Don't Overlook First Republic Bank: A Strong Company With Tons of Room to Grow

Solid asset, deposit and loan growth and enviably low charge-offs indicate that First Republic Bank is a well-run, high-quality bank.

Jun 24, 2014 at 3:11PM

GSource: Company.

First Republic Bank (NYSE:FRC) keeps a low profile in the banking sector due to its relatively small branch network. However, the bank does deserve more attention due to its outstanding performance over the last five years.

First Republic Bank presents investors with strong asset, loan and deposit growth and has great underwriting discipline. The bank fully capitalizes on its relationship-based banking model and increased its core net interest income dramatically over the last three years.

First Republic Bank was founded in 1985 and offers retail and business banking services as well as Private Wealth Management to its customers in 66 locations. The bank has a strong presence in California and New York City, two of the most important economic and financial centers in the United States. 

Similar to other mid-cap banks, First Republic Bank has taken ruthless advantage of the consolidation in the banking landscape over the last five years. Though the company has a 28-year record of consistent profitability, its performance since 2008 is particularly noteworthy.

Organic growth propelling asset, loan and deposits
First Republic Bank has been relying less than other banks on mergers and acquisitions in order to grow its business.The bank has achieved great success by appealing to customers with a relationship-based banking model. Organically growing bank businesses with a healthy customer base have become somewhat of a rarity in the United States which is why First Republic Bank stands out especially.

Most banks, especially larger ones, oftentimes focus too heavily on cyclical businesses such as investment banking or trading while they neglect their core deposit and lending business.

Banks like First Republic Bank certainly don't mind. The bank has a robust record in growing assets, loans, deposits and assets under management (AUM) over the course of its trading history.

Strong growth in its core business segments also led First Republic Bank to materially improve its core net interest income which increased 55% from $194 million in the first quarter of 2011 to $301 million in the first quarter of 2014.


It is important to note that First Republic Bank has grown organically. Organic growth is healthy for a variety of reasons: First, it shows that the bank is doing something right. Second, customers approve of the business model and the service offering. Third, organic growth can generally be characterized as less risky as opposed to purchased growth via acquisitions.

Acquisitions are always a risky away of obtaining growth. Oftentimes, the integration of a new company poses challenges due to different technologies, processes or corporate cultures. In addition, acquisition fueled growth often carries the risk of the acquiring company overpaying for the target's assets. First Republic Bank has to worry about nothing of that.

Very low charge-offs indicate disciplined lending
Another sign of a robust banking business other than deposit and loan growth, is a bank's charge-off history. Naturally, some loans will blow up, this is simply a matter of probabilities. However, a bank that applies extraordinary discipline in evaluating and selecting credit risks, can tilt the odds in its favor.

And First Republic Bank definitely has its stuff together when it comes to loan underwriting.

Compared against 50 other banks, First Republic Bank has had extremely low net charge-offs over the last ten years, both in absolute and relative terms.

Its net charge-offs stood at just 0.48% of average loans at the height of the financial crisis in 2009 and have fallen ever since. Loan net charge-offs are practically non-existent at First Republic Bank which points to a supreme selection of credit risks.


Source: First Republic Bank, Morgan Stanley Financials Conference Presentation June 10, 2014

Final assessment
First Republic Bank is a robust and organically growing banking franchise with excellent credit risk selection skills, a proven business model and a footprint in promising geographies which will drive further growth. With expansion drive and a recovery in the U.S. economy, First Republic Bank has much more potential to boost its earnings and deliver more value for shareholders in the coming years.

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