It has been about a month since the last earnings report for First Republic Bank (FRC). Shares have added about 1.3% in that time frame, underperforming 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 the most recent earnings report in order to get a better handle on the important drivers.
First Republic Q1 Earnings Beat Estimates, Revenues Rise
Driven by top-line strength, First Republic delivered a positive earnings surprise of 30.4% in first-quarter 2020. Earnings per share of $1.20 surpassed the Zacks Consensus Estimate of 92 cents. However, the bottom line was down 4.8% from the year-ago quarter.
Results were supported by an increase in net interest income (NII) and non-interest income. Moreover, the company’s balance sheet position remained strong in the quarter. However, higher expenses and provisions for credit losses were an offsetting factor.
Net income available to common shareholders declined 3.8% year over year to $205.7 million.
Revenues Increase, Expenses Escalate
Total revenues were $916.2 million, up 13.5% year over year. Also, the figure surpassed the Zacks Consensus Estimate of $871.4 million.
NII jumped 11.4% year over year to $752.1 million, primarily supported by growth in average earning assets. Net interest margin was 2.74%, down from 2.97%.
Non-interest income was $164 million, up 24% year over year. The rise was backed by an increase in almost all fee components, except for loan servicing fees.
Non-interest expenses for the reported quarter were up 13.6% year over year to $596.3 million. An increase in salaries and benefits, occupancy, and information systems expenses from continued investments in the expansion of the franchises led to the rise.
The efficiency ratio was 65.1% compared with 65% recorded in the prior-year quarter. It should be noted that rise in the efficiency ratio indicates lower profitability.
Healthy Balance Sheet
As of Mar 31, 2020, net loans climbed 4.9% sequentially to $94.7 billion, while total deposits were up 3.9% to $93.7 billion. Loan originations were $10.3 billion, up 59.2% sequentially.
First Republic’s total wealth management assets were $137.9 billion as of Mar 31, 2020, indicating an 8.7% sequential decline. The decrease was primarily due to market decline on account of the Covid-19 outbreak, partially offset by net new assets from existing and new clients.
Notably, wealth management assets included investment management assets, brokerage assets, money market mutual funds, and trust and custody assets.
Credit Quality Deteriorates
On a year-over-year basis, total non-performing assets increased significantly to $126.5 million. Non-performing assets to total assets ratio was 0.1%, up from 0.05% in the year-ago quarter.
Also, provision for loan losses increased considerably to $48.1 million.
As of Mar 31, 2020, the company’s Tier 1 leverage ratio was 8.46%, indicating a fall of 38 basis points from the prior-year quarter. Tier 1 capital to risk-weighted assets was 11.14%, down from 11.82%. Common equity Tier 1 capital to risk-weighted assets ratio was 9.87% compared with 10.54% a year ago.
Tangible book value per share increased 11.9% to $52.40.
Loan growth is expected to be in the mid-teens.
The company anticipates net interest margin of 2.65% to 2.75% for 2020.
Management expects efficiency ratio between 63.5% and 64.5% in 2020.
Further, tax rate is anticipated to be between 20% and 21% in 2020.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 31.54% due to these changes.
Currently, First Republic Bank has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. However, 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 upward for the stock, and the magnitude of these revisions looks promising. 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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