First Republic (FRC) Q4 Earnings Beat Estimates, Costs Rise

Driven by top-line strength, First Republic Bank’s (NYSE:FRC) delivered a positive earnings surprise of 10.3% in fourth-quarter 2019. Earnings per share of $1.39 surpassed the Zacks Consensus Estimate of $1.26. Also, the bottom line jumped 7.8% from the year-ago quarter.

Results were supported by increase in net interest income (NII) and non-interest income. Moreover, the company’s balance sheet position remained strong in the quarter. Also, decline in provisions came as a positive factor. However, expenses witnessed a rise.

Net income available to common shareholders grew 9.5% year over year to $235.6 million.

Revenues Increase, Expenses Escalate

Total revenues were $877.5 million, up 8.2% year over year. Also, the figure surpassed the Zacks Consensus Estimate of $849.8 million.

NII jumped 7.9% year over year to $720.1 million, primarily supported by growth in average earning assets. Net interest margin came in at 2.73%, down from 2.98%.

Non-interest income was $157.3 million, up 9.6% year over year. The rise was backed by increase in almost all fee components, except loan servicing fees.

Non-interest expenses for the reported quarter were up 12.1% year over year to $558.8 million. An increase in salaries and benefits, occupancy and information systems expenses from the continued investments in the expansion of the franchises led to the rise.

The efficiency ratio was 63.7% compared with 61.5% recorded in the prior-year quarter. It should be noted that rise in the efficiency ratio indicates lower profitability.

Healthy Balance Sheet

As of Dec 31, 2019, net loans climbed 5.2% sequentially to $90.3 billion while total deposits were up 5.1% to $90.1 billion. Loan originations were $11.2 billion, up 2.4% sequentially.

First Republic’s total wealth management assets were $151 billion as of Dec 31, 2019, indicating 7.7% sequential rise. This increase resulted from net new assets from existing and new clients, and market appreciation.

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

Credit Quality: A Mixed Bag

On a year-over-year basis, total non-performing assets increased significantly to $143.2 million. Non-performing assets to total assets ratio was 0.12%, up from 0.05% in the year-ago quarter.

However, provision for loan losses decreased 62% to $9.6 million.

Capital Position

As of Dec 31, 2019, the company’s Tier 1 leverage ratio was 8.39%, indicating fall of 29 basis points from the prior-year quarter. Tier 1 capital to risk-weighted assets was 11.21%, down from 11.7%. Common equity Tier 1 capital to risk-weighted assets ratio was 9.86% compared with 10.38% a year ago.

Tangible book value per share increased 11% to $50.24.

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, decline in net interest margin owing to lower interest rates is a concern as it is likely to hurt interest income growth to some extent.

First Republic Bank Price, Consensus and EPS Surprise

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Written By: Zacks Investment Research