First Republic Bank at J.P. Morgan SMid Cap Conference
Nov 28, 2012 AM EST
FRC - First Republic Bank
First Republic Bank at J.P. Morgan SMid Cap Conference
Nov 28, 2012 / 04:00PM GMT
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Corporate Participants
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* Jim Herbert
First Republic Bank - Chairman and CEO (Founding)
* Mike Selfridge
First Republic Bank - Senior EVP
* Martin Gibson
First Republic Bank - Manager, Preferred Banking
* Ruth Aronowitz
First Republic Bank - Senior Managing Director
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Conference Call Participants
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* Steve Alexopoulos
JPMorgan - Analyst
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Presentation
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Steve Alexopoulos, JPMorgan - Analyst [1]
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Good morning, again, everyone. So next up we have -- and I'm Steve Alexopoulos from JPMorgan; I cover the mid and small cap banks. Next up we have First Republic Bank, headquartered out of San Francisco, spends a lot of time in New York these days, market cap $4.5 billion. From the Company we have Jim Herbert, who is Chairman and CEO, and Founding Member; Mike Selfridge, who joined in February, and we have two relationship managers, is that correct? Do you guys want to introduce --
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Martin Gibson, First Republic Bank - Manager, Preferred Banking [2]
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Hi. I manage Preferred Banking for New York. I'm Martin Gibson.
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [3]
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Yes, Martin Gibson. Okay.
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Steve Alexopoulos, JPMorgan - Analyst [4]
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Okay.
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Ruth Aronowitz, First Republic Bank - Senior Managing Director [5]
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I'm Ruth Aronowitz, Relationship Manager in New York.
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Steve Alexopoulos, JPMorgan - Analyst [6]
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Okay. Glad to have you here today. Just -- Jim's going to go into the story on First Republic, you are the 24th largest bank by size in the US. I like to think of you as the second-fastest growing bank in the US. And one thing we always look at is how has the model made money for shareholders. At the end of the day that's why everybody is sitting in the room and this is a track record, right, between selling to Merrill for 50% premium to market, buying the Company back at a discount to fair value, can't really beat that.
So with that, I'll turn it over to you, Jim and the team.
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [7]
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Okay, thank you. Thank you, Steve, very much. Let me come up here, so I can run the clicker. But we'll go through the slides here fairly quickly and then open up for questions. And importantly we have Ruth and Martin here. Mike and I are going to go back and forth on the slides. But we have Ruth and Martin here to answer questions about how we actually do the business. So we'll talk to the numbers and then they can explain where the numbers actually come from.
So, very briefly, First Republic is actually more of a culture of service than it is a bank that happens to be the business we're in. It's about very low turnover, very high quality people connecting with clients, taking in clients at the higher net worth range but not super-high, really, and we'll come to that in a minute, and then taking very good care of them. We sell nine products to every home loan client for instance. Most banks would be in the three to four category. We have very low client attrition, very low turnover of our people and of clients, and I think they're directly related actually.
Size wise we're $33 billion, deposits of $26 billion, I don't need to read the slide to you. Our capital is very strong. We started the Bank with 10 people in 1985 in San Francisco. That's still our home market and we have about 2,000 people today and we are in San Francisco, we're urban coastal, San Francisco, Los Angeles, Santa Barbara, Orange County, San Diego, Boston and New York. We're very focused on markets and we're very focused on niche within the markets.
The fundamentals, it's been a strong leadership continuity. Katherine August-deWilde, who is not here today, is President and Chief Operating Officer. She and I've been together 27 years, pretty much since the start of the Bank. I had started a bank in 1980 prior to this one, sold it in 1984 and started this in 1985, and then the first bank stumbled into jumbo home lending, which is our core product. It's a very simple business model, attractive geographic markets, attractive client segments.
Our core competences are two things, really, credit and service, and we'll get to the credit record here in a minute. Last 12 months growth, just to give you an example, Steven talked about growth. We have grown at about 18% to 20%, 22% for a very long time compounded for many years.
We also have a wealth management business. It has approximately $24 billion in assets at this time. We have announced an acquisition of Luminous, which is about a $5.5 billion manager, so end of year we'll be $30 billion to $31 billion in wealth management assets. That complements our core banking business, which is affluent banking and it really is where our more junior clients and all the way along the line aspire to be, which is in the wealth management trust area of our Bank.
