It has been about a month since the las t earnings report for First Republic Bank (FRC). Shares have lost about 3.5% in that time frame, outperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is First Republic Bank due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recen t earnings report in order to get a better handle on the important drivers.
First Republic Q2 Earnings Lag Estimates, Costs Escalate
First Republic Bank's 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.
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.
Given strong pipeline and client activity, management expects mid-teens loan growth for 2019.
The company anticipates net interest margin to be at the low-end of 2.85-2.95% in 2019.
Management expects efficiency ratio to be below 65% in 2019.
Further, tax rate is anticipated to be between 18% and 19% in 2019.
On the departure of the wealth managers in the second quarter, of the $16 billion in assets that they managed, management expects to retain about $2 billion. In the third quarter, a final outflow of around $4 billion in assets is anticipated related to these wealth managers. As a result, investment management fees are likely to be around $83 million in the current quarter.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -8.59% due to these changes.
At this time, First Republic Bank has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. 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. It's no surprise First Republic Bank has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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