Shares of First Republic Bank FRC slipped 4.4% on Friday, following the announcement of an underwritten public offering. The company announced the pricing of 3.5 million shares of its common stock for expected gross proceeds of $205 million. This represented the second round of share issuance by the West-based private bank, since its initial public offering in Dec 2010.
The proposed offering will lead to dilution of shares, which will adversely impact the company’s earnings per share. We believe anticipation regarding a fall in future earnings per share has triggered investors’ bearishness toward the stock.
Moreover, as the record date for the company’s Annual Meeting of Shareholders fell on Mar 13, prior to the closure date of the offering on Mar 18, shares issued in the latest offering did not carry voting rights in the scheduled meeting. As a result, the offering failed to generate interest among investors, adding to the bearishness.
Around same time last year, the company came out with its first underwritten public offering of 4 million shares of common stock at a price of $53.22 per share, to meet general corporate needs.
Reportedly, First Republic has appointed The Goldman Sachs Group, Inc. GS, Bank of America Corp. BAC and JPMorgan Chase & Co. JPM to serve as the joint book-running managers. Moreover, it has granted the underwriters an option to buy additional 0.525 million shares of common stock.
Proceeds from the sale will likely be utilized for the purchase of investment securities and funding of loans, among other general corporate purposes. Further, the offering, subject to customary closing conditions, is expected to end on or around Mar 18, 2015.
Though the news generated negative sentiments, as and when such proceeds are used for originating fresh loans, the company’s net interest margin, which grew at a 4-year CAGR (2011–2014) of 15%, will receive a further boost. Moreover, coupled with an anticipated interest rate hike in mid-2015, such rise in loans will enhance the company’s organic growth prospects.
Additionally, the proceeds are expected to relieve First Republic’s debt burden to some extent. At the same time, healthy capital and liquidity position will encourage the company to undertake meaningful acquisitions.
Notably, the company purchased investment securities of $1.4 billion and originated new loans worth $17 billion during 2014. Cash and cash equivalents came in at $817.2 million, while long-term total debt stood at $5.3 billion.
Currently, First Republic carries a Zacks Rank #3 (Hold).
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