First Republic Bank at Bank of America Merrill Lynch Banking and Financial Services Conference

Nov 17, 2015 AM EST
FRC - First Republic Bank
First Republic Bank at Bank of America Merrill Lynch Banking and Financial Services Conference
Nov 17, 2015 / 02:50PM GMT 

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Corporate Participants
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   *  Jim Herbert
      First Republic Bank - Chairman, CEO
   *  Jason Bender
      First Republic Bank - EVP, Chief Administrative Officer
   *  Ruth Aronowitz
      First Republic Bank - Senior MD
   *  Glenn Degenaars
      First Republic Bank - Senior MD, Portfolio Manager

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Conference Call Participants
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   *  Erika Najarian
      BofA Merrill Lynch - Analyst
   *  David Siino
      Epoch Investments - Analyst

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Presentation
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 Erika Najarian,  BofA Merrill Lynch - Analyst   [1]
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 I thought I would ask you guys a question first in terms of how you're thinking about mid-cap bank stocks for 2016. So if we could have the first polling question up, please: What do you guys think, in the audience, will be the biggest catalyst for mid-cap bank stocks in 2016? 1, stronger loan growth; 2, higher interest rates; 3, cost rationalization; 4, accelerating capital return, especially when comparing to large-cap banks; and 5, a pickup in M&A activity.

 So we have five seconds on the shot clock, and the feedback from the audience today: 48% of you -- this is actually the same answer as the large-cap question -- think it's higher interest rates. The next most popular answer, 34% of you think it's a pickup in M&A activity.

 So without further ado I thought I would introduce our next guests. We are very pleased to have First Republic join us for a fireside chat. You already know them well.

 First Republic is one of the most appealing organic growth stories in the space, focused on serving affluent and high net worth customers in key urban and coastal cities on both coasts. First Republic has seen impressive growth over the last few years and recently crossed the $50 billion asset threshold.

 To discuss what this means for the Bank and the outlook for growth heading for next year, it's my pleasure to have with us Chairman and Chief Executive Officer Jim Herbert, and Chief Administrative Officer Jason Bender. Thanks, guys, for joining us.

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [2]
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 Erika, nice to be here. Thanks for having us.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [3]
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 Before kicking off the first question, maybe we should ask the audience what they think about your stock --

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [4]
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 Oh, let's do.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [5]
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 -- heading into 2016. Let's see if there's any difference in answer. Let's pull up the second polling question if we could.

 What do you think will be the biggest catalyst for First Republic's shares in 2016? 1, continuation of best-in-class top-line growth; 2, the absence of negative surprises stemming from crossing the $50 billion threshold; 3, proving that it can grow revenues and keep the margin stable in a rising short rate environment; and 4, a pickup in M&A activity.

 At three seconds left; and your most popular response is number 1, 42% --

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [6]
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 Good, good.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [7]
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 -- believe that it's the continuation of best-in-class top-line growth.

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [8]
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 May they be right.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [9]
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 So are they? Maybe we'll start there. I just wanted to start by asking you what you're seeing in your urban coastal markets, particularly in San Francisco.

 I think during the dinner last night there was a lot of conversation about potential overheating in that market. Could you give the audience a little bit more color on what you're seeing?

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [10]
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 Sure. Well, to state the obvious, the San Francisco market in particular is a hot real estate market. Is it overheated or not? I don't really know how to he judge that.

 I've been doing this a long time, but it's never self-evident entirely when it's overheated. Last year looked overheated.

 But the thing that's really driving it is job creation. Job creation in San Francisco is still very, very strong. There is a lot of new commercial space with a lot of new companies and a lot of new people moving in.

 The constraint on all of that will probably actually be housing and a shortage of affordable housing. That's already spilling to the East Bay, and that's the natural outlet for San Francisco at least. Here it spilled to Brooklyn.

 So I don't -- prices are probably not going to go up, in my opinion, as much in the next 12 months as they have 12 months. But the most fundamental element of valuation in the Bay Area is supply constraint. There just is -- it's very hard to build new housing in the Bay Area, particularly in the city.

 So I think it is a very strong market. I think it's less strong now than it was even six months ago. Less bids: there were five bids; now there are two.

 Is it a market you can sell a home in? If you price it right, absolutely, in a minute. So I don't feel like it's a risky moment yet.

 I think the risk to all the housing markets -- across the country in fact -- comes more from lenders that are denigrating their standards a bit versus the market's intrinsic risk. And that's beginning to happen.

