Strong mortgage demand in key markets fuels First Republic profits

For all the worry about hollowed-out cities in the wake of the pandemic and shifts to remote work, First Republic sees continued vibrancy and solid loan demand in its home base of San Francisco as well as key markets such as Manhattan and Boston.

“Interestingly enough, the demise of the center city has been very prematurely announced,” Chairman and Co-CEO James Herbert said Wednesday during an earnings call. “The activity in the center city — San Francisco, New York, Boston — I would say that the core of the cities is, in fact, quite strong.”

Major cities are also fertile ground for wealth management assets, a source of ongoing strength and a key driver of third-quarter earnings, the bank said. This reflected a “strong stock market as well as quite strong client inflows from both existing and new clients,” President and co-CEO Hafize Erkan said on the call.

The $172.6 billion-asset regional bank generated robust growth in loans and wealth management assets in the third quarter, driving double-digit gains in revenue and net income.

“The demise of the center city has been very prematurely announced. The activity in the center city — San Francisco, New York, Boston — I would say that the core of the cities is, in fact, quite strong,” James Herbert, chairman and co-CEO of First Republic, said in an earnings call.

Jamey Stillings

This was boosted by single-family home loans in the affluent Bay Area and other major markets, though First Republic also reported gains in multifamily and commercial real estate lending. Business loans and credit-line commitments rose 31% from a year earlier. Fueled by lending activity, net interest income rose 27% to $1.1 billion. Loans rose 23% to $128.4 billion.

Large office centers and traditional corners of retail are recovering slowly, but that sluggishness is more than offset by other areas of CRE, high-end homebuying and multifamily loan demand, Herbert said.

“Multifamily values are stabilized at good levels — high levels — and rents and vacancy are stabilizing,” he said. “There’s also a fair amount of new multifamily activity going on, which I think the country definitely needs. So we’re seeing a pickup.”

While equity market strength played a notable role, First Republic said a hiring effort helped drive a surge in its wealth management business. “Those are highly specialized folks, and we have conversations going on at all times,” Herbert said.

Third-quarter wealth management assets jumped 50% from a year earlier to $251.7 billion. The bank said it has hired nine new wealth management teams this year, including one in the third quarter and another this quarter.

“We take extremely good care of our existing clients, and we don’t lose them, and they compound and grow,” Herbert said. “Also, they refer their friends and the more happy clients you have, you’re going to get referrals. … This adds to the compounding or network effect of the franchise.”

First Republic posted third-quarter net income of $369.7 million, up 26% from a year earlier, on revenue of $1.3 billion, up 30%. It reported earnings per share of $1.91, compared with $1.61 a year earlier. The median of a FactSet poll of analysts was $1.84 a share.

The bank’s strong loan growth was fueled by deposit growth of 39% from a year earlier to $145.3 billion. The influx of cash balances pinched the margin between what the bank pays for deposits and earns in interest income on loans.

Its net interest margin narrowed by 6 basis points from a year earlier to 2.65%. The bank said loan volume has eased margin pressure, but NIM contraction remains a wild card given uncertainty about the future of interest rates. Federal Reserve policymakers pushed short-term rates to near zero after the coronavirus became a pandemic in 2020, and they have kept rates low since.

First Republic’s credit quality, meanwhile, remained solid. Nonperforming assets were only 7 basis points of total assets, down from 11 basis points a year earlier. The bank recorded a provision for credit losses of $34 million to cover loan growth.

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