Recently, First Republic Bank (NYSE:FRC) reported year-over-year revenue growth of 17% for 2014. During the year, book value grew over 14%, and Tier 1 capital grew 17%.
From a growth perspective, First Republic was about as hot as it gets in 2014.
In the FDIC's most recent quarterly banking profile [link opens PDF], the bank insurer reported that the industry was growing revenue at a 4.8% yearly clip. Equity capital grew by just 0.7%.
Could this hot streak get even hotter? The bank's CEO thinks so, and I tend to agree with him.
What does the CEO have to say about growth?
Then, during the bank's conference call on Jan. 16, CEO James Herbert explained to the analysts listening in that the bank's real growth potential was much higher than the almost 20% attained in this quarter. He implied that the bank may be tapping the brake on growth purposefully, deliberately growing more slowly to give the itself time to prepare to cross over the significant regulatory threshold at $50 billion in total assets. He said:
We're operating in a range that we're comfortable with on loan growth. ... Even if they raised [the regulatory threshold] to $100 billion, we probably wouldn't change our course. We might change the speed of some things we're doing, but we wouldn't change the course at all.
In other words, once the bank has the infrastructure fully built out to become a compliant, $50 billion bank, Herbert sees no reason the bank can't crank up the growth to even higher levels. It doesn't matter if regulators tweak the rules; First Republic is building a foundation now to support rapid growth in the future.
The natural follow-up question is, of course, how?
The bank's two-pronged strategy for growth
Herbert and his management team addressed the plan for growth in the coming quarters and years, and the plan is really pretty simple. The bank is going to keep doing what it's doing, and that starts with cross-selling existing customers.
In the conference call, Herbert attributed "well over half" of the bank's growth to expanding relationships with the bank's existing customers. Based on the bank's own internal data, the typical customer buys eight products or services from the bank, including the bank's lead mortgage product. Those cross sells could be a variety of personal or business deposit accounts, other loans, investment management, or trust services. The point is that once First Republic on-boards a new customer, it's incredibly effective at closing the cross-sell.
Second, the bank has made excellent strategic decisions on where to pursue new clients. First Republic makes its dime serving a highly affluent, wealthy client base. The bank defines those target customers as households with at least $1 million in investable assets. Therefore, it behooves the bank to do business in the places where the wealthiest Americans live.
It turns out that the bank's target customers live in pretty consistent locations, and that's exactly where First Republic set up shop. With offices in San Francisco, New York City, Boston, Los Angeles, San Diego, Portland, Ore., and Palm Beach, Fla., the bank estimates that 56% of all high-net-worth households in the U.S. live within the bank's market footprint.
The bank reports that between 2011 and 2013, it increased the number of high-net-worth households it serves by 33%. The bank estimates that its market share of high-net-worth households is still just 3.84% in its select few markets, a respectable mark but with plenty of room to grow. That market penetration has increased as well, jumping from 2.83% in 2005.
Connecting the dots
Taking all this together, the picture for skyrocketing future growth becomes clear. First, the bank is extremely effective at maximizing the value of every customer in the bank, primarily through cross-selling a variety of value-added services to clients beyond the mortgage loan.
The bank is also effective at bringing in new clients, largely through its selective choice of markets, which zeroes in on the bank's precise target customer. Within those markets, the bank has respectable market share but still has ample space to grow. As new clients come into the bank, the cycle repeats itself in the form of cross-selling and revenue maximization.
Lather. Rinse. Repeat.
Herbert has seen the process work every day of the bank's 29-year history. It's no wonder he's so confident that First Republic will have no trouble finding lots of growth in the future.