First Republic Reports Strong Third Quarter 2015 Results

SAN FRANCISCO, Oct. 15, 2015 /PRNewswire/ -- First Republic Bank (NYSE: FRC) today announced financial results for the quarter ended September 30, 2015.

"Third quarter results were very strong," said CEO Jim Herbert.  "Credit quality remains excellent.  Our simple and client-focused banking model continues to deliver consistent, across-the-board growth."

Quarterly Highlights

Financial Results

• Core revenues were up 14.9% compared to last year's third quarter. ⁽¹⁾
• Net income was $134.8 million.
• Diluted earnings per share ("EPS") of $0.82.
• Core net income was $131.1 million. ⁽¹⁾
• Core diluted EPS of $0.79, up 11.3% over the third quarter a year ago. ⁽¹⁾
• Loan originations totaled $4.9 billion for the quarter, up 2.5% over last year's third quarter.
• Loans sold totaled $599.7 million, compared to $887.2 million for the prior quarter.
• Core net interest margin was 3.09%. ⁽¹⁾
• Core efficiency ratio was 59.4%. ⁽¹⁾

Continued Financial and Credit Strength

• Tier 1 leverage ratio was 9.29%. ⁽²⁾
• Common Equity Tier 1 ratio was 10.51%. ⁽²⁾
• Book value per share was $30.84, up 12.2% from a year ago.
• Nonperforming assets were low, at 10 basis points of total assets.
• Credit quality remains strong, with net recoveries of $39,000 for the quarter.

Franchise Development

• Loans outstanding, excluding loans held for sale, totaled $42.4 billion, up 15.7% from a year ago.
• Deposits were $44.3 billion, up 24.5% from a year ago.
• Checking balances represented 60.9% of total deposits.
• Wealth management assets were $58.8 billion, up 14.5% from a year ago.
• Wealth management revenues were $50.7 million for the quarter, up 13.4% from the same quarter a year ago.

"Wealth management had a good quarter, despite market volatility," said President Katherine August-deWilde.  "We continue to attract very accomplished advisors to our platform and are pleased to welcome the Constellation team to First Republic."

Quarterly Cash Dividend Declared

The Bank declared a cash dividend for the third quarter of $0.15 per share of common stock, which is payable on November 12, 2015 to shareholders of record as of October 29, 2015. 

Strong Asset Quality

Credit quality remains very strong.  Nonperforming assets were 10 basis points of total assets at September 30, 2015. 

The Bank had net recoveries for the quarter of $39,000, while adding $14.5 million to its allowance for loan losses during the quarter due to continued loan growth.

Continued Capital Strength

The Bank's Tier 1 leverage ratio was 9.29% and Common Equity Tier 1 ratio was 10.51% at September 30, 2015. ⁽²⁾

Book Value Growth

Book value per common share was $30.84 at September 30, 2015, up 12.2% from a year ago. 

Continued Franchise Development

Loan Originations

Loan originations totaled $4.9 billion for the quarter, compared to $4.7 billion for the third quarter a year ago.  For the first nine months of 2015, loan originations totaled $15.0 billion, compared to $12.7 billion for the same period a year ago, up 18.2%.  Single family originations were $2.3 billion for the quarter, of which 50% were for purchases. 

Loans outstanding, excluding loans held for sale, totaled $42.4 billion at September 30, 2015, up 15.7% compared to a year ago.

Deposit Growth

Total deposits increased to $44.3 billion, up 5.9% for the quarter and up 24.5% compared to a year ago.  At September 30, 2015, checking accounts totaled 60.9% of deposits.  The Bank is almost entirely deposit-funded, with deposits representing over 88% of total liabilities at September 30, 2015.

The average contractual rate paid on all deposits declined slightly to 0.14% for the quarter, compared to 0.15% for the prior quarter.

Mortgage Banking Activity

During the third quarter, the Bank sold $599.7 million of loans and recorded a gain on sale of $3.0 million, compared to loan sales of $1.8 billion and a gain on sale of $13.7 million during the third quarter of last year.  The margin on this quarter's loan sales was 0.49%.

The Bank utilizes loan sales in the ordinary course of business in order to provide a full range of lending options for its clients, while also managing asset growth and interest rate risk.  The Bank retains all loan servicing.

Loans serviced for investors at quarter-end totaled $10.5 billion, up 19.1% from a year ago.  Net loan servicing fees for the quarter were $3.1 million, up from $2.5 million a year ago.

Investments

Total investments at September 30, 2015 were $8.2 billion, up 5.0% for the quarter and 44.5% compared to a year ago. 

Our holdings of assets that are considered high-quality liquid assets, including eligible cash, totaled $4.8 billion at September 30, 2015, up 16.5% from $4.1 billion at June 30, 2015.

