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First Republic (FRC) Q4 Earnings Beat on Higher Revenues

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First Republic Bank (FRC - Free Report) delivered an earnings surprise of 5.3% in fourth-quarter 2020 on solid top-line strength. Earnings per share of $1.60 surpassed the Zacks Consensus Estimate of $1.52. Additionally, the bottom line climbed 15.1% from the year-ago quarter.

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

Net income available to common shareholders jumped 18.6% year on year to $279.5 million.

For full-year 2020, net income came in at $1.01 billion or $5.81 per share, up from the prior year’s $881.3 million or $5.20 per share. Full-year earnings also outpaced the Zacks Consensus Estimate of $5.70.

Revenues Increase, Expenses Flare Up

For 2020, net revenues were $3.9 billion, up 17.2% year over year. The top line also outpaced the Zacks Consensus Estimate of $3.86 billion.

Total revenues were $1.1 billion during the December-end quarter, up 23.1% year over year. The figure also surpassed the Zacks Consensus Estimate of $1.03 billion.

NII jumped 24% year over year to $892.7 million, primarily supported by growth in average earning assets. Net interest margin remained stable at 2.73% compared with the prior-year quarter.

Non-interest income was $187.6 million, up 19.3% year over year. This rise mainly resulted from elevated wealth management fees.

Non-interest expenses for the reported quarter flared up 19.2% year on year to $666 million. Rise in salaries and benefits and information systems expenses from continued investments in the expansion of the franchises led to this uptick.

The efficiency ratio was 61.6% compared with the 63.7% recorded in the prior-year quarter. It should be noted that a fall in the efficiency ratio indicates higher profitability.

Healthy Balance Sheet

As of Dec 31, 2020, net loans climbed 7.4% sequentially to $111.9 billion, while total deposits were up 10.1% to $114.9 billion. Loan originations, including PPP loans, came in at $16.7 billion, up 36.9% sequentially.

First Republic’s total wealth management assets were $194.5 billion as of Dec 31, 2020, marking a 15.6% sequential rise. This increase was primarily supported 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 Concern

During the October-December quarter, credit metrics deteriorated. On a year-over-year basis, total non-performing assets increased 28.6% to $184.1 million. Also, provision for loan losses more than doubled to $35.1 million.

Further, the non-performing assets to total assets ratio was 0.13%, up from the year-ago quarter’s 0.12%. Net loan recoveries were $0.6 million, down 45.5% year over year.

Capital Position

As of Dec 31, 2020, the company’s Tier 1 leverage ratio was 8.14%, reflecting a contraction of 25 basis points from the prior-year quarter. Tier 1 capital to risk-weighted assets was 11.18%, down from 11.21%. Common equity Tier 1 capital to risk-weighted assets ratio was 9.67% compared with the prior year’s 9.86%.

Tangible book value per share increased 14.1% to $57.30.

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 currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other mega banks, Citigroup (C - Free Report) , Wells Fargo (WFC - Free Report) and PNC Financial (PNC - Free Report) are scheduled to report quarterly numbers on Jan 15.

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