It has been about a month since the last earnings report for First Republic Bank (FRC). Shares have added about 7.5% 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 the most recent earnings report in order to get a better handle on the important drivers.
First Republic Q2 Earnings Beat on Higher Revenues
First Republic delivered an earnings surprise of 16.7% in second-quarter 2020 aided by solid top-line strength. Earnings per share of $1.40 surpassed the Zacks Consensus Estimate of $1.20. Additionally, the bottom line climbed 12.9% from the year-ago quarter.
Results were supported by an increase in NII. Moreover, the company’s balance-sheet position was strong during the quarter. However, higher expenses, decline in fee income and elevated provisions were offsetting factors.
Net income available to common shareholders jumped 15.3% year over year to $242 million.
Revenues Increase, Expenses Escalate
Total revenues were $919 million, up 12.2% year over year. The figure, however, missed the Zacks Consensus Estimate of $920.7 million.
NII jumped 16.8% year over year to $787.4 million, primarily supported by growth in average earning assets, partly mitigated by lower net interest margin, which declined to 2.70%, down from the year-ago quarter’s 2.85%.
Non-interest income was $131.6 million, down 9.5% year over year. This fall mainly resulted from negative loan servicing fees and loss on sale of loans. Moreover, mostly components of income declined, partly offset by higher brokerage and investment fees, along with gain on investment securities.
Non-interest expenses for the reported quarter flared up 7.7% year over year to $569.5 million. Rise in salaries and benefits, occupancy, and information systems expenses from continued investments in the expansion of the franchises led to the uptick.
The efficiency ratio was 62% compared with the 64.5% recorded in the prior-year quarter. It should be noted that a fall in the efficiency ratio indicates higher profitability.
Healthy Balance Sheet
As of Jun 30, 2020, net loans climbed 5% sequentially to $99.4 billion, while total deposits were up 5.1% to $98.5 billion. Loan originations, including PPP loans, came in at $13.4 billion, up 30.1% sequentially.
First Republic’s total wealth management assets were $155.8 billion as of Jun 30, 2020, marking a 13% sequential rise. This increase was primarily supported by market appreciation and net client inflow.
Notably, wealth management assets included investment management assets, brokerage assets, money market mutual funds, and trust and custody assets.
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 14.5% to $166 million. Also, provision for loan losses was up 46.7% to $31.1 million.
Yet, non-performing assets to total assets ratio was 0.13%, down from the year-ago quarter’s 0.14%. Also, net loan charge-offs were $1.1 million, down 8.3% year over year.
As of Jun 30, 2020, the company’s Tier 1 leverage ratio was 8.15%, reflecting a contraction of 54 basis points from the prior-year quarter. Tier 1 capital to risk-weighted assets was 11.04%, down from 11.39%. Common equity Tier 1 capital to risk-weighted assets ratio was 9.80% compared with the prior year’s 10.19%.
Tangible book value per share increased 12.2% to $53.46.
Loan growth is expected to be in the mid-teens.
The company anticipates net interest margin of 2.65-2.75% for 2020.
Management expects efficiency ratio between 62.5% and 64.5% for 2020.
Further, tax rate is anticipated to be between 20% and 21% in 2020.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
Currently, First Republic Bank has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. 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 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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