First Republic Bank to Present at the Goldman Sachs Financial Services Conference
Dec 10, 2013 AM EST
FRC - First Republic Bank
First Republic Bank to Present at the Goldman Sachs Financial Services Conference
Dec 10, 2013 / 07:00PM GMT
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Corporate Participants
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* Jim Herbert
First Republic Bank - Chairman & CEO
* Mike Selfridge
First Republic Bank - Senior EVP & Co-COO
* Chris Ramos
First Republic Bank - Preferred Banker
* Glenn Degenaars
First Republic Bank - Wealth Management Leader
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Conference Call Participants
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* Ryan Nash
Goldman Sachs - Analyst
* Unidentified Audience Member
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Presentation
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Ryan Nash, Goldman Sachs - Analyst [1]
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Up next, we're pleased to have First Republic joining us for a conference for the first time. Since its management-led buyout from Bank of America in 2010, First Republic has been a one of the fastest growing banks, doubling its assets to $40 billion today, driven by its intense focus on client service and relationship banking for high-net-worth clients, which I am sure Jim and team will tell us more about. Its outsized growth has helped it shares re-rate over 50% year to date.
Joining us, today, are Jim Herbert, Chairman and CEO, along with his team. With that, I am going to turn it over to Jim.
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Jim Herbert, First Republic Bank - Chairman & CEO [2]
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Thank you very much, Ryan. Good afternoon. We're going to go through a quick presentation, and then we'll open up for questions.
I have with me here, today, on the far end, Chris Ramos, who is a preferred banker here in New York and been with us 12 years; Glenn Degenaars, who is a wealth management leader here in New York, been with us a couple years; Mike Selfridge, who is a Senior Executive Vice President and co-Chief Operating Officer, been with us a couple years; Mollie Richardson, who handles IR for us and is Deputy Chief Administrative Officer for the Company, been with us 10 years. I'm Jim Herbert; I founded the Company in 1985.
We have been profitable ever since we started. We have had a focus on client service and one of our lead products has been home lending for a long time. The formula hasn't changed very much at all. As Ryan implied, we sold the bank in 2007 to Merrill Lynch. They, in turn, sold to BofA, and we bought it back from BofA about 3 years ago, now, 3.5 years ago.
We are both a bank and a wealth management enterprise. We came to wealth management a little late. We started that really in 2000. We will talk more about that in a minute. We focus on very high-quality assets; our delinquency, today, is about 13 basis points. We have done about $70 billion of home lending in 28 years, and we have had about 5 basis points of cumulative loss in those years. So, our focus is very high-quality service, high-quality assets.
We think we have got a good brand. When you invest in us, you invest in a few very limited geographies, urban coastal: San Francisco, with about 45%, 47% of the bank, the whole Bay Area; LA, and north and south from LA, Orange County and Santa Barbara, San Diego; New York, mostly Manhattan, up into Fairfield now. And, we have clients, of course, in the greater area, and then Boston.
Katherine August-deWilde, who is our Chief Operating Officer and President, and I have been working together for 28 years, and we've had quite consistent management the whole time. Our senior credit officer has only worked at this bank, only job he's ever had. Balances are -- and we continue to grow nicely, third quarter, growth was strong. Wealth management is up nicely as well, that's both market and new accounts. The book value per share continues to grow. Core net income, we do have some purchase accounting coming out of the BofA -- from our acquisition from BofA, so we think core income, primarily, it's up about 20% plus, 23% year over year.
The focus is simple, the client. This is one of the larger banks in the country now about number 40 or so. We only have 35,000 borrowing clients, approximately, relationships, and we have approximately 135 total relationships -- [134,000] total relationships in the bank. Jumbo home loan is our elite product on the consumer side.
We follow the client to their businesses, and we'll talk more about that, or to their heart. Meaning their nonprofits, their schools, their churches, their arts organizations that they're very involved in. So, our approach to banking is there are no companies, there are just people. We want to bank the people, and we'll go where they take us. If we like where they take us, we will do business.
This is our marketing theme. This will last less than a minute (video playing). We have used that testimonial approach to marketing for a long time, and it works because it's really the only way you can prove service.
