Mortgage boom fuels strong third quarter at First Republic

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A red-hot housing market drove double-digit gains in loan originations, revenue and net income at First Republic Bank in San Francisco.

The $133 billion-asset First Republic reported net income Tuesday of $293.1 million on $1 billion in revenue. Loan originations totaled $12.2 billion, excluding Paycheck Protection Program lending, which is the best quarterly result in the 35-year-old company’s history, First Republic President Gaye Erkan said.

Undergirding everything was explosive growth in single-family mortgages, which totaled $6.8 billion for the third quarter, representing a 16% increase from the second quarter and a 40% rise from a year earlier.

The average loan-to-value ratio for all real estate loans originated in the third quarter was 56%, and the bank’s overall pipeline “remains very strong, up meaningfully from last quarter," Erkan said.

Losses on First Republic's newly originated commercial real estate loans should be low, says CEO James Herbert.
First Republic CEO James Herbert predicted that losses on the company's newly originated commercial real estate loans will be low.

First Republic’s third-quarter net income amounted to $1.61 a share, which topped the consensus estimate by 23 cents.

“Overall, an impressively solid quarter,” John Pancari, an analyst at Evercore ISI, wrote in a research note. He pointed to "better than expected balance sheet growth" and "lower than expected net charge-offs," among other factors.

Nonperforming loans and net charge-offs were in line with the bank's June 30 results. Nonperformers totaled $164.2 million, or 0.12% of total assets. Net charge-offs increased by about $600,000, but at $1.7 million for the quarter they remained low when measured against the bank's overall balance sheet.

Commercial and multifamily loans totaled about $21.2 billion, or a fifth of all loans at Sept. 30. While that includes significant concentrations in New York and San Francisco, where markets have been under pressure in recent months, Chairman and CEO James Herbert said he doesn’t foresee any problems.

“Our loan-to-value ratios are all south of 50%, and the size of our deals is quite small,” Herbert said in Tuesday's call to discuss quarterly results. “The credit performance of that portfolio has actually been quite strong. … I don’t think we’ll take many losses.”

First Republic's loan-loss provision fell by 8% from the second quarter, but increased by 71% from a year earlier, to $28.5 million.

The bank reported solid progress managing coronavirus-related loan deferrals. The unpaid principal balance of deferred loans totaled $3.9 billion at Sept. 30, or 3.7% of total loans. Erkan noted First Republic recorded most of its deferrals for six-month periods beginning in April and May, so they are set to expire in October and November.

“We expect the vast majority of our clients to return to normal payments, and early indications are quite positive,” Erkan said.

First Republic also benefited from strong growth in deposits, which increased by 27% from a year earlier, to $104.4 billion. Non-interest-bearing checking deposits rose by 27%, to $41.5 billion. That allowed First Republic to fund its loan growth completely with deposits, while also paying down $4.6 billion in higher-cost CDs and borrowings.

“First Republic continues to demonstrate its unique culture can drive much stronger credit/growth metrics through more challenging economic scenarios,” David Rochester, an analyst at Compass Point Research & Trading, wrote in a client note.

Rochester argued that the biggest downside in First Republic’s quarterly results was it noninterest expenses, which rose by 7% from a year earlier to $608 million because of increased compensation costs.

First Republic has raised its employee base by 10% so far this year, but the increase is crucial to maintaining the high-touch customer service that clients have come to expect, Erkan said.

“The more clients we have, as long as they’re happy, the more business we get,” Erkan said.

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