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First Republic (FRC) Q2 Earnings Beat on Higher Revenues

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Zacks Equity Research
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First Republic Bank FRC delivered an earnings surprise of 16.7% in second-quarter 2020 aided by solid top-line strength. Earnings per share of $1.40 surpassed the Zacks Consensus Estimate of $1.20. Additionally, the bottom line climbed 12.9% from the year-ago quarter.

Results were supported by an increase in net interest income (NII). Moreover, the company’s balance-sheet position was strong during the quarter. However, higher expenses, decline in fee income and elevated provisions were offsetting factors.

Net income available to common shareholders jumped 15.3% year over year to $242 million.

Revenues Increase, Expenses Escalate

Total revenues were $919 million, up 12.2% year over year. The figure, however, missed the Zacks Consensus Estimate of $920.7 million.

NII jumped 16.8% year over year to $787.4 million, primarily supported by growth in average earning assets, partly mitigated by lower net interest margin, which declined to 2.70%, down from the year-ago quarter’s 2.85%.

Non-interest income was $131.6 million, down 9.5% year over year. This fall mainly resulted from negative loan servicing fees and loss on sale of loans. Moreover, mostly components of income declined, partly offset by higher brokerage and investment fees, along with gain on investment securities.

Non-interest expenses for the reported quarter flared up 7.7% year over year to $569.5 million. Rise in salaries and benefits, occupancy, and information systems expenses from continued investments in the expansion of the franchises led to the uptick.

The efficiency ratio was 62% compared with the 64.5% recorded in the prior-year quarter. It should be noted that a fall in the efficiency ratio indicates higher profitability.

Healthy Balance Sheet

As of Jun 30, 2020, net loans climbed 5% sequentially to $99.4 billion, while total deposits were up 5.1% to $98.5 billion. Loan originations, including PPP loans, came in at $13.4 billion, up 30.1% sequentially.

First Republic’s total wealth management assets were $155.8 billion as of Jun 30, 2020, marking a 13% sequential rise. This increase was primarily supported by market appreciation and net client inflow.

Notably, wealth management assets included investment management assets, brokerage assets, money market mutual funds, and trust and custody assets.

Credit Quality: A Mixed Bag

During the reported quarter, credit metrics were a mixed bag. On a year-over-year basis, total non-performing assets increased 14.5% to $166 million. Also, provision for loan losses was up 46.7% to $31.1 million.

Yet, non-performing assets to total assets ratio was 0.13%, down from the year-ago quarter’s 0.14%. Also, net loan charge-offs were $1.1 million, down 8.3% year over year.

Capital Position

As of Jun 30, 2020, the company’s Tier 1 leverage ratio was 8.15%, reflecting a contraction of 54 basis points from the prior-year quarter. Tier 1 capital to risk-weighted assets was 11.04%, down from 11.39%. Common equity Tier 1 capital to risk-weighted assets ratio was 9.80% compared with the prior year’s 10.19%.

Tangible book value per share increased 12.2% to $53.46.

Our Viewpoint

While First Republic has been able to sustain its organic growth momentum, reflected by higher loans and deposits, escalating costs on investments in digital initiatives might hurt its bottom line in the near term. Moreover, the decline in net interest margin on lower interest rates is concerning as it is likely to impede interest income growth to some extent. Nevertheless, rise in average earnings assets is a tailwind.

First Republic Bank Price, Consensus and EPS Surprise

First Republic Bank Price, Consensus and EPS Surprise
First Republic Bank Price, Consensus and EPS Surprise

First Republic Bank price-consensus-eps-surprise-chart | First Republic Bank Quote

First Republic currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other mega banks, Bank of America Corporation BAC, Morgan Stanley MS and Truist Financial Corporation TFC are scheduled to report quarterly numbers on Jul 16.

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