People ask us what the growth drivers are of the bank, and there are really a couple that are by far and away the majority of the growth. First and foremost, the clients we already have tend to be economic outperformers. They are highly educated. They are working in economic and very vibrant urban, coastal markets. And they, themselves, outperform.
We are mostly a first-generation bank. We have some inherited wealth, but not that much. We are beginning, now, to develop more of that as our clients from 30 years ago are now the wealth clients. But that growth, all by itself, is about half the growth of the bank. The client base we now have will, this year, grow about 8% or 9%, in terms of their net worth. And importantly, they will grow in complexity, and they will need more things. We do, on the average, nine things with every home-loan client.
Then, there are very satisfied customers, and we will come to a slide a little later on this subject, and they refer, passionately, like-kind individuals that become clients. We open new branches; we hire new people.
The markets that we're in have done well. This is a Ken Rosen study of our markets compared to the US, which is about 112 on this, or 113 on this chart. San Francisco is a real standout, obviously. We have -- the markets we're in represent about 20%, 21% of all the households in America. They represent fully 55% of all the high-net-worth households, measured by Capgemini of $1 million liquidity or greater. So, we have a target-rich environment.
We have increased our share of the higher-net-worth households each year. This study is actually 2.5 years old now. We engage in this study every two years. We're doing a new one as we speak. Our households that have more than $10 million in liquidity have grown about 18% per annum in recent years. Mike?
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Mike Selfridge, First Republic Bank - Senior EVP & Co-COO [3]
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Yes. Thank you, Jim. I am going to cover a few things. I am going to talk about the growth of the enterprise, in general, and then a few distinct segments: one, business banking; secondly, credit quality; and also, private wealth management. And, we have Glenn, here, who can speak to that in a little bit more detail with Q&A.
Given the markets we're in that Jim mentioned, the types of clients we have, the cross-sell opportunity, and distinctly, the relationship management and extraordinary service model, we've been able to grow the franchise, on the loan and deposit side, at about 22% CAGR for the last 10 years, and these numbers are very consistent with other segments that we operate in. Let me make sure I've got this right. Here we go.
We have been active, despite current trends in the secondary market, we've been active since we founded the bank. And, a few points here; one, of the $104 billion we've originated since inception, we've sold in the secondary markets about $20 billion, so just about 20%. But, the important point is, really, that we retain the servicing of any loan that we sell in the secondary market, and we are currently servicing about $6 billion in loans that we have sold off over time.
Jim touched on Silicon Valley. The Bay Area represents almost 50% of the enterprise, and Silicon Valley, as we define it, is about a third of the bank. We are very well situated in the Valley. We have been there the longest. We have invested quite substantially since divestiture, and those people that we have hired are now contributing quite nicely to the enterprise.
We're focused on a number of things. One, the professional service firms in those areas, venture capital, private equity. We bank now about a little over 250 venture capital, private equity investment management firms in the Bay Area, and this region is about 35% of our total deposits.
Balance-sheet loans, single-family, the hook that Jim mentioned, the jumbo is still the hook that gets us the client, brings them into the bank, and allows us to cross-sell other opportunities, although we have become more diversified by loan type and also by geography. So, about 48% of the loan book I mentioned being in Silicon Valley Bay Area region, although now with about two-thirds of our loans in California, we now have good traction in New York and Boston.
The types of clients that we bank at First Republic, on the single-family side, are very attractive. We have always fully underwritten and fully documented our loans, and our clients are liquid. Our loan to values are, we think, very safe. And, the net worth tends to be about 4 times the average loan outstanding, or the median loan outstanding, for a single-family client.
Credit quality, the track record since inception is very solid, so $104 billion in originations that I mentioned and a 17 basis point net charge-off ratio. Single-family, Jim touched on $67 billion originated with a 5 basis point net charge-off ratio. In comparison to the top 50 commercial banks in the United States, our net charge-offs have been about 9 basis points over the last almost 11 years. It's about 5 times less than the top 50 commercial banks in the US.
