First Republic Bank at Deutsche Bank Global Financial Services Investor Conference
May 22, 2012 AM EDT
Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N
FRC - First Republic Bank
First Republic Bank at Deutsche Bank Global Financial Services Investor Conference
May 22, 2012 / 02:20PM GMT
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Corporate Participants
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* Jim Herbert
First Republic Bank - Chairman & CEO
* Glenn Degenaars
First Republic Bank - Portfolio Manager
* Martin Gibson
First Republic Bank - Preferred Banking
* Anne Legio
First Republic Bank - Manager
* Michelle Celestino
First Republic Bank - Relationship Manager
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Conference Call Participants
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* Dave Rochester
Deutsche Bank - Analyst
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Presentation
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Dave Rochester, Deutsche Bank - Analyst [1]
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Good morning, everyone. We'll go ahead and get started here. I'm Dave Rochester. I'm the midcap banks analyst here at Deutsche Bank. It's my pleasure to introduce the management team of First Republic Bank. It's ticker FRC. First Republic is a $30 billion asset bank, a little over $4 billion in market cap. The bank is solely focused on catering to the high net worth customer segment. It has a bi-coastal footprint in regions with large concentrations of high net worth customers including San Francisco, LA, New York, and Boston, all of which, combined, account for just over 50% of the high net worth households in the US. It has an estimated 16% market share in the segment in San Francisco and is in the process of building out the platform in Boston and New York. There's a whole of opportunity there, which we'll hear more about.
I think this is easily one of the higher-quality banks that I cover and one of the strongest growth banks certainly in my coverage with a unique model that has really been the key to the success of this bank. So I think, with that, I'll introduce Jim Herbert, Chairman and CEO. We also have with us Molly Richardson, Director of Investor Relations, and a number of other professionals that we'll hear from today about the bank. So I think we'll get a really good perspective of what the story is all about.
We'll have the five to 10-minute presentation from Jim. We'll go into a fireside chat format, and then we'll break it into Q&A.
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Jim Herbert, First Republic Bank - Chairman & CEO [2]
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Okay, great. Okay, thank you very much. Thank you all for being here. I'll be brief on my opening comments and try to get to the fireside chat and some of the other people here with me because that really is the story.
First Republic has been built on service. It's a repetitive franchise. It works on word-of-mouth. One client has a good experience; tells a friend of like kind, and we pick up another client.
The basic growth rate of the bank has been about 20% for a long time. You can look back five-year, 10-year, 15-year increments. It's not because we reach to do that, our credit standards are very high, and you'll see that in some of the slides, and we can talk about that. It's because the service provided by individuals is so unusually good that people stay with us who have very low attrition, and they like it enough to tell their friends.
On the average, our core business is homelending -- larger homelending -- it has been for a long time. I started the bank in 1980 in Sunnyvale, California; stumbled into jumbo homelending when rates were 20%, now they're minus a decimal and -- we haven't gotten to zero yet, but we're trying.
And it worked. And I was sold out in 1984 and started this in 1985, and homelending has been one of the cores of the business from the beginning.
There are a couple of basic tenets of how we operate -- very high-quality people, limited number of locations, intensely focused on markets and segments, low turnover, listen to the client very carefully -- very, very carefully. Almost everything we do new is the result of some client asking for something and probably, in fact, several clients asking for the same thing and us listening and hearing it and being comfortable doing it safely.
So -- we are geographically specific, so when you invest in First Republic, you're investing in a couple of things. You are investing in very high credit quality, you are investing in the geographies of New York, Boston, San Francisco, Los Angeles, primarily -- the West Side of LA, up and down, Santa Barbara to Orange County. Those are the markets we're in, and we like them, we're staying in them, we don't expect to add to them. We are opening in Palm Beach, but that's a service point for New York and Boston, primarily.
So that's our intense focus. The balance sheet is about 70% single family. We like it as an asset class contrary to all the noise of the last few years. We've had six basis points of cumulative losses in 27 years on $50 billion of origination. So it's a great asset class for us. We sell nine products to every home loan client that we work with, so we have a deep relationship. It's this old-fashioned community bank relationship banking brought large, basically.
We have a wealth management division as well. Glenn is here to represent that and can speak with that. That has about $22 billion in it.
What we don't do -- we're very straightforward -- proprietary trading, credit derivatives, et cetera. We don't do subprime, we never have. We don't have any offshore business, really, of any kind. We have some offshore clients, but they're doing mostly domestic focused business.
