First Republic views loan growth as key offset to margin pressure

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First Republic Bank in San Francisco reported higher quarterly profit despite pressure on its net interest margin.

The $106 billion-asset company said in a press release Tuesday that its second-quarter earnings rose by 6% from a year earlier, to $223 million. Earnings per share of $1.24 fell 4 cents shy of the average estimate of analysts polled by FactSet.

First Republic has a strong loan pipeline heading into the second half of this year, Chairman and CEO Jim Herbert said during a conference call to discuss quarterly results.

Total loans increased by 19% from a year earlier, to $82.2 billion, helping offset a margin that narrowed by 12 basis points, to 2.85%.

Net income, as a result, rose by 10.2% to $674 million. It was flat compared with the first quarter.

Wealth management revenue increased by 15% to $120.3 million, though the bank said that a team of six wealth managers left, taking $4 billion in wealth management assets with. The departure will cut into fee income by $11 million in the third quarter, though a reduction in compensation expense should minimize the bottom-line impact.

The departure “doesn’t change our positive outlook,” Herbert said. “We’re very happy with the growth of wealth management.”


Herbert indicated that First Republic would likely stay away from wealth management acquisitions.

Residential mortgage originations jumped by 30%, to $4.1 billion. Though the bank expects double-digit loan growth through the remainder of 2019, Herbert said he saw no need to raise more capital.

“I think we probably won’t need any [additional] equity capital through the end" of 2020, he said. “For the risk in our balance sheet, we run very solid.”

First Republic’s common equity Tier 1 ratio was 10.19% on June 30.

Deposits increased by 15%, to $83.4 billion. The company's loan-to-deposit ratio was 99% on June 30, up from 95% a year earlier.

While net charge-offs totaled just $1.2 million in the quarter, nonaccrual loans nearly tripled from the end of the first quarter, to $145 million. Herbert said the increase stems from a single relationship that remains current.

“It’s an issue with one borrower,” Herbert said. “We’ve never had a late payment from him. We don’t see any risk to principal or interest.”

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