Business banking has been around at First Republic for about 11, 12 years. I would say in the last seven years, the compounding effect on business banking has been extraordinary. I'll cover a few segments that we focus on, but this has really been a great vehicle for us to diversify the deposit franchise and help us collect deposits. Business banking now represents about 48% of our total deposits. The growth looks good, and the important point, here, is that for every $1 we put out in loan outstandings, we get about $4.6 in deposits.
We focus on about nine distinct segments. The most significant would be schools and nonprofits, from there venture capital, private equity. Those two combined are about 62% of our loan outstandings.
Deposit franchise, we have spent a lot of time, again, trying to diversify the deposit franchise. I mentioned business banking is 48% of the franchise, consumer deposits 52%. And then, also, the channel, so the preferred banking offices, what you would call branches, are about a third of our deposit gathering mechanism, and 58% comes from our business bankers and relationship managers that are in the markets we serve. The deposit mix, as well, has improved over time, so we now have about 48% of our total deposits in checking accounts.
Private wealth management has also had exceptional growth. We have hired, since divestiture, about 92% of our wealth management professionals. They have brought new business to us and also worked very well with our relationship managers. They tend to be on the same floor, and they work very well together. There is not a siloed approach to cross-selling wealth management and banking, and that works very nicely.
Our growth in wealth management, when we came out of divestiture, we were about $14 billion in assets under management. We just touched $38 billion at the end of last quarter, and our fee income from wealth management continues to grow nicely. Jim?
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Jim Herbert, First Republic Bank - Chairman & CEO [4]
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Thanks, Mike. The margin has held pretty steady over time. It's under a little pressure now, as everybody, I think, is. And, we have had efficiency ratio has been steady as well.
The dotted line on this efficiency ratio chart is taking into account a GAAP accounting change that appears to be about ready to occur, which is when you invest in low-income housing tax credits, you don't have to amortize the expense of them against the P&L, against the expense line, but it goes against taxes, where it ought to go. So, our efficiency adjustment for that would be about 55.5%. Taxes would be higher. Tax rate would be higher.
The efficiency of people, for a minute, we think of this somewhat -- I don't know other banks, you don't see this number too often, but we have about $17 million, $18 million per person of assets. It's banking assets, not wealth management. That's 2.5 times the average. We have very good people. We have clean assets. The average transaction is larger on almost everything we do. It's not a complicated formula actually. And, we make about 2.5 times as much per person, in spite of the fact that we pay more per person. So, we can attract the best people.
Core net interest margin I mentioned a second ago. It's holding pretty steady, but it is declining, and it will be under pressure for a while yet. The loans going on the books are still a little lower than the loans coming off the books. The steep yield curve helps us a bit, but it won't solve the problem entirely.
Our core net interest income, which is actually what pays the bills, is growing fairly nicely. You can outrun NIM compression with growth to some extent, as long as the growth is controlled in terms of quality. Earnings per share, pretty nice growth since we've been out in public, and book value per share is growing nicely.
Let me go to -- we've done well, I like to think, for our shareholders over time. The chart on your left is before we sold to Merrill, but not including the 40% premium we got from Merrill. And, the chart on the right is since we've been out, again, here. The private equity investors that helped us, and were fantastic partners when we bought the bank back, are now out. They have sold all of their positions, and that includes most of our large investors at the time, including an individual family that is not technically PE, so the market is now a true public market.
This is something we've just done recently. It's the Net Promoter Score on my policies for the amount of information on the page. The top section is basically a listing of what they call Net Promoter Score. This is a Greenwich kind of thing that they've done for years on many companies. First Republic stands out very well.
When we're the lead bank for clients, we basically rank at -- we have about a 74% Net Promoter Score. The higher a Net Promoter Score, the more likely your clients are to refer like-kind, basic friends or others to you. Banks, on the average, have about an 18% Net Promoter Score. Even when we're not lead bank, we have a 55%, so it's kind of a proof of quality of service that we have been looking for, for a while, and haven't had before.
We have run stress tests. We are coming up on $50 billion, here. We now have our first mandatory stress test coming up this year. We ran them two years in a row, voluntarily, for many reasons, including being getting our system up and ready to go, and we're ranked pretty well there.