Home loan clients -- I mentioned the credit history of the bank. Our average size loan is about $1 million, 60% LTV, strong liquidity, median net worth about $3 million, average net worth $16 million. We have some very rich clients who still borrow. And we have credit scores up in the 760s. That's, by the way, that's the representation of everything we originate, whether we keep it or sell it. If we sell it, we keep servicing.
Very efficient operation from a people point of view; fairly high efficiency ratio. I'll come to that in a moment. But our assets per person are over 2 times the normal bank. The reason for that is each transaction is fairly large, our people are really good, and everything is clean so they can handle more. Profits per person also up in the same range.
Net interest margin -- we think stability is much underrated. We think the last couple of years have kind of reminded everybody of that. One of our objectives is to be very stable. Our objective is to make 10% to 14%, 10% to 13%, after tax, every year, like clockwork.
And the driver on that is net interest margin. We work really hard to keep this very stable through all kinds of markets. We can talk more about how we do that.
We built the bank for many years. We were public in 1986; we sold it to Merrill Lynch in 2007, exciting year. Woke up -- actually closed in September of 2007, woke up, and they had a loss in October of 2007, which was a little controversial at the time, as you might imagine -- with us, among others. And, anyway, we stayed inside Merrill BofA, bought it back with a private equity backing, and we closed that deal in July. We negotiated in the fall of 2009, set the price in 2009, bought for tangible book marked by BofA when they bought Merrill. So the assets -- face rate on the assets was about $0.96 on the dollar. All good-performing assets we could leave some behind.
We used private equity to back us. They started out at about 73%. They're down to about 32% now. So we've had an IPO in the same year that we bought it back, December of 2010. We've done two secondaries. So we are getting them liquid, basically -- rather rapidly, actually.
This is the results since selling to Merrill. We went into Merrill as a $1.2 billion market cap. We are now $4.2 billion, roughly, this is at the end of the quarter. At the top the loans have grown from 8.2 to 23, about 22% growth rate.
This happened through the chaotic period of 2008, 2009, 2010, and now 2011. And we basically -- when we got inside Merrill and BofA, they got into trouble; we circled our wagons; ran the bank; did not give up control of anything, basically, even things that they did take control of like accounts payable. We ran the department and did a shadow department.
And so when we were able to buy it back, which became self-evident to us fairly early that it might happen, we made sure we had everything intact. We never changed our system. So our clients never saw a merger, which is terribly important to why this has worked so well.
And we kept going. The second-best year we've ever had on loan origination was 2008. If you think about 2008, but nobody else was home, and Merrill actually had cash, and we were doing good assets. So they turned us loose, and we gathered 7,000, 8,000, 10,000 new clients -- high net worth households. So it was a good year.
Revenues have grown nicely. Net income, importantly, is up 30% compounded since we sold.
That's a quick summary. Maybe, with that, Dave, we have some people here. Maybe I could ask them to give about a two-minute synopsis of the pieces that they might represent. Martin, would you like to start, please?
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Martin Gibson, First Republic Bank - Preferred Banking [3]
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I'm Martin Gibson. I manage preferred banking for the New York group. And preferred banking, we're really the deposit experts for the business. We work with relationship managers, which we'll hear from Michelle Celestino soon, to be their secondary sales component on the deposit side for both consumers and business clients. We also are a bit of hybrid, because we do have our own books of business as well.
And I think the main differentiating factor for us on the deposit side and for other sides of the bank as well as the service component, so having a one-on-one relationship with the client from the sales process to the documentation process through the onboarding process and through their life at the bank, it's one main contact. They have a direct phone number, they don't have to go to voice mail, they can have their call answered and handled immediately.
We also have a servicing group that sits in our Rockefeller Center office, so they also have direct phone numbers. A client can call and have a transaction completed immediately; there is no wait time. So I find that kind of consistent service from my team, the relationship manager team, and the client service team to be an imperative point for differentiating us from the rest of the banks.
And then, as you'll hear from Anne for the office network, our branch network, that's a huge component of the servicing as well.
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Jim Herbert, First Republic Bank - Chairman & CEO [4]
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Martin's been with us for -- ?
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Martin Gibson, First Republic Bank - Preferred Banking [5]
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I have been here for almost 12 years in New York. I joined in July of 2000. There were seven of us in the New York office, and we now have about 285 in New York. So it's been a great opportunity and a great experience.
