First Republic (FRC) Q3 Earnings Beat Estimates, Costs Rise

First Republic Bank’s FRC third-quarter 2019 earnings per share of $1.31 surpassed the Zacks Consensus Estimate of $1.21. Also, the bottom line jumped 10.1% 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. However, rise in expenses and higher provisions were headwinds.

Net income available to common shareholders grew 13% year over year to $222.1 million.

Revenues Climb, Expenses Escalate

Net revenues were $837.2 million, up 8.9% year over year. Also, the figure surpassed the Zacks Consensus Estimate of $830.6 million.

NII jumped 9.5% year over year to $695 million, primarily supported by growth in average earning assets. Net interest margin was 2.8%, down from 2.85%.

Non-interest income was $142.2 million, up 5.8% year over year. The rise was backed by higher brokerage and investment fees, and foreign exchange fee income, partially offset by lower investment management fees.

Non-interest expenses for the reported quarter were up 10.3% year over year to $534 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 63.8% compared with 63% recorded in the prior-year quarter. It should be noted that rise in the efficiency ratio indicates lower profitability.

Healthy Balance Sheet

As of Sep 30, 2019, net loans climbed 5% sequentially to $85.8 billion while total deposits were up 2.7% to $85.7 billion. Loan originations were $11.1 billion, up 18% sequentially.

First Republic’s total wealth management assets were $140.2 billion as of Sep 30, 2019, indicating 1.9% 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 approximately $136.9 million. The non-performing assets to total assets ratio was 0.12%, up from 0.04% in the year-ago quarter.

However, provision for loan losses decreased 10.3% on a year-over-year basis to $16.7 million.

Capital Position

As of Sep 30, 2019, the company’s Tier 1 leverage ratio was 8.5%, indicating fall of 41 basis points from the prior-year quarter. Tier 1 capital to risk-weighted assets was 11.05%, down from 12.14%. Common equity Tier 1 capital to risk-weighted assets ratio was 9.91% compared with 10.47% a year ago.

Tangible book value per share increased 11% year over year to $48.84.

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

First Republic Bank Price, Consensus and EPS Surprise

First Republic Bank Price, Consensus and EPS Surprise

First Republic Bank price-consensus-eps-surprise-chart | First Republic Bank Quote

First Republic currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Banks

Goldman Sachs GS reported third-quarter 2019 negative earnings surprise of 4.8%. The company reported earnings per share of $4.79, missing the Zacks Consensus Estimate of $5.03. Further, the bottom-line figure compares unfavorably with earnings of $6.28 per share recorded in the year-earlier quarter.

Better-than-expected underwriting business performance, rise in mortgage banking fees and higher bond trading income drove JPMorgan’s JPM third-quarter 2019 earnings of $2.68 per share, which outpaced the Zacks Consensus Estimate of $2.44.

Citigroup C delivered a positive earnings surprise of 1% in third-quarter 2019, backed by improved investment banking performance. Adjusted earnings per share of $1.98 outpaced the Zacks Consensus Estimate of $1.96. Also, earnings climbed 20% year over year.

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