First Republic Bank 'Firing on all Cylinders'

NEW YORK (TheStreet) -- Bank stock investors "impatient about revenue recovery" and "wary of macro tail risk" should consider First Republic Bank (FRC), according to Bank of America Merrill Lynch analyst Erika Penala.

Penala on Friday reiterated her "Buy" rating for the San Francisco lender, with a price objective of $36, after meeting the bank's management and touring its branch facilities in Boston, saying that First Republic "offers both high quality, superior loan growth and a defensive balance sheet," and forecasting "best in class annual organic loan growth" of "18% in 2012; 17% in 2013; and 12% in 2014."

First Republic was acquired by Bank of America (BAC) as part of the purchase of Merrill Lynch in January 2009, and then sold in July 2010 to an investor group that included Colony Financial (CLNY) and General Atlantic LLC and was led by First Republic's original management team.

First Republic completed a public offering in December of 2010.

The shares closed at $32.79 Wednesday, returning 7% year-to-date, following a 5% return during 2011.

First Republic trades for 1.7 times tangible book value, according to Thomson Reuters Bank Insight, and for 11 times the consensus 2013 earnings estimate of $2.89 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $2.78.

The bank had $29.7 billion in total assets as of March 31, with offices in California, Oregon, Connecticut, Massachusetts and New York. First Republic's operating returns on average assets (ROA) have ranged between 1.28% and 1.53%, according to Thomson Reuters Bank Insight, for solid, consistent earnings performance in the current environment.

Penala described First Republic as having "a differentiated franchise, given its focus on lending to and collecting sticky deposits from high net worth customers and their businesses," that is well-positioned for growth, because of the bank's expansion in the Northeast, continued strong mortgage loan demand in San Francisco, "deeper client penetration, robust refinancing momentum, and opportunity from the continued shutdown of the secondary market for jumbo" mortgage loans.

Bank of America Merrill Lynch estimates that First Republic will earn two dollars a share this year, followed by EPS of $2.56 in 2013.

Penala said that First Republic's stock "deserves to trade at a premium to peers on both tangible book and earnings."

The analyst contrasted First Republic with "deserves to trade at a premium to peers on both tangible book and earnings," and contrasted the bank with City National Corp. (CYN) of Los Angeles, which she rates "Underperform," with a $42 price target. City National trades at a higher multiple to forward earnings than First Republic Bank, and has posted much weaker ROA over the past five quarters, ranging from 0.72% to 0.86%.

City National's shares closed at $49.68 Wednesday, returning 14% year-to-date, following a 27% decline during 2011.

The shares trade for 1.5 times tangible book value and 13 times the consensus 2013 EPS estimate of $3.89. The consensus 2012 EPS estimate is $3.57.

While Penala called City National "similarly a high quality franchise," she said the stock was "overbought on the hopes of rising short rates."

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-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.