A month has gone by since the last earnings report for First Republic Bank (FRC). Shares have added about 0.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is First Republic Bank due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
First Republic Q1 Earnings Beat, Revenues Increase
First Republic delivered a positive earnings surprise of 3.3% in first-quarter 2019, reflecting higher revenues. Earnings per share came in at $1.26, outpacing the Zacks Consensus Estimate of $1.22. Moreover, the bottom line improved 11.5% from the year-ago figure.
The company’s performance was supported by top-line strength. In addition, a considerable rise in loans and deposit balances was recorded. Strong capital position was another tailwind. However, higher provisions and expenses were the key undermining factors.
Net income available to common shareholders for the reported quarter jumped 14.4% year over year to $213.8 million.
Revenues and Expenses Increase
Net revenues in the quarter came in at $807.4 million, up 12% year over year. However, the figure lagged the Zacks Consensus Estimate of $814 million.
First Republic’s net interest income jumped 14.8% to $675 million, primarily supported by growth in average earnings assets. Nevertheless, net interest margin was 2.97%, stable year over year.
Non-interest income came in at $132.3 million, down marginally year over year. Prior-year quarter results had included a gain on investment securities, excluding which, higher investment management revenues were offset by lower brokerage fees.
Non-interest expenses for the reported quarter were up 13.7% year over year to $524.8 million. An increase in salaries and benefits, information systems and other costs, which was the outcome of continued investments in the expansion of franchise, led to the upsurge.
The efficiency ratio was 65% compared with 64% recorded in the prior-year quarter. It should be noted that a rise in the efficiency ratio indicates lower profitability.
Balance Sheet Remains Healthy
As of Mar 31, 2019, net loans climbed 1.8% sequentially to $76.8 billion, while total deposits were up 3.2% to $81.6 billion. However, loan originations were $6.7 billion in the reported quarter, down 19.7% sequentially, mainly due to fall in almost all types of lending including single family, multifamily and home equity lines of credit.
First Republic’s total wealth management assets were $139.9 billion as of Mar 31, 2019, indicating 10.8% sequential rise. Wealth management assets included investment management assets, brokerage assets, money market mutual funds, and trust and custody assets. Notably, net new assets from existing and new clients along with market appreciation led to higher level of assets.
Credit Quality: A Concern?
On a year-over-year basis, total non-performing assets increased 4.5% to approximately $51.1 million. The non-performing assets to total assets ratio remained stable at 0.05%.
Further, provision for loan losses jumped 9.2% on a year-over-year basis to $14.2 million in the quarter.
As of Mar 31, 2019, the company’s Tier 1 leverage ratio was 8.84%, indicating a rise of 20 basis points from the in the prior-year quarter.
Tier 1 capital to risk-weighted assets ratio was 11.82%, up from 11.80%.
Common equity Tier 1 ratio was 10.54% compared with 10.47% a year ago.
Tangible book value per share increased 12.9% to $46.81.
Given strong pipeline and client activity, management expects mid-teens loan growth for 2019.
The company anticipates net interest margin to be 2.85-2.95% in 2019.
Management expects efficiency ratio to be in the range of 63-64% in 2019.
Further, tax rate is anticipated to be between 19% and 20% in 2019.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, First Republic Bank has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, First Republic Bank has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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