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First Republic (FRC) Misses Q2 Earnings on Higher Expenses


First Republic Bank’s FRC second-quarter 2017 earnings per share came in at $1.06, missing the Zacks Consensus Estimate of $1.09. However, the figure improved 9.3% from the year-ago tally.

Higher revenues during the quarter were primarily responsible for the bottom-line improvement from the year-ago quarter. In addition, considerable rise in loans and deposit balances were recorded. Non-performing assets also declined. On the other hand, higher expenses and provisions remained a headwind.

Net income available to common shareholders for the quarter jumped 16.7% year over year to $172.3 million.

Revenue Climbs, Expenses Flare Up

Net revenue in the quarter came in at $641.3 million, up 19.9% year over year. However, the figure missed the Zacks Consensus Estimate of $650.0 million.

First Republic’s net interest income jumped 20.5% year over year to $532 million, primarily supported by growth in average earnings assets. However, the net interest margin was 3.16%, down 5 basis points (bps) year over year.

Non-interest income came in at $109.4 million, up 17% year over year. The rise was chiefly driven by higher wealth management revenues.

On the other hand, non-interest expenses were up 24.1% year over year to $397.1 million. An increase in salaries and benefits, information systems and occupancy costs, which came as an outcome of continued investments in the expansion of franchise, mainly stemmed the upside.

The efficiency ratio was 61.9% compared with 59.8% recorded in the prior-year quarter. It should be noted that a rise in the efficiency ratio indicates deterioration in profitability.

Balance Sheet Still Healthy

As of Jun 30, 2017, loans climbed 21.3% year over year to $57.8 billion, while total deposits were up 23.7% to $63.3 billion. Loan originations were a record $7.3 billion in the reported quarter, up 12.1% year over year.

First Republic’s total wealth management assets were $95.4 billion as of Jun 30, 2017, indicating 25.9% year-over-year growth. Wealth management assets included investment management assets, brokerage assets, money market mutual funds, and trust and custody assets. Notably, net new assets from existing and new clients, along with market appreciation, led to the elevated level of assets.

Credit Scenario: A Concern?

On a year-over-year basis, total non-performing assets declined 23.4% year over year to approximately $45.3 million. The non-performing assets to total assets ratio contracted 3 bps to 0.06%.

However, provision for loan losses climbed 68.3% on a year-over-year basis to $23.9 million in the reported quarter.

Capital Position

As of Jun 30, 2017, the company’s Tier 1 leverage ratio was 8.99%, reflecting a decline of 59 bps from the prior-year quarter.

Tier 1 capital to risk-weighted assets was 12.49%, down 74 bps year over year.
Common equity Tier 1 ratio was 10.72% compared with 10.74% in the year-earlier quarter.

Tangible book value per share increased 16.3% year over year to $37.83.

In Conclusion

First Republic’s decent performance during the second quarter looks encouraging. The company’s efforts to maintain its organic growth momentum, backed by growth in loans and deposits, which aided upswing in revenues, highlight optimism. Moreover, lower non-performing assets are another tailwind. However, higher expenses, and provisions and decline in net interest margin remain concerns.

FIRST REPUBLIC BANK Price, Consensus and EPS Surprise


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.

Among other West banks, Zions Bancorporation ZION is slated to release second-quarter 2017 results on Jul 25, Bank of Hawaii Corporation BOH on Jul 24 and SVB Financial Group SIVB is scheduled to report on Jul 20.

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