Can Record-High Loan Originations Protect First Republic Bank's From Low Interest Rates?

The second quarter was a record loan production quarter for the bank, with originations of $6.5 billion, up 11 percent year-over-year. Residential mortgage originations surged 55 percent un-annualized to nearly $3.5 billion, helped by a sharp uptick in refinance activity fueled by the drop in long-term interest rates.

"The loan originations were driven by RRE, C&I, and CRE/construction, despite tighter underwriting standards (LTVs). Deposit growth was softer this quarter, due to seasonality," analyst Lana Chan wrote in a note.

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Despite the tighter underwriting, management indicated that the loan pipeline remains strong and is higher than a year ago. The bank is optimistic that loan growth for 2016 could now be at the upper end of its low- to mid-teens target, as the recent surge in refinance volume is giving the bank an opportunity for new client acquisition.

"While the margin is likely to be under modest pressure due to lower new loan yields, net interest income should benefit from higher than previously expected loan origination," Chan highlighted.

Estimates And A Look Ahead

The brokerage raised its EPS estimates by 8 percent to $3.89 in 2016 and to $4.36 in 2017, driven by the early adoption of the new accounting guidance for share-based compensation.

"In addition, we raised our average loan growth estimate from 15 percent previously to 16 percent for 2016 and are assuming a slightly better net interest margin for the year (due mainly to the better-than-expected first-half performance)," Chan noted.

At time of writing, shares of First Republic gained 0.52 percent on the day to $71.65. The analyst has raised the price target by $1 to $71.