First Republic Bank at Bank of America Merrill Lynch Banking & Financial Services Conference
Nov 12, 2013 AM EST
FRC - First Republic Bank
First Republic Bank at Bank of America Merrill Lynch Banking & Financial Services Conference
Nov 12, 2013 / 04:20PM GMT
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Corporate Participants
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* Jim Herbert
First Republic Bank - Chairman, CEO & Board Member
* Mike Selfridge
First Republic Bank - SEVP & Deputy COO
* Michelle Feldstein
First Republic Bank - Representative
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Conference Call Participants
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* Leanne Erika Penala
BofA Merrill Lynch - Analyst
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Presentation
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Leanne Erika Penala, BofA Merrill Lynch - Analyst [1]
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First Republic Bank. One of the most appealing organic growth stories in the space, First Republic Bank, as most of you know, is headquartered in San Francisco with over $40 billion in assets and focuses on serving high net worth customers in key urban coastal cities on both coasts. And, as most of you already know, First Republic is one of those rare franchises that they both achieve a high-level of growth while maintaining pristine credit over different credit cycles.
And with that, it's always my pleasure to have with us and introduce Chairman and Chief Executive Officer Jim Herbert, and with him also today presenting is Senior EVP and Deputy COO, Mike Selfridge.
So with that, I will cede the stage to Jim.
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [2]
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Thank you all very much and good morning. There are some seats up front if you want to take them.
We are going to go through a quick presentation, but then we will open up for questions. I know that's really probably almost more viable to you. Mike and I will go back and forth a little bit. Let me just quickly start if I could, though, by introducing who's here with us, and actually, maybe if I ask, if you could introduce yourselves a little bit.
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Unidentified Company Representative [3]
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(inaudible). I manage the corporate banking group for the New York region.
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Unidentified Company Representative [4]
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My name is Scott (inaudible). I'm the regional managing Director for our Boston business.
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [5]
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And how long have you been with us?
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Unidentified Company Representative [6]
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A little over 13 years for me.
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Unidentified Company Representative [7]
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20 years for me this past August.
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [8]
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Mollie?
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Unidentified Company Representative [9]
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Mollie Richardson 10 years (inaudible).
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Unidentified Company Representative [10]
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Paul (inaudible), 6.5 years (inaudible).
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [11]
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And the purpose of having them here is to be able to answer questions to people that are on the street every day, so we'll open up for that in a minute. Mike Selfridge has been with us about two years now.
We've been profitable since we started the bank since 1985. Basically the numbers are fairly straightforward. We are about $41 billion today. Wealth management has come along very nicely. We started it about 10 or 12 years ago now. It has really come into its own in the last 3 to 4 years since we pretty much bought ourselves back from BofA.
Nonperforming assets, credit is a strong story, 13 basis points of delinquency, and we run a Tier 1 leverage of about 9.15, and thanks to the help from BofA, among others, at leading a deal, we did another preferred recently. So that number is today about 9.5.
We've originated $14 billion so far this year. The story of First Republic is an organic growth story, high touch service. That's the essence of the enterprise. The bank runs on -- I think of it as running on two words basically, care and trust. We care for the clients, and we deliver that kind of caring service that you would want to have yourself, and we trust our people to do that. And they have a great deal of variability and flexibility in terms of how they do that. We have lots of styles, but they all come from the same place of quality and integrity. And it works. It's a high touch model that is built around a service culture.
Third quarter was strong. Loan balances grew. Deposits grew very nicely. Wealth management was up, so we had a lot of good growth. The things that are affecting us are affecting everybody. Margin pressure is on. The competition for good jumbo home loans, which is our core product, the way we attract most clients first time, is ferocious, and I enjoy remembering when we had to explain jumbos to the world and they thought we were crazy. That was a while ago now.
The model that we have is simple. We are built around the client, and the folks that are here can speak to that in a moment. This is some of our marketing. Just give this a second.
(video playing)
We have for years had a testimonial approach because service is hard to prove, and really the only proof point is testimonial.