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Jim Herbert, First Republic Bank - Chairman & CEO [6]
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Thank you. Anne?
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Anne Legio, First Republic Bank - Manager [7]
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Hi, I'm Anne Legio. I run the Park Avenue office, which was the first office of First Republic in New York. Our aim is to make sure that when our clients do come in, we service them, that is with their checking needs, their loan needs. And what's happened over the years is that we do get to enlarge their relationship. We listen to the clients, hear what they have to say. I think that's a key word -- is to listen to what they need to say.
Most of the time (inaudible) they just express a desire to what are all about to ask us. And when we sit down with them, and we tell you, this is what we do, this is how we can assist you, little by little, they open up. And from there we have done anything from brought in business from a wealth management to loans and everything else.
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Jim Herbert, First Republic Bank - Chairman & CEO [8]
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We are opening about -- Anne, we have -- what's our office mix here now?
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Anne Legio, First Republic Bank - Manager [9]
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Currently, we have seven. Today, as we are opening number eight, and it is (technical difficulty) and this is the day, today, that we are opening. So yesterday we had a very soft opening, and we had about 10 people that came in just asking, say, when are you opening, welcome to the neighborhood. So we are excited for that. And we have one more coming up.
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Jim Herbert, First Republic Bank - Chairman & CEO [10]
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More coming up?
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Anne Legio, First Republic Bank - Manager [11]
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Yes, one coming up at 30th and Park Avenue South. We will also have 56th and Madison, and we're going to have Chinatown the first quarter of 2000 of next year. So it's going to be a great experience. I'm learning a little bit of Chinese, so that (inaudible). (inaudible) learned how to say to one of my colleagues. But it's been an exciting experience, and I came to New York in 2001. We were about 30 people then, and to see what it is today. My first day at the job, I said it can be possible, but what I saw within two months that by delivering the right service to the clients it is possible. And for that we have to thank Jim for that.
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Jim Herbert, First Republic Bank - Chairman & CEO [12]
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Michelle.
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Michelle Celestino, First Republic Bank - Relationship Manager [13]
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I have this mike and this mike.
(laughter)
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Michelle Celestino, First Republic Bank - Relationship Manager [14]
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I guess it doesn't matter. Can you hear me? My name is Michelle Celestino. I've been with the bank about 10 and a half years. I am a relationship manager, and basically what that means is I am responsible for bringing on new relationships and building those relationships and growing them, deepening them.
I often lead with a home mortgage product for client acquisition but not always. But that seems to be a very effective, very successful way in which we acquire new clients. My portfolio is primarily -- I mean, exclusively -- high net worth individuals. They are families, they're privately held businesses. I have a lot of what I call financial entrepreneurs in the financial industry -- asset managers.
I also manage a team of seven relationship managers up at the Time-Warner office, and I think the differentiating factor when we hire and when we bring on new relationship managers is I'm fully accountable always for the relationship, whether it's a deposit product, a credit product, investment management product, trust and estate, custody, et cetera. It begins and ends with me. I don't hand it over to anyone, and that's a big differentiating factor in terms of the length of the relationship, the depth of the relationship, and that's what sets us apart significantly from the money centers.
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Jim Herbert, First Republic Bank - Chairman & CEO [15]
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Good, thank you. Glenn?
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Glenn Degenaars, First Republic Bank - Portfolio Manager [16]
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My name is Glenn Degenaars. I joined the firm about two years ago. In addition to my role as a portfolio manager, I also help with the leadership role of the East Coast portfolio management team. First Republic wealth management consists of primarily two divisions -- it's the First Republic Securities Company division and the Investment Management division, which is the area I am in.
It's a very simple and straightforward business model. It's guided by three principles -- number one, first and foremost, is service. It's a message you'll hear communicated throughout the day here. The second is objectivity. We don't create or sell proprietary product. And, third, is customization. We provide a custom solution for our clients starting at the $2 million level and above. And it's a great business, and it's a business we're growing pretty extensively here in New York.
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Jim Herbert, First Republic Bank - Chairman & CEO [17]
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Glenn, you might mention the banking value of the cross-sell piece there.
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Glenn Degenaars, First Republic Bank - Portfolio Manager [18]
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Sure. A lot of our business comes from teams like Michelle, who refer their original home loan mortgage client to us. When they close on the mortgage, they'll see the client may have an investment portfolio at a competitor and bring us in to present our capabilities.