The model is very simple, we have a client-centric model. Martin and Ruth both represent that, each represent that. They are the Relationship Manager that surrounds the client and delivers to the client whichever part of the Bank the client needs. It's an old fashioned simple model that actually works, but the devil is in the execution. And it's in their ability to understand the client, read them, high EQ, understanding of what they need and then delivering the piece of the Bank that they need, but staying engaged.
And their clients would tell you that they are their banker. They don't bank with First Republic, they bank with them. And they get the delivery of everything that First Republic has. It's a very simple straightforward business model, we don't engage in a lot of stuff. This is a list of what we don't do. I won't dwell on it, but it's very, very old fashioned in a way.
This is how we market. This takes less than a minute, better than me anyway. (video playing). Basically, when you have service, really the only way you can -- everybody says they have good service, many do. But the only way you can really prove is testimonials. We've taken the testimonial approach to life over the years, we probably have some interim reports out here somewhere in the room and we use it in our Annual Reports as well. Let me turn over to Mike for a minute.
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Mike Selfridge, First Republic Bank - Senior EVP [8]
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Thank you, Jim. I'm going to couple -- let's see here. I'll cover a few broad things here, one is just the market opportunity. Second piece, I want to talk a little bit about our clients. And third, I'll get into a specific region, that being Silicon Valley. And then lastly, I will touch on business banking, which has been a growing part of our business over 10 years and more recently within the last few years has been exceptional.
So if you look at what we're pursuing here, Jim mentioned urban coastal, metro, and we like to think of the market as going after the affluent households and selectively the businesses that they are affiliated with. So if you look at the markets we're in, in total about 20% of all US households are in our First Republic markets. And yet 53% of all affluent households, those, as we define, being $1 million in investable assets or greater are within our footprint.
And so in terms of the total market share, some of you have seen these slides before, we have about 4.3% market share of the affluent households, plenty of upside. And specifically I'll look at just a few markets here, there are about two markets we're not looking at, these are the most sizable markets.
We've been in the San Francisco Bay Area the longest, we have the largest footprint there. So of the 160,000 affluent households in the Bay Area, we have roughly 15.6% market share. Again, plenty of upside in terms of market opportunity. Boston and New York, New York would actually be the largest market for us, market share 1.2%, plenty of upside.
Many of you've asked about these numbers. We -- and when the latest version of these numbers will come out, we use a firm called Cap Gemini. These are a few years dated, we're refreshing those, we'll have those available shortly. I think you'll find the results to be interesting. I think what you'll see is validation of increase in our households. But further validation of the markets we're in, very good growth in the markets that we serve, and particularly in the larger ultra high net worth market, we've done very well.
As Jim mentioned, just doing what we've been doing has allowed us to grow organically at a very nice rate. If you look at both loans and deposits, 22% for each category over the last 10 years.
I mentioned I want to talk briefly about Silicon Valley. This is about roughly a third of our offices within the Silicon Valley region. It also represents about a third of our loans and a third of our deposits. And again we're seeing on the loan and deposit side, 16% and 18%, respectively, our growth rate over the last three years.
We've been able to do a very good job on the business banking front, particularly with the venture capital and private equity firms. And as you know, the Silicon Valley region right now is experiencing quite considerable growth based on the innovation sector that's leading to wealth creation, and if you look at the real estate market where we have a nice presence and some loan exposure, prices are doing well, inventories are decreasing, multiple bids are quite frequent.
In terms of the balance sheet loan diversification, both by product and geography, about 60% of what we do is single family mortgages. That's an important strategy, I think, Jim touched on in terms of jumbo mortgages being the hook that leads to other business for us, be it wealth management, be it business banking.
Business banking, about 8% of our total loans and the rest you can see on the chart here. Geographically, 51% of the loans are out of the Silicon Valley region or Bay area, although a quarter of the Bank is now in the Boston and New York regions and we look forward to continuing to grow those markets.
And looking at our client, I guess I would step back here and just note a few things. We are attracting what we think are the best clients in our markets. And so from a credit perspective, the average loan size roughly $720,000, the median -- sorry, the median loan size $720,000. The median net worth about four times that and the median liquidity of that client is about 90% of the loan amount.
Strong credit. We have, as Jim mentioned, one of our core competencies being credit in the way we underwrite. Every loan is fully documented, fully underwritten, very reasonable loan to value, and as I'll show you, this has served us very well over time. We've originated since inception about $85 billion worth of loans, roughly two thirds of that has been in the single family residential market. Cumulative net charge-offs on the entire $85 billion, 19 basis points in terms of net charge-offs. And of the $56 billion, $57 billion originated in the single family residential market, 5 basis points in cumulative net charge-offs.
