First Republic Bank: This 5.50% Preferred Stock Has Begun Trading On The NYSE

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About: First Republic Bank (FRC)
by: Arbitrage Trader
Summary

Overview of First Republic Bank's new preferred stock, FRC-I.

A brief look at the company.

Where in the context of all securities, issued by First Republic Bank, does FRC-I stand?

Comparison with the sector.

Comparison with the all preferred stocks, issued by a bank.

In this article, we want to shed light on a new Preferred Stock issued by First Republic Bank (FRC). Our goal is purely to inform you about the product while refraining ourselves from an investment recommendation. Even though the product might not be of interest to us and our financial objectives, it is definitely worth taking a look at.

The New Issue

Before we get into our brief analysis, here is a link to the prospectus.

For a total of 12M shares issued, the total gross proceeds to the company are $300M. You can find some relevant information about the new preferred stock in the table below:

Source: Author's spreadsheet

First Republic Bank 5.50% Depositary Shares Non-Cumulative Perpetual Series I Preferred Stock (NYSE:FRC-I) pays a qualified fixed dividend at a rate of 5.50%. The new preferred stock has a BBB-Standard & Poor's rating and is callable as of June 30, 2023. Currently, the new issue trades a little below its par value at a price of $24.75, and has a 5.56% current yield and a 5.96% yield to call.

Here's how the stock's YTC curve looks right now:

Source: Author's spreadsheet

The Company

As per the the company's website:

Founded in 1985, First Republic and its subsidiaries offer private banking, private business banking and private wealth management, including investment, trust and brokerage services. First Republic specializes in delivering exceptional, relationship-based service, with a solid commitment to responsiveness and action. Services are offered through preferred banking or wealth management offices primarily in San Francisco, Palo Alto, Los Angeles, Santa Barbara, Newport Beach, San Diego, Portland, Boston, Palm Beach, Greenwich, and New York City. First Republic offers a complete line of banking products for individuals and businesses, including deposit services, as well as residential, commercial and personal loans.

Publicly traded under the NYSE stock symbol "FRC," First Republic is a component of the S&P Total Market Index, the Wilshire 5000 Total Market IndexSM, the Russell 1000®, Russell 3000® and Russell Global indices, and six Dow Jones indices. The Bank exceeds all of the current regulatory guidelines to be well-capitalized and is a member of the Federal Deposit Insurance Corp. (FDIC) and an Equal Housing Lender.

Below, you can see dividend and profitability information about the common stock, FRC:

Source: FastGrahps.com

And the market opinion:

Source: Tradingview.com

The company's net income has doubled for the last eight years, which, along with the bullish expectations for the next couple of years, has resulted in a strong uptrend for the stock. FRC's dividend distribution has also been on the rise (from $0.30 in 2012 to $0.68 in 2017). For 2018, the expected annual dividend on FRC's common stock is $0.71. With a market price of $101.08, the current yield of FRC is 0.70%. As an absolute value, this means it has $72.2M in yearly dividend expenses for the common. By way of comparison, the yearly dividend for the newly issued preferred units of the company is around $65.15M. In addition, the market capitalization of FRC is around $16.26B.

Capital Structure

Below you can see a snapshot of First Republic Bank's capital structure as of its last quarterly report in March 2018. You can also see how the capital structure evolved historically.

Source: Morningstar.com, company balance sheet

As of Q1 2018, FRC had a total debt of $10.17B ranking senior to the newly issued preferred stock. The new Series I preferred shares rank junior to all outstanding debt and equal to the other outstanding preferred stocks, which total $840M.

The First Republic Bank Family

The company has five other outstanding preferred stocks, listed on a National Exchange, issued by FRC:

  • First Republic Bank 7.00% Depositary Shares Non-Cumulative Series E Preferred Stock (NYSE:FRC-E)
  • First Republic Bank 5.70% Depositary Shares Non-Cumulative Series F Preferred Stock (NYSE:FRC-F)
  • First Republic Bank 5.50% Depositary Shares Non-Cumulative Series G Preferred Stock (NYSE:FRC-G)
  • First Republic Bank 5.50% Depositary Shares Non-Cumulative Series D Preferred Stock (NYSE:FRC-D)
  • First Republic Bank 5.125% Depositary Shares Non-Cumulative Series H Preferred Stock (NYSE:FRC-H)

Source: Author's spreadsheet

FRC intends to use the proceeds from the newly issued preferred stock to redeem (in whole or in part and subject to all applicable regulatory approvals) its Series E Preferred Stock (NYSE:FRC-E), which is redeemable at the company's option on or after Dec. 28, 2018.

