First Republic (FRC) Stock Missed the Rally: Time to Dump It? - Analyst Blog

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On Sep 2, 2014, we issued an updated research report on First Republic Bank (FRC). While the S&P 500 index has gained over 8%, shares of this California-based major bank lost nearly 6% year to date. We believe the stock performance has been affected by several headwinds encountered by the company. Particularly, it suffered with escalating costs and declining net interest margin (NIM). We don't see its fundamental pressures alleviating any time soon.  
Rising operating expenses is an ongoing concern for First Republic. Expenses increased at a 3-year CAGR (2011-2013) of 16.4% and the trend did not reverse in the first half of 2014.

In its latest earnings call-conference, management stated that it expects consolidated assets for the trailing four quarters to average at least $50 billion by the end of 2015 and the company is working to the necessary high regulatory and compliance standards required for institutions with more than $50 billion in assets. This calls for infrastructure investments in areas including enterprise risk management, BSA/AML, capital and liquidity stress testing and compliance. Hence, management expects increased expenses in the coming quarters particularly for compensation costs, information systems, consulting and other professional fees.

Adding to the concerns, the prolonged low interest rate environment kept the NIM under pressure. First Republic's NIM declined to 3.26% in 2013 from 4.22% in 2012 and 4.63% in 2011. Further, during the first half of 2014, NIM declined 23 basis points (bps) year over year to 3.16%. Management expects NIM to remain under pressure in the coming quarters as well with new loan origination rates remaining lower than the company's current average loan portfolio yield.

Further, growing into a $50 billion plus institution might pose a challenge for the company as it will lead to competition with larger players in the market.

However, improving loan and deposit balances reflect organic growth of the company.  As of Jun 30, 2014 net loans were up 5.5% year over year to $47.3 billion, while total deposits rose 5.7% from the prior-year quarter to $54.2 billion. For full-year 2014, management expects loan growth to be in the range of 11–13%.

Analysts' bearish stance on the stock was reflected in the estimate revisions over the past 60 days. For 2014, the Zacks Consensus Estimate declined 4.2% to $2.95 per share. Also, it fell 11.6% to $3.06 per share for 2015.

Comerica currently carries a Zacks Rank #5 (Strong Sell).

Stocks That Warrant a Look

Some better-ranked stocks in the West banks space include Central Valley Community Bancorp (CVCY), Northrim Bancorp Inc. (NRIM) and Sierra Bancorp (BSRR). All these stocks hold a Zacks Rank #1 (Strong Buy).


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FIRST REP BK SF (FRC): Free Stock Analysis Report

CENTRAL VLY COM (CVCY): Free Stock Analysis Report

SIERRA BANCORP (BSRR): Free Stock Analysis Report

NORTHRIM BCP (NRIM): Free Stock Analysis Report

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