First Republic (FRC) Q3 Earnings Beat On Higher Revenues

First Republic Bank’s (NYSE:FRC) adjusted earnings per share for third-quarter 2016 came in at $1.00, beating the Zacks Consensus Estimate of 99 cents. The figure also improved 22% from the year-ago tally.

A sizeable increase in net interest income and non-interest income during the quarter was primarily responsible for the bottom-line improvement. The top line also witnessed a decent upside on the back of a considerable rise in loans and deposit balances. Lower provisions also drove results. On the flip side, the quarter recorded higher expenses.

Net income available to common shareholders for the third quarter jumped 29.2% year over year to $154 million.

Revenue Up, Expenses Rise

Net revenue in the quarter was $557.9 million, up 19% year over year. The figure, however, lagged the Zacks Consensus Estimate of $571.0 million.

Specifically, First Republic’s net interest income soared 18.4% year over year to $460.6 million primarily backed by growth in average earnings assets. Moreover, core net interest margin, excluding the positive impact of purchase accounting, increased 2 basis points (bps) to 3.11%.

Non-interest income came in at $97.3 million, up 22% year over year. The rise was primarily driven by higher wealth management revenues.

On the other hand, non-interest expenses were up 22.4% year over year to $337.7 million. An increase in salaries and benefits, which was an outcome of continued investments in the expansion of franchise and regulatory compliance activities, and growth across all business segments, primarily led to the upside.

The efficiency ratio was 60.5%, compared with 58.9% in the prior-year quarter. The rise was mainly a result of higher costs due to the new FDIC assessment rule and interest expense on subordinated notes issued during the quarter. Note that a rise in the efficiency ratio indicates deterioration in profitability.

Balance Sheet Still Healthy

As of Sep 30, 2016, loans increased 17.6% year over year to $49.9 billion, while total deposits were up 24.2% to $55.1 billion.

First Republic’s total wealth management assets were $80.2 billion as of Sep 30, 2016, reflecting a growth of 36.4% 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 declined 1.1% to approximately $54.0 million. Further, as of Sep 30, 2016, the ratio of net loan charge-offs to average total loans was 0.01%, up 1 basis point.

On the other hand, the non-performing assets to total assets ratio declined 2 bps to 0.08%. Moreover, provision for loan losses decreased 58.5% to $18.0 million in the reported quarter.

Capital Position Deteriorates

As of Sep 30, 2016, the company’s Tier 1 leverage ratio was 9.26%, reflecting a decline of 12 bps from the prior-year quarter.

Tier 1 risk-based capital ratio was 12.89%, down 32 bps.

However, tangible book value per share increased 13.5% year over year to $33.41. Further, on Aug 1, the bank issued a 30-year, 4.375% fixed-rate unsecured subordinated notes, amounting to a total of $400 million. The issued notes qualify as Tier 2 capital.

In Conclusion

We are encouraged by First Republic’s strong performance during the third quarter and expect the company to maintain its organic growth momentum backed by increase in loans and deposits.

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 (NASDAQ:ZION) and Bank of Hawaii Corporation (NYSE:BOH) are slated to release third-quarter 2016 results on Oct 24, while SVB Financial Group (NASDAQ:SIVB) will report quarterly numbers on Oct 20.

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