In addition, the business also moves upstream, where the portfolio managers who are outsourcing their own business will bring in the banking side and cross-sell the home loans and the banking business as well.
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Jim Herbert, First Republic Bank - Chairman & CEO [19]
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Great, thanks.
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Glenn Degenaars, First Republic Bank - Portfolio Manager [20]
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Thanks.
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Questions and Answers
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Dave Rochester, Deutsche Bank - Analyst [1]
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Great, thank you for that summary. I think since you have a number of your talented individuals here today, a good first question might be you had mentioned, in conversations with me, that it had been easier for you to pull top talent from other institutions. And so maybe you can just talk about that and your incentive structures and I'm sure that's one of the big (multiple speakers).
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Jim Herbert, First Republic Bank - Chairman & CEO [2]
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Well, I think the timing is such that, needless to say, there's a little dislocation going on in the larger banks.
If you think about it, you hear these numbers all the time, but 60% to 65% of the banking is in the hands of four or five folks in America. And that's actually probably even more concentrated in the larger markets that we operate in -- urban markets.
And so to the extent that they are adjusting their business models in any way, or their incentive models in any way, it's been easier to hire people from them for us. And also I think our re-establishment as an independent entity has been particularly helpful because it's a different model, and it has the value of independence and objectivity in the investment side as Glenn just mentioned.
The incentive programs we have are we -- 85% of the people in the bank are on incentives -- objective incentives, maybe more. We have certain departments you don't want that happening in, but -- internal audit, things of that nature, obviously.
And the driving incentive plan is focused on deposits and assets under management with lending as a lead. We have had clawback on lending, we've had clawback provisions in our loan and lending program since 1986, and that actually has a lot to do with that record.
Our relationship managers are paid on a transaction alone when they do it, but for three years, sometimes a little longer, on unsecured it's forever, they are responsible for the credit. They have to collect it if there's a problem, actually, because they have the best ear for the client, which (audio break), and they get -- they have a clawback on their bonus model equal to 3 to 6 times what they make. They take the first loss, and it's always been that way.
And it's not meant to be punitive, it's meant to be selective. If you don't have the confidence in your own lending capacity, you actually shouldn't work for us. And if you don't feel like you own -- if you're not lending your own money, don't work here, either.
On the other hand, the kind of clients you're looking for is the client that's the most liquid client, and because you'll make, generally speaking, about 60% or more of your total comp will be on non-lending -- it will be on deposits, it will be on assets under management, et cetera. And the most liquid clients are, in fact, the best credits. So it's very circular, it's very reinforcing. So, in fact, it is a helpful targeting tool.
Portfolio managers have incentive programs as well, I trust everybody does. They have -- every incentive program has a qualitative component, a substantial qualitative component, and most of them have a teamwork component as well, because the culture is about teamwork and working together and cross-selling together.
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Dave Rochester, Deutsche Bank - Analyst [3]
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And would you say the most consistent players in the market would be the larger banks? Is that what you're up against?
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Jim Herbert, First Republic Bank - Chairman & CEO [4]
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Consistent in terms of quality?
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Dave Rochester, Deutsche Bank - Analyst [5]
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Yes.
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Jim Herbert, First Republic Bank - Chairman & CEO [6]
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Not necessarily -- some of them are very good, and some teams are very good. But consistent isn't a word I'd apply.
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Dave Rochester, Deutsche Bank - Analyst [7]
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Okay.
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Jim Herbert, First Republic Bank - Chairman & CEO [8]
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The toughest competitor is almost always the local competitor -- the Silicon Valley Bank, the Boston private city nationals -- I'm missing many but -- and the reason is they can deliver the same kind of quickness and decisiveness that we can.
But very underrated is turnover -- the negative impact of turnover. Not necessarily somebody leaving the firm but being promoted up, moving on. We generally have people that like what they're doing very, very much, and they stay with it. They do more business, they're paid more, they have the responsibility of leadership. But it's their bank, and they want to see it grow. And everyone here, actually, is in a leadership role, but they didn't necessarily start with us that way. And it really is leadership not management, in a way.
So we have stability. We have turnover below 10% including the offices -- the offices are about 12%, I think. The branch office system in the big banks can be 50%, 60% turnover. And the number one thing you really want in a private banker is someone that knows you and cares about you. They don't have to be a genius. Some of them are. But they really need to care about you, they need to be smart, they need to know the market, they need to know what you want. But mostly they need to know you and care about you. That's really important. And that is a turnover issue, to a large extent.
