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It has been about a month since the last earnings report for First Republic Bank (FRC). Shares have added about 11.4% 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 Q3 Earnings Beat, Revenues & Costs Rise
First Republic delivered a positive earnings surprise of 16.7% in third-quarter 2020 aided by solid top-line strength. Earnings per share of $1.61 surpassed the Zacks Consensus Estimate of $1.38. Additionally, the bottom line climbed 22.9% from the year-ago quarter.
Results were supported by an increase in NII and fee income. Moreover, the company’s balance-sheet position was strong during the quarter. However, higher expenses and elevated provisions were offsetting factors.
Net income available to common shareholders jumped 25.3% year over year to $278.3 million.
Revenues Rise, Costs Increase
Total revenues were $1 billion, up 19.6% year over year. The figure surpassed the Zacks Consensus Estimate of $956.5 million.
NII jumped 19.5% year over year to $830.3 million, primarily supported by growth in average earning assets and decline in interest costs. It was partly mitigated by lower net interest margin, which declined to 2.71% from 2.80%.
Non-interest income was $171 million, up 20.2% year over year. This rise mainly resulted from elevated gain on sale of loans, higher investment management fees and income from investments in life insurance.
Non-interest expenses for the reported quarter flared up 13.9% year over year to $608.2 million. Rise in salaries and benefits, information systems expenses and continued investments in the expansion of the franchises led to the uptick.
The efficiency ratio was 60.7% compared with the 63.8% recorded in the prior-year quarter. It should be noted that a fall in the efficiency ratio indicates higher profitability.
Impressive Balance Sheet Position
As of Sep 30, 2020, net loans climbed 4.8% sequentially to $104.2 billion, while total deposits were up 6% to $104.4 billion. Loan originations, including PPP loans, came in at $12.2 billion, up 11.6% sequentially.
First Republic’s total wealth management assets were $168.2 billion as of Sep 30, 2020, marking an 8% sequential rise. This increase was primarily supported by market appreciation and net client inflow.
Wealth management assets included investment management assets of $74.7 billion, brokerage assets and money market mutual funds of $81.2 billion along with trust and custody assets of $12.3 billion.
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 20% to $164.2 million. Also, provision for loan losses was up 70.8% to $28.5 million.
Yet, non-performing assets to total assets ratio was 0.12%, stable year over year. Also, net loan charge-offs were $1.67 million, down 61.1%.
As of Sep 30, 2020, the company’s Tier 1 leverage ratio was 8.38%, reflecting a contraction of 12 basis points from the prior-year quarter. Tier 1 capital to risk-weighted assets was 11.5%, up from 11.05%. Common equity Tier 1 capital to risk-weighted assets ratio was 9.78% compared with the prior year’s 9.91%.
Tangible book value per share increased 12.6% to $55.00.
The company anticipates net interest margin of 2.65-2.75%.
Management expects efficiency ratio between 62.5% and 64.5%.
Further, tax rate is anticipated to be between 20% and 21%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 5.19% due to these changes.
Currently, First Republic Bank has a poor Growth Score of F, a grade with the same score on the momentum front. Following the exact same course, 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. It comes with little surprise First Republic Bank has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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