Source: Author's spreadsheet

If we compare the newly issued Series I preferred stock with the rest of FRC's preferred stocks, we can see that it has a slightly better yield to worst than the previously issued preferred stocks.

Furthermore, there are four corporate bonds issued by the company:

Source: FINRA

I chose the fixed-rate bond that has a maturity close to the call date of FRC-I, FRC4502771, which has a yield to maturity of 3.569%. This should be compared to the 5.96% yield to call of FRC-I, but when making that comparison remember that FRC-I's YTC is the maximum you can realize if you hold the preferred stock until 2023. Still, there is a yield spread of 2.4% between the two securities. Some information about the bond could be found in the table below.

Source: FINRA, FRC4502771

Sector Comparison

The chart below contains all preferred stocks in the Money Center Banks sector (according to Finviz.com) that pay a fixed dividend rate and have a par value of $25, by their yield to call and current yield. It is important to take note that none of these preferred stocks are eligible for the 15% federal tax rate.

Source: Author's database

Take a look at the investment grades only:

Source: Author's database

And look at these, with a positive yield to call:

Source: Author's database

The Banking Preferreds

The chart below contains all preferred stocks issued by a bank with a par value of $25 that have qualified fixed dividend rate.

Source: Author's database

Again, the investment grades only:

Source: Author's database

And these have a positive yield to call:

Source: Author's database

All BBB- Preferred Stocks

The last chart contains all preferred stocks that pay a fixed dividend rate, have a par value of $25, and carry a BBB- Standard & Poor's rating.

Source: Author's database

The main group:

Source: Author's database

Redemption Following a Regulatory Capital Event

As per the FRC-I Prospectus:

We may redeem the Series I Preferred Stock, in whole but not in part, for cash, at any time within 90 days following a Regulatory Capital Treatment Event, at our option, subject to the approval of the appropriate federal banking agency, at the cash redemption price provided below ('Regulatory Event Redemption'). A 'Regulatory Capital Treatment Event' means our good faith determination that, as a result of (i) any amendment to, or change in, the laws or regulations of the United States or any political subdivision of or in the United States that is enacted or becomes effective after the initial issuance of the Series I Preferred Stock; (ii) any proposed change in those laws or regulations that is announced after the initial issuance of the Series I Preferred Stock; or (iii) any official administrative decision or judicial decision or administrative action or other official pronouncement interpreting or applying those laws or regulations that is announced after the initial issuance of the Series I Preferred Stock, there is more than an insubstantial risk that we will not be entitled to treat the full liquidation value of the Series I Preferred Stock then outstanding as 'Tier 1 Capital' (or its equivalent) for purposes of the capital adequacy guidelines of the FDIC (or, as and if applicable, the capital adequacy guidelines or regulations of any successor appropriate federal banking agency), as then in effect and applicable, for as long as any share of Series I Preferred Stock is outstanding. Dividends will not accrue on those shares of Series I Preferred Stock on and after the redemption date.

Addition to the S&P preferred stock index

With the current market capitalization of the new issue of $300, it is a potential addition to the S&P U.S. Preferred Stock iShares Index (NASDAQ:PFF). If the average monthly volume of FRC-I after its first six months trading on the NYSE is more than 250,000, it would be eligible to be included in the S&P U.S. Preferred Stock Index. With fewer than six months of trading history, issues are evaluated over the available period and might be included if available trading history infers the issue will satisfy this requirement.

Conclusion

This is an informational article about the new preferred stock, FRC-I. With this kind of article, we want to keep you informed of all new preferred stock and baby bonds IPOs. I believe that FRC-I offers good returns when compared to other securities in FRC's capital structure and to other preferred stocks in its peer group.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.