This is the enterprise value over 27 years for shareholders. It's done pretty well. With that summary, let me open up for questions (inaudible).
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Questions and Answers
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Ryan Nash, Goldman Sachs - Analyst [1]
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Jim, starting big picture, if you think about year to date, you've been able to outgrow the entire industry when the industry has struggled to find growth. And as I look ahead to 2014, our economists are calling for a pickup in GDP, markets higher, steeper yield curve, improving real estate values. In this kind of environment, what are your expectations for your customer base in terms of continued demand for loans as well as usage of their deposits for alternative uses?
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Jim Herbert, First Republic Bank - Chairman & CEO [2]
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Well, I think, let me answer quickly, and then turned to Chris and Glenn here. The markets we're in are doing well. They will probably continue to do well for 2014. The clients we have are generally doing well. There's always an exception. So, I think the growth rate in 2014 is likely to be equal to 2013, or a little better, in terms of activity of clients.
In terms of balance sheet growth rate, the refinance boom is probably passed, and so that slows down our opportunity to pick up new clients. But, it actually has a positive impact in terms of cross-sell ratio. Chris, maybe you can speak for a moment to that?
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Chris Ramos, First Republic Bank - Preferred Banker [3]
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Yes. I think the formula is simple, as I think Jim touched upon earlier, is that service. You deliver good service, and a lot of opportunities are going to arrive. Even after the refinance boom, we're still seeing an uptick in the amount of accounts that we open, as well as new opportunity going back to our existing portfolio and clients and discovering more of a private wealth management opportunity.
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Jim Herbert, First Republic Bank - Chairman & CEO [4]
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Glenn, do you feel the same on wealth management?
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Glenn Degenaars, First Republic Bank - Wealth Management Leader [5]
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Yes. On the wealth management side, it may be counterintuitive, but it's not as much driven by economy or markets or the yield curve. It is driven more by having a differentiated service offering that you can bring forth to the client. And as Chris said, the service culture is pervasive throughout the entire Company. So, whether it's the banking side, the lending side, or the wealth management side, we tend to lead with the service-driven model.
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Jim Herbert, First Republic Bank - Chairman & CEO [6]
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Mike, you might respond in terms of velocity of business banking.
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Mike Selfridge, First Republic Bank - Senior EVP & Co-COO [7]
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Velocity of business banking is strong, again, nine segments, two make up a majority of that. I would say, traditionally, your comment about the jumbo being the hook, and then bringing the relationship on the private banking side, and that would extend to the business. We are now in a position where businesses are referring other businesses in the segments we serve, and that's bringing great momentum to us in the core markets that we serve.
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Ryan Nash, Goldman Sachs - Analyst [8]
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You talked about jumbo obviously being the lead product, and jumbo prime has obviously been a product that has gotten extremely competitive from some of the bigger banks pricing through conforming. Now that we have actually seen rates back up a little bit, are you seeing any easing on the competition front, and is it hindering your ability to win relationships?
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Jim Herbert, First Republic Bank - Chairman & CEO [9]
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I would love to say yes, but the answer is no (laughter). There is not an easing on competition front at all. There is a little bit of crack in standards, which we find to be disturbing. That's something we won't ever follow. The competition is ferocious. Everybody, 10 years ago, nobody wanted jumbo lending really, and all of a sudden it's what everybody wants to do.
It is still about service. At the end of the day, it's about service. And, the Net Promoter Score that I just put up is really an indication that we get a lot of referral business. One of the things that we think about, in terms of growth, is that because of the nature of our client base, if we brought in no new clients at all, the bank would probably grow between 7% and 10% because of the momentum of the client base we have and who they are and how they're growing. So, we have an intrinsic growth rate that's quite extraordinary, particularly as you have a slowdown of refinance going on. So, you have (inaudible). The other thing I'd like to -- Chris, how many clients have you had leave you this year?
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Chris Ramos, First Republic Bank - Preferred Banker [10]
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None.
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Jim Herbert, First Republic Bank - Chairman & CEO [11]
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Glenn?
