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Bank of America Castoff Doing Way Better Than Bank of America

Philip van Doorn | Bank Analyst
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First Republic Bank, was already one of the best bank growth stories out there, but its recent agreement to acquire Luminous Capital will further improve its earnings and revenue mix, according to Jefferies analyst Casey Haire.

After being acquired by Bank of America as part of that company's purchase of Merrill Lynch in January 2009, First Republic was sold in July 2010 for $1.86 billion to an investor group that included Colony Financial Services and General Atlantic LLC, and was led by First Republic's original management team. First Republic completed a public offering of common shares in December of 2010.

First Republic is headquartered in San Francisco and had $32.6 billion in total assets as of Sept. 30, with 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 bank made clear that Luminous team would stay in place, 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.

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 earnings per share (2 percent in our view), but also boosts First Republic's fee contribution into the mid-teens (vs. 12 percent in 2011), and thus decreases the company's reliance on spread income."

While many of the largest U.S. banks — especially Bank of America and Citigroup — have touted cross-selling opportunities when making transformative acquisitions, with some very disappointing results, First Republic has a specialized focus on high-net-worth clients, with a reputation for excellent customer service, that Haire expects to lead to a successful integration with Luminous.

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 and established team to extract more wealth management business from its borrower base, which is under-penetrated from a wealth management perspective (only 25 percent of FRC clients participate)."

First Republic reported third-quarter earnings available to common stockholders of $97 million, or 72 cents a share, increasing from $87.8 million, or 66 cents a share, in the third quarter of 2011. The company's total loans grew by 27 percent year-over-year, to $26.3 billion, as of Sept. 30. First Republic's return on average assets (ROA) has ranged between 1.27 percent and 1.34 percent, while its return on equity (ROE) has ranged between 13.13 percent and 15.12 percent, over the past five quarters, according to Thomson Reuters Bank Insight.

Those are very respectable returns in the prolonged low-rate environment, and while Bank of America certainly had good reason to take the $1.86 billion when it unloaded First Republic in 2010, there's no question that First Republic has thrived on its own, with the shares returning 21 percent since the IPO on Dec. 9, 2010, through Tuesday's close at $44.56, while Bank of America's shares were down 23 percent, though Tuesday's close at $9.63.

Haire 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 percent coupon), which will add $8 million of below-the-line dividends annually."

First Republic's shares have returned 10 percent year-to-date, following a 5 percent 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, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $2.96.

—By's Philip van Doorn

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