Flight to suburbs helps boost First Republic's 2Q profit

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First Republic Bank’s mortgage activity gained momentum in the second quarter, aided by consumers leaving cities such as New York and San Francisco and buying houses in the surrounding suburbs.

Single-family residential mortgages set a record at $5.9 billion for the second quarter, accounting for more than a half of the bank’s non-Paycheck Protection Program loan originations, executives said on an earnings conference call Tuesday. Home purchase finance activities gained momentum in June, and executives expect the spring buying season to extend to at least the next quarter.

“Especially on the West Coast, the purchase activity has picked up nicely,” Hafize Erkan, president of the San Francisco bank, said during the call. “June is especially particularly strong, and we are also seeing purchase activity in New York suburbs to be quite active as well.”

Sales of new single-family houses rose about 13% annually in May, according to the U.S. Census Bureau, partly driven by consumers fleeing cities for suburbs amid the coronavirus pandemic. First Republic executives expected the move from urban centers to be a long-term trend, but cities will not be “hollowed out.”

“It’s a reversal of a trend that has been going on for 10 or 15 years where people have been coming out of the suburbs and going into the cities,” said Chairman and CEO James Herbert. “But the number of units of housing in the suburbs versus in the cities is going to be the driving factor.”

The uptick in home purchase finance activity was accompanied by strong mortgage refinancing. Refinancing accounted for 80% of the single-family residential loans in the second quarter, Erkan said.

The $128.3 billion-asset First Republic’s net income rose about 15%, to $256.8 million, from a year earlier. Revenue rose roughly 12%, to $919 million.

Total loans, excluding PPP and sale loans, increased 19%, to $97.9 billion, year over year, led by growth in single-family mortgages. Total deposits rose by 18%, to $98.5 billion.

Net interest income rose almost 17%, to $787.4 million, from a year earlier, while the net interest margin contracted by 15 basis points, to 2.7%. A drop in wealth management revenues drove the bank’s noninterest income down 9%, to $132 million.

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