First Republic Reports Strong Quarterly Earnings

SAN FRANCISCO, April 16, 2014 /PRNewswire/ -- First Republic Bank (NYSE: FRC) today announced financial results for the quarter ended March 31, 2014.

"We're very pleased with our first quarter results," said Chairman and CEO Jim Herbert.  "Excluding the unusually high level of gain on loan sales during last year's first quarter, year-over-year core earnings per share were up nicely.  All elements of our franchise continue to make a meaningful contribution to results.  Assets are very clean and capital is strong."

Quarterly Highlights

Financial Results

• Net income was $114.7 million.
• Diluted earnings per share ("EPS") were $0.73, compared to $0.85 a year ago. 
• Core net income was $105.8 million. ⁽¹⁾
• Core diluted EPS were $0.67, compared to $0.72 a year ago. ⁽¹⁾
• Gain on sale of loans contributed $0.01 per share to the current quarter results, compared to $0.11 per share a year ago.
• Loans sold were $346.2 million in the first quarter, compared to $1.2 billion for the same period a year ago.
• Book value per share was $26.21, up 14.1% from a year ago.
• Core revenues were up 7.8% over the first quarter of last year. ⁽¹⁾
• Core net interest margin was 3.17%, compared to 3.06% for the prior quarter. ⁽¹⁾

Continued Credit and Financial Strength

• 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.
• Nonperforming assets continued to be extremely low at 12 basis points of total assets at quarter-end.
• Net charge-offs were a single basis point for the quarter.
• Tier 1 leverage ratio was 9.85%.
• Tier 1 leverage capital has grown by 31.3% in the last twelve months.

Franchise Development

• Loan originations were $3.2 billion, down 9.1% from the first quarter of 2013 in the face of a substantial decline in the single family refinance market.
• Loans outstanding totaled $35.3 billion, up 3.0% for the quarter.
• Deposits were $33.6 billion, up 4.6% for the quarter.
• Wealth management assets were $45.1 billion, up 8.6% for the quarter and 30.3% from a year ago.

"Franchise development continued to be very strong, reflecting our ongoing success in cross selling and client acquisition," said President Katherine August de-Wilde.  "This was especially evident in the wealth management area.  More than 90% of the increase in wealth management assets was from net client inflows."

Quarterly Cash Dividend Increases 17% to $0.14 per Share

The Bank announced an increase in its quarterly cash dividend for the first quarter to $0.14 per share of common stock, which is payable on May 15, 2014 to shareholders of record as of May 1, 2014. 

Strong Asset Quality

The Bank's credit quality remains very strong.  Nonperforming assets were 12 basis points of total assets. 

Net charge-offs for the quarter totaled 1 basis point of average loans.

In the first quarter, the Bank recorded a provision for loan losses of $7.1 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 $150.2 million, or 0.52% of such loans outstanding. 

Additional Capital Strength

The Bank's Tier 1 leverage ratio was 9.85% at March 31, 2014, compared to 9.19% at year-end.

During the quarter, the Bank sold 4.6 million shares of new common stock, which added approximately $240.0 million to common equity.

Growing Book Value

Book value per common share was $26.21 at March 31, 2014, up 6.4% for the quarter and up 14.1% from a year ago. 

Franchise Development

Composition of Loan Originations

Loan originations totaled $3.2 billion for the quarter.  Single family and home equity lines of credit originations were $1.8 billion, or 55% of total originations; 60% of single family home loan originations were for purchases.

Total Assets

Total assets were $44.3 billion, up 5.3% for the quarter. 

Excellent Deposit Results

Total deposits increased to $33.6 billion, up 4.6% for the quarter and up 25.0% compared to a year ago.  At March 31, 2014, 96% of deposits were core deposits; 51% of deposits were checking accounts. ⁽²⁾

The average contractual rate paid on all deposits declined to 0.21% for the quarter, compared to 0.25% for the prior quarter. 

