First Republic (FRC) Lags Q2 Earnings & Revenue Estimates

First Republic Bank’s (NYSE:FRC) adjusted earnings per share for the second-quarter 2016 came in at 89 cents, lagging the Zacks Consensus Estimate of 91 cents. However, results exceeded the year-ago tally by 11.3%.

A sizeable growth in non-interest expenses is primarily responsible for the lower-than-expected results. However, top line showed decent improvement on the back of considerable rise in loans & deposit balances. Lower provisions were also on the positive side. It’s encouraging to see that the company made decent organic growth during the quarter.

After considering the positive impact from the adoption of new accounting guidance for share-based compensation, net income available to common shareholders for the second quarter increased 25.6% year over year to $165 million or 97 cents per share.

Revenue Growth Not Enough to Counter Higher Expenses

Net revenue in the quarter was $535.1 million, up 8.7% year over year. However, it lagged the Zacks Consensus Estimate of $550.3 million.

First Republic’s net interest income increased 17.7% year over year to $441.6 million. Moreover, core net interest margin, excluding the positive impact of purchase accounting and the one-time special dividend, increased 4 basis points (bps) year over year to 3.16%.

Non-interest income came in at $93.5 million, up 16.5% year over year. The rise was primarily driven by higher wealth management revenues.

Non-interest expenses were $320.1 million, up 21.7% year over year. An increase in salaries and benefits from the continued expansion of the franchise, along with growth across all business segments, primarily drove this rise.

Efficiency ratio was 59.8% compared with 57.8% in the prior-year quarter. A rise in efficiency ratio indicates deterioration in profitability.

Balance Sheet Remained Healthy

As of Jun 30, 2016, net loans increased 16% year over year to $47.6 billion, while total deposits rose 22.1% to $51.2 billion.

First Republic’s total wealth management assets were $75.8 billion as of Jun 30, 2016, increasing 31.7% year over year. Wealth management assets included investment management assets, brokerage assets, money market mutual funds, and trust and custody assets.

Credit Scenario a Mixed Bag

On a year-over-year basis, total non-performing assets jumped 5.9% to $59.1 million. Further, as of Jun 30, 2016, the ratio of net loan charge-offs to average total loans was 0.01%, up 1 bps from the prior-year period.

On the other hand, the non-performing assets to total assets ratio declined 2 basis points to 0.09%. Moreover, provision for loan losses decreased 16.5% to $14.2 million in the reported quarter.

Capital Position Deteriorated

As of Jun 30, 2016, the company’s Tier 1 leverage ratio was 9.58%, a decline of 28 bps from the prior-year quarter.

Tier 1 risk-based capital ratio was 13.23%, down 24 bps from the year-ago quarter.

However, tangible book value per share increased 13.8% year over year to $32.53. Further, the bank issued 2.9 million shares of common stock during the quarter, which added approximately $202 million to common equity.

Our Viewpoint

We are encouraged by First Republic’s strong performance during the second quarter across all the lines of business and expect the rise in loans and deposits to keep the company’s organic growth momentum alive.

Despite the rising expenses, we are optimistic about the company’s prospects. Higher expenses in the recent quarters were triggered by an increase in compliance and infrastructure investments. Going forward, the company intends to offset increased expenses through various cost-containment initiatives.

First Republic currently carries a Zacks Rank #3 (Hold).

Other Players in This Space

Among other West banks, BBCN Bancorp, Inc. (NASDAQ:BBCN) is slated to release its second-quarter 2016 results on Jul 18, SVB Financial Group (NASDAQ:SIVB) on Jul 21, and Zions Bancorp. (NASDAQ:ZION) on Jul 26.