Continued Expansion of Wealth Management

Wealth management revenues totaled $50.7 million for the quarter, up 13.4% compared to last year's third quarter. 

Total wealth management assets were $58.8 billion at September 30, 2015, up 2.2% for the quarter and up 14.5% compared to a year ago.  The growth in wealth management assets in the quarter was primarily due to net new assets from both existing and new clients, partially offset by market declines.  Wealth management assets include investment management assets of $29.0 billion, brokerage assets and money market mutual funds of $22.8 billion, and trust and custody assets of $7.1 billion.

To further expand wealth management, First Republic Investment Management, Inc., a wholly-owned subsidiary of the Bank, completed the previously announced purchase of substantially all of the assets of Constellation Wealth Advisors LLC ("Constellation") on October 1, 2015.  Constellation had assets under management of approximately $5.9 billion as of September 30, 2015.

Income Statement and Key Ratios

Highlights

Strong Core Revenue Growth

Total revenues were $468.6 million for the quarter and $1.3 billion for the first nine months of 2015.

Core revenues were $459.0 million for the quarter and $1.3 billion for the first nine months of 2015, up 14.9% compared to last year's third quarter and up 13.3% compared to the first nine months of 2014. ⁽¹⁾   

Continued Core Net Interest Income Growth

Net interest income was $388.9 million for the quarter and $1.1 billion year-to-date.   

Core net interest income was $379.2 million for the quarter, an 18.4% increase from the third quarter of last year.  Core net interest income was $1.1 billion year-to-date, a 14.5% increase from the same period a year ago. ⁽¹⁾

Core Net Interest Margin

The Bank's net interest margin was 3.17% for the quarter, compared to 3.30% for the prior quarter. 

The core net interest margin was 3.09% for the quarter, compared to 3.12% for the prior quarter. ⁽¹⁾  The modest decrease was primarily the result of higher average cash balances. 

Noninterest Income

Noninterest income was $79.7 million for the quarter and $234.9 million year-to-date. 

Core noninterest income was $79.7 million for the quarter, relatively flat compared to the third quarter a year ago.  Core noninterest income was $234.9 million year-to-date, up 8.1% compared to the same period a year ago. ⁽¹⁾

Steady Core Efficiency Ratio While Continuing Infrastructure Investment

Noninterest expense for the quarter was $275.9 million, a 15.7% increase from the third quarter of last year.  The year-over-year increase in these expenses was significantly attributable to the Bank's ongoing investments in infrastructure build-out to address enhanced regulatory standards and to support ongoing business activities.

The Bank's efficiency ratio was 58.9% for the quarter, compared to 57.8% for the prior quarter and 54.1% for the third quarter a year ago.   

The Bank's core efficiency ratio was 59.4% for the quarter, compared to 59.8% for the prior quarter and 58.7% for the third quarter a year ago. ⁽¹⁾

Income Tax Rate

The Bank's effective tax rate for the nine months ended September 30, 2015 was 24.9%.  By comparison, the effective tax rate was 27.3% for 2014.  The decrease in the effective tax rate results from the steady increase in tax credit investments, tax-exempt securities, tax-advantaged loans and bank-owned life insurance.

_________

⁽¹⁾ "Core" measures are non-GAAP financial measures that exclude the positive impact of purchase accounting.  In addition, core measures also exclude other positive, but one-time, impacts from the special FHLB dividend in the second quarter of 2015, and the gain from repositioning of investment portfolio in the third quarter of 2014.  See non-GAAP reconciliation under section "Use of Non-GAAP Financial Measures."

⁽²⁾ Represents the ratios assuming that Basel III is fully phased-in.  See "Capital Ratios" table for additional information.

Conference Call Details

First Republic Bank's third quarter 2015 earnings conference call is scheduled for October 15, 2015 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 #47819794.  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, 2015, at 10:00 a.m. PT / 1:00 p.m. ET, through October 22, 2015, 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 #47819794.  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, 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 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 or 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; our geographic concentration; our opportunities for growth; our future provisions for loan losses; our regulatory compliance and future regulatory requirements, including any requirements that have become applicable to us as a bank with a four-quarter average of total consolidated assets of at least $50 billion; any increased compliance costs; the phase-in of the Basel III Capital Rules; and new accounting standards.  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.  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.

The Bank's non-GAAP measures also exclude the positive impact of certain nonrecurring items.  In the second quarter of 2015, the Bank received a one-time special dividend of $9.1 million from the FHLB, which is excluded from non-GAAP net income, earnings per share, net interest income, net interest margin and efficiency ratio.  In addition, in the third quarter of 2014, as a result of the restructuring of its investment securities portfolio, the Bank had a gain on sale of investments of $23.6 million, which is excluded from non-GAAP net income, earnings per share, noninterest income, revenue and efficiency ratio.

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:

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