First Republic Bank at Raymond James Institutional Investors Conference

Mar 07, 2017 AM EST
FRC - First Republic Bank
First Republic Bank at Raymond James Institutional Investors Conference
Mar 07, 2017 / 09:35PM GMT 

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Corporate Participants
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   *  Shannon Houston
      First Republic Bank - Head of IR
   *  Bob Thornton
      First Republic Bank - EVP & President, Private Wealth Management
   *  Olga Tsokova
      First Republic Bank - Chief Accounting Officer

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Conference Call Participants
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   *  David Long
      Raymond James - Analyst

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Presentation
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 David Long,  Raymond James - Analyst   [1]
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 Alright, why don't we go and get started. Good afternoon everyone. My name is David Long, I'm the Research Analyst here at Raymond James that covers First Republic. We are excited to welcome First Republic to the Raymond James conference for the first time.

 First Republic is a $73 billion asset bank headquartered in San Francisco. It has been among the most consistent growth stories in banking for several years, all while maintaining peer best credit quality. Also, we'll disclose that the Company did complete 2.5 million share offering this morning.

 Presenting on First Republic's behalf will be, President of Private Wealth Management, Bob Thornton who has been with the bank for 13 years and previously held management positions with Deutsche Bank, Credit Suisse and Goldman Sachs. Also presenting for the First Republic today will be its Chief Accounting Officer Olga Tsokova, as well as its Head of Investor Relations Shannon Houston. And also, in the audience is Liz Green from Investor Relations as well.

 With that, I'll pass it on.



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 Bob Thornton,  First Republic Bank - EVP & President, Private Wealth Management   [2]
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 Good afternoon. As Dave introduced, I'm Bob Thornton. I also have responsibility for some of our banking regions, particularly LA and Palm Beach as an EVP of the Bank, and I have a wonderful job as President of Private Wealth Management.

 We want to take you through -- some of you may have different levels of familiarity with First Republic. So we're going to take you through a few slides fairly quickly and then we're happy to answer any questions anyone has.

 So First Republic; 2016 we have deposit growth of about 22%, loans grew 18%, and total Wealth Management assets grew 16%. You can see also we have $73 billion in total bank assets as well as total Wealth Management assets of approximately $84 billion.

 So, one of the questions we get quite frequently is why do people like First Republic? Why do we continue to gain customers? Why do we do new business? And quite frankly, it's fairly simple. We are a service organization that really focuses on the needs of our clients as well as very focused and conscious about credit and a culture that is really designed to sort of promote that. And you can see in this slide here, we have a business model that emphasizes culture, credit and very consistent performance and I think you'll see that in the numbers as we go through this.

 So we have a relation-based business model where any of you who become a client with the bank effectively has an advocate and that advocate's job is to make sure we meet all of your needs and to make sure that if you're introduced to other people in the organization, they do a terrific job of serving you. As a result of that, most of our growth comes from existing clients and doing more business with us or clients they refer to us.

 We're blessed to be in very strong markets. We're headquartered in San Francisco and our four principal markets are the San Francisco Bay area, the Los Angeles area, New York and Boston, with important presence in the Portland and San Diego. You can see that, over the long-term those markets have been well performing in growth and better than the country as a whole. And, as you can see on the very bottom of this slide, our markets have outgrown the US average by about 42%.

 More importantly is the opportunity for growth. So this slide shows our percentage share with the goal line across the top -- our share of the high net-worth individuals in our market. And you can see, we only have about 4% market share. However, these markets represent about 58% of the US high net worth households. So while the markets we're in are about 21% of total household, it's really more than half of world footprint in the United States. So there is enormous room for us to grow, we tend to grow every year partly through just normal growth and also through share from our competitors.

 One of the things we really measure ourselves on is something called a Net Promoter Score. A Net Promoter Score is an industry metric used by many companies including Ritz Carlton, Jet Blue, Amazon, all of our competitors that measures how likely is a client going to refer you to another family member or a close friend. You can see that First Republic's Net Promoter Score is 72 and when the client does at least probably three to four products with us, they often consider us their lead bank and the Net Promoter Score is 82. At 72, our overall Net Promoter Score, that's about more than twice what the average of banking Net Promoter Score is and puts us in the company of other very well-known brands such as Nordstrom, Ritz Carlton, Amazon and the like. So this is a very important measure of why we are able to build so much of our business by continuing to do more business with clients and client referrals.