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Dave Rochester, Deutsche Bank - Analyst [9]
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Just switching gears to the signs you're seeing in the market. You mentioned previously you've seen some signs of stability in the early coastal housing market. Maybe can you talk a little bit about that with -- ?
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Jim Herbert, First Republic Bank - Chairman & CEO [10]
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I would turn to Michelle, maybe, a little bit here, but the markets are pretty strong here, they're very stable. And upticking, I would say.
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Michelle Celestino, First Republic Bank - Relationship Manager [11]
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Is it on? Okay. So for the last year or so, I would say the market has been somewhat fragmented. Obviously, the very high-priced, high-quality properties have been very good throughout the last couple of years. But what's really started to show some good volume and some price stability is that mid-tier market, which, for us, it sounds odd. But in these high net worth coastal markets, I mean, the $2 million to $5 million purchase price is really starting to show more stability, whereas a year, 18 months ago, I wouldn't have necessarily said that.
The lower end, the starting point, the entry into the housing markets in our chosen markets, have been very good because those price points came down to where it was more obtainable. Obviously, borrowing costs are at historical lows, so with a very fragmented market, and I'm happy to say that over the last couple of months, it's started to show stability in all sectors.
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Jim Herbert, First Republic Bank - Chairman & CEO [12]
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That's true of -- that's the New York region primarily where Michelle operates, but that's true of West Side of LA, it's true of Boston, and it's particularly true in San Francisco for all kinds of reasons. San Francisco is close to hot in terms of housing markets. We haven't done a deal that didn't have multiple bids for several months.
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Dave Rochester, Deutsche Bank - Analyst [13]
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Switching gears again to the recent hiring, the branch expansion plans -- given what you've done, so far, and what you plan to do through the end of this year, how large can the bank grow in terms of assets and assets under management even?
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Jim Herbert, First Republic Bank - Chairman & CEO [14]
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I don't have a clue. The reality is I wouldn't have said we'd be this large. Our main objective is to act and deliver small, no matter how large we get. And it just compounds, and Michelle does a great job for a client today, or Martin does a great job for a client, and they tell their friend of someone like kind, and the next thing we know, we have another new client (technical difficulty).
About 60% to 70% of our growth comes in every year through referrals of happy clients. And so the way compounding works, the larger your client base, the more likely you are to have positive numbers of referrals and it grows.
The market that we grow the most rapidly in is still San Francisco because we have more clients on the ground. But we've reached very much -- reached critical mass from our operating model in New York and Boston, not to mention LA, where we've been for a while. So it just compounds.
Wealth management is a slightly different thing. The referral system works the same, but you have the influence of the markets up and down, the psychology at the moment, and so on. So there's another impact point there.
It impacted our homelending a little bit, but we stayed -- we have not not been lending money for a single day in 27 years, we never go out of the market, ever -- 2008, 2007, we never went out of the market. And that stability is very important to the flow of business. And we try not to do jerky things. We don't move pricing much. We do stuff very calmly, if we can.
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Dave Rochester, Deutsche Bank - Analyst [15]
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You've had some very strong growth rates on the loan side and on the deposit side. The loan pipeline now is at an all-time high.
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Jim Herbert, First Republic Bank - Chairman & CEO [16]
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Yes.
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Dave Rochester, Deutsche Bank - Analyst [17]
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You're ramping up the business side, continuing to do that. There's a very low penetration rate amongst the customer base that can actually use your business products. I would imagine -- I already know what your answer is going to be -- but do you think the strong growth is sustainable?
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Jim Herbert, First Republic Bank - Chairman & CEO [18]
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I do, I do. The business banking growth is -- we now have $9.5 billion of our deposit base, which is about 40%, 35%, in business banking. Five years ago, that percentage was probably 10%. So that growth has been quite extraordinary.
And it comes from the simplest of things -- if you think about the profile of our clients, they are influence-makers, they are decision-makers in both businesses and in nonprofits. And so we have gone from them to their businesses. We have about 10 verticals we've identified. We bank, for instance, 550 venture capital private equity funds. We bank a couple of hundred law firms, we bank 100 to 150 private schools. We have developed verticals. And every private school has got a Board of Directors of 35 to 50 fairly wealthy folks, some of whom already bank with us probably -- it's probably how we got there. And so that the influence center, the power of that influence center is stunning.