And just looking at the last 10 years, this is a comparison of our net charge-off track record compared to the top 50 banks in the United States. We've had roughly 10 basis points per year on average in net charge-offs. The industry average for the top 50 would be roughly 49 basis points. I look at that as a credit cost we don't incur. So if we were right on par with other banks, that would be about $140 million in credit costs not incurred by First Republic Bank.
Lastly, as I mentioned, business banking has increasingly become an important part of the overall First Republic franchise. Loans about $2.2 billion. Those would be fairly concentrated in investment service firms, professional services, venture capital and private equity, and non-profit and non-profit school lending. Those categories would roughly make up about two thirds of the business banking loan outstanding portfolio.
But more importantly here is the deposit inflows. It allows us to diversify the deposit base. We get about $5 in deposits for every dollar we put out in terms of loan outstandings to a business banking client and business banking, as you'll see, I'll hand this back over to Jim, is now about 46% of our total deposit base. And we've seen tremendous growth in this area.
Again, going to the strategy we're linking or leading with the jumbo mortgage and often that might be, for example, a General Partner at a firm that then makes an introduction to the firm to go ahead and bank the firm with various products and services we have. Might be a board member on a non-profit school and again making an introduction. So that word of mouth that Jim described really comes into play and creates nice synergies with the business bank and the private bank.
Jim, I will hand it back to you.
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [9]
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Deposit franchise is very core. Those of you who follow banking, and I realize this is not a financial services conference. So, but this is really the business, lending is interesting. But the core franchise, the brand value is in the deposits. We have a very nice split now between business and consumer deposits and then we have two or three different channels.
We have offices, we have the preferred banking channel, which Martin runs and founded here in New York, for instance, and then we have wealth management sweep accounts that are coming out of the wealth management piece, which is growing rather nicely. And then business deposits are almost half our deposits. That's important because they are the cheapest deposits. The services you have to render are sophisticated, but their average size is large in terms of accounts.
Deposit mix over time has improved. We've managed to bring our CDs down, checking up. That's the direction we want to go. That's been driven largely by the growth in business banking, which is very favorable. Offices, they're out of date, people don't need them, they never go in, not right. I was with someone this morning at breakfast and he pointed out to me that a competitor of ours has come to town. And I said, well, what do you mean? They've been here for a decade. He said, I just saw them the other day. They opened -- they are opening two retail offices, it's called branding. He didn't know they've been here for a decade before, which is interesting.
Scalable business model, we think we have a very good model, it's working well, yet we can run our efficiency ratio, cost -- operating cost ratio in the sort of 58% to 62% range. That's a solid ratio. It's actually lower than many competitors right now. But it's a high touch service business and it has limitations on how inexpensively it can be operated. You get in return stickiness and rapid growth.
Our people -- and here is the underlying efficiency question, how many assets are your people handling? And ours are handling about 2.5 times the banking average. So it's very efficient and our profits pre-tax per person are also about 2.5 times the industry average. The reason for that is average relationship is large and clean and we have very good people.
Private wealth management has grown nicely. We were inside of Merrill Lynch and BofA for a while. They were not overly interested in having our wealth management grow. So that was a quiet period as well as the market conditions, but it's really gotten under control in the last 24 months and is doing very well. And we've added Luminous recently, which will be a good acquisition we can talk about in a minute.
Core earnings, this is really the issue and the reason we emphasize core is we did, as Steve mentioned, we did a buyback from the Bank of America-Merrill and that had had some positive GAAP accounting, purchase accounting gains in it. So we tend to ignore those. They will come into income over time, come into book value over time, over about five years, about three more to go, three to four to go. So we look at core and our objective is to increase core net interest income and, as a result, core net income and earnings per share quarter-after-quarter if we can.
Our objective in the business is to be a steady Eddie, highly-predictable rapidly-growing enterprise, with a predictable return in the 10% to 12%, 10% to 13% ROE basis core, in a 1% world, higher rates and higher returns probably.
Net interest margin is very stable. We work extremely hard at this. We stay carefully matched. This goes back more than almost 12 years now. We've managed to stay quite steady through ups and downs. We spend a lot of time on asset liability matching. We're under some NIM pressure now, everybody is. So far we've held up, but that's getting harder.
