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First Republic (FRC) Q2 Earnings Lag Estimates as Costs Rise

Zacks Equity Research

First Republic Bank’s FRC second-quarter 2019 earnings per share of $1.24 lagged the Zacks Consensus Estimate of $1.26. Nevertheless, the bottom line improved 3.3% from the year-ago quarter.

The stock fell nearly 1.8% in pre-market trading, indicating that investors did not take the results in their stride. Notably, the full-day trading session will depict a better picture.

Results were hurt by rise in expenses and higher provisions. However, an increase in net interest income (NII) and non-interest income supported results to some extent. Moreover, the company’s balance sheet position remained strong in the quarter.

Net income available to common shareholders for the reported quarter grew 6.2% year over year to $209.8 million.

Revenues Improve, Expenses Rise

Net revenues were $819.4 million, up 10.1% year over year. However, the figure lagged the Zacks Consensus Estimate of $836.3 million.

NII jumped 10.2% year over year to $674 million, primarily supported by growth in average earning assets. Net interest margin was 2.85%, down from 2.95% in the year-ago quarter.

Non-interest income was $145.4 million, up 9.8% year over year. The rise was driven by an increase in almost all components of fee income.

Non-interest expenses for the reported quarter were up 11.9% year over year to $528.9 million. An increase in all expense components except for FDIC assessments led to the rise.

The efficiency ratio was 64.5% compared with 63.5% recorded in the prior-year quarter. It should be noted that rise in the efficiency ratio indicates lower profitability.

Healthy Balance Sheet

As of Jun 30, 2019, net loans climbed 6.4% sequentially to $81.8 billion while total deposits were up 2.2% to $83.4 billion. Loan originations were $9.4 billion in the reported quarter, up 40.3% sequentially.

First Republic’s total wealth management assets were $137.6 billion as of Jun 30, 2019, indicating 1.6% sequential fall. This decrease resulted from the departure of wealth managers, partly offset by client inflows and market appreciation.

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

Credit Quality Worsens

On a year-over-year basis, total non-performing assets increased significantly to approximately $145 million. The non-performing assets to total assets ratio was 0.14%, up from 0.05% in the year-ago quarter.

Further, provision for loan losses increased 9.4% on a year-over-year basis to $21.2 million.

Capital Position

As of Jun 30, 2019, the company’s Tier 1 leverage ratio was 8.69%, indicating rise of 14 basis points from the prior-year quarter. Tier 1 capital to risk-weighted assets was 11.39%, down from 11.90% a year ago. Common equity Tier 1 capital to risk-weighted assets ratio was 10.19% compared with 10.18% a year ago.

Tangible book value per share increased 13% year over year to $47.64.

Our Viewpoint

While First Republic has been able to sustain its organic growth momentum, reflected by higher loans and deposits, escalating costs owing to investments in digital initiatives might hurt its bottom line in the near term. Moreover, despite relatively higher interest rates, decline in net interest margin is a concern as it is likely to hurt interest income growth to some extent.

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 #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other West banks, East West Bancorp EWBC, Zions Bancorp ZION and SVB Financial Group SIVB are slated to release second-quarter 2019 results on Jul 18, Jul 22 and Jul 25, respectively.

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