How do we grow? The top box is the one that is the most overlooked. The second piece of it is self-evident. The first piece you need to think about a bit. Generally speaking, the clients we already banked are the most rapidly growing members of the economic society in which they operate. They are the highly educated A types operating in coastal, highly intense urban markets. If San Francisco is growing at 3%, our clients are probably growing at 6% or 7% in terms of their economic well-being and their networks. And so you have an intrinsic growth rate varied inside the client base.
Then what you have is word-of-mouth referral from very satisfied, fairly complicated clients in many cases to like kind. That's it. That's 70% to 80% of the business. The other 20% comes from opening new offices, hiring new people, targeted marketing.
Our geographic areas outperform generally. We have in the back of the small books, if we've given them out here -- I think we have -- the breakdown by market of this economic index that we've asked Ken Rosen to do at Rosen Consulting for us on our markets. But generally speaking, our markets have held up better and recovered faster. It's not a surprise, I think, to anybody here.
The Boston -- San Francisco is doing extremely well, we can speak to that. New York is doing well. Those are the two largest markets we have. West side of LA is doing very well. Boston, all four of them core markets that we entered doing well and have recovered more rapidly.
We are in -- we have high net worth concentration in these markets. We've done a study several years in a row, I think, 5 or 6 times now with Capgemini. We do it every other year, and basically we focus on their metric, which is households that have $1 million of liquidity or more. 55% of all such households live in our markets. We don't need to go anywhere else. 20% of the total households live in those markets, 21%, so it's target rich.
The numbers are by market interesting. New York is basically larger than the others almost put together. So the biggest opportunity for us is clearly right here. We have a small percentage of the market. It is growing. These are 2 year, 2.5-year-old numbers right now. So we are up considerably from those numbers, and we're making good progress.
If you drill down into wealthier households inside of subsets of these households, you'll get even better numbers.
Our position is growing. I'll skip over that. Mike, you want to talk about the overall growth?
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Mike Selfridge, First Republic Bank - SEVP & Deputy COO [12]
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Good morning. I'd like to talk about a few things. One, just the growth in general for the franchise. I'd like to touch a little bit on business banking, which is an important and continuing growing segment for us, the deposit franchise and then also the wealth management franchise.
So just to reiterate a little bit about what Jim said, the relationship model, the deep markets with headroom and the cross-sell opportunities have allowed us to grow organically and do that quite consistently. So in this slide, you'll see quite consistent growth in terms of loans and deposits over a period of time.
Despite current trends in the secondary market and with the gain on sales margins reverting a little bit back toward the mean, we're still very active in the secondary market. This actually allows us to manage the balance sheet in a way that we can sell our longer-term fixed rate loans, and the important point here really is that we maintain the relationship for all the loans we've sold. We've been doing this since 1985. We've originated about $104 billion since inception and sold about $20 billion of that to the secondary market, but in just about every instance, we maintain that relationship that allows us to keep a affluent household and also cross-sell other parts of the franchise.
Silicon Valley where I spend a lot of my time, this is looking at Silicon Valley proper. The nine counties of the Bay Area actually represent about 50%, 52% of the bank. A couple of points here.
One, this is a market or markets we've been in the longest. Two, we've, since divestiture, been building the Bay Area in a way that allowed us to invest in relationship managers, wealth managers and business bankers, and those folks are very much producing for the organization.
Layered on top of that is an extraordinary economic opportunity in the Silicon Valley. So quite a bit of wealth creation going on there, job growth and, of course, the very strong real estate market.
We bank over 200 venture capital private equity investment management firms in Silicon Valley, and it's about 1/3 to 35% of our deposit franchise. So, very good momentum there.
Balance sheet loans. We are 59% in single-family mortgages. We've been able to diversify a little bit more by loan type. The single-family is still the lead product for us that brings in the relationship and allows us to cross-sell other opportunities with the bank. Interestingly, 47% of our originations last quarter came out of non-single-family residential. So we continue to diversify by type and also by geography. Most importantly, about 1/4 of the bank is now in New York and Boston, and we will allow Martin and Scott to talk a little bit more about the opportunities on the East Coast.
We have very attractive home loan clients as you'd expect from an affluent client base. We underwrite to fully document our loans. We always have. Our clients tend to have liquidity. We conservatively write to underwrite low loan to values, and the medium net worth of our clients tends to be about 3 times the average loan amount.