 It's not over the top yet, but you can get an 85%, 80% mortgage up to about $4 million now without much trouble. That's a mistake.

 We're not doing that, but it's a mistake. We're losing some business for that, not too much.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [11]
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 Given the comment on asset value growth and your peers, have you at all shifted your lending standard? I know it's not to the downside, but have you made adjustments in terms of making it tighter in certain regions and for certain products?

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [12]
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 We have, a little bit. We have a little bit. And we're willing to lose deals over terms and conditions.

 We'll compete on price. We're not afraid of that. We have the funding costs and the operating expense control to be able to do so. But we will not compete on terms, and so we'll watch deals walk away.

 Ruth Aronowitz is here with us, who is a Senior Regional Managing Director here in New York, and Glenn Degenaars, who is in our wealth management activity. Ruth was just commenting in the prior meeting that she's let some deals go recently, about LTV. But it doesn't -- we have enough business.

 It's going to be a record lending year for us, so we have enough business and we're willing to do that. Quite frankly, even if we didn't have enough business, we would do that.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [13]
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 Hopefully the Fed is going to shift interest rate policy in December. Clearly that has played a large role in asset inflation as well. How should we think about how a normalization in interest rate policy would impact activity levels for your wealthy clients, if at all?

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [14]
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 It won't slow it down very much, actually, particularly in the range that is likely: 100 points, maybe, over a year; even 150. I don't think it will change their activity much.

 Because the average in San Francisco proper, for instance, about every other home, doesn't have a mortgage -- the $1 million-plus homes anyway. That's almost all of them. And our average LTV is 60% in San Francisco and actually throughout the country.

 So the borrowing cost is not the driver. The need for the liquidity or the transaction opportunity is the driver.

 It's not that high-end is immune to interest rates. But within the range we're talking about, it's not going to matter.

 The place where it matters is the fixed-rate borrower, the 30-year fixed, 15-year fixed. That will slow down. And it's interesting; there isn't an absolute level as much as a relative level.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [15]
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 Right.

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [16]
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 If it was 3% and now it's 5%, oh my gosh, the world is falling. Well. So I think there'll be a psychological reaction.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [17]
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 You're in urban cities that are also the most global in the United States. Thoughts on how some of the economic discord outside of our borders could impact some of the activity, especially in New York and San Francisco.

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [18]
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 Well, I think as Rush could indicate, here in New York the foreign buyer has slowed down quite a lot. If you go through the origins of the foreign buyers: Russia, China, Europe in general --

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [19]
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 Makes sense.

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [20]
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 -- and then Brazil. If you just go down the list, they are having problems of various types at home so they're not going offshore.

 And those topped off the markets, but they really were not the core of the market. They were not the driver.

 Miami, the Latin buyer was a driver. But most of the other cities they were kind of icing; they were not the cake. Some of the very high-end condos here in this city probably are exposed to that a little bit. But the majority of the market in this city is co-op, and that wasn't a foreign buyer market.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [21]
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 Right. Maybe I'll move on and get this topic over with, which is that of regulation. Now that you have officially crossed the $50 billion asset mark threshold, I know that you said on the earnings call that there shouldn't be anything incremental that you need to do from either a cost standpoint or a compliance standpoint. Could you care to elaborate to the audience?

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [22]
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 Jason, you want to take that? Because we did have one -- we did point out a couple of incremental things that are coming at us now.

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 Jason Bender,  First Republic Bank - EVP, Chief Administrative Officer   [23]
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 Yes. No, be happy to. I mean first and foremost, we've known for a while that $50 billion was coming, and so this is something that we've really been at for the better part of two years now, and with a focus on things like compliance, BSA/AML, ERM, on balance sheet liquidity. And of course we've had two years now of capital stress-testing submissions under DFAST.

 Most of the expenses associated with that are really baked into the efficiency ratio now. So we've really seen that built into the Bank's model.

 We did mention on the earnings call a couple of areas where we're doing some additional work. Incremental expense I think of roughly $5 million a year for things like Volcker Rule adherence and living will. So a couple of minor things, but the vast majority of it's already built in.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [24]
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 One of the themes of this year's conference is that the good news is we're getting increased visibility on post-crisis regulation. The one that I think could impact you the most is a shift in the designation of what a SIFI means. So if they raise the bottom --

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [25]
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 Threshold.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [26]
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 -- the threshold from $50 billion to, let's say, whatever it is, $100 billion, 250 billion, what are the implications for your Bank, if any? Before that, how likely is that to happen?

