mcintire investment institute - uvacollab · 2011-10-03 · mcintire investment institute at the...
TRANSCRIPT
M c I n t i r e I n v e s t m e n t I n s t i t u t e
McIntire Investment Institute At the University of Virginia
Long Pitch: First Republic Bank
(NYSE: FRC)
Prepared by Jon Haas| September 15, 2011
1
M c I n t i r e I n v e s t m e n t I n s t i t u t e
• Company Overview • Stock Analysis • Thesis Points • Catalysts • Risks • Recommendation • Q&A
Outline
2
M c I n t i r e I n v e s t m e n t I n s t i t u t e 3
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
FRC is an FDIC-Insured Commercial Bank
Business Overview Provides private and business banking services, private wealth management, brokerage, trust services, and real estate lending Founded in 1985 as First Republic Bancorp California state-chartered bank – no holding structure, does not report to SEC 56 branches in five states 1,681 employees
Ownership 1. Acquired by Merrill Lynch in 2007 2. Regained independence in October 2009 in a buyout led by management, PE shops
3. Owners invest $1.86 bn in equity in July 2010
4. $281 mm IPO in December 2010
5. $431 mm secondary offering in July 2011
M c I n t i r e I n v e s t m e n t I n s t i t u t e 4
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
How to Make Bank
M c I n t i r e I n v e s t m e n t I n s t i t u t e 5
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
How to Count Stacks
M c I n t i r e I n v e s t m e n t I n s t i t u t e 6
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
FRC is Trading Near Its 52-Week Low
Price (9/15/11): $25.12
Market Cap (9/15/11): $3.25 bn
52-week spread: $23.42-$34.75
TBV/Share: 16.71
Trailing P/E: 10.3x
Forward P/E: 9.8x
PEG: 0.94
Total Assets: $23.4 bn
Total Deposits: $19.2 bn
ROATCE: 16.7%
Short Ratio: 4.1
Short % of Float: 19.3%
FRC does not pay dividends
Relative Performance since IPO (12/9/10): FRC: -9.71% KBW Regional Bank Index: -16.44% S&P 500: -3.59%
Source: SNL Financial, Yahoo! Finance, Scottrade
M c I n t i r e I n v e s t m e n t I n s t i t u t e 7
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
FRC has Slightly Outperformed Peer Index but Trails S&P 500
Source: Yahoo! Finance
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Investors incorrectly believe that First Republic is just like any other bank and, as such, it will face the same troubles that plague the rest of the financial sector. In addition, investors saw the sale of shares by executives and PE investors as a move to cash out before the business environment worsened.
8
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
Misperception
“I believe that banking institutions are more dangerous to our liberties than standing armies” - Thomas Jefferson
M c I n t i r e I n v e s t m e n t I n s t i t u t e
First Republic is not like any other bank. The firm will take advantage of superior asset quality, expanding operations, a favorable customer base, and strong leadership, causing the stock to outpace the sector and investor’s expectations in an industry-wide recovery.
9
“It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country.” - Adam Smith
Theses
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
M c I n t i r e I n v e s t m e n t I n s t i t u t e 10
Focusing on High Net Worth Loans Enables FRC to Pursue Growth in Key Demographics
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
Source: Investor Presentation, 9/8/11
M c I n t i r e I n v e s t m e n t I n s t i t u t e 11
FRC’s Unique Market Position Creates a Strong Asset Base
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
Source: SNL Financial. Data as of 9/15/2011
Ticker Institution NameTARP Status
Market Capitalization
($mm)
Debt/Equity
Net Loans ($mm)
Total Assets ($mm)
Total Deposits ($mm)
Tier 1 Ratio
NPAs + 90 Days PD / Assets
Reserves/NPAs
ROATCENet Interest
MarginEfficiency Ratio
BPFH Boston Private Financial Holdings, Inc. Redeemed 492 1.55 4,315 6,037 4,551 12.1% 1.9% 87% NA 3.4% 72.4%CVBF CVB Financial Corp. Redeemed 910 1.76 3,437 6,460 4,504 17.3% 1.9% 80% 14.3% 4.3% 48.9%UMBF UMB Financial Corporation No 1,505 1.81 4,665 12,771 9,914 11.5% 0.2% 328% 14.1% 2.8% 73.5%FMER FirstMerit Corporation Redeemed 1,351 0.73 8,804 14,348 11,341 11.5% NA NA 11.3% 3.8% 64.4%BOH Bank of Hawaii Corporation No 1,901 1.91 5,220 13,161 9,979 18.0% 0.5% 233% 14.3% 3.2% 57.5%VLY Valley National Bancorp Redeemed 1,914 2.35 9,481 14,470 9,706 11.1% 1.6% 61% 15.3% 3.7% 60.7%SIVB SVB Financial Group Redeemed 1,930 0.30 5,896 19,367 16,278 13.6% 0.2% 226% 18.7% 3.1% 66.1%CYN City National Corporation Redeemed 2,252 0.41 13,054 22,526 19,265 10.7% 0.8% 184% 12.8% 3.8% 67.6%EWBC East West Bancorp, Inc. Redeemed 2,539 0.86 13,785 21,873 17,136 15.2% 1.1% 91% 14.3% 4.7% 42.2%CBSH Commerce Bancshares, Inc. No 3,292 0.65 9,088 19,571 15,657 15.1% 1.0% 114% 14.0% 3.8% 54.0%FNFG First Niagara Financial Group, Inc. Redeemed 3,170 1.90 16,113 30,890 18,900 12.1% 0.8% 92% 3.0% 3.6% 53.8%WFC Wells Fargo & Company Redeemed 132,999 1.43 763,794 1,259,734 853,635 11.7% 3.3% 53% 18.0% 4.0% 56.2%JPM JPMorgan Chase & Co. Redeemed 131,827 3.73 661,216 2,246,764 1,048,685 12.4% 1.3% 104% 16.9% 2.7% 66.0%
