Surging demand for mortgage loans drove double-digit increases in revenue, net income and loan originations at First Republic Bank in the fourth quarter.
San Francisco-based First Republic, the first U.S. bank to release fourth-quarter and full-year performance details, reported revenue of $1.1 billion for the period ending Dec. 31, a year-over-year increase of 23.1%. Quarterly net income totaled $295.6 billion, an increase of 20% from the fourth quarter of 2019.
Loan originations hit a record $16.7 billion for the three-month period, led by single-family mortgages that accounted for 47% of all loans during the quarter, the bank said Thursday.
Diluted earnings per share totaled $1.60, topping consensus analyst estimates by eight cents.
Executives at the $142.5 billion-asset bank cautioned that potentially rising interest rates could put a damper on residential refinancing activity, which has been particularly robust since the Federal Reserve lowered interest rates to near zero in March in response to the pandemic.
“It's not slowing down very much yet,” Chairman and CEO James Herbert said during the company’s fourth-quarter earnings call with investors. “But if the 10-year [Treasury rate] continues to move up, in due course, the refinance part of the demand will slow down. We're not saying that it's happening now. We're just saying it could easily happen.”
The 10-year Treasury rate, a benchmark for mortgage rates, has been creeping up since August. It climbed above 1% this week for the first time since March, pushing rates on 30-year fixed mortgages to their highest level in two months.
Still, there’s an upside to rising rates: They usually mean the economy is strengthening, and a stronger economy usually means more home and multifamily purchases, Herbert said.
“So," he said, those other lending categories offset refinancing "pretty well.”
Analysts praised First Republic’s results, though some noted higher-than-expected expenses. In a research note, Andrew Leisch of Piper Sandler said “credit metrics remained outstanding” while deposit growth was “impressive” and assets under management “posted strong growth.”
Nonperforming assets made up just 0.13% of total assets for the quarter while wealth management assets rose 15.6% for the quarter. At the same time, noninterest expenses rose 19.2% year over year, due to increased salaries and benefits as well as investments in the franchise, including hiring more personnel and upgrading regulatory infrastructure.
Chief Financial Officer Michael Roffler defended the spending, pointing to First Republic as a growing bank with “tremendous opportunities to serve clients.”
“To be able to do that, you have to continuously invest in the franchise to do it better because that’s what differentiates us frankly from a service model standpoint,” Roffler said. “And so that that might be from a regulatory standpoint. That might be from a technology [standpoint]. It’s really about investing for that future growth, because there are tremendous opportunities in front of us.”
The bank said both expenses and loan growth should be “in the mid-teens range” for the full year.