Driven by top-line strength, First Republic Bank FRC delivered a positive earnings surprise of 7.1% in first-quarter 2020. Earnings per share of $1.20 surpassed the Zacks Consensus Estimate of 92 cents. However, the bottom line was down 4.8% from the year-ago quarter.

Following the release, the stock rallied almost 3% in pre-market trading, indicating that investors have taken the results in their stride.

Shares Results were supported by an increase in net interest income (NII) and non-interest income. Moreover, the company’s balance sheet position remained strong in the quarter. However, higher expenses and provisions for credit losses were an offsetting factor.

Net income available to common shareholders declined 3.8% year over year to $205.7 million.

Revenues Increase, Expenses Escalate

Total revenues were $916.2 million, up 13.5% year over year. Also, the figure surpassed the Zacks Consensus Estimate of $871.4 million.

NII jumped 11.4% year over year to $752.1 million, primarily supported by growth in average earning assets. Net interest margin was 2.74%, down from 2.97%.

Non-interest income was $164 million, up 24% year over year. The rise was backed by an increase in almost all fee components, except for loan servicing fees.

Non-interest expenses for the reported quarter were up 13.6% year over year to $596.3 million. An increase in salaries and benefits, occupancy, and information systems expenses from continued investments in the expansion of the franchises led to the rise.

The efficiency ratio was 65.1% compared with 65% recorded in the prior-year quarter. It should be noted that rise in the efficiency ratio indicates lower profitability.

Healthy Balance Sheet

As of Mar 31, 2020, net loans climbed 4.9% sequentially to $94.7 billion, while total deposits were up 3.9% to $93.7 billion. Loan originations were $10.3 billion, up 59.2% sequentially.

First Republic’s total wealth management assets were $137.9 billion as of Mar 31, 2020, indicating an 8.7% sequential decline. The decrease was primarily due to market decline on account of the Covid-19 outbreak, partially offset by net new assets from existing and new clients.

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

Credit Quality Deteriorated

On a year-over-year basis, total non-performing assets increased significantly to $126.5 million. Non-performing assets to total assets ratio was 0.1%, up from 0.05% in the year-ago quarter.

Also, provision for loan losses increased considerably to $48.1 million.

Capital Position

As of Mar 31, 2020, the company’s Tier 1 leverage ratio was 8.46%, indicating a fall of 38 basis points from the prior-year quarter. Tier 1 capital to risk-weighted assets was 11.14%, down from 11.82%. Common equity Tier 1 capital to risk-weighted assets ratio was 9.87% compared with 10.54% a year ago.

Tangible book value per share increased 11.9% to $52.40.

Capital Deployment Activities

The board increased quarterly common stock dividend by 5.3% to 20 cents per share. The new dividend will be paid out on May 14 to shareholders of record as of Apr 30.

Our Viewpoint

While First Republic has been able to sustain its organic growth momentum, reflected by higher loans and deposits, escalating costs on investments in digital initiatives might hurt its bottom line in the near term. Moreover, the decline in net interest margin, owing to lower interest rates, is concerning 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 #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other mega banks, Bank of America Corporation BAC, Morgan Stanley MS and U.S. Bancorp USB are scheduled to report their quarterly numbers on Apr 15.

Source link