EFTA01450790.pdf

Deutsche Bank Markets Research Rating Company Date 15 October 2013 Buy First Republic Bank Alert Results Nt.trth ;:km;n lcc United States Twi.t; Price at 15 Oct 2013 (USD) 47.38 Fitthnciai FP.0 N FRC UN NYS FRC Price Target (USDI 52.00 Banks 52-week range (USN 47.68 - 32.00 Core NIM Upside in FY14, Growth Onw flochwinf Research Analyst Normalizing But Still Strong Re:itorote Buy. IP t St. to $52. Core EPS to $2 56:S2.70S3.15 for FYI3/14/ I 5 We continue to view the stock as one of our top growth picks in the mid cap ;rasa Esrazilur bank space. We raised our core EPS estimates by $0.03/$0.10 in FY14/FY15 to Research Associate account for stronger earning asset growth and lower than expected expenses and tax rate, which more than offset a lower expected core NIM and mortgage banking. While FRC expects asset growth to slow to a rate more in line with recent levels prior to 2O13, given the lower loan pipeline heading into 4O13, we note this implied -20% annualized gr. rate remains strong and well above the industry, and should continue to be a solid driver of core NII gr. with the Target Price 48.00 to 52.00 I 8.3% backdrop of a generally stable-to-expanding core NIM in FY14. With the Sara Dana% ant variability of mortgage banking largely removed from core EPS trends going forward, we expect solid fee income growth in 4Q13/FY14 to further support & option liquidity data strong core EPS trends. Market Cap IUSD) 6.219.8 Rel-, out Sc?is First Rt,ad Alec toi qua, lac iv tiendst Shares outstanding Cm) 131.3 Core NIM likely to expand in FY14 with stable Interest rates. Following a Avg. daily volume MOM 411.456 modest decline in 4Q13 NIM, we expect 6-7 bps of core NIM expansion Sane' autica• Sat through FY14. We expect some unwind in FY14 of the •14 bps NIM impact from excess deposit gr. in 3O13 (following what may also be a solid deposit rev Mita growth quarter in 4O131, as FRC funds loan gr. with cash over time, supporting FYE 12/31 2012A 2013E 2014E earning asset yields. While loan production yields are below book yields, they 10 0.67 0.85A 0.75 are only modestly so (3.44% book yield ex. prepayment penalty income vs. a 20 0.60 0.77A 0.76 -3.30% loan production yield), which should mean only modest loan yield 30 0.72 0.75A 0.81 pressure in FY14. Given the pull-back in deposit rates at the end of 3O13, core deposit costs should actually decline modestly in 4013. 40 0.77 0.75 0.83 FY (USD/ 2.76 3.11 3.16 Mortgage banking likely remains weak, at least near-term. FRC guided to continued thin gain on sale spreads and modest loan sales in 4O13, with lower P/E 11.8 15.3 15.0 volumes reflecting stronger demand for ARM product vs. longer-term fixed Saes* DORSCht an 'IrateMs mina Of FASI23R mum, Me apsesWO Of nod rate product (most of which FRC sells). We note that while shifting customer Wiens demand favoring resi ARMs is a negative for loan sale volume, it is a positive for loan growth. We have reduced our gain on sale income ests. to 53.7M/$3.6M for FY14/15, levels which may prove conservative over time. Risks Capital thinner, but still solid. While solid asset growth pushed the Tier 1 Downside risks: (1) economic leverage ratio -65 bps to 9.18%, we note this is well above FRC's 8% minimum, and given the expected pace of asset growth, we expect the Tier 1 weakness in California. 12) lower leverage ratio to remain above 9% through FY15. longer-term interest rates (pressuring NIM), (3) the adoption Valuation of unfavorable tax policies that Our 552 target is based on a P/E of 16.5x our FY15E core EPS and a P/TBV of 2.1x our 3Q14 TBV/share estimate, versus the current mid cap bank medians adversely impact higher net of 15.1x FYI4E/1.9x, respectively, reflecting a premium on a P/E basis, which worth individuals (i.e. the we deem appropriate given the stronger relative core EPS growth through lowering of the mortgage interest FY15, the higher quality nature of the franchise, and the potential increase in deduction threshold). take-out premium over time as the bank approaches 550B in assets. Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.THE VIEWS EXPRESSED ABOVE ACCURATELY REFLECT PERSONAL VIEWS OF THE AUTHORS ABOUT THE SUBJECT COMPANY(IES) AND ITS(THEIR) SECURITIES. THEY HAVE NOT AND WILL NOT RECEIVE ANY COMPENSATION FOR PROVIDING A SPECIFIC RECOMMENDATION OR VIEW IN THIS REPORT. FOR OTHER DISCLOSURES PLEASE VISIT http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=FRC.N MICA(P) 054/04/2013. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SONY-0106653 CONFIDENTIAL SDNY_GM_00252837 EFTA01450790