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First Republic (FRC) Rides on Organic Growth Moves: Time to Buy?

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First Republic Bank (FRC - Free Report) has been growing through considerable top-line strength on growth in loans and deposit balances. Moreover, the bank’s decent debt level is a tailwind. However, escalating expenses might impede bottom-line growth.

The company has been witnessing upward estimate revisions, reflecting analysts’ optimism about its growth prospects.

Looking at its fundamentals, First Republic has demonstrated impressive top-line strength in the past few years. The bank’s net interest income (NII) has exhibited a five-year compound annual growth rate (CAGR) (2016-2020) of 15.8%. During the same time period, its non-interest income reflected growth of 13.4%, with support from a steady rise in investment management fees (accounting for 61% of fee income as of Mar 31, 2021).

First Republic recorded notable growth in loan balances on increased loan origination volumes, with a three-year CAGR (2018-2020) of 29.4%. Additionally, the company’s total deposits have witnessed a CAGR of 12.9% during the same time span. Therefore, a rising trend in loans and deposits is anticipated to continue with economic recovery.

As of Mar 31, 2021, the company had total debt worth $12.3 billion, while its cash and cash equivalents and due from banks totaled $8.9 billion. Further, the time-interest-earned ratio of 6.2 has been increasing steadily for the past several quarters. Thus, given the favorable factors and record of earnings growth, First Republic has a lesser likelihood of default in interest payment and debt repayment if the economic situation worsens.

Nonetheless, total expenses have flared up, witnessing a CAGR of 34.7%, over the last five years (2016-2020). Remarkably, cost savings from completed build-out of systems and processes required for crossing $50 billion in total assets are being invested into digital initiatives, including mobile banking applications and data analytics. As such, operating costs are likely to remain elevated in the near term.

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