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First Republic Depicts Organic Growth: Time to Hold?


First Republic Bank FRC continues to grow organically, backed by the company’s balance-sheet strength among other factors. The company looks poised for top-line growth, primarily driven by the rise in net interest income. However, escalating expenses remains a key concern.

First Republic’s improving loan and deposit balances continue to support its organic growth potential. Notably, loan originations witnessed a four-year compound annual growth rate (CAGR) (2014-2017) of 17.5%. Total deposits have witnessed a four-year CAGR of 22.9% (2014-2017), with similar growth witnessed during the first six months of 2018 as well.

Solid top-line performance is expected to drive First republic’s growth over the long run. Net-interest income exhibited a five-year CAGR (2013-2017) of 15.1%, with the trend continuing in first-half 2018. This is expected to continue backed by the increase in earning assets and rising interest rates. Non-interest income also reflects a strong five-year CAGR (2013-2017) of 17.2%. The increasing trend continued in the first half of this year as well.

Further, compliance with regulatory ratio requirements indicates stability and a good capital position. As of Jun 30, 2018, the bank’s Tier 1 leverage ratio was 8.83%. This enables the company to pursue any acquisition opportunities for faster growth.

Despite these positives, we remain cautious due to several challenges plaguing the company. Notably, operating expenses witnessed a five-year CAGR (2013-2017) of 20.9%, with the trend continuing in first-half 2018. Investments in digital initiatives, including mobile banking applications and data analytics, will likely keep expenses elevated, in turn, straining the bottom line.

The company’s shares have gained 4.8% over the past six months, outperforming the industry’s growth of 0.2%. The stock currently carries a Zacks Rank #3 (Hold).

Key Picks

A few better-ranked stocks in the same space are Bank of Commerce Holdings (CA) BOCH, Bank of Marin Bancorp BMRC and Northrim BanCorp Inc. NRIM. All these stocks flaunt a Zacks Rank of #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Over the last 60 days, the Zacks Consensus Estimate for Bank of Commerce’s current-year earnings has been revised 8.8% upward. Its share price has gained 26.1% in the past year.

Bank of Marin’s earnings estimates for 2018 have been revised 5.6% upward over the past 60 days. Its shares have surged 35.1% in a year’s time.

Over the last 60 days, Northrim BanCorp’s 2018 earnings estimate moved 15.4% north. Over the past year, its share price has appreciated 48.3%.

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