Driven by higher revenues, First Republic Bank FRC delivered a positive earnings surprise of 1.3% in second-quarter 2015. Earnings per share of 80 cents beat the Zacks Consensus Estimate of 79 cents. Further, this compared favorably with the prior-year earnings of 76 cents.

Nevertheless, shares of First Republic fell more than 1% at the close of Thursday’s trading session. Perhaps the price reaction reflects investors’ concern about the company’s continuous rise in expenses.

Core earnings per share for the quarter came in at 73 cents, up 5.8% year over year. Core measures are non-GAAP financial measures and exclude the impact of one-time special dividend received from the FHLB in the reported quarter.

Results were aided by higher revenues that came on the back of strong performance in the wealth management segment.  Also, the quarter witnessed lower provision for loan losses. However, increase in non-interest expenses was on the downside.

Core net income available to common shareholders was $106.7 million, up 10% from the prior-year quarter.

Performance in Detail

Total revenue (“GAAP”) was $455.3 million, climbing 11% year over year. Also, it surpassed the Zacks Consensus Estimate of $453.3 million. Further, core revenues were $434.2 million, up 11.7% year over year.

First Republic’s core net interest income increased 13.5% year over year to $353.9 million. Nevertheless, core net interest margin fell 4 basis points (bps) from the year-ago period to 3.12%.

Excluding gain on sale of loans, the company’s non-interest income came in at $76.8 million, up 23.8% year over year. The rise was primarily driven by increased income across several income categories including investment advisory fees, gain on investment securities, income from investments in life insurance, loan and related fees, and brokerage and investment fees.

Non-interest expense went up 18.1% year over year to $263.1 million, led by an increase in salaries, professional fees, information systems and occupancy costs. This rise was primarily related to investments made in infrastructure building for meeting regulatory standards.

Core efficiency ratio was 59.8% compared with 56.3% in the prior-year quarter. An increase in efficiency ratio indicates deterioration in profitability.

As of Jun 30, 2015, net loans increased 12.8% year over year to $40.7 billion, while total deposits rose 19.6% to $41.9 billion.

First Republic’s total wealth management assets were $57.6 billion as of Jun 30, 2015, up 18.3% year over year. 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 in the quarter. On a year-over-year basis, total non-performing assets increased 7.2% to $55.9 million. Non-performing assets to total assets ratio was 0.11%, flat year over year.

However, provision for credit losses decreased 22% from the year-ago quarter to $17 million.

Capital Position

First Republic’s capital ratios represented a mixed bag as well. As of Jun 30, 2015, the company’s Tier 1 leverage ratio was 9.86% versus 9.73% as of Jun 30, 2014. Common Equity Tier 1 ratio stood at 10.87%. Tier 1 risk-based capital ratio was 13.47% compared with 13.74% as of Jun 30, 2014.

At the end of the quarter, book value per share was $30.03, reflecting an increase of 12 % year over year.

Our Viewpoint

First Republic reported decent results for the second quarter. We remain encouraged by the continued revenue growth. We expect a rise in loans and deposits will keep the company’s organic growth momentum alive.   

Despite the rising expenses, we remain optimistic about the company’s prospects. Higher expense in the recent quarters was triggered by increased compliance and infrastructure investments. These are necessary for First Republic as it expects consolidated assets for the trailing four quarters to average at least $50 billion by the end of third-quarter 2015. Notably, the average of the last four quarter-end total assets came in at $49.8 billion.

However, margin pressure amid a low interest rate environment keeps us on the sidelines.

First Republic currently carries a Zacks Rank #2 (Buy).

Other Banks

Among other West banks, Zions Bancorporation ZION is set to report second-quarter results on Jul 20 while Bank of Hawaii Corporation BOH and Western Alliance Bancorporation WAL are scheduled to report second-quarter results on Jul 27.

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