Rapid book value, the endgame in banking, as in most enterprises actually, but in banking, in particular, is book value per share. We're accreting ours at 15%, 16% or better. And that's where the purchase accounting will show up rather nicely.
Enterprise value, we've done well for shareholders. We've spent a lot of time on this. We are big shareholders, so we care a lot and it's worked out quite well for people from beginning of time, but even from the two big intervals from start-up to sell to Merrill and then subsequent to coming out and going public.
Private equity ownership, we were private equity backed when we came out and as a result, we had a high private equity almost entirely, except for management, and that has come down very nicely. We worked hard at it. We've created considerable liquidity and there are basically at about 27% down from the mid-70%s. So, that's worked out well.
I won't bother you with this. This is stress test. We've done stress test voluntarily. The reason we did that was we're a pretty good size, they're not required of us for a couple more years yet probably, but we have clients who know what they're doing. They know how to read a balance sheet. So we basically undertook stress test to give them the comfort of where we stood. We came out where we thought we would at the top of the pile basically of those who did stress test, and that's very helpful in our larger deposit base.
So maybe with that, let me open up for questions. Steve?
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Questions and Answers
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Steve Alexopoulos, JPMorgan - Analyst [1]
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Yes, maybe I'll start off, if I get my microphone working, there we go, and then we'll open it up to the audience. So, Jim, I mean, you guys have focused on private banking high net worth since inception; that was the idea of the Bank. It's funny when you listen to the larger banks and even mid-sized banks now post Dodd-Frank, where they've lost a tremendous amount of fees from retail clients, you're hearing private banking is our new growth area, high net worth is our focus.
So I'm curious from your view and also maybe from, Ruth, your view as a Relationship Manager, are you seeing more competition yet for your client? Are other firms coming after your people? I don't know, Ruth, if you want to comment, if recruiters are calling you, but are you seeing more of that?
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [2]
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Go ahead. Being bashful by nature, you can go ahead.
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Ruth Aronowitz, First Republic Bank - Senior Managing Director [3]
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On the client front, I don't see that we're getting more competition. I think we've always had competition in New York City. I think it gets down to what we can deliver, how quickly we can deliver it and it's the reputation. I mean, since most of my new clients come from my existing client base, they're coming to me, because they already have a recommendation. So I don't have to even worry about that part of it. They know we can get that mortgage done quickly, seamlessly, easily and they'll be done and they can move on.
So competition from other institutions, occasionally you will find people who are very rate sensitive, so you'll always find that, but since we're relationship-based, as long as we can do enough with the client, we're not going to lose a deal with a client that we want to bank over 5 basis points; that's just not going to happen.
And your other question--?
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Steve Alexopoulos, JPMorgan - Analyst [4]
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In terms of firms coming after? Yes.
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Ruth Aronowitz, First Republic Bank - Senior Managing Director [5]
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Yes, the phone rings occasionally, but no interest.
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Steve Alexopoulos, JPMorgan - Analyst [6]
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Martin, from your point of view, I want to come to this chart in a second, but, Martin, from your point of view, same question.
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Martin Gibson, First Republic Bank - Manager, Preferred Banking [7]
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I would agree. I think from the relationship perspective on the client side, that's where we really shine. So, I think we do have competition across the board and occasionally it comes up in rate on the deposit side or on the loan side. But at the end of the day, we're very honest to say we may not be the cheapest on everything or we may not have the highest rates in everything, but when you look at the whole package and you look at the service that's delivered, we think it's worth it and I think even if we do have a client who may try another bank, they end up coming back.
So even deals where we may have lost here or there from a rate perspective, we find that they tend to come back, because they didn't get quite what they were looking for. So I think the service really wins out on that. On the employee side, I have a team of 13 people that work with me as kind of the deposit experts for the relationship manager universe. And the phone definitely rings.
I think from our kind of level of employee and career growth and career path, that is a very attractive part of First Republic. They know that we do look internally for promotions or lateral moves or when we're opening a new office or something like that. So I think there's tremendous career growth potential. I think we're also given performance-based pay in our jobs where we may not have been at larger institutions, so you really do feel like you're sharing in the growth of the Bank. So the incentives are there at the banks, so it's not an attractive place to look elsewhere or when that phone rings I don't think it really offers the same kind of whole picture.
