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On Sep 12, we initiated our coverage on regional bank, First Republic Bank (FRC - Analyst Report) at Neutral, based on its strong second-quarter results. However, an unsettled economy, persistent low interest rate environment and stringent regulations are matters of concern.

Why Neutral Stance?

In the second quarter of 2013, First Republic marginally beat the Zacks Consensus Estimate with respect to higher net interest and non-interest income. An increase in loans and deposits was also a positive for the company. However, higher non-interest expenses were the downside.

First Republic’s ability to grow core deposits has helped in reducing its dependence on wholesale funding, thereby resulting in a less expensive and more stable funding base. Further, the company continues to build capital, leading to a better financial position that will help in fulfilling stringent capital requirements.

However, the company’s increased efficiency ratio and significant exposure in California, particularly San Francisco and the Northeastern United States remain plausible concerns. In addition, First Republic’s profitability remains subject to stringent regulations. Further, due to the low interest rate environment, First Republic is expected to continue experiencing pressure on its net interest margin, which will be more than offset by a solid balance sheet, continuous growth in loans and rise in interest rates.

Other Stocks to Consider

First Republic currently carries a Zacks Rank #3 (Hold). Other stocks in the sector that are performing well include SVB Financial Group (SIVB - Analyst Report), Preferred Bank (PFBC - Snapshot Report) and BofI Holding, Inc. (BOFI - Snapshot Report). All of these carry a Zacks Rank #1 (Strong Buy).

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