Jim touched on credit quality. I would say this is a tenet of First Republic Bank and very much a part of our culture. We do good business, and we've done that since inception. So out of $104 billion in originations, we've had a cumulative net charge-off ratio of 17 basis points, and that's been 5 basis points on $67 billion in originations on the single-family mortgage front.
In comparison to the top 50 banks, we over a 10-year period have had a 9 basis point chargeoff. Other institutions in the top 50 would be about 5 times that.
I mentioned business banking. We've been at business banking for a little over 11 years. If you look at the compounding effect of the last seven years on the organization, it's been quite significant. We do a few things. One, we hire teams that have expertise in about eight or nine verticals. The majority of our opportunities tend to be in the private equity and venture capital, as well as the schools and nonprofit business. But the value to the franchise in terms of deposit growth here has been extraordinary. So we've 26% compounded annual growth rate in deposits over the last seven years.
This has brought in about $4.5, $4.6 in deposits for every loan outstanding that we put out. So an important aspect of the franchise that I mentioned in terms of the loans outstanding of about 62% tends to be concentrated in schools, nonprofits and venture capital private equity. But more importantly, it's now 48% of the deposit franchise for the organization -- 48% business banking and the other coming from consumer -- and importantly here we continue to diversify the deposit franchise by channel. So our branches are about a third of our deposit gathering and 58% coming through relationship managers and business bankers and 6% actually coming through our wealth management group, which is the Swiss accounts related to our wealth management activities.
Steady deposit growth, very consistent. We've seen -- we saw very good growth in the third quarter. Those of you that follow us may know unusual -- end of last year, we saw a little bit of flattening in deposits in the first quarter, and that steadily reversed in the second and third quarters as the organization responded to deposit gathering.
A little bit of an uptick in our contractual deposit rate. So we were at about 28 basis points in the third quarter. That actually compares to 29 basis points at the same time last year, and the momentum looks steady at this point.
And, of course, the mix checking at 48%, we've worked very diligently to improve the deposit mix over time, brought the CD concentration down and, of course, the checking account balances up and partially attributable to the business banking opportunities that I mentioned earlier.
We run efficient offices. Our offices tend to have about four or five bankers in each office that do probably 2.5 times the pretax profit as compared to other commercial banks and do anywhere from 20% to 300% the deposit volume that other institutions do around the United States.
Wealth management is going very well. We have invested quite substantially in wealth management since divestiture. About 92% of our wealth management professionals are new to the organization since July 2010. And in terms of the results, you know, our model is much more of an advisory relationship based model, open architecture, and that resonates very well. I would say, in the last few years, the branding of wealth management has worked very nicely, and the quality of the professionals that we are bringing in, in addition to the cross sell with the bankers, is doing quite well. So we're about $38 billion in assets under management at the end of last quarter.
You know that we acquired Luminous Capital at the end of last year. That integration is working very well. They are concentrated in Northern California and Southern California. The overlap with client based between Luminous premerger, pre-asset acquisition clients and ours was very good, and culturally they sit very well with First Republic Bank. So we're quite pleased with the acquisition of Luminous, and the run rate looks good, about $33.7 million of wealth management fees in the third quarter.
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [13]
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The efficiency ratio because it's a high touch model tends to be about high 50s, low 60s, and we've been able to keep that steady since we have kind of come out of BofA. We learned some efficiency lessons from BofA. Some we chose to follow; some we didn't. But it really comes down to people, and it comes down to the type business we do.
Our assets per person are about 2.5 times greater than norm, our revenues per person are 1.7, and importantly, pretax profit is 2.5 times the size per person. That's in spite of paying more on the average. And the reason is they are very good people. They work really hard, and we do larger average business in everything we do, and it's clean and we stay very focused on what we do. So you get an operating efficiency that shows up.
Stable core interest and net interest margin, let me go past this. I am sure we will come to that in Q&A. Our net interest income is growing nicely. That actually pays the bills. Net interest margin is a measure, but the net interest income is the key result obviously, and this is a combination of pressure on NIM offset by growth.
EPS is holding up very nicely. We are pleased. We look at core. We did buy the bank back from BofA. We have purchase accounting. We had about $750 million originally. It was positive purchase accounting we bought at a discount. Things that are paying a dollar we bought for about $0.96 and which they had marked. So that's burning off.