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [8]
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Our turnover, as a result, really is quite low and we don't take it for granted, we work hard at it. But our job is to -- at the senior level is to set the strategy right, but to create a good place to work.
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Steve Alexopoulos, JPMorgan - Analyst [9]
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Yes.
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [10]
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An exciting place to work. And if you think about it, one of the most important definitions of a good personal banker is someone that knows you. That's really the starting point. Someone you can trust, someone who cares about you and who will take your call immediately and come back to you with a how are you doing, what can I do for you, how is that house up in Greenwich going or did you buy the place out on -- the familiarity. Turnover in private banking is the worst possible thing and some of our competitors are known for high turnover.
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Steve Alexopoulos, JPMorgan - Analyst [11]
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Yes [Stephanie].
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Questions and Answers
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Unidentified Audience Member [1]
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Hi. You mentioned jumbo mortgage being the hook that really attracts the high net worth client, but given the tremendous growth you've had on the business banking side as well as the wealth management side, are you seeing that hook evolve? Have you seen new customers coming through these other channels?
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [2]
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Mike, you want to take that?
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Mike Selfridge, First Republic Bank - Senior EVP [3]
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Yes, I'll answer that. The answer to your question quite simply is yes. So it's interesting, and as Steve mentioned, I joined about eight months ago, coming from another organization where I was 18 years. One thing -- I'll get to two points I want to make, because you can't underscore enough the cultural piece and what makes this Bank work.
I'll give you an example of a client that we did a jumbo mortgage for seven years ago. For some reason seven years went by and, in this gentleman's mind, he remembered what the Bank did for him at a very critical time. He was an upcoming professional that one day would run a very well known venture capital firm.
And as of today, we'll now win the business for that venture capital firm. So these things germinate over time, but it clearly works and there's something different about a jumbo mortgage, in our opinion, that is much more personal than a business, but when you make that personal connection, it works. And then from there, we're very -- also I should underscore very selective in the types of businesses we're going after, generally professional, I mentioned venture capital, private equity.
But it's that personal connection that transcends over to the business side and that's where we're starting to see a real nice flywheel effect going on with the business banking front.
But having said that, that exceptional service works and it works on both sides. And then as you develop a relationship and get deeper with that relationship, people open up to you. They open up their finances, they open up their wealth management, they trust the organization and trust has a lot to do with it, which goes back a little bit to your question on competition, what we see in the West is quite a bit of competition and we think that will get more significant over time.
However, having said that, I think what Jim and Katherine have built culturally can't be underscored enough, giving people the ability to make decisions, being empowered to make decisions. KYC, or know your customer regulations that many banks may struggle with, that's in our DNA. We've been doing that since inception and that's what people want. So the cultural element of being able to deliver service works, and so that's working very well on all segments and all fronts.
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [4]
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To take this -- the chart I have up for a second, this looks like a business school chart or something, I'm sorry about that, but it's really the essence of the enterprise. The top box is about 80% of the source of the growth. Why do we grow at 20% a year and the industry grows at 5%, maybe or 4%?
The difference is two things. Fundamentally, our clients are the outperformers in their areas, generally speaking. If the San Francisco proper nine counties is growing at 3%, our clients are growing at 6% or 7%. That's where they are. And so we outgrow this.
So if we had a Bay Area wide banking franchise growing -- it would grow at 3% plus a bit of market share take, whereas ours will grow at 6% or 7% intrinsically. Then we do a lot of things with those clients. So they have a lot of opportunities to like us. They get passionate about it and they tell their like kind friend, and that's what Ruth is talking about in terms of leads or Martin talking about in terms of leads. And then they come in. That's it, that's 60%, 70%, 80% of our growth, 70% minimum. The rest is hire new relationship managers, hire new portfolio managers, they bring clients with them, open new offices, focus marketing. So it's not a difficult strategy, but it's 100% execution.
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Steve Alexopoulos, JPMorgan - Analyst [5]
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Jim, when we listen to other banks, not the large banks, but smaller banks, mid-sized, you listen to them and what they say is not that dissimilar to you, we have people on the market, we focus on service, like we pretty much hear the same thing over and over. But the difference is the numbers, right? Their numbers, you look at them and they grew loans 2% over the past year and you're like, oh wow. You guys, it's 10 times.
Is it that they don't deliver the service that they're talking about like there's something in the market that's happening that's definitely what we're hearing, right, to the investor community? What is it?
