Why Is First Republic Bank (FRC) Down 1.7% Since Last Earnings Report?

A month has gone by since the last earnings report for First Republic Bank (FRC). Shares have lost about 1.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is First Republic Bank due for a breakout? 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 drivers.

First Republic Q4 Earnings Beat on Higher Revenues

First Republic delivered a positive 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 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 over year to $279.5 million.

In 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

In 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 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% year over year.

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 in the reported quarter flared up 19.2% year over 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.

Outlook 2021

The company expects loan growth to be in the mid-teens range.

NIM is anticipated to be in the range of 2.65-2.75%. The company expects NIM to be influenced by higher cash levels as a result of current economic conditions and government stimulus.

Management expects efficiency ratio between 62% and 64%, as it continues to invest in business and regulatory infrastructure.

Further, effective tax rate is anticipated to be between 20% and 21%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

Currently, First Republic Bank has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

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

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise First Republic Bank has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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