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First Republic's (FRC) Q1 Earnings Beat, Revenues & Costs Rise

First Republic Bank FRC delivered an earnings surprise of 16.2% in first-quarter 2021 on solid top-line strength. Earnings per share of $1.79 surpassed the Zacks Consensus Estimate of $1.54. Additionally, the bottom line climbed 53.1% from the year-ago quarter.

Results were supported by an increase in net interest income (NII) and non-interest income. Moreover, the company’s balance-sheet position was strong during the quarter. However, higher expense was the offsetting factor.

Net income available to common shareholders jumped 13.2% year on year to $316.3 million.

Revenues Increase, Expenses Flare Up

Total revenues were $1.1 billion during the March-end quarter, up 23.8% year over year. The figure also surpassed the Zacks Consensus Estimate of $1.08 billion.

NII jumped 24.8% year over year to $938.8 million, primarily supported by growth in average interest-earning assets. Net interest margin contracted 6 basis points from the prior-year quarter to 2.67%. The fall was majorly attributed to higher average cash balances during the quarter.

Non-interest income was $195.9 million, up 19.4% year on year. This rise mainly resulted from elevated wealth management fees and higher income from life insurance investments.

Non-interest expenses for the reported quarter flared up 23.8% year on year to $720.4 million. Rise in salaries and benefits and information systems costs from continued investments in the expansion of the franchises as well as higher professional fees led to this uptick.

The first-quarter efficiency ratio of 63.5% remained flat year over year.

Healthy Balance Sheet

As of Mar 31, 2021, net loans climbed 5% sequentially to $117.5 billion, while total deposits were up 11.3% to $127.9 billion. Loan originations, including PPP loans, came in at $15.7 billion, down 6% quarter on quarter.

First Republic’s total wealth management assets were $218.9 billion as of Mar 31, 2021, marking a 12.6% sequential rise. This increase was primarily aided by market appreciation and net client inflow.

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

Credit Quality: A Mixed Bag

During the January-March period, credit metrics were a mixed bag. On a year-over-year basis, total non-performing assets increased partially to $174.2 million. Also, the non-performing assets to total assets ratio was 0.11%, up from the year-ago quarter’s 0.10%. Net loan charge-offs were $0.5 million, up substantially year over year.

Nonetheless, provision for loan losses witnessed a reversal of $14.6 million due to significant improvement in economic prospects since the end of 2020, and major revival of regular, steady loan payments on Covid-19 loan modifications.

Capital Position

As of Mar 31, 2021, the company’s Tier 1 leverage ratio was 8.32%, reflecting a contraction of 14 basis points from the prior-year quarter. Tier 1 capital to risk-weighted assets was 11.60%, up from 11.14%. Common equity Tier 1 capital to risk-weighted assets ratio was 9.64% compared with the prior year’s 9.87%.

Tangible book value per share increased 14.5% to $59.98.

Our Viewpoint

While First Republic has been able to sustain its organic growth momentum, highlighted by higher loans and deposits, escalating costs on investments in digital initiatives might hurt its bottom line in the near term. Moreover, low net interest margin is concerning as it is likely to impede interest income growth to some extent. Nevertheless, rise in average earnings assets is a tailwind.

First Republic Bank Price and EPS Surprise

First Republic Bank price-eps-surprise | First Republic Bank Quote

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 banks, M&T Bank Corp. MTB and Citigroup C are slated to report quarterly results on Apr 19 and Apr 15, respectively, while KeyCorp KEY will announce it on Apr 20.

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