 Our client attrition is quite low, it typically is about 2% a year versus about 10% average attrition for most US banks and therefore, as you can see we have checking growth and loan origination in the left and right and about half of our growth every year comes from just doing more with the same client. About another 25% comes from loan referrals and deposit referrals to their friends that they want us to do business with. So the actual growth we earned from new clients with whom we're not familiar is actually relatively modest part of our business. And so therefore, we have a very sustainable growth model by making client's happy in good markets doing more with us.

 So we're going to take a moment and let you hear from one of our clients Thomas Keller, who is a well-known chef and a restaurateur that many of you may know.

 (video playing)

 Olga, I'm going to let you take it over from here.



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 Olga Tsokova,  First Republic Bank - Chief Accounting Officer   [3]
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 Yes, thank you Bob. Olga Tsokova, Chief Accounting Officer. So in the video you just heard what our all-important clients have to say to about First Republic and now I want to talk about our most important, credit quality, which we're really proud of. Take a look at the bottom of the slide, since 1985, we have originated about $170 million of loans and our net cumulative loss is only 19 basis points over this period, which translates in less than 1 basis points per year. And on the home loans, that number is even lower. We had cumulative net losses of 7 basis points and it's truly remarkable.

 So we're very proud of our strong credit history and this slide shows how it compare to the top 50 US banks and dark green bar here on this slide, this is First Republic's net charge-off shown on the annual basis. And you can see that our charge-off since 2001, which is over the last 16 years, was significantly lower than the top 50 US banks. In fact, they are almost five times lower than top 50 US banks [offers]. And in our worst year of loss, which was 2009, our charge-offs were only 48 basis points which is significantly low than the group.

 And for the home loans, that number is even more remarkable. Again this compares us to the top 50 US banks and our losses, over the last 16 years, were more than 13 times less than those of the top 50 US banks. And again, if you take a look at the worst year of losses 2009-2010, our net charge-off for this portfolio were only 14 basis points for those two years.

 So how are we able to achieve this amazing credit quality? It's a combination of the four factors; one it's our stable geography mix; two, it's our stable portfolio mix; three, is our conservative underwriting; and four, it's longevity of our bankers.

 Let's talk about our geography, on this pie chart you see that over the last 16 year our portfolio mix on geographies, San Francisco, New York and Los Angeles was around 80% and this geography didn't change much for those markets, it's about 80% today. And we have entered New York in 1999. We have entered Boston in 2006 and we continue to grow carefully in those markets. And we'll stay focused on the coastal urban markets and we get a knowledge of our clients in those areas. One thing which is a critical part of our great foundation, 90% of all real estate loans are located within 20 miles within one of our offices and this is pretty remarkable.

 Let's talk about loan portfolio mix, again, which shows is at year 2000 and then 16 years forward, our portfolio mix remains relatively consistent. So our home loans including home equity lines of credit was over 50% in 2000 and this is about the same at the end of 2016.

 Our clients that have home loans with ad films that goes around their businesses, they involved in non-profits and with banks those in the (inaudible) so with that, we see the Business Banking portfolio have been growing overtime. We're conservative underwriter and this slide shows that our loan-to-values remain under 60%. And remarkably, less than 3% of our portfolio is unsecured.

 So what does our typical single-family world look like?. If you look at this slide, they have ample liquidity. In fact liquidity almost equals to the amount of home loan they have with us and also because we can maintain a consistent and conservative underwriting standards, our loans consistently have low loan-to-value. Our clients have high FICO score and they have ample liquidity.

 And again, we've been consistent lenders. This shows year 2010 and end of 2016, we're continuing to have our LTVs under or around 60%. And in the past 18 months or so, we actually further tightened our underwriting standards and this was in response to the appreciation of the real estate markets that was seen in the markets that we're in.

