OREANDA-NEWS. Fitch Ratings has affirmed First Republic Bank's (FRC) ratings at 'A-/F1'. The Rating Outlook remains Stable.

The rating action follows a periodic review of the midtier regional banking group, which includes BankUnited Inc. (BKU), BOK Financial Corp. (BOKF), Cathay General Bancorp (CATY), East West Bancorp (EWBC), First Republic Bank (FRC), First Horizon National Corp. (FHN), First National of Nebraska Inc. (FNNI), Fulton Financial Corp. (FULT), Hilltop Holdings, Inc. (HTH), Synovus Financial Corp. (SNV), TCF Financial Corp. (TCB), Trustmark Corp. (TRMK), UMB Financial Corp. (UMBF) and Wintrust Financial Corp. (WTFC).

Company-specific rating rationales for the other banks are published separately, and for further discussion of the midtier regional bank sector in general, refer to the special report titled 'U.S. Banks: Midtier Regional Bank Periodic Review,' to be published shortly.

KEY RATING DRIVERS

IDRs, VRs, AND SENIOR DEBT
Today's affirmation reflects FRC's focused strategy, its strong franchise, and conservative credit culture that have led to consistent performance over time. These strengths are offset by FRC's geographic and product concentration which are consistent with the company's core competencies but present unique challenges and limit rating upside over the near- to medium-term. Moreover, the company's relative lack of revenue diversity and level of loan growth when compared to peers are also considered rating constraints in the near- to medium-term.

FRC is heavily focused on relationship banking that targets an affluent customer base and uses jumbo residential mortgage products lending as a feeder to its private banking and wealth management activities. This focused strategy, along with a fairly unique, high-touch, single point-of-contact approach to relationship management, creates customer loyalty and execution that is difficult to emulate. Fitch notes that the strategy also results in good opportunities for client referrals for both deposit and loan products, which further entrenches FRC's strategic advantage within the industry as the residential lender of choice for the affluent.

Fitch considers FRC's relationship management strategy and conservative credit culture primary reasons for its strong asset quality performance over time. FRC's nonperforming assets (NPAs) stood at 0.16% of loans and other real estate owned (OREO) at third quarter 2015 (3Q15), well below the peer average of 1.6%. Over three decades of operations, the company's cumulative net charge-off (NCO) rate is under 25bps for all loan types and just 7bps for single-family residential. These figures are inclusive of loans that were left at Bank of America when FRC was spun back out of it in 2010 as well as all single-family loans sold into the secondary market. This credit performance is unparalleled in the industry and its peer group.

Although FRC's credit quality is expected to remain relatively unchanged in the near term, Fitch views FRC's level of loan growth over the last year cautiously. The company grew total loans 16% in 2015 with much of the growth in the multifamily, single-family residential and commercial businesses spaces. These are three areas that have seen a great deal of competition over recent periods and the level of growth seen could test risk-oversight systems. Still, Fitch believes mitigants such as significant compensation clawbacks for relationship managers and low loan-to-values at origination should mute potential credit risk through the next credit cycle.

FRC's earnings performance remains solid, although lower than in years past as the company absorbs costs associated with heightened regulatory costs, net interest margin compression and the build-out of its franchise. Through 3Q15, the company generated a return on average assets (ROA) of 97bps, as compared to the peer average of 102bps, but still in line with Fitch's expectations. Fitch expects FRC's earnings to remain relatively flat in 2016 as it continues to invest in people and systems that strengthen its franchise and risk management.

Currently, FRC's earnings profile is heavily dependent on spread revenues. However, over the long term, Fitch expects FRC's growing wealth management business to help diversify earnings, which could be a positive for the company's overall credit profile. For instance, FRC acquired Constellation Wealth Advisors in 2015. At the time of closing, Constellation had nearly $6 billion of assets under management. At 4Q15, total wealth management assets were $72.3 billion. Moreover, the company brought on several other wealth management advisor teams in 2015. These acquisitions, while costly in the near term, fit within FRC's strategy of providing a full suite of products to its high net worth clients as well as diversifying its revenue base.

Fitch recognizes FRC's adequate and improving liquidity position. The company has continued to grow deposits faster than loans, leading to its loan-to-deposit ratio dropping to 96% at 3Q15 from 103.5% a year prior. Moreover, the company has indicated publically that it would build high-quality liquid assets (HQLA), as defined by regulatory standards, to around $8 billion by the end of 2016, or 12% of its projected assets. This strategic move, coupled with FRC's strong asset quality and its proven ability to sell jumbo mortgages, even in stressed liquidity markets, significantly reduces the company's liquidity risk.

Fitch views FRC's capital levels to be appropriate in the context of the company's overall risk appetite and anticipates that FRC will maintain its capital ratios near current levels. The company has done two separate common stock offerings in 2015 in order to augment capital in light of its growth trajectory. Fitch views these capital management actions as prudent in light of balance sheet growth. Moreover, FRC is still considered a de novo bank and is thus subject to elevated capital requirements through 2Q17. Fitch expects FRC to maintain capital levels near their current levels even after that time, given its product and geographic concentration.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

FRC's preferred stock is notched five levels below its VR of 'a-', two times for loss severity and three times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments' non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The uninsured deposit ratings of FRC are rated one notch higher than its IDR because U.S. uninsured deposits benefit from depositor preference. Such preference gives deposit liabilities superior recovery prospects in the event of default.

SUPPORT RATING AND SUPPORT RATING FLOOR

FRC has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, FRC is not systemically important and, therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.

RATING SENSITIVITIES
VR, IDRs, AND SENIOR DEBT
Fitch considers FRC's current ratings as well-situated over the near- to medium-term and sees limited upside to ratings over the long term. Upward rating movement would likely be predicated on further product and revenue diversification while maintaining earnings and capital at or above current levels.

Negative pressure could be placed on FRC's rating or Outlook should Fitch observe the company loosening its credit standards or if adverse trends emerge in its loan portfolio. FRC's ratings could also be adversely affected if Fitch believes the company is experiencing strategic drift away from its core competencies. This could be evident in acquisitions or in excessive loan growth in asset classes that are not in line with management's stated strategy. Moreover, should Fitch observe FRC's earnings performance begin to lag similarly rated peers due to either asset quality deterioration or because of the need to invest in risk management systems over and above Fitch's expectations, pressure could be placed on either FRC's rating or Outlook.

Finally, although mitigated by an insurance policy purchased in 2014, Fitch would likely view a major earthquake in one of FRC's primary operating markets that led to outsized credit losses as a credit negative that could put pressure on the bank's ratings.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings for FRC's preferred stock are sensitive to any change to FRC's VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The long- and short-term deposit ratings are sensitive to any change to FRC's long- and short-term IDR.

SUPPORT RATING AND SUPPORT RATING FLOOR

Since FRC's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.

Fitch affirmed the following ratings with a Stable Outlook:

First Republic Bank
--Long-term IDR at 'A-'; Outlook Stable;
--Short-term IDR at 'F1';
--Viability Rating at 'a-';
--Long-term deposit at 'A';
--Short-Term deposits at 'F1';
--Senior Unsecured at 'A-'
--Preferred stock at 'BB';
--Support Floor 'NF';
--Support '5'.