of exercise or vesting, rather than increasing additional paid-in capital.  In addition, this guidance increases average diluted shares, since the Bank no longer includes such excess tax benefits in the calculation of diluted shares.  For the first quarter of 2016, adoption of this guidance reduced the provision for income taxes by $8.6 million of excess tax benefits, resulting in a positive impact of $0.05 per diluted earnings per share.  This new accounting guidance does not change the Bank's total equity, book value per share, or regulatory capital ratios.

The following table presents the impact of the adoption of the new accounting guidance to our previously reported financial results:

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SOURCE First Republic Bank

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