 Let's talk about the longevity for our bankers, which was one of the contributing factors to our strong credit foundation. Interesting fact about First Republic, since 1985, we have originated almost $170 billion of loans and 90% of those loans were originated by the bankers who are still with Frist Republic, and such banker stability, we believe, is unmatched in the industry. This translates into the bankers knowing their clients well and they are able to serve their clients well and maintain the high-touch model.

 One of the examples of our credit culture, we have what we call a credit clawback. Our bankers are responsible for the loan performance throughout the life of the loan. If a loan goes bad, the banker has to work it out and if their workout doesn't work, the banker has to clawback on the credit side. Our model is high-touch and our bankers have been with the bank for many years and they know our clients pretty well and this results in the high net promoter score that Bob talked about and as well as on strong financial results.

 And with that, I'll pass it on to Shannon Houston.



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 Shannon Houston,  First Republic Bank - Head of IR   [4]
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 Sure. Thank you Olga. So I'm Shannon Houston, Head of Investor Relations for First Republic Bank and I would just quickly touch upon what we're doing to attract the next generation of the bank's clients, our growth over a 15-year time period to give you some perspective in a different way on macroeconomic environment and deposit gathering and Business Banking.

 So First Republic was founded in 1985, using the home loan as an opportunity not to engage in transactions with clients, but to build a lifetime relationship and serving that comprehensive financial needs. What we've recognized over time is that in the markets we operate in, New York, San Francisco, Boston, Los Angeles, people are buying homes a little bit later in life. So what can we do to get that next generation of client before they purchase their first home?

 We started these two programs here under our Eagle lending group; the first on the right with the green bar, Professional Loan Program. This provides an individual a line of credit to buy into either a fund if they work in private equity or a venture capital or a partnership if they happen to be in a professional services firm. We came across this opportunity because there are lots of folks who wanted to do the partner level, not so many who are willing to do the 35 year old Managing Director or Vice President, the next generation of leadership at these firms. We thought it was a great opportunity to come in, meet folks who met our credit criteria. You can see here average FICO score 772, strong employment, firm relationships with the companies that we already know and are familiar with.

 And we served those folks, brought in 2.3 thousand households with an average age of 40 years old. Some of those that already purchased their homes, for those who hadn't, we gave them the opportunity to help buy in to their former funds and if we do a good job servicing them through those net promoter scores, hopefully they'll buy that first home with us and continue to build the lifelong relationship.

 Rewinding back eight years here, if we look on the Gold side, Eagle Gold All-in-One, we recognize that a lot of folks are pushing back a home purchase because they spent a significant amount of money on their education and are paying a significant amount to service that debt for an extended period of time following, how can we help them? This is a refinance vehicle that refinances primarily graduate student loan debt at a very favorable rate, again meeting our credit criteria, average FICO here is 767; a little bit younger, average age 32. Very importantly here -- so you'll see total loans outstanding just over $800 million, a small sliver of our total loan portfolio, again importantly, meeting our credit criteria, but this program in 2016 contributed over half of the new lending relationships to First Republic.

 So we're thinking not next quarter, not next year, but 10 years from now, how are we [feeding] the banks for future growth. This Eagle program has been a very strong contributor to that next generation of bank clients. Importantly, at the end of 2016, zero delinquencies and losses, again meeting First Republic's strong credit criteria in this portfolio.

 Quickly to touch upon an acquisition we made that does helped with this opportunity. At the end of 2016, we acquired Gradifi. Gradifi is a very innovative technology platform that facilitates the corporate benefit of repaying an employee's student loan. So got to know Gradifi because we were a client. We recognized that this is a problem in paying back student debt not only for our clients and potential clients but also for our employees. We wanted to do something to help. We became a client of Gradifi because of their very safe, secure, online, easy to use technology platform and a service approach that really parallels First Republic's approach to service.

 We essentially give them one check every month and then they facilitate the distribution of that $100, $200 payment towards our employees, who qualify for this benefit on every single month. The opportunity that we had for Gradifi is a couple of different avenues. First, we can provide this to our business clients who are looking for innovative ways to attract and retain talent in very competitive job environments. The second is, going back to our Eagle Gold All-in-One through this platform as those individuals think, average age 32, sign up for this benefit through their companies, they then can have the opportunity if they meet our credit criteria to refinance through our Eagle Gold All-in-One. So yet another channel to fuel the next generation of the bank's growth.

 Just to quickly touch upon here, we wanted to give a picture of our organic growth throughout a longer time period. From 2001 to 2016, you can see a compounded annual growth rate of 20% here. This is primarily organic. We did one very small bank acquisition in 2006 to get a retail presence in the East Bay of San Francisco. But you can see here very consistent growth through a variety of rate environments and macroeconomic environments as well. This next slide shows that same picture, but with deposits, again compounded annual growth rate of 22% over a 15-year time period.

 So turning to deposits; First Republic is very largely deposit funded, we had total deposits at year-end of $58.6 billion that represents 88% of total liabilities. It's very diversified by source, channel and type. You can see the pie chart on the right here, about 53% comes from our Business Banking channel, 47% through our consumer channel.

 On the left here, you can see our different sources, so through preferred banking, our relationship manager, our relationships through our preferred banking retail office network. And also, very importantly, through Wealth Management, through our sweep deposits which Bob can touch upon in just a moment.

 One big change; First Republic is very consistent over time that we do evolve and this is one particular evolution that's been very strategic. In 2000, we offered our first checking account. We were a thrift and loan in 1985; offered our first checking account in 1996. In 2000, we had 11% checking compared to year-end 2016 64% checking, so very strategic and meaningful difference in our deposit mix that has reduced our deposit cost to about 15 basis points at year-end.

 A strong contributor to deposits and to the shift in mix has been our Business Banking efforts. We started Business Banking, again, at the end of the 1990s, grow in some very specific verticals, this is largely people driven businesses, personal relationships that we had with folks who said, you know you do a great job for me on the personal side, can you help out the law firm that I'm a part of or the non-profit organization that I serve on the Board for?

 We grew Business Banking as very much a part of our strategic effort. Importantly, for every $1 we lend in Business Banking, we bring in, on average, about $4.5 in deposits. Those deposits have a rate paid of about 6 basis points.

 Her are our targeted verticals in Business Banking. We are very focused and we do people-driven businesses. Top verticals here are nonprofit organizations and schools. Not only were we led to those by the personal clients that we bank, but it also gives us an opportunity to get to bank other individuals either on the Board of Directors or the parents of those children, private equity venture capital and then some professional services firms.

 So Business Banking, this dives a little bit deeper into those top two verticals. Overall, our Business Banking loan portfolio represents 13% of First Republic's total loans. You can see here our top two verticals which make up the lion's share of this Business Banking portfolio. Nonprofit organizations/schools are collateralized loans to well established institutions generally for capital improvement. Private equity/venture capital funds, these are primarily short-term capital call lines of credit. Importantly, we don't do any pre-profit portfolio lending. These are directly to the funds themselves to bridge a capital call.

 And with that, let me turn it to Bob Thornton to cover Private Wealth Management. Thank you.



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 Bob Thornton,  First Republic Bank - EVP & President, Private Wealth Management   [5]
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 So as you can see, we've had very strong growth in assets under management and fee revenue, most of that has come about through organic growth. We've made two acquisitions, but even outside these acquisitions, we've had a growth rate that's been high 20%s over the last several years, as we have grown this business.

 One of the important contributors of the Wealth Management business to the bank is, it's becoming an increasingly large percentage of the bank's overall revenue base, representing 6% of the overall revenue in the bank in 2010 to 13% last year and we expect this to continue as Wealth Management tends to outpace the bank growth a bit year-over-year.

 One other thing that I think has been rewarded in the marketplace by investors is the very stable efficiency ratio that we've had through periods of ups and downs as well as through the investments we've made in the franchise or the technology of the projects and you can see that's been in that 58% to 63% range.

 Similarly, our core net interest margin has also stayed within a fairly narrow band at the time despite what's going on in terms of fed funds and interest rates and we're comfortable in sort of [3.8%, 3.12%] range as we continue to move towards this year and beyond.

 This is a busy slide, but I think the most important thing I'd want to share that Olga already spoke about is, in a rising rate environment we're very well positioned in part because almost two-thirds of our deposit base has little or no interest checking and we also have the ability to reprice other deposit obligations as well as our loan book as interest rates rise.

 As a result of all this, our compounded annual revenue growth over the last two years has been 20% a year. Our earnings per share has also grown 20% a year over the last two years. And the tangible book value per share has grown at 14% annually.

 I think one of the things that's really rewarded First Republic with a premium in the marketplace and price appreciation, you can see on the left that our overall performance has exceeded that of our peers, the S&P as well as the KBW index. It's fairly simple; one it's consistent earnings and growth year-over-year, this become quite predictable for investors.

 So with that -- one more, so as a result, you can see with -- this is what really matters, what's the enterprise value have been over the last several years? You can see the buyback in beginning of July 2010. Since then, it's been a very remarkable story of growth and return to shareholders. 24% over the long-term if you're an investor and initial IPO at $23 million.

 So with that, I think we'll turn it over to you and let you ask any questions you want to ask us or others.

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Questions and Answers
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Unidentified Audience Member   [1]
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 (inaudible - microphone inaccessible)



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 Bob Thornton,  First Republic Bank - EVP & President, Private Wealth Management   [2]
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 I think the reason we've been able to add talent in terms of new hires who bring novel books of business is really because if you are a team in a major investment firm Merrill Lynch, Morgan Stanley, UBS and you decide to want to move, a lot of those teams aren't necessarily going to move to another warehouse. They are really more interested in moving to a firm that might offer the products and services of a large firm, but also one that's maybe more boutique, little more entrepreneurial, has great banking services and the breadth in services that a big firm would have, but we can deliver. And so, we're sort of a unique choice versus going to another big firm or else going out on your own. So as a result of that we've been able to attract a lot of people to our model and I think some of you may have seen, we've announced three significant hires in the first quarter of this year and I think, you'll continue to see us add additional hires.





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Unidentified Audience Member   [3]
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 (inaudible - microphone inaccessible)



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 Bob Thornton,  First Republic Bank - EVP & President, Private Wealth Management   [4]
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 Alight, so I want you to repeat the question?



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 Olga Tsokova,  First Republic Bank - Chief Accounting Officer   [5]
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 So the question was about the deposits and the impact of the rising rate environment on deposits, and do we have competition on this side? So I'll start with -- Bob briefly talked about the interest rate sensitivity and deposit sides are [shaking] at 64%, which pays no [dilutive] interest. And if you look back to 2015, the end of the year, when they had the first Fed rate hike and through now, our cost on deposits through a two Fed hikes, didn't really change that much, has moved from 14% to 15%. So we still see some stability in our core deposit base on the deposit side.

 And maybe just touch upon the other side, on the loan book as well. It's important to know, it's not just cost of deposits but also repricing of our existing portfolio. Our loan growth in mid-teens over the years coupled with about 10% or prepayment rates resulted and [place the] core asset will creep right coming on the balance sheet of the new rates. And also about 40% of our loan portfolio is floating or maturing within a year. So you see those are repricing at least quarterly. So we have a good combination between deposits and a loan book repricing.



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Unidentified Audience Member   [6]
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 (inaudible - microphone inaccessible)



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 Shannon Houston,  First Republic Bank - Head of IR   [7]
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 So we priced and equity deal that closed this morning and just general corporate use. So, we are a growth company and we periodically go-to-market with equity offerings or debt offerings to support growth opportunities that we see ahead of us.



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 Bob Thornton,  First Republic Bank - EVP & President, Private Wealth Management   [8]
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 I think it's about the seventh time we've been to the market in about 18 months, 20 months and it's really simply because when we can opportunistically raise capital to fund our overall growth, we take advantage of this, not to prefund any particular (technical difficulty)



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Unidentified Audience Member   [9]
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 (inaudible - microphone inaccessible)



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 Bob Thornton,  First Republic Bank - EVP & President, Private Wealth Management   [10]
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 No, overall the capital markets. We did the bit (inaudible) offering in, I think it was on September or October, maybe earlier, time flies.



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 Shannon Houston,  First Republic Bank - Head of IR   [11]
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 I remember yeah.





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 David Long,  Raymond James - Analyst   [12]
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 Well, that does conclude the formal presentation and probably move downstairs corridor and expect to continue the Q&A session.




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