But in the meantime, so we focus entirely on core earnings and core measures. Book value is accreting nicely. The purchase accounting is obviously helping with that. The stock has done well, so I'll skip over that, and our ownership of private equity is now zero we bought back with the help of private equity and some other investors. They are all out. They've sold over the last -- well, the last couple of years, but heavily in the last 12 months or so. And so that we are delighted to have Tom Barrack and Bill Ford stay on the Board. They are fantastic directors, but the overhang from them realizing on their investment which they were quite happy with is over.
We did a stress test, I won't go here. We've done well. We did two voluntary stress tests. We're not subject to this. Only the first time this year now, we are subject to it. We got two years ahead to make sure we were up and running and capable of doing it. We are also quite curious about how the system worked, and we stand up pretty well.
Let me stop there and take questions, Erika or -- I'm sorry.
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Leanne Erika Penala, BofA Merrill Lynch - Analyst [14]
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Before actually we take questions from the audience, I did want to mention for those on the webcast that it's standing room only in the room. So the theme on this year's conference focusing on growth seems to resonate with you all. But we wanted to get your feedback, through polling, in terms of how you are thinking about stories like First Republic. So maybe we'll get some feedback from the audience, and then we will go right into Q&A.
So if we could first please have the the first polling question up on the screen. As a bank investor, what are you willing to pay from a P/E standpoint for a midsize growth story like First Republic? One, 13 to 15 times Board earnings; two, 16 to 18 times; three, 19 to 20 times; and four, more than 20 times?
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [15]
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Can I vote?
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Leanne Erika Penala, BofA Merrill Lynch - Analyst [16]
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(laughter) So you have 4 more seconds to vote. So without Jim's vote, your conclusion is -- interestingly the majority of you -- actually all of you voted either 13 to 15 times or 16 to 18 times. And I would say that First Republic is not yet at the top end of the choice range.
We also wanted to know given how compelling the growth story is, what will cause the market to close the GAAP between you and other peers they consider high growth? So I'm going to pose the question to the audience. What do you think is key for First Republic to close its current P/E discount, which is about 3 turns right now to high-growth bank peers?
One, demonstrating that it can continue to grow resi mortgage loans, despite slowing refi activity. Two, exhibiting stronger loan growth in non-resi mortgage categories. Three, the net interest margin bottoming. And four, redeploying more capital back to shareholders.
So the vote is coming up. This should be more exciting than the mayoral vote in New York City. So here are the results. Interestingly, 33% mentioned exhibiting stronger loan growth activity in non-resi mortgage categories, whereas behind that 30% is the net interest margin bottoming, and 26% wanted you to see mortgage loans continue to grow, despite the refi headwind.
And Jim, I'm sure you have comments on some of the responses?
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [17]
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I do. Do you want them now?
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Leanne Erika Penala, BofA Merrill Lynch - Analyst [18]
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Yes, please.
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [19]
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Well, the first one I'll pass on. That's up to you all in terms of P/E. We think that we have a sustainable growth model.
On this one, I would say that the thing that probably is the most on our minds is really maintaining -- number three. Maintaining net interest margin -- net interest income in spite of margin pressure. This is the margin question that I think of as net interest income. Because margin is one measure, but the real thing that pays the light bill is net interest income. Having enough capital to support the growth to continue to grow net interest income in the headwind of compressing margin. And in due course, margin will expand, but who knows when?
So in the meantime, we take on just doing good business, and it works. Mortgage loans, number one, that's on a lot of people's minds. It's going to go up and down on the refi side. On the purchase side, we're very steady in the business. Purchase markets are pretty active.
Are you done with your polling?
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Leanne Erika Penala, BofA Merrill Lynch - Analyst [20]
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We are.
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [21]
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Let me actually use that to spring off to the folks that are in the room here, if we could. Scott, could you speak briefly about Boston and how it's doing?
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Unidentified Company Representative [22]
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Sure. I'd be happy to. The Boston growth story is similar to what Mike spoke about earlier. We opened Boston in February of 2006 with a small group of people. Today we have just over 150 in our Boston business. We've grown to four offices, three downtown in the city, our Federal Street or Back Bay Post Office Sq., and then about 18 months ago, we opened up in Wellesley. So we have a grand total of four.
Our deposits have grown nicely to approximately $3.3 billion of deposits in our Boston business, and where does it come from? Same sources that Mike spoke of earlier. When we first started Boston, we started with the residential high-end home loan, bringing in clients that we sold all the other products and services to. We then parlayed off of our San Francisco venture capital private equity business. We have a nice component of that. Obviously in the Boston market, it was a great opportunity. We did that, and we are continuing to do that and grow that, and we've since in the last 24 months added our nonprofit segment, which we've had terrific success with our schools up in the Metro Boston area. We actually closed 13 schools deals in the last 18 months, so that's been terrific.
Typical, staying with the First Republic model, we built out our wealth management business over the last 36 months one wealth advisor at a time. Today we have 17 folks in our wealth business in Boston. So Boston offers all the products and services that our main markets offer.
From a marketing opportunity, we see a great opportunity. When you looked at the size of the household charts that you saw a few minutes ago, if you think of San Francisco being twice the size of Boston, you think of the market share and the growth we've had in the Bay Area, that inspires us and what we can do in the Boston market. And I'm quite excited about it.
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [23]
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Great. Home finance activity in New York. Michelle, maybe you can take that?
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Unidentified Company Representative [24]
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I'm not miked.
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [25]
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Oh you're not miked. No problem. (laughter)
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Michelle Feldstein, First Republic Bank - Representative [26]
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Hi, I'm [Michelle Feldstein]. I've been with the firm for 12 years. The home finance market in New York is very strong. It shifted from refi into purchase, but as you know, the purchase market in New York is steady. My job is to build my existing portfolio of clients and stay with them throughout their life transitions and buying new homes and second homes, as well as deepen the relationships abroad, bringing the entire bank to bear with the wealth management products, and then using that client base to obviously acquire new clients, leading often with the real estate transaction, which is a very successful and proven model, and we continue to do that day in and day out.
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [27]
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The market is active. Scott, Boston is active.
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Unidentified Company Representative [28]
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Active.
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [29]
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Mike, San Francisco is quite active.
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Mike Selfridge, First Republic Bank - SEVP & Deputy COO [30]
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Quite active, yes.
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [31]
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Very active. The biggest problem everywhere is shortage of supply of homes. Refinance has slowed down, but I think some of that is sticker shock. I think it will come back as people get over the mood that's occurring.
The remaining opportunity for refinance in terms of how many mortgages need to be refinanced is the declining point.
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Leanne Erika Penala, BofA Merrill Lynch - Analyst [32]
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And so maybe now is a good time to take questions, and we have one right here.
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Questions and Answers
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Unidentified Audience Member [1]
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I'm new to the story, so forgive my elemental question. But there's a disconnect in my mind between what you describe as a high touch, high service proposition for high net worth individuals, and the fact that the bulk of what you generate your income on is what I perceive to be a commodity product, which is a mortgage, and I was expecting to see a lot more fee income from risk management, other services, which are the sort of high touch -- well, what you call high touch, I guess. So could you help me understand the disconnect?
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [2]
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Sure. A couple of things. The choice of asset class to hold on the bank's balance sheet is clearly an important decision. We like very much home loans, jumbo done the way we do them for obvious reasons. How they came through the credit downturn is a good example.
We also like the lead product, as Michelle was referring to. That is the product that gets you to the client. You can think of that as a home loan, or you can think of it as a relationship. We choose the latter.
And what happens is, when you access the relationship through the call of action of a home loan, you get to that relationship in all of its facets. We find that we take good care of the family. We bank first the home loan. Then we get 2.5 checking accounts, etc. And then we follow them to their business or we follow them to their heart, which is often their nonprofit, their charity, their school, where their kids go, etc. And over time, we had to build out, and then we follow them to their retirement.
In the last 12 years, we built out business banking, and we built out wealth management. So the bank you see, which is 28-years-old, is really only a 10- or 11-year-old business bank and really about a 5- or 6-year-old wealth management bank because we got our act together, quite frankly, while we were inside Merrill Lynch. We learned a lot from them, and we came out much more fully formed.
So the fee structure, you see, is not that old. We also take another philosophical approach. The anger that small fees generates among clients is stunning compared to the value of their checking account to the bank. We do not have banking fee income as a big element.
This bank only has 135,000 relationships. We are about the 40th largest in the country. We only have 35,000 borrowing clients. So you are not going to make a lot of money feeing 135,000 checking accounts.
What you do make a lot of money from is their average size is 70,000 to 80,000, and they have 2.5 of them per household. And they bring the law firm they work in, and they bring the school the kids go to. So we see it as very holistic.
If you fast-forward the bank five years with the growth in wealth management, you're going to see a fee number that will be larger. But this is a relatively hard bank to outgrow on the fee side because the bank grows so much.
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Leanne Erika Penala, BofA Merrill Lynch - Analyst [3]
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Another question out here in the audience, if you don't mind waiting for the microphone.
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Unidentified Audience Member [4]
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Is the source of your new business by financial institution changing? In other words, are you most likely to get business from Merrill Lynch or a traditional bank?
And the second question is that you talked about leading with jumbo mortgages. As you grow and become more sophisticated, wouldn't a more logical way to generate business be corporate family businesses and then, in effect, satisfying growing needs through leading with small business loans and so forth?
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [5]
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Let me ask Martin and Paul to respond to the source of where we're getting business. I presume you meant from whom are we taking it?
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Unidentified Audience Member [6]
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Correct, yes.
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Unidentified Company Representative [7]
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From whom are we taking it? Competitor wise, who are we taking it from?
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Unidentified Audience Member [8]
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(inaudible - mic inaccessible)
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Unidentified Company Representative [9]
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(laughter) Favorite competitor to take it from? You know, we do get it from all angles, and I honestly find that the biggest complaint or the biggest reason that someone will look outside of where they currently are is because they aren't being serviced properly. They can't get a phone call back whether that's a consumer, whether that's a CFO of a hedge fund, whether it's the CFO or controller in a private school. They can't get the phone call back. They can't find out wire details when they need to, and they've done a capital call with $250 million wires coming in, and they can't figure out which investor it came from. The basic service needs aren't being handled to their liking or to their needs.
So it starts that way, and it comes from all over mean. We see it from Chase, from Citibank, from some of the smaller community banks. It's really not one place over the other. It's just a general upset feeling with the service level.
Paul, I don't know if you see anything differently on the --
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Unidentified Company Representative [10]
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I agree 100% with Martin. That's how a lot of my clients are actually family offices. And when they try working with us on a very smaller basis with checking accounts just to fill their family office management needs, once we provide the ability to show them our service levels and the way we execute the business, they bring over the entire family office relationship, and they expand it through the businesses the family has owned, and then that leads us to more referrals from their business associates and colleagues.
So to your point, the family office business is a large avenue of getting relationships and growing those relationships completely. But to Martin's point, it's actually servicing them with the cash management services and the execution of it and providing that extraordinary service that gets them in the door, and they leave those competitors' banks. And we don't sell widgets for the sake of of selling widgets. We want to build these long-standing business partnerships with our clients. And to be quite frank, in this industry, that's a rarity.
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [11]
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I think the other implication to your question is I would say that half of our new business is not single-family home loan driven any longer. It's coming from other businesses we are ready have. It's coming from wealth management clients to the bank. So we have morphed.
And we do do a fair amount of small business lending, and we have a scored lending product that has worked very well for almost a decade. It's kind of a small piece of the business, but it's actually very important.
Other questions?
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Leanne Erika Penala, BofA Merrill Lynch - Analyst [12]
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Right here up front.
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Unidentified Audience Member [13]
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Yes, you have a lot of interest only loans on your book, and what -- there has been some regulatory uncertainty concerning the treatment of those interest only mortgages. Do you have the latest of that, please?
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [14]
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We do have a lot of them, and we're still doing them. And the credit record that they have includes interest-only loans since 1995. They have been probably between 50% and 70% of our originations since 1995. We think of them as prepaid principal loans.
I'd rather have a 60% interest-only than a 75% amortized loan any day from the safety and soundness point of view. The interest-only loans have been damaged in the subprime backwash. I get that, I understand that. They were abused. They are not qualified mortgages under the guidelines. And so the jury is out on how that will play out in the secondary market and how it will play out in terms of people holding them on their books.