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [6]
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Yeah. I think it's a couple or three things. Number one, it's the intensity of our focus. We are after A and B and that's it. And we don't get distracted with C through Z. And that is a certain type of client, it's a certain type of need. I've got five calls, one of them I know wants to buy that house today and they're new and they were referred by Harry, my good client, that's where I'm going. The other four are going to wait.
So it's the intensity of the focus and we teach this and quite frankly it's intrinsic in the people we hire. The bankers we hire on the average have about 15 years of experience before they get to us. So we know who they are when they come. And we hire -- we grow inside, but as you're growing you're growing.
The other thing is markets. You can have exactly this model in Wichita. You're not going to grow at 20%. And then back to this top line, on this page, once you establish this client base, they will outgrow for you. There's also something on no page anywhere called attrition. If you want to grow at 10% a year and you have attrition of 5% a year on your client base you're going to grow 15%.
So the most important client is the client you already have, keeping them happy, not losing them or you're not paying attention. Because it is -- if you look -- if that's going on it's a disaster, number one, they're gone. Number two, they're telling people you're terrible, they left. So keeping the clients you have is fundamental to the enterprise. And then in the process of keeping them they tell a friend because they're happy. So it's all very reinforcing.
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Mike Selfridge, First Republic Bank - Senior EVP [7]
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I'd just add one point to that, Jim, and that's the slide, I think, previous with the relationship management model, the single point of contact. And I'm not sure if you're hearing that quite a bit, but from what I've seen with the way other banks are structured, you're small, you're medium, you're large. And if you're small, you get this channel of delivery, and if you're medium, you get this one, and if you're large, you get this one. And each step along the way you get somebody new.
And back to turnover, that person may leave, they may get promoted, there's a new person yet again. So the churn of the relationship manager is quite significant as compared to what I see here. This works. Somebody stays with Ruth forever.
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [8]
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I'd actually add a financial piece to this, which we don't generally talk about, but since you asked the question so pointedly. We don't -- have no constraints of capital. Our legal limit is $600 million or $700 million on a transaction, we never use it. Everything we do is well within that. I mean, it's down in the $150 million or below. But there is not a client -- somebody wants a $20 million home loan on a $40 million house, done. No problem. And a lot of the community banks that are particularly good at providing similar service don't have that checkbook.
So we're operating, we stay -- quite on purpose, we try to operate inside -- well inside our comfort zone so that we don't get -- we're not going to -- we know who we can't deal with. The really big real estate fund that needs $200 million on this building, that's not our client and we tell them so right away. You need $50 million, that's another matter.
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Steve Alexopoulos, JPMorgan - Analyst [9]
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Jim, in terms of just focusing on A and B and not the rest of the alphabet, you are focusing on wealth management now, more than you had before you had initially sold to Merrill, right. This is the first time I remember you doing an acquisition, which is in the wealth management space. Can you give us a sense, where is this going? Is that -- I mean to the previous point, is this a new area to get high net worth, is this to cross-sell into your existing high net worth? Who is in that area and where are you going with that?
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [10]
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This is the second acquisition in 20 years, or maybe the third, I guess, and we just don't do acquisitions.
These folks are particularly good and they have a complete geographic overlay with us, Century City, Palo Alto dead on. They are going to move into our quarters actually over the next six months and they have a profile, client profile that is dead on us. In fact we overlap on a number and they don't provide banking to them, so they want that as an additional -- as an additional thing. That's already working quite well actually. They also have a very good alternative product platform that has been developed that we have one as well, but theirs is additive to us.
So I think it should work and we do not have enough wealth managers to service all the banking piece, all the banking clients we have because we came to wealth management behind banking, about 20 years into our banking business did we get to wealth management. And so we actually need more interface time, interface capacity to -- for Ruth or Martin to be able to mine entirely what we already have in the Bank in terms of wealth management. Not just -- we need numbers, but we also need range of personalities because wealth management is very personal. And I think they bring that.
Wealth management is a very rapidly growing part of the business. If you just add up where we are now and Luminous, you get to $31 billion. We started the year at $20 billion. So, it's a 50% plus growth. It's a good business. The money market piece of it is not profitable now, but the rest is.
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Steve Alexopoulos, JPMorgan - Analyst [11]
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If we look at City National, I think they are 17% of revenues from wealth management and you are 6% or so today. Is it realistic could you ever get anywhere in that zip code in terms of contribution to revenue?
