First Republic Bank at Barclays Global Financial Service Conference
Sep 11, 2017 AM EDT
FRC - First Republic Bank
First Republic Bank at Barclays Global Financial Service Conference
Sep 11, 2017 / 02:30PM GMT
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Corporate Participants
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* Fatema Arande
* Hafize Gaye Erkan
First Republic Bank - President, CIO and Chief Deposit Officer
* James H. Herbert
First Republic Bank - Co-Founder, Executive Chairman and CEO
* Lauren Ehrhardt
* Michele Celestino
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Conference Call Participants
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* Matthew John Keating
Barclays PLC, Research Division - Director and Senior Analyst
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Presentation
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [1]
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Great. Well, my name is Matthew Keating. I cover the U.S. Mid-Cap Banks for Barclays, and we're very pleased to welcome back First Republic to our Global Financial Services Conference.
I think the last time First Republic presented in this event was back in the fall of 2011. At that time, the bank had about 24 billion in assets. Today, it maintains more than 80 billion in assets. And the one constant throughout this impressive growth has been Chairman and the Founding CEO, Jim Herbert, who we're fortunate enough to have here with us today. Also participating in our fireside chat discussion is the company's new President, Gaye Erkan. We also have Shannon Houston, Deputy Chief Marketing and Communications Officer in attendance; as well as a host of First Republic team members.
So with that, maybe we'll kick off the fireside chat.
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Questions and Answers
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [1]
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So Gaye, obviously, you joined First Republic now about 3 years ago and have already served in a variety of different roles from Chief Investment Officer to Chief Operating Officer and now most recently, President. We believe this is your first fireside chat sort of public appearance in the President's role, so I was wondering if you could share your perspective for a few minutes about what you see as First Republic's greatest strengths and perhaps the greatest opportunities for your organization moving forward.
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Hafize Gaye Erkan, First Republic Bank - President, CIO and Chief Deposit Officer [2]
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Sure. Well, thanks for hosting us here today. And I'm honored to be named President of this unique and pristine organization. Privileged to working with Jim Herbert, and we have a stellar management team so it has been really fun. In terms of the strengths of the organization, the -- it's pure play on private banking business. It's clients first all the time and pure play and very strong credit and strong capital at all times with a great stability and consistency. And given my background, I've spent fair amount of time and have been focused on and very excited about coupling that opportunities around technology, opportunities around process improvements and leveraging data and analytics to empower and enable our bankers. We have Michele Celestino of the team and several other RMs in here today as well as far as empowering and enabling them to do more of what they do best, which is taking care of our clients.
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [3]
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Great, that's terrific. So maybe Jim, you could speak for a moment about the economic -- or from -- I guess from the economic growth perspective, how the bank's urban, coastal markets are faring? And maybe perhaps talk to -- about any competitive issues that you might be seeing in those markets?
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [4]
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Well, the -- thanks, and thanks again for having us today. We really appreciate it. We should introduce some folks that are here with us from First Republic. Maybe I could -- Michele Celestino, okay? Fatema Arande, who is Deputy Head of our PBOs. Michele's been with us, how long now?
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Michele Celestino, [5]
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17 years.
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [6]
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17 years as a Relationship Manager; Lauren Ehrhardt and [Dewitt]. And both of these latter are in our Fast Track RM Program, but have been with us how many years?
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Unidentified Company Representative, [7]
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5 years?
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [8]
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5 years?
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Lauren Ehrhardt, [9]
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5 years.
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [10]
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5 years. So what we've done is draw the Fast Track RMs, which we can come to in a minute around our student lending program. The coastal markets are very strong and -- that we are in. There's a demographic thing happening that's quite stunning, 3 of the markets that we're in contained 46% of all the high net worth households in America. And today, those same markets contained 58% of a much larger group of high net worth households. That's 12% in 12 years, 1% per annum aggregation into our markets either movement in, growing or non-movement out. We don't see a lot of demographic moves of that order of magnitude, quite rare. So they're doing very well. Our challenge, to be honest with you, is to keep up with that. We have moved our market share of that segment, which is a surrogate for our entire business, but not all of it is 40% of our business. But we've moved our share from 3% to 4% in 12 years. So it's actually challenging to be able to keep up. Technically, our shares slipped a little bit in San Francisco like 0.1% so in the last few years. So it's a very interesting thing. From an economic point-of-view, if you go back to '05, our markets weighted by their importance to us, have outperformed the U.S. in recovery through that period down and then up by 42%. So Gaye was referring earlier to pure play. When you buy us, you buy those markets and you buy that segment.