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Glenn Degenaars, First Republic Bank - Wealth Management Leader [12]
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Just a handful, and it has been more from a standpoint that there is another investment that they are making in their private business and they needed the liquidity from their investment portfolio. We have very little attrition of clients.
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Jim Herbert, First Republic Bank - Chairman & CEO [13]
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This is a very fundamental point. We don't fight a riptide. We don't have an outflow of clients. You want to grow 8% a year and you have 4% leaving you, you've got to grow 12%. So, we don't have -- we lose clients, we're not perfect by any means, but we don't lose very many.
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Ryan Nash, Goldman Sachs - Analyst [14]
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Jim, just a quick follow up on a point you made about the crack in standards. Can you give us an example of the type behaviors that you're seeing in the market?
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Jim Herbert, First Republic Bank - Chairman & CEO [15]
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I'm sorry, what was --?
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Ryan Nash, Goldman Sachs - Analyst [16]
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Can you give us an example of the types of cracks in standards that you're seeing in the market?
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Jim Herbert, First Republic Bank - Chairman & CEO [17]
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Mostly, LTVs creeping up. That's the main one. And, the amount of advance rates, is where it's beginning, and that's, quite frankly, over a long period. I've been doing this a long time, that's where it always begins.
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Ryan Nash, Goldman Sachs - Analyst [18]
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Okay. You've had a lot of success growing the New York and Boston part of the franchise. Mike talked about San Fran being 50%. Those obviously make up a much smaller part of the bank. Given the strong growth rates they have had, how big of a piece of the bank do you think they could be over time?
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Jim Herbert, First Republic Bank - Chairman & CEO [19]
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I think they could be enormous, particularly in New York. There's two aspects to New York and to Boston that are slightly different. Boston is about the most consolidated banking market in America, so the opportunity to compete with the larger guys is the best there. We consider that an opportunity not a problem.
And then, New York is, of course, New York, so the size of the market and the magnitude of the market is second to none. But, it's harder to get positive word-of-mouth because it's harder to have the critical mass of referral. We sort of just appear to have just gotten there.
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Ryan Nash, Goldman Sachs - Analyst [20]
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Given that you've now gotten there, are you starting to think about potential expansions into other markets beyond the four core markets?
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Jim Herbert, First Republic Bank - Chairman & CEO [21]
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No.
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Ryan Nash, Goldman Sachs - Analyst [22]
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Switching gears for a second to wealth management, obviously the build out has been a big success. Where do you think you are in terms of a product, personnel, and client penetration standpoint? Are we still in the early innings and do we have a lot of runway to go?
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Jim Herbert, First Republic Bank - Chairman & CEO [23]
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Well, in New York, as near as we can tell, of the 500,000, 550,000 $1 million households a couple years ago, it's probably larger now, probably 10% larger, we have about a 2%, 2.5% share, so we have a long ways to go. Boston's about the same. The numbers are different, of course. San Francisco, we're at about 13% to 15%. So, we have plenty of runway, and even in the most mature market, San Francisco, and the generation rate of new middle- and upper-income households in San Francisco is stunning.
It's important to note that our -- the average, or the median net worth of our home-loan client is about $2 million. That's a very respectable number for sure, but it's not a staggeringly high number. We do a lot of professional lending. A lot of professions, lawyers, doctors, venture capital is starting to be weak, so one of the challenges we have in the bank is to always be adding the younger member of all those professionals. And at the older end of the bank is the highest, the best clients in the bank, the larger clients in the bank, rather, are probably in their late 50s, but we have a lot of younger clients coming in. So, we've been very successful the last couple of years of regenerating that part of the bank.
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Ryan Nash, Goldman Sachs - Analyst [24]
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You talked, Jim, about the net interest margin remaining under pressure, the core margin at 3.3%. But given the expectation of tapering starting either this month or next month that you are [miss it], it's a 75% chance it happens, and assuming we get further steepening of the yield curve, what do we need to see for the actual core margin to begin to stabilize, so then we could actually start to see net interest income growing along with the loan portfolio?