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [27]
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 I think it's very reasonably unlikely. The Dodd-Frank is a third rail in Washington, and we're going into an election year. So I think it's reasonably unlikely that any significant banking legislation passes. That wouldn't be my desire, but I think it's a realistic read of what's going to happen.

 If it were to happen, however, I doubt it would change very much how we act. We've complied with the rules; we've worked hard to do so. We have the infrastructure in place.

 We are a growth organization. If they raised it to $100 billion, we're going to get to $100 billion in due course. So why not maintain the standards?

 Does that mean we would slow down the implementation of anything we're working on? Probably not, because most of the things are done, as Jason just indicated.

 We have a couple things we're working on. Living will, we haven't submitted our first one yet. But that's not an overwhelming job for us because we're so simple: we have a Bank; no holding company; we have four subsidiaries. That's it.

 So a resolution plan on us is a nothing. It's what they do for a living at the FDIC. So they're good at it.

 So I think that we would keep our standards pretty much where they are. I don't think we would change much.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [28]
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 Just to be clear, the capital constraints on this Company is not really that you're $50 billion or over. It's the de novo?

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [29]
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 Yes.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [30]
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 Okay.

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [31]
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 That's actually a worthwhile point to make. The constraints on us on capital have to do with the fact that -- surprisingly enough, because we came out of the BofA -- we are still a de novo. We had a seven-year de novo period that we have to work through, and that has another year and a half to go.

 That entails a business plan understanding with the regulators, which we're in constant touch with them about. They've been very actually supportive of our activities; but it's all subject to a detailed business plan.

 So that's -- and buried in there, and we've made this very much public, is one of the main constraints is 8% Tier 1 capital -- Tier 1 leverage capital, irrespective of all other constraints. That's our driver.

 And that's not about SIFI or about size or anything else. We're not designated SIFI because we don't have a holding company, but we meet most of the standards.

 It's an unusual situation for us because we operate a little differently structurally. But we don't rely on that to sort of dodge issues. We just take them on.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [32]
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 If you look at your Tier 1 capital in the third quarter and your level of growth, let's say, is sustainable; it's 15% on the loan side. It didn't seem like you needed the capital that you raised recently. Could you give the audience a little bit more sense in terms of what drove the decision tree on the timing?

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [33]
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 Well, we did have -- we've had in our thinking a capital round sometime next year -- a modest one; this was only about a 2% round. A modest one sometime next year, so we just pulled it forward, really, based on the opportunity and based on you never know.

 I think that -- also we're growing relatively rapidly. We just did the Constellation deal on the wealth management side. We just did the Constellation transaction; that cost about $115 million. The net difference from book value on this transaction recently in a way replaces that tangible book value hit on the purchase of Constellation.

 But the other thing is that we like to stay ahead of our needs. So when you say need, it implies a time frame; and we try to think at least two years ahead on our capital needs, because our experience is that the capital markets are not there when you need them. You need to be there before you need them.

 Growth is a driver for us. I mean we don't -- it's not a target, it's just a result of the client base and the model we have and the markets we're in. And we want to stay ahead of it.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [34]
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 Moving on to the fun stuff, as I like to call it, and since everybody in this -- 42% of you want to know about top-line revenue growth, could you give us a sense of how client activity is shaping up in the quarter? Notice I didn't say loan growth, because loan growth is just a result.

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [35]
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 Yes, yes. Well, actually, we have Ruth here for a minute. Would you like to give us a sense here in New York on the ground what it's been like?

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 Ruth Aronowitz,  First Republic Bank - Senior MD   [36]
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 Hi, everyone. I would say client acquisition continues to grow because we get so many referrals from our existing client base when we provide this service, and we get their deals done in a timely manner. There is no problem where -- they will refer someone that they work with, or a family member, or a friend. So client acquisition continues to grow very strongly.

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [37]
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 And, Glenn, you can talk to wealth management growth.

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 Glenn Degenaars,  First Republic Bank - Senior MD, Portfolio Manager   [38]
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 Sure. As everybody knows, third quarter was a little bit of a difficult quarter in the markets, and we were effectively able to increase our assets under management by over $5 billion in a difficult market environment. Now the markets have improved modestly in the current quarter. Growth has continued to accelerate.

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [39]
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 Maybe just a comment on that last point about wealth management for a second. We have closed Constellation -- this fourth quarter is going to be a very active wealth management quarter for us, and that actually was a little bit of our thinking on the equity round, too. We closed Constellation October 1 or 2.

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 Jason Bender,  First Republic Bank - EVP, Chief Administrative Officer   [40]
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 October 1.

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [41]
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 October 1, okay, and that brought in about $5 billion, about $6 billion. But also -- and it's public knowledge, of course -- the Credit Suisse private banking has going to Wells Fargo or wherever the teams might want to go. We've already announced two teams that have joined us, and there are other ongoing discussions.

 So that has an -- we have an unexpected opportunity in wealth management right now. It's kind of a 90-day window because they have to settle by the end of the year. And then there's a few other things in the background that are going on at the same time, similar.

 So we're going to have a little efficiency challenge in the fourth quarter, but it's coming from the growth in wealth management. When you bring these teams in, right away they're not -- the assets don't come right away; the costs do come. So there is a little bit of that.

 On the other hand, it's an incredible opportunity. It's a one-off opportunity. It's extraordinary.

 Between Constellation and the Credit Suisse situation, our wealth management could take a pretty nice jump here. We're excited about it.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [42]
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 Outside of Credit Suisse, there seems to be ongoing restructuring at our European peers. Do you suspect that the opportunity for recruitment is going to last well after this 90-day period with CS from other peers?

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [43]
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 I think so. Well, Glenn, who joined us from Deutsche, three or four -- yes, and we brought in people from almost every large organization. But the European organizations seem to be under the greatest pressure. Credit Suisse is the extreme example.

 So I think there are going to be greater opportunities coming. We hear about that from people already. You're beginning to hear about it, too.

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 Glenn Degenaars,  First Republic Bank - Senior MD, Portfolio Manager   [44]
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 Yes. I think we're going to definitely approach it from a strategic standpoint making sure the people that we hire are a good cultural fit and fit into the overall philosophy of the institution. But we are seeing more and more opportunities on that front.

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [45]
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 Yes.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [46]
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 Not just to pick on our European counterparts -- I mean, we all start picking on large US banks. What are the opportunities that are coming from some of the balance sheet optimization that the big banks have had to go through because of various rules that are not applicable to you? Specifically the CET1 surcharge, where you're being penalized for certain kinds of deposits.

 Are you seeing a flow of deposits to your institution in terms of business deposits? If so, are you able to capture the persons, the individuals behind those businesses as they flow into First Republic?

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [47]
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 Yes and yes. We're seeing a flow of those kinds of clients, to some extent. We've brought in -- we have taken in some hedge funds; but we've also importantly brought in the management companies and the individuals.

 Actually, Ruth has handled a fair amount of that in New York. And that's been quite successful on a cross-sale basis.

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 Ruth Aronowitz,  First Republic Bank - Senior MD   [48]
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 Absolutely. In a lot of cases we already had the personal relationship of the person that owned the hedge fund, and then I didn't have the feeder fund or the management company. Now we have that as well, so it really just broadens the whole relationship.

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [49]
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 Our surcharge on this kind of thing is different than other banks. Our surcharge, if you want to call it that, is called: we want everything here, or we don't want anything. So we want the fund; the sweep funds we'll put -- the feeder funds we'll put sweep on. These are more modest size, by the way, most of them; and we want the management company; and we want the principals.

 Because at the end of the day, the fee goes home with the principals, and so we just follow the money. We want to build the model around the individuals; and as Ruth said, we've been banking a number of these principals already, so now this piece comes over.

 But if we can't keep the relationship of those right -- and this is a very clearly stated agreement in advance. It takes some quarters to get it executed properly. But if we can't have the proper totality, sort of the total relationship proper, then we pass.

 We're going to -- and we've made it clear, we will assess it at the end of each quarter. So if we don't get the individuals, we will not bank the funding; but we give a little time for that. And if we don't get the management company, we don't even start.

 Whereas those pieces were broken up in most of the larger banks. Private banking wasn't very engaged with the fund management there.

 We've been in the fund management business -- we do private equity and venture capital -- for 30 years, particularly VC. But we came at it from the individuals, not from the funds. We went from the individual to the funds.

 It's been a good business, very good business. And our deposit growth in the last -- that's another driver on the equity round. Our deposit growth in the last 12 months has been 25%. So the difference between the loan growth and deposit growth has gone into HQLA and other investments, cash.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [50]
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 Switching topics here, on innovation, we've had only two presenters so far, Bank of America and Goldman, and both management teams were asked about technology. So maybe I'll ask both of you here.

 First Republic is known as a high-touch, fantastic service bank. How are you marrying your traditional model with financial innovation, particularly as you capture the upcoming affluent that may choose to interact with us, the banking sector, a little bit more differently?

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [51]
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 (inaudible)

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 Jason Bender,  First Republic Bank - EVP, Chief Administrative Officer   [52]
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 Sure, yes. I think first of all, high-tech is not mutually exclusive from high-touch. We also feel like we benefit quite significantly by being in San Francisco where a lot of the fintech innovation is taking place. I think there are opportunities for us to partner and learn with those who are innovating (technical difficulty).

 One piece of it that I think is important is I think a lot of the fintech evolution is really causing a lot of innovation in the client experience, so how banking services are actually delivered. So we can take advantage of that, frankly, by thinking through how we deliver applications for loans, for instance; how we manage the service experience with the client as they're opening up new accounts.

 We ourselves continually invest significantly in technology. We're working now, for instance, on considerable enhancements to our consumer online banking platform. So there's a lot going on in our markets, a lot that we can take advantage of.

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [53]
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 We have a smaller loan program designed for junior professionals. It's either around -- it's really around loan refinance, [school], on the refinance, or purchases for a partnership interest, and those applications are now being done online. Taken a couple hundred already, smooth as silk.

 Then they go into an algorithmic scoring system, and then they go to a credit officer. We have an upfront system that's online that with four questions and a location, which obviously we read off of where they're coming in from, we can give them a probable yes; and on the same screen pops up the face and the contact information of the officer that's going to reach out to you within 90 minutes.

 And then if you want to scroll to your online app, you can do it right then. So we can bring in a client sitting in a cafe with their phone in about 20 minutes, start to finish. And that's already working.

 Cost us $150,000; not a big deal. We just turned it over to some young people and said get it done. They did.

 And we're rolling out online mortgage apps this quarter. And we have a complete rework of our online banking system in place, rolling out this quarter and starting the next four quarters.

 So it's not easy, but we tend -- our philosophical base is fast follower, not leading edge. I have no interest in leading edge. That's not who our client base is.

 We need -- we want to be fast follower, and we have the advantage of where we are and who we deal with. We bank 700 venture capital funds and about 100 venture capital families. There is very little that's going on that we're not one phone call away from, on a very personal level.

 And we get a lot of it coming at us saying: would you be willing to try, etc.? The one thing we don't do is invest in them, because I don't want to get committed to any one particularly. I want to stay open.

 It is fast moving, though. And the other piece of that is the alternative lenders, the crowdfunding lenders; and I think that's mostly a cost of funds issue. Forget credit discussions, which are out there, but just a cost of funds issue.

 We're at 14 basis points cost of funds. We have higher operating costs, but our cost of money is so much cheaper that we have a pretty good advantage.

 And so far the areas that they're operating in -- SoFi just started to do mortgages, for instance, but they're secondary sold. And they'll do 85% when we won't, so it's a little different model.

 But I don't think any of these in the near term -- I don't want to be naive -- in the near term, they're not more threatening than a Wells Fargo is. But in the long term, you have to be part of it, for sure, and we're completely committed to that; but we intend to be quickly behind.

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 Jason Bender,  First Republic Bank - EVP, Chief Administrative Officer   [54]
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 I think importantly for us, too, our clients want it easy, and they want it convenient; but that's not to say that they don't still want a banker. So we're able to retain that personal relationship. We just introduce ourselves at the right point in the process.

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [55]
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 The online student lending refinance: 4.7 products. That's our average: 4.7.

 Most banks are struggling to get to 5. We start out at 4.7 with the student online, because the banker steps in right at the beginning. And they'll have that client for life. So they'll start him -- so we've jumped 10 years in front of the mortgage.

 So it's actually very exciting. It's really very exciting. And we can afford to do it because the systems are so cheap, actually. The acquisition cost is very low.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [56]
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 Well, I wanted to move on to the next topic and then ask the audience here with another polling question before we move into interest rates. I think we talked about this often.

 Would you characterize First Republic's balance sheet as: 1, asset sensitive, translating into an expanding core net interest margin when short rates rise; 2, liability sensitive, translating into a compressing core net interest margin when short rates rise; or 3, neutral, which should keep the net interest margin in a tight range when short interest rates rise? Jason, you want a clicker?

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 Jason Bender,  First Republic Bank - EVP, Chief Administrative Officer   [57]
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 Yes, please. (laughter) Can I vote multiple times?

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [58]
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 And the audience response is neutral: 65% of you believe that your margin will be in a tight range when short interest rates rise. Would you like to address that response?

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 Jason Bender,  First Republic Bank - EVP, Chief Administrative Officer   [59]
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 Sure, I'd be happy to. No, I mean, that's encouraging. First Republic has traditionally been neutral to mildly asset sensitive to interest rate changes, and we are so today.

 Obviously, on the asset side of the balance sheet, if you take a look at our 10-Q disclosures you can see that a little under 40% of our assets reprice within the first 12 months. Importantly, and something that is often overlooked, is on the liability side of the balance sheet for us: we are now 61% checking, which is non-interest-bearing deposits. Contrast that to 2008 when we were just 27% checking, and that's an evolution that's taken place here over the last several years that is oftentimes overlooked.

 Obviously, that provides an anchor in a rising interest rate environment. Deposits for us are a primary source of funding, a little under 90% of all funding. So between those two things we really have a pretty neutral to slightly asset-sensitive balance sheet.

 The other component to our story about interest rate risk management really has to do with the turnover on the asset side. Our loan portfolio in particular.

 On average, we have 10% CPR on our mortgage portfolio, which is probably a little higher than peers. That's simply a factor of how active our clients tend to be.

 When you add on to that a roughly 15% growth factor for the Bank, you've got kind of a 25% repricing built into the loan side of our balance sheet already. That also contributes to the asset sensitivity that you see.

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 Jim Herbert,  First Republic Bank - Chairman, CEO   [60]
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 To follow up on that, if you look in the 10-Q you'll see a GAAP analysis and you'll see a sensitivity to net NII. And GAAP analysis looks pretty neutral, first year slightly negative, second-year slightly positive, two years slightly positive to neutral.

 If you look at sensitivity in a rising rate environment, we do better: single-digit percentage of NII growth in the first year and the second year, or more than that. The difference is that the static GAAP doesn't have this last point, which is the repayment rates and the growth rate. The sensitivity does.

 So what you get is if you have two banks side-by-side and the same portfolios exactly, one's growing at 15%, one growing at 5%, this person has 10% more (inaudible) pricing. That is not yet on the balance sheet. That's the important thing: it's not on the balance sheet yet, so it isn't measured in a GAAP analysis.

 So we've managed to stay -- if you take our net interest margin, it's been between 3% and 3.30% for about 15 years, and those 15 years have some pretty good movements in them. Never thought I'd see zero, though; but who knows?

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [61]
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 Maybe breaking this down a little bit further, during the Bank of America presentation we asked the audience what their outlook on interest rates were. The prevalent response was they thought that through 2016 there will be less than three rate hikes on the short end; and the long end will stay where it is.

 Just wondering, in the event of one or two rate hikes, how does that impact pricing for the industry? Does that accelerate it? Do we lag significantly because the absolute level is still so low?

------------------------------
 Jim Herbert,  First Republic Bank - Chairman, CEO   [62]
------------------------------
 Pricing at the consumer credit level -- at the loan level?

------------------------------
 Erika Najarian,  BofA Merrill Lynch - Analyst   [63]
------------------------------
 At the consumer deposit level.

------------------------------
 Jim Herbert,  First Republic Bank - Chairman, CEO   [64]
------------------------------
 Deposit level? Very little. Very little.

 Just taking your fact exactly as you say it, if it went up two quarter-point rises, I don't think our cost of funds goes up 5 basis points, 6 or 7 maybe at the most.

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 Jason Bender,  First Republic Bank - EVP, Chief Administrative Officer   [65]
------------------------------
 Yes.

------------------------------
 Jim Herbert,  First Republic Bank - Chairman, CEO   [66]
------------------------------
 It's a big, big lag. The working capital account size of our client is pretty high. And the working capital -- I mean, the individual clients, you don't normally think of it as working capital. But if you take a household, a wealthier household or a high income household -- forget whether they are very wealthy or not, just a high income household -- they have a pretty heavy deposited working capital number, and that stays. We've been in the business a long time; it doesn't vary very much. It has gone up a bit recently.

 But -- and then the businesses we have, generally particularly the funds for instance, their deposits are predicated by money going out or coming from deals. So it is what it is.

 Then the working capital of our nonprofits, which are the biggest part of our business bank, is kind of -- is what it is. Now some of it, the schools will want to put a little into interest rates, so they'll move some over into a money market account with us. That will take some of it out, but not very much, I don't think.

 Now you talk about 2% move, it's probably a little different answer.

------------------------------
 Erika Najarian,  BofA Merrill Lynch - Analyst   [67]
------------------------------
 Well, you bring up a great point on volume, not just rate. I think point well taken on the working capital side. Maybe on the consumer side, I think there's a slide in your presentation where you show that while you've grown your deposits and your loans significantly, your number of clients hasn't grown to the same speed.

 I'm wondering if that level of concentration worries you in terms of volume, if we're normalizing throughout 2016 and 2017.

------------------------------
 Jim Herbert,  First Republic Bank - Chairman, CEO   [68]
------------------------------
 I don't think so, because the clients we have are very -- are one-off, the clients with an average of eight or nine or 10 things that we do. We know who they are and how they act quite well, and they are not going to change how they act over 50 basis points. It really isn't going to be a big difference.

 The institution that is funded off of -- if anybody is anymore; I'm not sure they are -- off of CDs and money markets are probably more in that game. Most of our checking is like 5 basis points or zero. So it's really what I think of as need checking, not discretionary checking.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [69]
------------------------------
 Right.

------------------------------
 Jim Herbert,  First Republic Bank - Chairman, CEO   [70]
------------------------------
 So I think that it's pretty stable. Now I've been -- actually before this Bank I started a bank in 1980 and rates were 22%, so I've seen the other side. It's naive to think that as rates go up people won't want to be paid more. They definitely will.

 But our client base will lag behind that because it's not a major source of their income. It's not a big part of their stream of income. It's an incremental thing.

 They are more interested in the liquidity availability and service and, third, earning from their cash. So we have had -- through many ups and downs we have a pretty good history of lag, pretty strong lag.

 And we can apply -- applying that to this doubling of checking level gives us a very good indicator, I think, of how it will play out.

------------------------------
 Erika Najarian,  BofA Merrill Lynch - Analyst   [71]
------------------------------
 Right. I want to leave some time for the audience to ask questions as well, so I will switch to the last polling question of the day. You all want to know, so I'm going to ask you all anyway.

 Do you, the institutional investors, think First Republic is a seller? Is a potential seller? 1, yes, within the next 12 to 24 months; 2, yes but over the long term; or 3, no, as there are a limited amount of financial institutions that could be a good fit with First Republic. Five seconds on the clock.

 Andrew, you can't vote twice. (laughter) Interesting. This is a little bit more spread out than I would have thought.

------------------------------
 Jim Herbert,  First Republic Bank - Chairman, CEO   [72]
------------------------------
 Interesting.

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 Erika Najarian,  BofA Merrill Lynch - Analyst   [73]
------------------------------
 41% of you say yes, but over the long term; 31% of you say yes, but within the next 12 to 24 months; while 28% of you say no, there is very little out there that could fit well with First Republic. And they are waiting for your response, Jim.

------------------------------
 Jim Herbert,  First Republic Bank - Chairman, CEO   [74]
------------------------------
 Are they? Okay. The answer is, we're not a seller, active seller, under any circumstance. We are a responder to inquiries. That's what happened with Merrill, and that's the only thing we would probably ever do.

------------------------------
 Erika Najarian,  BofA Merrill Lynch - Analyst   [75]
------------------------------
 Great. So I thought -- I've asked a lot of questions; I'm sure you guys have them too. We wanted to open it up to the floor. Any questions for Jim or Jason? Right here in front.

==============================
Questions and Answers
------------------------------
 David Siino,  Epoch Investments - Analyst   [1]
------------------------------
 Good morning. David J. Siino with Epoch Investment Partners. Two questions.

 One, you've been fairly active in wealth management. Over the long term, what percentage of revenue do you believe noninterest income will make up in your ideal model for the Bank?

 And secondly, I think historically you haven't offered a credit card or any kind of unsecured consumer-type product. Is there a reason for that? Is that just a business line that you're just not interested in?

------------------------------
 Jim Herbert,  First Republic Bank - Chairman, CEO   [2]
------------------------------
 The latter is easier. Those credit cards are a really good example of you need massive scale to make them work. And then we actually have offered two credit cards -- I won't necessarily the brands -- but we did offer two of them, and we found that the service did not further enhance our service image and so we pulled back.

 The number of client -- it's really about also the number of households we have. The number of households we have in the Bank is actually quite a modest number. So we're nowhere near -- now they spend a fair amount of money, so they're good -- but they also pay on time. So we don't have large numbers, and they all pay on time. All? But most do.

 So we're not really a particularly good Bank for a credit card supplier to want to deal with, surprisingly enough, except that our clients spend a lot of money. So the merchant-based income stream is good, but the credit-based income stream is nonexistent and so is the fee, because of the quality of the client.

 In terms of wealth management, it's gone up from about 11% or 12% to about 18%. Do I have the numbers right? And we'd like -- more is better as far as we're concerned. That's one of the reasons we're taking advantage of the opportunity right now on wealth management.

 Because wealth management growth opportunities, organic is there every day, but in terms of being able to pull a good FA team in or being able to find a good acquisition that actually is culturally a good match is very rare. So we tend to take them whenever we see them. We look at a lot and pass on a lot.

 But I'd like to see -- most of the banks of our type, if you think about them, are about 100 years older than we are. Northern Trust, Mellon, JPMorgan, the old JPMorgan private bank, U.S. Trust.

 What happens is that you work with families; you help them become wealthy. Almost all of our clients are first generation and then -- first generation to achieve the level that they're at. It's not that they came from poor backgrounds -- many of them did, actually -- but it's just that they didn't inherit a lot of wealth. So they are making it -- because we were new. And the people that had inherited wealth are already -- many already had a bank when we started, hung out our shingle. And so they grow.

 What happens, however, over time is that if you do a good job they leave their wealth they develop with you. Then you go to the next generation of client, the child or the next new client, the next 30 years; and suddenly this wealth piece keeps building and the bank starts to evolve at a certain size.

 And if you think back, that's the U.S. Trust. And 100 years later, Northern Trust, their wealth management business is like probably 6 to 7, 8 times their size of the bank. So it evolves over time.

 We're beginning to get there. The wealth management size of the Bank now if you add in Constellation is about $65 billion, just adding the quarter end and Constellation. And the Bank is below $60 billion. I mean, it's the high $50 billions. So we're beginning to see this passing of size a little bit now.

 The wealth management business, though -- and this goes back to the efficiency ratio, which -- the wealth management business has an efficiency ratio, misnamed, of about 80%; whereas the Bank operates in the upper 50%s. So it is less efficient; there's more costs embedded in it. Unless you buy something, it doesn't take capital.

------------------------------
 Jason Bender,  First Republic Bank - EVP, Chief Administrative Officer   [3]
------------------------------
 We also tend to look at the absolute growth in wealth management and fee businesses as well. And that's simply because we also see growth opportunities in net interest income as well.

------------------------------
 Jim Herbert,  First Republic Bank - Chairman, CEO   [4]
------------------------------
 What's missing from the percentage is we're not a bank of fees. We don't do a lot of fee charging. We prefer to take it in much larger relationships, primarily checking accounts. We prefer to take it in funding, and we prefer to take it in cross-sell of products and in stability and longevity of relationship.

 One of the things that people miss on our growth is that we have very, very low attrition rates, about 2% a year. So we're not fighting an outgoing tide every year.

 Our growth is net, and that's a big deal. And that stability is a source of tremendous efficiency.

------------------------------
 Erika Najarian,  BofA Merrill Lynch - Analyst   [5]
------------------------------
 Great. I think we have time for one more question. Jim, any closing thoughts from you as we wrap up?

------------------------------
 Jim Herbert,  First Republic Bank - Chairman, CEO   [6]
------------------------------
 No, I think we're continuing to do well. The volumes of this year will be good. The credit quality is holding up fine.

 We have great opportunity in the wealth management area, actually in this quarter, so that's going to chip away a little bit at our costs. But on the other hand, it's a growth opportunity that's quite rare.

 And the markets we're in are solid. One could say San Francisco is a little bit overheated. We would kind of agree with that, thoughtfully. So I think it's a good moment in time for us.

------------------------------
 Erika Najarian,  BofA Merrill Lynch - Analyst   [7]
------------------------------
 Great.

------------------------------
 Jim Herbert,  First Republic Bank - Chairman, CEO   [8]
------------------------------
 Thank you all very much.

------------------------------
 Erika Najarian,  BofA Merrill Lynch - Analyst   [9]
------------------------------
 Thank you.




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