Shares of First Republic Bank (NYSE:FRC) are soaring, rising by more than 12% as of 3:45 p.m. EST after the bank pleased Wall Street with a better-than-expected earnings report.
The company reported that its pre-tax earnings increased 21.4% in the fourth quarter compared to the same period a year ago, driven by robust deposit and loan growth. Management also issued guidance that suggests 2019 could be a banner year for this fast-growing bank.
First Republic carved out a niche as the relationship banker for wealthy households in major U.S. metropolitan areas spanning from Silicon Valley to New York City. That approach has served it well, helping it attract depositors who care more about service than interest rates, powering its bottom-line profitability.
After years of double-digit annual growth in deposits, First Republic's fourth-quarter results showed little sign of slowing down. Average deposits increased 4.1% quarter over quarter and 14.5% year over year in the fourth quarter.
Most impressively, it achieved this high rate of growth without substantial increases in the rates it pays its depositors. Its average deposit cost is 0.51% in the fourth quarter, up only modestly from 0.45% in the sequential quarter and up from 0.28% a year earlier. The bank's "secret sauce" is its checking accounts, which make up nearly 60% of deposits despite the fact the bank pays just 0.05% in interest on those deposits.
First Republic Bank's model is a simple one, built on the basic business of taking in deposits and making loans. On its fourth-quarter conference call with analysts, bank management laid out its guidance for 2019, calling for double-digit loan growth and little change in net interest margin in the coming year.
Guidance calls for the bank to deliver a net interest margin of 2.85% to 2.95% in 2019, just slightly lower than its net interest margin of 2.96% in 2018. Any profit growth will be driven by volume, as management guided for loan growth to continue at a breakneck pace in the "mid-teen" percentages year over year.
Wall Street took the message in stride: All signs suggest First Republic's growth story is far from over.