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Jim Herbert, First Republic Bank - Chairman & CEO [25]
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Time, primarily. The steepness of the yield curve will be very good for the bank, good for most banks, and good for the economy too, historically, but it's going to take a little time. I think the margin turn is probably four to six quarters away, four to eight quarters away. But flat's okay. That's closer. And, I don't know, from our perspective, we think the steepness will increase a bit, but we're pretty close to historical steepness right now. That doesn't last, usually, if you go back, it doesn't last all that long.
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Ryan Nash, Goldman Sachs - Analyst [26]
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Great. Any questions from the audience?
I guess I'll continue. One of the things that's been contemplated in Washington has been taking down overall GSE loan limits, whether it's in some of the markets that you guys participate in, or just in the broader markets down from $417,000. Have you thought longer term how -- would this be a big tailwind for your business in terms of your ability to acquire customers and grow the loan portfolio?
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Jim Herbert, First Republic Bank - Chairman & CEO [27]
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It helps. It helps because we do -- last year, we did about [$0.75 billion] of Fannie business, agency business, mostly Fannie, and this year we will be in that range. So, we do a lot of that business, but also the drop in increments tends to impact, disproportionately, the markets we're in. Those larger sizes are heavily coastal slanted. And so, actually, it opens up more probably in our markets than anywhere else. But Chris, you're working on a lot of agency business -- you do a lot of agency lending, the teams you work with.
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Chris Ramos, First Republic Bank - Preferred Banker [28]
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Yes, a lot of the teams that I work with.
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Jim Herbert, First Republic Bank - Chairman & CEO [29]
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So, it's still a big business for us. The bigger issue is how are they going to resolve the GSEs? I have trouble imagining them going away, quite frankly, but we'll see.
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Ryan Nash, Goldman Sachs - Analyst [30]
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One of the other big areas you guys have had of growth has been the business banking, and you said it's been business for 10 or 11 years, concentrated in a number of verticals. Where do you think you are in terms of building out each of the verticals that you have, I'd say both by product and by a geographical perspective? And, are there any other verticals that you think would make sense, just given your client mix and how it's evolved?
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Mike Selfridge, First Republic Bank - Senior EVP & Co-COO [31]
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I would say we are well situated. Obviously, when you serve a certain vertical, you want a certain individual that's going to be an A-player and able to speak the language to a private equity firm or a nonprofit, so we'll selectively hire. And, I think we're being methodical about the growth and the growth is still quite good.
As far as new verticals, I can't see anything that we would get into at this stage. Now having said that, we have added verticals by doing a deal and two deals and four deals and on and on, and then realizing we had an expertise and the credit quality, first and foremost, was there. So, it's hard to say in the future it will be something we could explore, but at this stage, there's nothing on the horizon.
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Ryan Nash, Goldman Sachs - Analyst [32]
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Jim, one of the big questions a lot of people have asked about to other banks has been around the CCAR process. Obviously you guys are not part of that process just yet, but as you look forward two to three years and become a $50 billion bank, I know you've talked about on the last call that there will obviously be some incremental expenses that come into it. Can you just give us a broader context, what have you done to prepare for that? What is still left to do in terms of preparation?
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Jim Herbert, First Republic Bank - Chairman & CEO [33]
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I think we're pretty well prepared in the stress test area. We've done at two years in a row already. And, the intensity of, so to speak, the real thing is a little greater, but not that much. The additional regulatory scrutiny on all the things that we do, particularly focused on AML, BSA, and other things of that nature, will cause us to, and is causing us to, staff up and invest in software. I think a fair amount of that is behind us already.
The big change that's out there is liquidity coverage ratio, and of course, the draft is just out on that. That's going to have a two-step -- it implements over 3 or 4 years, and it has a two-step, [50] to [250], and 250 and above. So, we're not -- it won't hit us for about 2 years, 2.5 years, something like that. But, that will cause us to increase our liquidity holdings. And, that will have, not so much a cost, but a margin impact. We do have adequate capital and are planning forward. We've got it modeled in, I think, pretty correctly. So, I think it's mostly the intensity of all reporting.