Expansion of Wealth Management Assets and Revenues

Total wealth management assets were $45.1 billion, up 8.6% for the quarter and up 30.3% compared to a year ago.  Such 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 $23.3 billion, brokerage assets and money market mutual funds of $15.7 billion, and trust and custody assets of $6.2 billion. 

Wealth management revenues for the quarter totaled $38.7 million, up 4.3% compared to the prior quarter and 31.1% compared to last year's first quarter.

Mortgage Banking Activity

Mortgage banking sales volume and profitability were down compared to the first quarter of last year, which had the highest quarterly gain on sale in the Bank's history.  The Bank sold $346.2 million of primarily longer-term, fixed-rate home loans during the quarter and recorded net gains of $2.8 million, or 0.82% of loans sold.  Gain on sale contributed $0.01 to diluted EPS for the quarter, compared to $0.11 for the quarter a year ago.

Loans serviced for investors totaled $6.2 billion, up 3.3% from the prior quarter and 14.1% from a year ago primarily due to the increased level of loan sales since the beginning of 2013.  The carrying value of mortgage servicing rights was $30.3 million, or 49 basis points of such loans serviced.

Income Statement and Key Ratios

Revenue Growth

Total revenues were $381.7 million for the quarter, a 2.9% increase from the prior quarter and a 3.1% increase over the first quarter last year.

Core revenues were $362.2 million for the quarter, a 4.7% increase from the prior quarter and a 7.8% increase over the first quarter last year. ⁽¹⁾

Net Interest Income Growth

Net interest income was $320.7 million for the quarter, a 1.9% increase from the prior quarter and a 7.6% increase over the first quarter last year.  

Core net interest income was $301.2 million for the quarter, up 4.0% from the prior quarter and up 14.2% over the first quarter last year. ⁽¹⁾

Net Interest Margin

The Bank's net interest margin was 3.37% for the quarter, compared to 3.32% for the prior quarter.   

The core net interest margin was 3.17% for the quarter, compared to 3.06% for the prior quarter. ⁽¹⁾

The increase in core net interest margin for the first quarter was primarily due to a reduction in average interest-earning cash balances during the quarter.  Such average cash was $1.2 billion for the first quarter, compared to $2.6 billion in the prior quarter, resulting in approximately 10 basis points of the 11 basis point increase in core net interest margin. ⁽¹⁾

Noninterest Income

Noninterest income for the quarter was $61.0 million, an 8.6% increase compared to the prior quarter.  Noninterest income, excluding gain on sale of loans, increased 25.7% over the first quarter last year.

These increases in noninterest income are primarily due to increases in investment advisory fees.

Noninterest Expense and Efficiency Ratio

Noninterest expense for the quarter was $217.5 million, an 8.2% increase over the prior quarter and a 16.6% increase from the first quarter a year ago.  The increase in noninterest expense from the prior quarter is attributed to increased personnel costs primarily due to seasonal payroll taxes, incentive compensation related to the expansion of wealth management and increases in health care costs.

The Bank's efficiency ratio was 57.0% for the quarter, compared to 54.2% for the prior quarter and 50.4% for the first quarter a year ago. 

The Bank's core efficiency ratio was 58.9% for the quarter, compared to 56.9% for the prior quarter and 54.1% for the first quarter a year ago. ⁽¹⁾  The increase in the efficiency ratio compared to the prior quarter is predominantly the result of seasonal increases in payroll taxes.  The efficiency ratio in the first quarter of 2013 significantly benefitted from the unusually high level of gain on sale of loans.

Income Tax Rate

The Bank's effective tax rate for 2014 is expected to be 27.0%, compared to 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."
⁽²⁾ Core deposits exclude CDs greater than $250,000.

Conference Call Details

First Republic Bank's first quarter 2014 earnings conference call is scheduled for April 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 #19743263.  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 April 16, 2014, at 12:00 p.m. PT / 3:00 p.m. ET, through April 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 #19743263.  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 March 31, 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: