First Republic Bank at Goldman Sachs Financial Services Conference

FRC - First Republic Bank
First Republic Bank at Goldman Sachs Financial Services Conference
Dec 10, 2014 / 08:20PM GMT 

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Corporate Participants
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   *  Katherine August-deWilde
      First Republic Bank - President
   *  Mike Selfridge
      First Republic Bank - COO
   *  Gaye Erkan
      First Republic Bank - SVP, CIO & Co-Chief Risk Officer

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Conference Call Participants
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   *  Ryan Nash
      Goldman Sachs - Analyst

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Presentation
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 Ryan Nash,  Goldman Sachs - Analyst   [1]
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 Alright, rounding out the conference we are pleased to have the management team from First Republic here. First Republic has undergone a big transformation this year as it prepares to cross the $50 billion asset threshold, investing in new systems and work processes. Once these are complete, this should allow First Republic to resume growing at levels much above the peers. Here to tell us how they're going to do that are Katherine August-deWilde, President; Mike Selfridge, Chief Operating Officer; and Gaye Erkan, Chief Investment Officer.

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 Katherine August-deWilde,  First Republic Bank - President   [2]
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 Good afternoon. Thank you for staying until this very last presentation. We appreciate it.

 So the question is why First Republic? What is it that we do that's different? We have a very simple structure. We don't have a holding company. We're FDIC regulated, not a Fed member. We have a very focused business model where every client has a specific single point of contact and that single point of contact introduces the client to the other product specialists. A very intense service-based culture. A strong brand. You've probably seen it in your markets. Superior credit quality. We have lived with a very focused, no losses kind of credit culture from the very beginning. We're in strong urban, coastal markets that are very knowledge based, with attractive urban professionals, well capitalized and a consistent broad and growing leadership team.

 We've been profitable for 29 consecutive years, since we started. The bank is almost $48 billion. We expect to be $50 billion on a four-quarter basis at the third quarter of 2015. It's almost entirely organic growth. Our wealth management business is just over $50 billion. Nonperforming assets are 11 basis points. We have a very high Tier 1 leverage ratio of 9.5%, 68 banking offices in 7 coastal, urban markets.

 The third quarter is old history so you can look at it in our earnings report, but it was a very good quarter where wealth management grew 5.6% and loan originations were the third highest ever.

 Let me take you to a very important piece of our core model. The client is at the center of the model. Whichever banker or wealth management professional brought the client in is forever the quarterback of that client. We don't change relationship managers when a client gets larger. The client comes in for the one thing they need that day, be it a loan or a deposit or a mortgage or an investment management solution. The quarterback who works for that client brings in other product specialists to help the client. We have a unique model where they can choose the specialist who will be most appropriate for that client and that situation. For example, if someone comes in for a residential mortgage and needs wealth management, the relationship manager who works on the mortgage will choose which wealth management professional is going to be right for our client. And it will be a different one one time to the next depending on their needs.

 50% of our growth year over year is from existing clients and about 25% is from organic growth from our satisfied clients telling their friends and colleagues about us.

 Our incentive structure is very focused on relationships, as well as on very strong credit quality. We've had a clawback since the very beginning and there is a first loss position that our lenders take, and so they're very focused on making sure they make good loans. In addition, they're additionally focused because they're paid more than half of their compensation from non-lending; from deposits and investment management. That causes them to look for the most liquid client. That liquid client tends to be one of the safest clients.

 Key drivers of growth. Our markets are very strong. They outperform the US economy. We focus on outstanding service and our existing clients. Our existing clients tend to grow faster than average. We have very high retention rates, about five times the average, and they have increasingly complex and growing needs so we expand our relationships with our existing clients. They refer their friends so we develop new relationships.

 In addition to that, we hire experienced relationship managers, business bankers and wealth management professionals. Those people bring their book of business to us and our marketing is extremely focused.

 I'm now going to turn it over to Mike Selfridge, our Chief Operating Officer. Thank you, Mike.

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 Mike Selfridge,  First Republic Bank - COO   [3]
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 Thank you, Katherine. I'm going to talk about a few key drivers to our strategy, as well as the market opportunity for First Republic and some intrinsic growth that's built into the model.

 First and foremost, if you look at what we're focused on, it's a few geographies, urban, coastal, affluent households, educated, densely-populated areas. We put an index out every quarter and we look at key economic variables of those core markets that we're in and we benchmark that against the broader US economy. And generally speaking, we outperform. Specifically, I'd highlight that 65% of the organization is centered around the San Francisco Bay area and New York, so 65%. Those markets are outperforming the broader US economy quite significantly.

 In terms of the opportunity for growth, while 21% of all households in the US reside in our key markets, nearly 56% of the affluent household market resides in our key markets. So again, we believe we are in the right geographies with plenty of room for growth. So if you look at our composite market share of those affluent households, we're a little bit under 4% and we were able to grow over the last 2 years those affluent households by 33%.

 The hallmark of who we are, we're really a service organization. We differentiate ourselves on service. One measure that we look at is our Net Promoter Score. It's a gauge of client loyalty and satisfaction. We look at both personal or private banking, wealth management and business banking. And on average, if you look at the client loyalty metric, we are 1.5 to 2 times better as a Net Promoter Score than the industry average. If we are the lead bank or lead wealth management firm, we are nearly 4 to 5 times better and we're actually up there with brands that are highly recognized, those of the likes of Apple, Ritz-Carlton or Nordstrom.

 One of the things that we decided to highlight a little more is just where the growth is coming from. We looked at a cohort of clients over the last seven years, deposits, loans, wealth management. In this instance, this is checking/deposit growth and I think there's a few things I want to highlight here. One, the churn or the ability to retain clients, we do a very good job. So our churn of clients in terms of balance is about negative 2%. It's about a fifth better than the industry average.

 More importantly, nearly half of our growth is coming from existing clients who try us and they like us, they become net promoters and they do more with us. If you look at the rest of the growth, half of the remaining growth is coming from word-of-mouth referrals. So somebody's very satisfied and they refer a like, friend or colleague. That builds in 75% of the growth through existing and word-of-mouth referrals.

 The same for loans. If you look at loan origination year to date, nearly 80% of that is coming from existing clients. That has implications in terms of seasonality from a risk perspective. We know our clients and they're asking for more transactions with us. This also creates some efficiency for the organization.

 Lastly, I think a differentiator is just the culture and how we operate. We operate as a very flat organization. We trust and empower folks in the market to do their job. We hold them accountable. And with that, we think we can drive very good results.

 And then I would say, lastly, much of our marketing is centered around the client experience and so we have various testimonials. This would be one example.

 (Video playing)

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 Gaye Erkan,  First Republic Bank - SVP, CIO & Co-Chief Risk Officer   [4]
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 So as evidenced in our client testimonials, while maintaining our focus on exceptional client service and satisfaction, we have also put in place multiple work streams to enhance our infrastructure and processes to meet heightened regulatory standards, including those that become applicable at $50 billion mark.

 We currently anticipate that our four-quarter ending moving average assets will reach $50 billion in the third quarter of 2015. All of our initiatives to enhance infrastructure are well underway and under good control. Most importantly, also, our very intensely client-focused business model continues to operate uninterrupted.

 Let me speak for a moment about -- on a couple of these initiatives in detail. Capital stress testing. So having robust management information systems, single system of records, given almost entirely organic growth in institution, in-house loan level modeling capabilities makes stress testing a lot easier; not to mention that First Republic has done two voluntary stress tests before DFAST made stress testing mandatory. Also, on a spot basis, as you may all know, we are held against de novo capital standards which are much higher than the bank standards for other institutions.

 Liquidity stress testing, or liquidity risk management in general, not only we have enhanced liquidity stress testing in the last two quarters and before, we have also increased on-balance sheet liquidity sizably. As of -- in the third quarter of 2014 we made a meaningful repositioning of the portfolio where we sold all of our CLO and (inaudible) CMBS holdings, a $23 million gain, and repositioned the proceeds into high quality liquid assets, increasing from $600 million as of end of the second quarter to $2.2 billion as of end of the third quarter.

 Before I touch on the remaining other initiatives, let me mention a little bit about the business model and the fundamentals that makes these initiatives a lot easier and efficient for us to navigate through.

 Number one is extraordinary simple corporate structures Katherine alluded to, which makes resolution planning a lot easier for First Republic.

 Number two, in terms of organic growth, most of the growth coming from existing clients. That makes BSA/AML a lot easier for First Republic and better client service at the same time.

 Another example would be, for instance, in the appendix during our investor presentations that you would see 30-plus activities, business activities, that we do not engage in. That makes, as Co-Chief Risk Officer, enterprise risk management a lot easier.

 And not to mention data, especially compared to my prior experience while at Goldman. I want to mention that we have a Chief Data Officer, which is different from Chief Investment Officer and Chief Technology Officer, and a centralized data system that has very good quality. That makes, again, risk aggregation and the simple business model makes risk reduction a lot easier.

 So with that we have more time to actually focus on client service, so that is evidenced by our strong deposit growth. Year to date, the deposit growth has been 15% compared to the loan growth year to date, 10%. Expected 11% to 12 -- 11% to 13%, pardon me, for the full year of 2014.

 In terms of loan origination volumes, we had very strong loan origination, especially in the last two quarters, with the last quarter being the third best ever.

 Let me take a quick second to talk about the secondary market participation. We had the record loan volume sales in this past quarter. And that not only speaks to the quality of underwriting, but also to the competitive pricing and the documentation behind it as we have been selling to 8-plus different buyers. And being able to sell the loan, not only do we retain the client relationship, we also have an opportunity to cross-sell other products to the clients. And also, the secondary market selling continued success also serves us as a lever, as a risk mitigation tool in terms of asset liability management and interest rate risk.

 With that, let me turn it back to Katherine.

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 Katherine August-deWilde,  First Republic Bank - President   [5]
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 Thank you. Let me give you a sense of who our average loan client is. First, our loans are all fully underwritten and fully documented. We never did a no docs, low docs, no income, no assets loans. We actually didn't know they were happening.

 Our average loan size is about $700,000. That includes the CRA loans we make and sell to Fannie Mae. Our average loan-to-value is about 61% with liquidity almost equal to the loan amount, net worth about $2.5 million and a very high credit score. If we were to show you averages, they would be much higher, but the median seems a more appropriate measure to go through today.

 In terms of loan characteristics of non-single-family loans, our average multi-family loan is about $1 million with a loan-to-value of 59%. Our average commercial real estate loan also just over $1 million with a very low loan-to-value. The result of that is a very good credit history. This chart shows our losses over time and I'm going to direct your attention to the first row, where on $77 billion of single-family loans in almost 30 years we've had losses of 8 basis points; not per year, but over the 30-year period. If I take you to the bottom row, cumulatively over the 30 years, on all of our products, including multi-family, commercial real estate and business loans, we originated about $120 billion of loans and we lost 26 basis points or less than 1 basis point a year.

 Many of you may know that we sold ourselves to Merrill Lynch and bought ourselves back from BofA. And at that time we left about $2 billion of loans behind. Our losses include -- the loss experience includes the loans we left behind at Bank of America. Because most of our loans are real estate loans, you're able to search the records and find out exactly how those loans were dealt with and so it's a complete history of all of the loans we've made.

 The reason that we've been strong here is our high FICO scores, our good credit quality, our extreme liquidity, low loan-to-values and experienced urban professionals in good markets. In addition, the fact that our bankers share in a clawback and that they are compensated for finding liquid borrowers helps in the situation. And so our charge-off experience -- we are the blue bar compared to the yellow bar -- is much, much lower than our competition. In 2014 year to date we've had no losses. It's been a good year for many banks. But on balance, we've been much, much lower than other banks.

 We've had very good consistency in lending, a lot of banker stability. 90% of the loans made since 1985 were originated by bankers who are still with First Republic. We have very low turnover. Those who join us and don't work out, don't work out very quickly. Those who work out stay with us for a long time. They build their client base and we trust their credit quality because they do a good job over time. We have many, many bankers in the green slice of the pie who have been with us more than 10 years. And the yellow slice is those who have been with us 2.5 to 10 years. Our culture focuses on a very strong retention and that's key to both credit quality and client service.

 We've had a lot of consistency over time in terms of our geographies and our loan types. You'll see that in San Francisco, New York and Los Angeles in 2010 represented 84% of our loans. Today that represents 79% of our loans.

 If we look at loan types in 2010, single-family loans, including HELOCs -- and our HELOCs are originated to the same standards as our first mortgages. We had never made a loan that was 125% HELOC. We never understood why anybody did that. I guess they learned. But we made them to the same standards. Four years ago they were about 70% of originations and today they are about 65% of our -- 62% of our originations. Multi-family and commercial real estate were 25%. Today they're 22%.

 The business segment is growing a bit. It's a very important piece of business to us. We tend to focus on the small businesses that our clients own, run and manage and the non-profits they have influence over.

 Business banking is an average loan amount of $2 million. There's a 4-to-1 deposit-to-loan ratio for our business loans. The average business deposit is about $300,000 and the business deposits are highly checking account based so the average cost is about 7 basis points. And we've been -- the yellow bar is the loans, the green bar is the deposits. So we like this business very much. It's led us to a deposit base that now has 55% checking accounts.

 People have asked us who we make business loans to. The highest percentage of our loans, over 40%, are to schools, arts organizations and other nonprofits. And the next-highest category would be syndicate receivable loans to venture capital and private equity firms. The others are the types of businesses that you would expect our clients would own, run and manage. They represent only 12% of our portfolio, but business deposits are now 50% of our deposit portfolio.

 Our deposit base is diversified; half are business, half are consumer. 57% come from relationship managers and portfolio managers who bring in clients for a loan or for an investment management solution. 35% come from our deposit offices or branches and about 6% come from our broker sweeps.

 In terms of our deposit franchise, I want to give you a perspective on the size and the way we can service clients so well and also have a good understanding of our data. We have almost 300,000 clients. The average bank with $35 billion to $65 billion in assets would have almost 5 times that amount, 1.4 million clients. So we have a greater opportunity to have oversight and understanding of our clients for BSA and AML and a much greater opportunity to serve those clients well.

 Our investment management business has been growing very well. We have a single brand, an integrated model. We have an unbiased perspective. We don't manufacture any proprietary products. We don't charge more for one product than another. We have open architecture and we often lead with financial planning. It's a franchise that's growing very nicely. We've grown it 35% per year over the last several years. AUMs are up almost 6% for the quarter. About 75% is net new money. And they come from three sources. We hire new people who bring their book of business; our existing portfolio managers increasingly have clients who refer business to them; and our bankers who are compensated and well trained bring their clients who may have come for a deposit or a loan to our wealth management business.

 So it's grown very nicely. AUMs are up 35% on a compounded average growth rate and fee income is up 39%. It's still a small part of our business, but it's only a business that's about 10 years old. People ask us when we will have the same ratio of fee income for wealth management to total revenue as someone like Northern Trust does. They have been at it for 150 years, so we're working at it.

 Our efficiency ratio is quite stable and we have given guidance of 57% to 61% efficiency ratio.

 Our net interest margin is also very stable in the face of considerable changes over the years in the fed funds rate. Obviously margin pressure is in place for all banks and we're not excluded from that.

 We have consistent growth in net interest income, consistent growth in EPS. The year -- in 2013, the quarter you saw particularly high growth was because of a very unusually high return on a loan sale that quarter. And the last quarter we did a portfolio trade where we sold some securities to buy HQLA securities and we netted a $0.10 per share profit on that trade. Book value per share continues to grow.

 Obviously, in a growing business that's increasingly complex, we have a leadership team that we're focused on growing. It is broad and deep, comprised of both long-term existing executives and new talent. We brought in 46 key leaders in the last three or four years who are either people we had promoted or people like Mike and Gaye who have joined the organization. So we have the senior management team with an average tenure of 12 years. We've been introducing new leaders and we're working very hard to develop our existing leaders, promoting them and creating deputy positions so that we have people ready to take over.

 Our stock performance has been very good. The chart on the left shows our performance from 2002 until we sold to Merrill. It does not include the increased sales price when Merrill made an offer to buy us, but it shows that we had a very strong performance compared to either the S&P or the banking index. Since our second IPO after buying ourselves back from BofA in 2010, we've also shown very strong performance compared to those two indices. And most importantly, we continue to grow enterprise value, which is up very nicely.

 What we'd like to do now is take any of your questions.

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Questions and Answers
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 Ryan Nash,  Goldman Sachs - Analyst   [1]
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 Great. Thanks, Katherine.

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 Katherine August-deWilde,  First Republic Bank - President   [2]
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 Thank you, Ryan.

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 Ryan Nash,  Goldman Sachs - Analyst   [3]
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 Maybe I'll start off by asking a question or two to each of you before we open up to the audience.

 Gaye had talked about in her remarks you guys are targeting 11% to 13% loan growth as you manage to get it to $50 billion by the third quarter of the year. Mike, you had some interesting slides up there in terms of how much of the deposit growth is generated from existing clients or referral clients. I'm assume the loan picture doesn't look that dissimilar, which means pretty high embedded organic growth across the footprint.

 Assuming all goes well over the next year and you build out some of the work steams, which I'll ask Gaye about shortly, what type of growth rate do you think the bank could resume once we get beyond that?

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 Mike Selfridge,  First Republic Bank - COO   [4]
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 I'll start and, Katherine, if I you want to add to that. I think I would -- we've given guidance on this year, 11% to 13%. I would point you to originations as well. We had a very good quarter in terms of originations; the best quarter ever in terms of loan sales. So think of originations and then we've managed the balance sheet.

 What I guess I would say going forward, the only guidance we've offered is that we -- on the four-quarter rolling average of the definition of $50 billion, we would land that somewhere around third quarter of next year. Beyond that, I would say look to the market opportunities and activity's good and the pipeline is also good.

 Katherine?

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 Katherine August-deWilde,  First Republic Bank - President   [5]
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 Our focus is to continue to grow households every day in all of our markets. Our bankers are out looking for new clients and servicing old clients, existing clients and doing more with them and that's something we continue to expect to do well over the next several years.

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 Ryan Nash,  Goldman Sachs - Analyst   [6]
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 Just on the point of originations, Katherine, I mean one of the things I think that's been debated a lot (technical difficulty) conference has been what is the mortgage market going to look like in 2015. You guys are obviously uniquely positioned given the markets that you serve.

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 Katherine August-deWilde,  First Republic Bank - President   [7]
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 Right.

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 Ryan Nash,  Goldman Sachs - Analyst   [8]
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 I would say just in terms of the outlook for First Republic for mortgage for 2015, as well as the broader origination platform, what are your expectations as we look into 2015?

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 Katherine August-deWilde,  First Republic Bank - President   [9]
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 We're very bullish on the mortgage market in our markets. 50% of our business is in the San Francisco Bay area. As you can imagine, it's a very strong market, as in New York, Boston, Los Angeles. We do take share. We take share because we deliver. The realtors we work with and the clients we work with know that we'll close their loans and so we are often one of the very few names given as a reference by either an existing client or a real estate broker. And so we would expect, all things being equal, that this will be a very good year for mortgages, as well as for income property and business banking for us.

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 Ryan Nash,  Goldman Sachs - Analyst   [10]
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 Gaye, maybe I could ask you a question. Joining First Republic after working many years at another great firm, shortly after you came on you guys put out the plan to build out infrastructure. Can you talk about what's the infrastructure you're building now, what kind of capabilities it's going to give the bank once it's all done in terms of processes, or maybe even how big it could allow the bank to grow to over time?

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 Gaye Erkan,  First Republic Bank - SVP, CIO & Co-Chief Risk Officer   [11]
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 Sure. And I have been with the bank for about 5 months now, but I have been working with First Republic for about 2.5 years while I was at Goldman covering financial institutions, including banks and insurance companies for 9.5 years.

 So the infrastructure that we are looking at, it's -- the nature of the business model and the simplicity and the fewer number of accounts that Katherine mentioned actually make a lot of the work streams a lot easier and quickly to be implementable.

 One of the first work streams that we have been working on, and you have seen it happen in the quarterly filings, is the building the on-balance sheet liquidity portfolio. I mean not to mention that First Republic had about $16 billion -- still has about $16 billion of secondary borrowing capacities, the fed FHLB, but turning it into an on-balance sheet liquidity was one of the first work streams that we worked on.

 The second one is, again, as I mentioned, in my 2.5 years as advisor with the bank, the bank has built in-house modeling capabilities to do loan-level and depositor-level analytics. And as evidenced in the investor presentations, a lot of the statistics are very easy to produce in a short period of time, mainly driven by the single system of records due to the lack of the merger acquisitions within this bank. Almost entire organic growth.

 Now what does this enable? Some of the initiatives that they are undertaking is not just regulatory driven. It's also -- it's looking from inside the bank at the clientele and the cross-sell opportunities and the penetration in the big markets that we are in competing to the -- against the Big Four. There is actually a lot of good client analytics and risk management analytics at the same time that they are looking to provide to the first line of defense or the front line of the business, to be able to cross-sell more, to be able to create artificial intelligence across a line of clientele; what else can we do with our clients and how effectively.

 And then the third one would be to actually make the desegregation from an enterprise risk management perspective a lot easier.

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 Ryan Nash,  Goldman Sachs - Analyst   [12]
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 Do you think once this is all said and done, and I know this is a continuous process, it will allow the bank to operate more efficiently than it had historically?

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 Gaye Erkan,  First Republic Bank - SVP, CIO & Co-Chief Risk Officer   [13]
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 Absolutely. And I would say the way that I think that's unique to First Republic, at least in my own sample set that I've seen in my own career, I think the focus on relationship and looking at the bank as a collection of relationship segments with deep relationships on the loan side, deposit side, doing more with the existing clients and their referrals and looking at the profitability at that dimension, both compensation and risk management, pricing, etc., along the same dimensions provides a competitive advantage to First Republic.

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 Ryan Nash,  Goldman Sachs - Analyst   [14]
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 Got it. Katherine, one of the things that you talked about in your presentation was wealth management and I know this has been a big focus of yours. I think margins are currently around 15% and you've talked in the past about a goal of getting to 20% over time. I guess, one, can you talk about how big of an opportunity this is for the bank and, two, what do you need to happen to see margins in that business improve? Is it more about just continuing to build the scale and getting to the point in terms of asset size that you need to be, or is there -- you've had to over-invest in the business and you'll get efficiencies over time? Where does it really come from?

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 Katherine August-deWilde,  First Republic Bank - President   [15]
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 Well, we think it's a spectacular opportunity and we're bringing in terrific clients every day and we're very pleased with it. If we wanted to increase the margin tomorrow morning, we would stop growing it. But we don't want to do that. We're very focused on top-line growth and we've been able to achieve it. In the first three quarters of the year we've grown almost $10 billion in assets under management from a base of $41 billion, so that's quite high.

 There are two things that are causing us to spend money. One is building out an improving infrastructure that deals with trading, risk management, compliance, reporting and proposal generation. And so we're very pleased about that. We are about 60% through a process that will improve our infrastructure significantly, making it even easier for us to hire and bring in the right kind of advisors and the right kind of clients.

 In addition, we continue to focus on bringing in advisors who bring a book of business with them, but it takes us about a year for them to break even. We therefore will see our margin grow little by little over time until the day we decide to stop growing and then it would grow very quickly. But at the moment, while we still have the opportunity, we plan to focus a bit more on top-line growth and live with the mid-teens to high-teens margin.

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 Ryan Nash,  Goldman Sachs - Analyst   [16]
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 Got it. Let me see if there's any questions from the audience at this point. Start in the back and then there's someone up here. Go ahead, John.

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Unidentified Audience Member   [17]
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 Just in terms of where you kind of see mortgage demand going next year, maybe diving a little bit deeper into that, I guess do you think your demand from your clients will change in terms of product set? So for example, are people more looking to play longer-dated products with the fed funds potentially increasing and how do you think that's going to change next year?

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 Katherine August-deWilde,  First Republic Bank - President   [18]
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 Right now the product of choice is a 5- or 7-year fixed-rate loan. Whether they change what they want will depend on the yield curve. It always does. Our clients are smart and they make decisions based on that. So if you tell me what the yield curve would be I could tell you what they're going to choose. And we always have people who want 30-year fixed-rate loans. We sell them off to other people who want to hold those mortgages. And our job is to have every type of mortgage our clients might want and offer it to them. If the yield curve stays where it is, we would see the same kind of demand.

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 Ryan Nash,  Goldman Sachs - Analyst   [19]
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 Got one in the back.

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Unidentified Audience Member   [20]
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 Could you explain the clawback? Are those loans that are held on your books and are not sold into the secondary market? Is it an individual clawback? Is it a team? Could you elaborate?

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 Katherine August-deWilde,  First Republic Bank - President   [21]
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 It's an individual clawback and it doesn't matter if we sold the loan or if we held the loan. But for example, an individual -- a person might make for a $1 million loan maybe $1,600 or $2,000 to make that loan. They might make double that for their investment management and their deposits. If they have a loss within a certain time period, and it depends by product, they could lose as much as $10,000 on that loan as soon as there's a default. If it works out, then they get the money back. It happens very infrequently because they're quite careful. But we've always believed that they should have the same skin in the game that our shareholders have. They understand it. And one of the best things about that is, if people don't think they have a good credit skill level, they tend to not join us.

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Unidentified Audience Member   [22]
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 (Inaudible) question. In terms of deposits and business loans, it's a 4-to-1 ratio.

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 Katherine August-deWilde,  First Republic Bank - President   [23]
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 Yes.

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Unidentified Audience Member   [24]
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 So how do you -- how are you able to do that? I mean if somebody borrows $1 million and then they got to put up $4 million from their business that they're not able to use?

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 Katherine August-deWilde,  First Republic Bank - President   [25]
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 No, they don't have to put that money up. What happens is the kinds of clients we choose tend to have more deposits with us than loans, on average, and some of those business clients don't have any borrowings. So I'm taking all of our business deposits and comparing them to our business loans.

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Unidentified Audience Member   [26]
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 Okay. Thank you.

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 Katherine August-deWilde,  First Republic Bank - President   [27]
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 I think the average person doesn't do a 4-to-1 ratio, but some do. Some have more and some have less. That's the average.

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Unidentified Audience Member   [28]
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 Okay. Thank you.

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 Ryan Nash,  Goldman Sachs - Analyst   [29]
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 Maybe if there's one more from the audience?

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Unidentified Audience Member   [30]
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 There's a lot of debate in the market about -- around your net interest margin; not just from the general pressure in the market, but also from the need to continue to build liquidity. Can you give us your outlook?

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 Katherine August-deWilde,  First Republic Bank - President   [31]
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 I'm sorry?

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Unidentified Audience Member   [32]
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 Can you give us your outlook on your net interest margin considering the ongoing need to build liquidity.

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 Katherine August-deWilde,  First Republic Bank - President   [33]
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 Let me take part of that and Gaye will finish the rest of that.

 Our net interest margin, like all banks, will continue to be under pressure in this interest rate environment. But I think Gaye could address the liquidity.

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 Gaye Erkan,  First Republic Bank - SVP, CIO & Co-Chief Risk Officer   [34]
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 Sure. Sure. Let me take a quick -- because I know we are running against time, but just a quick step back.

 So in the third quarter the repositioning of the investment portfolio out of the CLOs and now into CMBS (inaudible) into high quality liquid assets. We have indicated that we would expect the impact on net interest margin for the fourth quarter to be minimal; not significant. And let me explain how and why because that will give you more information and outlook into how we are going to build the rest of the liquidity portfolio.

 So deposits year to date at 15% growth. Incorporating loan sales, after the loan sales, loan growth year to date is 10%. So that difference likely speaks to build up of any type of HQLA portfolio even going forward.

 Talking about the yield, just to give it as an example, the banking sector in general, when you look at the quarterly reports you would see they would be investing into agency paper, whether it's agency debt, agency (inaudible), agency CMOs. Let's just take one example; not that we are investing only in that security; one out of the many alternatives across duration and come back to the spectrum. A 4-year to 6-year duration agency paper, call it Fannie Mae pass-through, would be yielding in this rate environment about 2.8% to 3.15%, depending on what type of secured (inaudible) we are looking at and yield. Compare that to single-family residential home lending, it's actually not that much of yield differential.

 So in terms of size, we communicated that we are halfway there as of Q3, which is $2.2 billion of HQLA. The strong deposit growth (inaudible) to the loan growth after the sales and strong secondary market activity is a nice way of building that. So I don't have any concerns in terms of execution of how we are going to build the rest of the HQLA, assuming the same balance sheet size. And in terms of the yield, as I have given in the example, we do not expect any significant impact on the yield.

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 Ryan Nash,  Goldman Sachs - Analyst   [35]
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 Everyone please join me in thanking Katherine, Mike and Gaye.




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