Remember, one of the main things that is behind that answer is we're pretty simple. We don't do a lot of stuff. We keep it simple, and we don't add new stuff very often. And so, basically, what we've been doing, we've been doing for quite a while, and it is core banking. Deposit taking and lending, and the lending is a very limited type. And so, we don't have a lot of the things that the CCAR activities, not just the stress test, but all the others, focus on.
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Ryan Nash, Goldman Sachs - Analyst [34]
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Probably have time for one or so more questions.
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Unidentified Audience Member, [35]
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(Inaudible) What does your wealth management business bring to the table for (inaudible).
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Mike Selfridge, First Republic Bank - Senior EVP & Co-COO [36]
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Sure. I think there's really three things that we bring to the table that differentiate us. One is customization, so very few of our clients come in and write us a check for $5 million and say I have no concentration in my life, no liquidity constraints, just give me your best banking. They want us to look at their total asset and liability picture, and create a custom solution for that. A lot of firms have moved much more towards asset-allocation buckets, doing more with less. We don't do that.
Two is objectivity. We do not create or manufactured proprietary products, which rings true to a lot people, especially in our industry, where it's an industry that's been riddled historically with conflicts of interest, to come there and say we're fully open architecture, we're purely going to pick managers based on their own merits, we're not going to enter into fee-sharing arrangements, and we're not going to sell you product.
And lastly, it's the service side. Again, the clients had a good experience on the banking side and the lending side, it's pervasive throughout the culture of the bank. So, being there at 4:00 or 3:59 on a Friday to answer the client's call and talk about the market when they want to. I think that's really the differentiating characteristics.
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Jim Herbert, First Republic Bank - Chairman & CEO [37]
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The latter fact is really important too. Where, if Chris refers a banking client over to Glenn, Chris has a choice of wealth advisors, and he matches up the client with Glenn or with someone else. And, he's not restricted to the team he's been assigned, he can use somebody in San Francisco. So, it's very personal business. And, he knows the client.
The other thing is, of course, Chris has seen the balance sheet of the client, so the referral is not only personally targeted, but opportunity targeted and not a waste of time, not miss targeted. And then, our turnover is very low. Our turnover is extremely low, so the consistent consistency of player, on both the banking side and the wealth management side is very important.
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Ryan Nash, Goldman Sachs - Analyst [38]
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Okay. We have time for one more.
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Unidentified Audience Member, [39]
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Just given that you lead, admittedly you lead the customer relationship with the jumbo origination, how does the QRM rule that's going into effect in a couple weeks change your strategy around that? Also, do you have the capacity to absorb all those loans on your balance sheet, since you supposedly, or presumably, can't sell them anymore?
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Jim Herbert, First Republic Bank - Chairman & CEO [40]
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The QM part of the question, it doesn't change very much what we're doing. That's what Mike was referring to when he made the point that we've done fully documented, fully underwritten loans. That's all we've ever done, really. And, we do it that way because we see it as a relationship.
If you think about a holistic approach to banking over a 20-year period, which is actually how we think, a loan comes and goes, it's a 4- or 5-year asset, and it's like 20% of the relationship. But, the relationship stays forever, if you do a good job, and that's what we're after. The loan, in order to have that kind of thinking, it has to be fully underwritten. You wouldn't do anything else. And, we actually won't do a loan without a relationship. We will, we'll quote them, but you don't like the price, so it's a little different. So, QM doesn't impact us in some ways.
Now, in another way, it impacts us a lot. Probably most of you know, if you know us well, we do a lot of interest-only lending. We do that mostly because our clients want it, we didn't make it up, and they like it. They like it because many of our clients have uneven cash flows in the form of bonuses annually. So, they like to be able to manage their cash flow, and then make a principal payment out of the bonus. That piece of our lending will be more subject to secondary conditions, which are not clarified yet.
So, we may or may not be able to sell quite as many, but I don't think it's going to have an overwhelming impact on us. I don't want to be naive. We've focused on it intensely. We've had enormous amounts of training, documentation changes, et cetera, obviously. Income qualification, we've been doing that from day one.
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Ryan Nash, Goldman Sachs - Analyst [41]
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Great. Please join me in thanking First Republic.
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Jim Herbert, First Republic Bank - Chairman & CEO [42]
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Thank you.
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