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First Republic Bank (FRC) Up 0.5% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for First Republic Bank (FRC). Shares have added about 0.5% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is First Republic Bank due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

First Republic Q4 Earnings Beat Estimates, Costs Rise

Driven by top-line strength, First Republic delivered a positive earnings surprise of 10.3% in fourth-quarter 2019. Earnings per share of $1.39 surpassed the Zacks Consensus Estimate of $1.26. Also, the bottom line jumped 7.8% from the year-ago quarter.

Results were supported by increase in NII and non-interest income. Moreover, the company’s balance sheet position remained strong in the quarter. Also, decline in provisions was a positive factor. However, expenses witnessed a rise.

Net income available to common shareholders grew 9.5% year over year to $235.6 million in the fourth quarter.

For full-year 2019, the company reported net income available to common shareholders of $881.3 million or $5.20 compared with $796.1 million or $4.81 in 2018.

Revenues Increase, Expenses Escalate

For 2019, the company reported net revenues of $3.3 billion, up 9.7% from the prior-year quarter figure.

Total revenues were $877.5 million in the quarter, up 8.2% year over year. Also, the figure surpassed the Zacks Consensus Estimate of $849.8 million.

NII jumped 7.9% year over year to $720.1 million, primarily supported by growth in average earning assets. Net interest margin came in at 2.73%, down from 2.98%.

Non-interest income was $157.3 million, up 9.6% year over year. The rise was backed by increase in almost all fee components, except loan servicing fees.

Non-interest expenses for the reported quarter were up 12.1% year over year to $558.8 million. An increase in salaries and benefits, occupancy and information systems expenses from the continued investments in the expansion of the franchises led to the rise.

Efficiency ratio was 63.7% compared with 61.5% recorded in the prior-year quarter. It should be noted that rise in the efficiency ratio indicates lower profitability.

Healthy Balance Sheet

As of Dec 31, 2019, net loans climbed 5.2% sequentially to $90.3 billion while total deposits were up 5.1% to $90.1 billion. Loan originations were $11.2 billion, up 2.4% sequentially.

First Republic’s total wealth management assets were $151 billion as of Dec 31, 2019, indicating 7.7% sequential rise. This increase resulted from net new assets from existing and new clients, and market appreciation.

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

Credit Quality: A Mixed Bag

On a year-over-year basis, total non-performing assets increased significantly to $143.2 million. Non-performing assets to total assets ratio was 0.12%, up from 0.05% in the year-ago quarter.

However, provision for loan losses decreased 62% to $9.6 million.

Capital Position

As of Dec 31, 2019, the company’s Tier 1 leverage ratio was 8.39%, indicating fall of 29 basis points from the prior-year quarter. Tier 1 capital to risk-weighted assets was 11.21%, down from 11.7%. Common equity Tier 1 capital to risk-weighted assets ratio was 9.86% compared with 10.38% a year ago.

Tangible book value per share increased 11% to $50.24.

Outlook 2020    

Loan growth is expected to be in the mid-teens. Also, earning assets are expected to grow in mid-teens.

The company anticipates net interest margin to be in the range of 2.65% to 2.75% in 2020, assuming no changes in Fed funds rates throughout 2020.

Management expects efficiency ratio to be between 63.5% and 64.5% in 2020. First-quarter 2020 efficiency ratio is expected to be higher due to the seasonal impact of payroll taxes and benefits.

Further, tax rate is anticipated to be between 20% and 21% in 2020. The tax rate in the first half of 2020 is expected to be a little lower due to the anticipated exercise of stock options that are to expire on Jul 1, 2020.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

Currently, First Republic Bank has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

First Republic Bank has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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