We currently intend to proceed as we have for a long time. We are not worried about that particular characteristic as being a credit driver. It is not.
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Leanne Erika Penala, BofA Merrill Lynch - Analyst [15]
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A question upfront.
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Unidentified Audience Member [16]
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Can you give me a sense of what you think is going to happen when some of your deposit rates start to go up on the short end? I mean especially some of your larger clients who have just a lot of liquidity. I think we've seen that they're willing to stay there through, despite FDIC limits. But they be a little more rate seeking?
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [17]
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Well, some of them will be for sure, but the -- we bank about 950 funds, for instance, of private equity venture capital, real estate funds, and our fund deposit base is almost entirely deal being done, deal being paid. A flow. You've 950 cylinders, you've got a lot of cylinders. And so that base, although fairly large, is, in fact, very stable because it's based on activity levels. If rates are up, presumably, activity levels might be fairly good, too, because the economy is driving the rates one would hope.
We do have some larger concentrations that probably are beyond working capital levels in all kinds of areas. The nonprofits tend to be not overly sensitive. It's not there -- they're not getting up in the morning worried about 10 basis points on their cap. They have other things going on. But we undoubtedly will have a follow-on effect on rise of rates. Our historical correlation is about 0.6, 0.7 of rising rates on money market accounts.
What we do have now that we've never had before is a very much higher percentage of pure checking, 2 to 3 times when the last time rates went up. And so we have been quite conservative, I think, in our analyses and the sense that we have allocated about half of the increase in account size that's occurred in the bank in the last few years too volatile to price it right away. I think I hope that's conservative. I believe it is. But there'll be pressure for sure.
I want to point out one thing, and this goes back to why growth is interesting. If you have a bank growing 20% on the loan line and you have a bank growing 5% on the loan line into rising rates, you're better off with the bank growing 20% because they are repricing 15%, new all the difference 20% new all the time as it goes up. So growth actually has a considerable opportunity in a rising rate environment. It's overlooked usually when people do the analyses.
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Unidentified Audience Member [18]
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(inaudible) fast growth in the last seven years, and did you say that Bay area is twice as large a market as the Boston area, but it's defined by SMSA and that your penetration in Boston is more than half of the Bay Area?
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Unidentified Company Representative [19]
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No, that's not what I said.
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Unidentified Audience Member [20]
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Okay. Maybe you could elaborate?
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Unidentified Company Representative [21]
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What I was saying is when we track households with greater than $1 million of liquidity per household, the Bay Area is twice the size of what Metro Boston is.
So my point was, if you look at the growth that we had in our original market in the Bay Area since the bank started in 1986, the opportunity for Boston is immense, and we've just begun eight years ago. That was my point.
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [22]
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This is the household count by market of households that are $1 million liquidity, which is just one measure, but it's the uniform measure. And Boston is the smallest of the markets, but it's also the most concentrated banking market we are operating in because of the rollup of Fleet and BofA over the years and Citizens into TD.
Another question?
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Leanne Erika Penala, BofA Merrill Lynch - Analyst [23]
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Anymore questions? So maybe just one more to wrap everything up. I'm glad Scott and Martin were here to talk about in the East Coast, but we've all seen the headlines coming out of your home market on the innovation sector and maybe we can close the presentation in terms of sharing with the audience how you are positioning the banks to benefit from it from both the consumer side and the business banking side?
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Jim Herbert, First Republic Bank - Chairman, CEO & Board Member [24]
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Well, thanks. Let me do that briefly. But that's our oldest market. We've been banking BC employees for 28 years actually, the lawyers that deal in the market. We've been down to Silicon valley for years and years and years. So we're doing that, and that's a natural part of what we're doing. We're also on the Facebook campus with an office, and we're in the Twitter building with an office that will open in about 3 months.
And Silicon Valley is moving into San Francisco proper. Part of it at least is, and that is our literally our home market. And so I think we are doing -- we're well-positioned, and obviously our funded business is extremely good positioning for this because almost all of these companies are backed by funds, many of whom we bank, and we bank individuals that are sitting on the Boards. We bank a couple of thousand venture capitalists at least. So it's pretty good positioning, I think. Thanks.
Thank you all very much. Appreciate it.
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