First Republic (FRC) Misses On Q3 Earnings, Shares Drop 7.1%

Shares of First Republic Bank (NYSE:FRC) fell 7.1%, following the third-quarter 2017 results. The company reported negative earnings surprise of 1.7 %, reflecting elevated expenses. Earnings per share came in at $1.14, missing the Zacks Consensus Estimate of $1.16. However, the figure improved 14% from the year-ago tally.

Despite rising rates, net interest margin disappointed on high deposit costs. However, revenues improved from the prior-year quarter. In addition, considerable rise in loans and deposit balances were recorded. Non-performing assets and provisions also declined.

Net income available to common shareholders for the quarter jumped 20.3% year over year to $185.7 million.

Revenues Climb, Expenses Flare Up

Net revenues in the quarter came in at $670.3 million, up 20.1% year over year. However, the figure missed the Zacks Consensus Estimate of $695 million.

First Republic’s net interest income jumped 19.6% year over year to $551 million, primarily supported by growth in average earnings assets. Nevertheless, net interest margin was 3.09%, down 7 basis points (bps) year over year.

Non-interest income came in at $119.3 million, up 22.7% year over year. The rise was chiefly driven by higher wealth management revenues.

On the other hand, non-interest expenses were up 23.9% year over year to $418.4 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 62.4% compared with 60.5% 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 Sep 30, 2017, loans climbed 19.2% year over year to $59.5 billion, while total deposits were up 18.7% to $65.4 billion. Loan originations were $7.2 billion in the reported quarter, up 11.9% year over year, marking the strongest third quarter ever.

First Republic’s total wealth management assets were $101.3 billion as of Sep 30, 2017, indicating 26.4% 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 Quality Improved

On a year-over-year basis, total non-performing assets plunged 29.8% year over year to approximately $37.9 million. The non-performing assets to total assets ratio contracted 4 bps to 0.04%.

Further, provision for loan losses plummeted 43.9% on a year-over-year basis to $10.1 million in the reported quarter.

Capital Position

As of Sep 30, 2017, the company’s Tier 1 leverage ratio was 8.76%, indicating a decline of 50 bps from the comparable period last year.

Tier 1 capital to risk-weighted assets was 12.18%, down 70 bps year over year.
Common equity Tier 1 ratio was 10.58% compared with 10.52% in the year-earlier quarter.

Tangible book value per share increased 16.4% year over year to $38.90.

In Conclusion

First Republic’s performance during the third quarter was decent. 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 decline in net interest margin remain concerns.

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 2017 results on Oct 23, while SVB Financial Group (NASDAQ:SIVB) is scheduled to report on Oct 19.

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