So the business banking -- our constraint on business banking has been having good business bankers, and we've added a number recently in all markets. We also have built out the wealth management piece pretty much in all markets now. We have trust everywhere. We've opened the Wilmington Trust office recently. We needed that for the East. We're going to open a deposit office in Palm Beach early in the first quarter of next year, I think. And that's a piece we need for the New England area.
But the model is pretty well fully built everywhere now. So now it's a case of size.
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Dave Rochester, Deutsche Bank - Analyst [19]
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Going back to the wealth management piece, I know you've recently been hiring PMs and whatnot, and that hiring continues. But I saw that profitability in that segment jumped pretty significantly in the first quarter versus last year. I was just wondering what are those dynamics that are driving that? And should we see more of that?
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Jim Herbert, First Republic Bank - Chairman & CEO [20]
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Well, the assets under management have grown, and the FRIM, the First Republic Investment Management assets have grown the most rapidly, and that's our highest yield asset in terms of fee.
The other thing that's happened is it's become about -- wealth management has delivered to us, and we give them some credit for this in our analysis -- about 12% of our deposit base now through sweep accounts and other things. So it's become a substantial and very stable source of deposits for us.
But it's working very well. The market hasn't hurt. Recently, it's not been so great, but in the last 12 months, it's been a lot better than previously, obviously. We've been able to hire as well. We've hired a number of new people -- 30 to 40 in the last two years -- portfolio managers. And we hire -- importantly, we've hired from all different names. So the platform, obviously, can absorb, successfully, people from almost anyplace.
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Dave Rochester, Deutsche Bank - Analyst [21]
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Switching to the margin -- you talked about stability is what you're going for and, certainly, you saw expansion in the last quarter. This quarter, maybe a different story, and part of the last quarter's expansion was investment of cash. Maybe you can talk about those dynamics, going forward, and how you sort of maintain --
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Jim Herbert, First Republic Bank - Chairman & CEO [22]
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Bank margins are under pressure, obviously. We've managed to hold up better than I actually thought we could. It's mostly been a case of growth and employment of cash. One of the ways we developed that very steady net interest margin is we stay hedged. We don't use fancy tools. We don't understand them, so we don't use them. We do term draws from the FHLB, things of that nature. We sell 30-year fixed mortgages, even though their yield is better. And so that has created a continuing flow of cash to be reinvested again.
And we're still in a somewhat cash-heavy position. And then we have capital. We've agreed with the regulators because we're technically de novo. We've agreed with the regulators that we keep an 8% tier 1 leverage, and we're operating at about 9.5%, so we have some growth room. But it's a constant fight.
But the bills get paid by net interest income not NIM. And net interest income comes from -- can come from -- clearly comes from NIM but can also come from growth. But the pressure on homelending pricing is, by far and away, the worst I've ever seen -- any of us have ever seen.
The flip side of that is, to Michelle's comment, it has bumped affordability to staggering levels.
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Dave Rochester, Deutsche Bank - Analyst [23]
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(inaudible) we have about five minutes left.
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Unidentified Audience Member [24]
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I have a question. (inaudible) very, very consistent over time. (inaudible) stability and don't change the pricing. How do you see different macro environments as different demands (inaudible). How do you keep that growth as stable as you have?
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Jim Herbert, First Republic Bank - Chairman & CEO [25]
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You just do a good job every day for the clients, and they bring in new clients. If you think about it, we have about 105,000 relationships in the bank. We'll only grow 10% this year; need 10,000 more.
We have about 500 really front-line people, relationship managers, preferred bankers, portfolio managers, office leaders -- so they've got to get 10, 12 a year -- 15 a year, one a month. We have a lot of people out there saying good things about us. So if you think about it, if you just do the math -- now, it's not easy. We work really hard at it, and the main thing is don't screw up with the clients you now have, because if you start to get negative attrition, you're dead.
If you only grow 10% a year and you're losing 4% of your clients every year because you're not doing a good job, you've got to grow 14%. So the first thing you do is don't lose 4%. The next thing you do is get new.
If you don't lose 4%, you've got attrition down to about 1%, you're doing a really good job, and your clients are talking about it. So they'll get you the new client. You have to ask, we're not passive.
But that's really the way it works. And we don't -- we pay a lot of attention to macro, but we operate day to day with -- we stay with the clients we have, and then we ask them for a referral. And it works.
