Core Portfolio Insight: First Republic (FRC)

Core Portfolio Insight: First Republic (FRC)

July 22, 2022
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Jim Herbert founded First Republic Bank (FRC) in 1985 in San Francisco. At the time, it had one office and less than 10 employees. Jim had a core belief that he could build a successful business by differentiating its client services, while taking care of employees and communities, and operating in a safe and sound manner. Just over 35 years later, First Republic has 94 offices, 6,452 employees, and total bank assets of $197.9 billion, as of June 30, 2022. Jim recently started a new role as FRC's Executive Chairman, while Mike Roffler took over the CEO role. Mike has been a part of FRC for over a decade, most recently as the bank's CFO. [1] [2]

To begin with, First Republic focuses on extraordinary service in private banking, which includes residential, personal, and commercial real estate lending, along with checking, savings, and CDs. FRC does not engage in complex or exotic financial products. In management's investor presentations, there is always a slide included that shows a list of business activities NOT undertaken. Operating in a safe and sound manner has led to stable and consistent returns on average common equity, with returns 80% less volatile than the KBW Nasdaq Bank Index. [1] [2]

First Republic's client satisfaction exceeds that of other leading service brands. For example, FRC's Net Promoter Score (NPS) is higher than Ritz Carlton, Apple, Airbnb, and the U.S. Banking Industry average. How does FRC grow faster today as a larger company than it did when it was much smaller? Satisfied clients, strong referrals, and low attrition created a compounding effect on organic growth throughout the years. [1] [2]

Next, FRC has a long track record of success. Average annual net charge-offs have been 1/10th those of the top 50 U.S. Banks. FRC had no losses in San Francisco/Silicon Valley during the dot-com crash of 2000-2002. Since its founding in 1985, the bank has only $345 million of losses on $421 billion of originations, equating to only 8 basis points of cumulative losses. FRC's loan mix is consistent from 20 years ago, with 81% of loans collateralized by real estate. Since 1985, 90% of all loans were originated by bankers still with First Republic. FRC is on its 11th consecutive year of dividend increases. [1] [2]

Finally, First Republic has growth opportunities in private wealth management, investments in its service model & technology, the next generation of clients, and new geographies. Private wealth management makes up 15.6% of total revenue today, up from 5.5% in 2010. It is a strong growing franchise (a 22% compounded annual growth rate since 2016), with $246.8 billion of assets under management as of June 30, 2022. For attracting the next generation of clients, FRC has lending programs like Household Debt Refinance, which consolidates consumer debt into a single monthly payment, and Professional Loan Program, which gives employees a way to invest with/in their firms. Lastly, on geographies, First Republic expanded into Palm Beach, FL in 2013, Jackson, WY in 2018, and Seattle, WA in 2022. These geographies are in addition to areas already served, including San Francisco, NYC, Los Angeles, and Boston. [1] [2]


Sources: 

[1] First Republic Bank Investor Presentation July 2022

[2] First Republic Bank 10-K filing for FY2021

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