Mean 22,006 1.49 116,836 283,690 156,889 13.3% 1.2% 137.7% 13.9% 3.6% 60.3%Median 1,930 1.55 9,088 19,367 15,657 13.3% 1.2% 142.3% 13.9% 3.6% 59.2%
FRC First Republic Bank No 3,246 0.50 19,709 23,798 19,940 14.4% 0.1% 110% 16.7% 4.5% 45.4%
M c I n t i r e I n v e s t m e n t I n s t i t u t e 12
First Republic has an Expanding Presence in Key Geographies
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
New York San Francisco and CA
First Republic bank location. Not depicted: Boston, MA, Stamford, CT and Portland, OR locations
M c I n t i r e I n v e s t m e n t I n s t i t u t e 13
First Republic has an Expanding Presence in Key Geographies
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
Total Assets
Source: Investor Presentation 9/8/11
M c I n t i r e I n v e s t m e n t I n s t i t u t e 14
Dedicated Leadership and Committed Investors will Guide Long-Term Growth
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
Pine Eagle LLC
Other Investors
Institutional Ownership
M c I n t i r e I n v e s t m e n t I n s t i t u t e 15
Catalysts
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
Value Correction
Continued outperformance of peers, industry
Improving economics conditions in credit, housing markets
Increased penetration of growing HNW HH demographic
M c I n t i r e I n v e s t m e n t I n s t i t u t e 16
Risks
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
Company Risks • Departure of key executives
• Failure to penetrate new markets
• Shift in target demographics
Industry Risks • Worsening credit markets
• Regulatory interference
• Disruptions in housing market
Continued turmoil in the financial sector will affect First Republic
M c I n t i r e I n v e s t m e n t I n s t i t u t e 17
FRC is Undervalued Relative to Industry
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
Source: Capital IQ, SNL Financial. Data as of 9/15/2011
Ticker Institution NameMarket
Capitalization ($mm)
Total Assets ($mm)
P/TBV P/E (ttm)
BPFH Boston Private Financial Holdings, Inc. 492 6,037 NA NMCVBF CVB Financial Corp. 910 6,460 1.47x 13.8xUMBF UMB Financial Corporation 1,505 12,771 1.81x 15.2xFMER FirstMerit Corporation 1,351 14,348 1.25x 11.9xBOH Bank of Hawaii Corporation 1,901 13,161 1.96x 12.0xVLY Valley National Bancorp 1,914 14,470 1.95x 13.1xSIVB SVB Financial Group 1,930 19,367 1.34x 12.5xCYN City National Corporation 2,252 22,526 1.47x 14.3xEWBC East West Bancorp, Inc. 2,539 21,873 1.46x 13.6xCBSH Commerce Bancshares, Inc. 3,292 19,571 1.65x 13.4xFNFG First Niagara Financial Group, Inc. 3,170 30,890 1.47x 15.1xWFC Wells Fargo & Company 132,999 1,259,734 1.46x 9.8xJPM JPMorgan Chase & Co. 131,827 2,246,764 1.07x 7.2x
Mean 22,006 283,690 1.53x 12.7xMedian 1,930 19,367 1.47x 13.3x
FRC First Republic Bank 3,246 23,798 1.50x 10.3x
M c I n t i r e I n v e s t m e n t I n s t i t u t e 18
DCF Analysis Implies a 29% Premium over Market Value
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
*Data as of 9/15/2011
First Republic Bank (FRC) - DCF ValuationSeptember 13, 2011 FYE December 31,
2011 2012 2013 2014 2015Net Income Avail to Common 302,889$ 318,251 298,016 272,747 284,174 Less: Increase in BVE 61,574 100,056 98,981 97,142 94,427 Add: OCI (2,679) -‐ -‐ -‐ -‐ Cash Flow to Equity 238,637$ 218,195 199,035 175,604 189,746 Terminal Growth 4,300,910.47 Discount Factor 0.3 1.3 2.3 3.3 4.3Discounted Cash Flows to Equity 234,191$ 201,061$ 172,211$ 142,665$ 3,425,658$
Implied Equity Value 4,175,787$ Shares Outstanding 129,213 Terminal GrowthImplied Share Price 32.32$ 32.32$ 1.0% 1.5% 2.0% 2.5% 3.0%
5.5% 33.24 36.66 41.06 46.92 55.126.0% 30.08 32.78 36.14 40.47 46.24
WACC 6.5% 27.50 29.67 $ 32.32 35.63 39.89Cost of Capital 6.5% 7.0% 25.34 27.12 29.26 31.87 35.13Terminal Growth Rate 2.0% 7.5% 23.52 25.00 26.75 28.86 31.43
M c I n t i r e I n v e s t m e n t I n s t i t u t e 19
MII should Initiate a Long Position in FRC at 3%
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A
First Republic is not like any other bank. The firm will take advantage of superior asset quality, expanding operations, a favorable customer base, and strong leadership, causing the stock to outpace the sector and investor’s expectations in an industry-wide recovery.
“It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country.” - Adam Smith
M c I n t i r e I n v e s t m e n t I n s t i t u t e 20
Q&A
Company Overview Stock Analysis Thesis Points Catalysts Risks Valuation Recommendation Q&A