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Unidentified Audience Member [26]
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On the wealth management piece, is it open architecture and how easy is it to get the wealth management relationship across, given that deeper high net worth individuals with potentially relationships with other wealth managers -- how easy is it to get that across?
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Jim Herbert, First Republic Bank - Chairman & CEO [27]
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It is open architecture. It is open architecture. Glenn, do you want to speak to how easy it is to get across?
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Glenn Degenaars, First Republic Bank - Portfolio Manager [28]
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On the open architecture front, I think it's important to clarify true open architecture versus open architecture with revenue share arrangements. Our platform is full open architecture. We do not enter into revenue share arrangements with any of the managers we use. So when we put forth a manager, it's in the client's best interest. It's not that we're getting paid by that manager.
In terms of cross-selling, I think, again, the service-driven model is what leads to the client coming to us on the wealth management side as well. If the client has a pleasant experience on the closing of the mortgage with Michelle, and let's move the banking business over to Anne and Martin, we're going to get a shot of going in there and presenting the wealth management side.
So we're getting a lot of looks, and we're getting a lot of opportunities to get in there and talk to these folks. I think once we're in there, the platform and the personnel sells itself. So I think the penetration is going to continue to improve as well.
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Jim Herbert, First Republic Bank - Chairman & CEO [29]
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What he just did is exactly how it works. It's a complete team. We have a single point of contact in the bank. If someone comes into Glenn, then Glenn basically quarterbacks them pretty much forever, unless they choose to move, which sometimes happens but very seldom. They may go to Michelle for banking, and actually the banking calls when they come to Michelle, but it's Glenn's source. And our comp program covers that. And so that single point of contact is very important. But they bring in the team members.
And we have an internal open architecture. You can choose any team member you want. If Glenn thinks that the banker that matches up with you might be Michelle, then he calls on Michelle. If he thinks it's Martin, he calls on Martin. So he can align -- so the person that hears best and sees personality best aligns. It's called private banking. It's about people.
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Unidentified Audience Member [30]
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(inaudible question-microphone inaccessible)
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Jim Herbert, First Republic Bank - Chairman & CEO [31]
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No, exactly right, and it's working reasonably well. Last year, about 25% of our loan clients pulled down some wealth management product. Probably one-third of them, at least, weren't at the stage where they really needed that. And since we do a lot of -- we do a lot of LMI sensitive track lending -- about 18% of our units are -- we did $0.75 billion of Fannie and Freddie last year.
We don't take the approach people are born rich, and we finance very young first-time home buyers.
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Michelle Celestino, First Republic Bank - Relationship Manager [32]
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I just wanted to comment on -- in terms of acquiring clients and then selling investment management. I think one of the most successful components of when I sell is increasingly high net worth people are very frustrated with proprietary products. And they've all been told that neither unsuccessfully, and that has become a very frustrating piece, and we do not offer any proprietary product. High net worth people are getting -- paying fees not on the investment management piece but also on the proprietary product piece. So that's been a differentiating factor for me. I just wanted to point that out.
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Jim Herbert, First Republic Bank - Chairman & CEO [33]
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Big one. The objectivity of that is clear to people.
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Unidentified Audience Member [34]
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(inaudible question-microphone inaccessible)
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Jim Herbert, First Republic Bank - Chairman & CEO [35]
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They're jumbos, they're jumbos, yes. The answer is they used to be securitized when there was a security market. Although they're Redwood Trust deals, the two Redwood Trust deals have been done, then about half of our product. We know Redwood very well.
We sell -- we put a package out the other day for bid, and we got nine bids because of the quality of the asset. There's no problems there. We could sell half the portfolio in 48 hours.
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Unidentified Audience Member [36]
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(inaudible question-microphone inaccessible)
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Jim Herbert, First Republic Bank - Chairman & CEO [37]
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We keep servicing, we always keep servicing, because that's a client relationship, and we'll never sell servicing. And actually we have very stringent servicing agreements. You can't pull servicing unless it's fraud, and you can't solicit the client. You cannot talk to the client. It's just an asset, and we've had that for years. We service for about 30 different people, and we keep servicing -- servicing and collection are in the same office building that I'm in. We don't ship it out to Iowa because it's about client relationship. And the people that are servicing the loans have direct contact with the relationship managers or the bankers all the time.
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Dave Rochester, Deutsche Bank - Analyst [38]
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All right, I think that's all the time we have. Thank you very much, Jim.
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Jim Herbert, First Republic Bank - Chairman & CEO [39]
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Thank you all very much.
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