Shares of First Republic Bank FRC rose 2.1% at the close of Thursday’s trading session based on impressive first-quarter 2015 results. Earnings per share of 71 cents beat the Zacks Consensus Estimate by 4.4%. However, this compared unfavorably with the prior-year earnings of 73 cents per share.
Core earnings per share for the quarter came in at 68 cents compared with the prior-year quarter tally of 67 cents.
Better-than-expected results were attributable to improvement across the franchise, particularly the wealth management segment, revenues from which grew 22.1% year over year. Also, continued growth in assets was one of the major positives. However, higher non-interest expenses and a rise in provision for loan losses were the dampeners.
Core net income available to common shareholders was $96.6 million, up 5.1% from the prior-year quarter.
Performance in Detail
Total revenue (“GAAP”) was $422.9 million, climbing 10.8% year over year. However, it lagged the Zacks Consensus Estimate of $437.3 million. Further, core revenue for the quarter was $410.1 million, up 13.2% year over year.
First Republic’s core net interest income increased 11.3% year over year to $335.2 million. Nevertheless, core net interest margin fell 8 basis points (bps) year over year to 3.09%.
The company’s non-interest income came in at $74.9 million, up 22.8% year over year. The rise was primarily driven by higher investment advisory fees, foreign exchange fees, loan servicing fees as well as income from investments in life insurance.
Non-interest expense escalated 17.6% year over year to $255.7 million, led by an increase in salaries, professional fees and costs of information systems. This rise was primarily related to investments made in infrastructure building for meeting regulatory standards.
Core efficiency ratio was 61.5% compared with 58.9% in the prior-year quarter. A rise in efficiency ratio indicates deterioration in profitability,
As of Mar 31, 2015, net loans increased 12.6% year over year to $38.8 billion, while total deposits rose 19% to $40 billion.
First Republic’s total wealth management assets were $56.4 billion as of Mar 31, 2015, increasing from $45.1 billion as of Mar 31, 2014. Wealth management assets include investment management assets, brokerage assets, money market mutual funds, trust and custody assets.
Credit Quality
First Republic’s credit quality was a mixed bag for the quarter. On a year-over-year basis, total nonperforming assets declined 10.7% to $49.4 million. Further, nonperforming assets to total assets ratio was 0.10%, down from 0.12% in the year-ago quarter.
However, provision for credit losses increased to $11.9 million as against $7.1 million in the prior-year quarter.
Capital Position
First Republic’s capital ratios represented a mixed bag as well. As of Mar 31, 2015, the company’s Tier 1 leverage ratio was 9.90% versus 9.85% as of Mar 31, 2014. Further, book value per share increased 12.4% year over to $29.45.
However, Tier 1 risk-based capital ratio was 13.73% compared with 14.07% as of Mar 31, 2014.
Dividend
Concurrent with the earnings release, First Republic raised its quarterly cash dividend by 7% to 15 cents per share. The dividend will be paid on May 14, 2015, to shareholders of record on Apr 30.
Our Viewpoint
Despite the rising expenses, we remain optimistic about the company’s future prospects. Higher expense in the recent quarters was triggered by increased compliance and infrastructure investments, which remain necessary for First Republic as it is heading toward assets of over $50 billion by end of 2015. Notably as of Mar 31, 2015, total assets stood at $49.9 billion.
We also remain encouraged by the continued growth in revenues. We expect a rise in loans and deposits to keep First Republic’s organic growth momentum alive. However, margin pressure amid a low interest rate environment keeps us apprehensive.
First Republic currently carries a Zacks Rank #3 (Hold).
Other Banks
Among other West banks, Zions Bancorporation ZION, Bank of Hawaii Corporation BOH and Western Alliance Bancorporation WAL are all scheduled to report results on Apr 20.
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