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [12]
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The problem is outgrowing the Bank's growth. If the Bank grew at this rate that City National is growing at, we would get there. But it grows at twice that rate. So actually outrunning our Bank is the challenge. Money -- the revenues from our wealth management piece are actually going up very nicely, but they don't outrun the Bank. So, the percentage relationship is likely to stay a bit the same, maybe accelerate a little bit, thanks to Luminous and a few other things. But I think it's hard. It's a nice problem.
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Steve Alexopoulos, JPMorgan - Analyst [13]
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Yeah. One of the things I want to add on, now we only have a few minutes left, everybody is talking about the fiscal cliff and obviously taxes are part of that. Buffett was on this morning again, beating the drum of him paying less than his secretary, so tax rates need to go up on the wealthy, which is your segment, right? When you think about what looks like it's going to happen in 2013, how does that impact the behavior of your clients? Do they move business overseas, like -- how are you thinking about this playing out?
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [14]
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I think two fundamental aspects, number one -- or three. They are going to have a little less, they are going to have a little less liquidity because they are going to pay more taxes. They are going to need more advice, strategies get more complicated. And number three, I have complete confidence that Wall Street and we and others will develop products that deal with this.
And number four, real estate is a very important part of the answer, investing in and owning real estate. And we are seeing that move already. The other one I would add by the way is, in California at least, a whole bunch of folks are looking at Wyoming and Nevada and actually we have already financed homes in tax free states in the last 30 days. California is going to be a little disappointed in their net revenues.
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Steve Alexopoulos, JPMorgan - Analyst [15]
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In terms of New York, I mean you're 1% share. I think when you launched in San Francisco you thought you could get to 2% to 3%, you are at 16%, right. How do you think about market share in New York? Is 2% to 3% again the target and you will get there in a couple of years?
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [16]
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Martin, Ruth, how're we doing?
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Ruth Aronowitz, First Republic Bank - Senior Managing Director [17]
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I think we are growing every day. We are adding clients all the time. And I think there's a lot we can do.
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Martin Gibson, First Republic Bank - Manager, Preferred Banking [18]
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I think we've been really focused on increasing the share of households over the last couple of years and so kind of back to the hook question, one newer hook that I've found to be exciting is this partner loan program that we are doing with some of the financial service law firms, CPA firms where we can provide a loan to the individuals within that company and that has increased our share of households dramatically. And it's with that, what I kind of call the up and coming generation, those that are going to need their first mortgage, going to get married, going to have children, going to need wealth management and planning going forward.
So those people typically aren't entrenched somewhere at the onset, so when you give someone their first loan, or you get in with them early, I find that they stay pretty true to you going forward. So, I think those types of things we're all thinking about and trying to figure out how to continue to grow that share of households, because there is a lot of opportunity in New York, but I think we are focused on what are the best ways to do that in our targeted areas.
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [19]
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Our market share is up a bit here.
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Mike Selfridge, First Republic Bank - Senior EVP [20]
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I was going to add one point to Martin's comment just in terms of, there is only so many of us and so many branches in New York and almost a half million high net worth households, lots of opportunity. We'll do well over time we think.
But to your question about tax changes, the partner loan program that Martin just mentioned has been a real nice opportunity for us to be strategic and grab a few hundred households with one program.
And because of tax law changes, we actually may see more business out of this, folks that used to defer fees and put it into funds will now see long-term capital gains taxed at ordinary income rates. There's no incentive to defer fees. What do they do? They look to a bank like us to provide these kind of programs. So interesting that out of the changes that are coming down the pike, with the economy, fiscal cliff, tax law changes, we will see some opportunities out of those.
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [21]
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And the impact so far has been increased liquidity and increased transactions, people moving quickly, but that's in anticipation. After the fact, I don't know.
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Steve Alexopoulos, JPMorgan - Analyst [22]
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Right. Well, we've seen dividend recaps have been, and you have pretty sizable BCPs, so I'd imagine that's some at least near-term opportunity.
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [23]
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There is a lot of near-term opportunity, longer term is going to await the details of whatever they do. I have a lot of faith that the entire United States will and all the professionals will respond interestingly to whatever they do.
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Steve Alexopoulos, JPMorgan - Analyst [24]
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All right. I think we are out of time. Thanks a lot. I appreciate it.
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Jim Herbert, First Republic Bank - Chairman and CEO (Founding) [25]
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Thank you all very much. Thank you.
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