Loan growth at First Republic is robust. Can deposits keep pace?

Abstract

First Republic Bank is facing questions about whether deposits, which offer a low-cost way to fund its flagship mortgage business, can keep pace with its torrid loan growth. The San Francisco bank reported $22 billion in loan originations during the second quarter, a 31% increase from the same period a year ago. The bank's results suggest that "Loans will outpace deposits," said Terry McEvoy, an analyst at the investment bank Stephens. Still, McEvoy said that he expects First Republic's revenue to climb at a rate "In excess of the banking industry."Meanwhile, First Republic CEO Mike Roffler said Thursday that certificates of deposits are likely to "Tick up" after declining for two years amid low interest rates. Beneath JPMorgan's solid credit trends, some early signs of weakness Credit quality at the largest U.S. bank by assets remains strong for now, but a top executive issued a warning about what may lie ahead. Roffler also explained the gap between loan growth and deposit growth by pointing to seasonal factors. The bank's mortgage clients averaged loans of around $1 million last year, which is larger than the average balance at many other mortgage lenders. During the second quarter, the bank reported a net interest margin of 2.8%.Total revenue jumped 22.6% year over year to $1.5 billion, while noninterest expenses climbed 19.7% as First Republic reported the opening of a new Seattle office, new hires and increased compensation.