3. First Republic Bank


Shares of First Republic Bank ( FRC) of San Francisco closed at $33.78 Wednesday, returning 11% year-to-date, following a 5% return in 2011.

The shares trade for 1.7 times their reported Sept. 30 tangible book value of $20.37, and for 11.5 times the consensus 2013 EPS estimate of $2.93. The consensus 2014 EPS estimate is $2.96.

First Republic had $32.6 billion in assets as of Sept. 30. The bank has offices in with offices in California, Oregon, Connecticut, Massachusetts and New York, focusing on private banking and jumbo mortgage lending.

The bank on Nov. 2 announced a deal to acquire Luminous Capital of Los Angeles, which is an investment advisor with $5.5 billion in assets under management. The cost of the deal was not disclosed, but the First Republic reassured investors by saying that "the six partners of the firm will sign long-term employment contracts as part of the transaction," which is expected to close by the end of the year.

First Republic reported third-quarter earnings available to common stockholders of $97.0 million, or 72 cents a share, increasing from $87.8 million, or 66 cents a share, in the third quarter of 2011. The company said that "Excluding the impact of purchase accounting, net income for the third quarter of 2012 was $78.7 million, up 43% from last year's third quarter. On this non-GAAP basis, the third quarter diluted EPS were $0.54, up 29% year over year."

Third-quarter net interest income was $298.8 million, increasing 3% sequentially, and 11% year-over-year. On a non-GAAP basis, excluding accretion and amortization of fair value adjustments recorded in purchase accounting, the third-quarter net interest margin was 3.47%, expanding from 3.41% the previous quarter, but narrowing from 3.49% a year earlier.

First Republic's total loans grew by 27% year-over-year, to $26.3 billion, as of Sept. 30.

The Bank's operating return on assets was 1.27% and its return on average tangible common equity was 13.87% during the third quarter, according to Thomson Reuters Bank Insight.

Jefferies analyst Casey Haire on Tuesday upgraded First Republic to a "Buy" rating from a "Hold" rating, while increasing his price target for the shares to $39 from $35, saying that the "the addition of Luminous is not only accretive to EPS (2% in our view) but also boosts FRC's fee contribution into the mid-teens (vs. 12% in 2011), & thus decreases the company's reliance on spread income."

In light of disappointing cross-selling results from some of the largest U.S. banks, including Bank of America and Citigroup ( C), following major acquisitions, First Republic may be quite successful in its integration of Luminous Capital, because of its focus on high-net-worth clients and reputation for strong customer service.

Haire said that "on the Luminous side, the firm can now recommend banking products to its clientele without worrying about tarnishing its brand due to poor service quality. For FRC, the addition of Luminous provides the company with a reputable & established team to extract more wealth management business from its borrower base, which is under-penetrated from a wealth management perspective (only 25% of FRC clients participate)."

The analyst raised his 2013 earnings estimate for First Republic $2.26 a share from $2.21, while raising his 2014 EPS estimate to $2.49 from $3.27, saying that the benefit of the Luminous acquisition would be partially "offset by last week's $150 million preferred issuance (at 5.6% coupon), which will add $8mm of below-the-line dividends annually."

FRC Chart FRC data by YCharts

Interested in more on First Republic Bank? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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