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [11]
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And I guess given the health of those markets, are you seeing an increase in competition as more banks want to be exposed to similar hotbeds of economic growth?
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [12]
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Sure. Absolutely. The good news is consolidation continues, and our less challenging competitors tend to be larger. And it's not about that they're not good, they're great banks. But their service delivery simply is challenged by the size and order of magnitude of the enterprise and by the silent nature of those enterprises. And so our ability to deliver service -- because our competitive advantage, and in fact, the entire game as far as we're concerned, is service delivery to each household individually over a period of time.
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [13]
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Right. I mean, I guess the question here now, obviously, the bank is over 80 billion in assets, close to 60 billion in loans last quarter. I think going back, it seems like every couple of years, the law of large numbers becomes a concern for the investment community, yet every year, First Republic continues to post mid-teens-type growth. So how are you thinking about the level of growth of the banks going to be able to do going forward? Is the bank size becoming an encumbrance in terms of continuing to post such impressive growth numbers?
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [14]
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What are we going to be today? The answer would seem to be no so far. The question was asked at 10 billion and 20 billion and 30 billion. It's not really about the size of the residual balance sheet. It's about the number of new households that we have to take on and do well with each year, and that number of new households is a very modest number. We have 60,000 households borrowing in the bank after 30 years, couple thousand a year. We have 170,000 total households in the bank, including depositors, wealth management borrowing. Obviously, lots of duplication inside that number. That's the whole point. Michele, you've had -- you've been doing business for 15 years. Any trouble growing this year versus last year or the year before?
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Michele Celestino, [15]
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Not at all. We just continue to just stick to our knitting, do what we do every day, and that attracts clients. We've built our teams. I have Fast Track RMs that work with me as well and that is able to advice -- come across a relationship that necessarily I would like to give to a junior person, and it's appropriate for that. We have a real team in place that can absorb that. And our services are a differentiator, and we continue to invest in that part of the business. And the client experience doesn't change and will not change, and that's how we continue to grow the business year in and year out.
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [16]
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There is an important basic concept here, which is the size of the balance sheet, in our case, is entirely the result of the aggregation of individual relationships that are nurtured and grown each year and the vast majority of our business as well. More than half our business growth each year comes from the underlying growth of the existing client relationship, and there's 2 components of that. One is the obvious one, which is they do more with us. But the less obvious one is their wallets grow. If you think about the lawyer, the doctor or the investment banker, the whomever professional technologist in these coastal cities, and then you think of the growth rate of the coastal city, I'd say 3%, pick a number, a round number. Their wallet is growing more than 3% per annum for sure. If you're hanging onto that wallet, you're growing at the rate of the wallet. But we only experience about a 2% attrition rate versus 10% for most banks, so we do hang onto the wallet. And then we do extra things. They get more complicated. So they get larger and they get more complicated. And if we don't lose them, we grow with them.
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Michele Celestino, [17]
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And if I may add really quickly. So as Jim mentioned, strong, healthy markets. And the -- in the market that we are in, we only have 4% market share. And the markets are growing faster than we can keep up with at a mid-teens, long-growth guidance that we have given for several years now. I would also add that we have had several initiatives for attracting the next generation of bank clients, and these will play nicely into the future of the bank's household growth. So there are even more opportunities for additional growth in households, not to mention that, as Jim said, 75% of our growth comes from happy, satisfied existing clients and their referrals. And the law of large numbers also dictates the more clients that we have and (inaudible) we keep them with our Net Promoter Score at 80 when they're a lead bank, the more referrals that we're going to get from them. So we'll also be helping with that. So the answer is no.
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [18]
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Both ways, yes.
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [19]
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Okay. Great. I guess -- just to transition from the high level to the extremely granular. Obviously in the third quarter so far, the yield curve has flattened a bit. Has this in any way altered the bank's expectation for the interest margin to be stable to potentially have some modest pressure? Have things gotten worse, I guess, on an interest margin front as this quarter has progressed?
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [20]
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It hasn't gotten better. I would say it's about the same, maybe a little down, but not much. We focus a lot more in net interest income because of the growth of the enterprise. But our NIM has been, if you go back -- I think we have control for this. But if you go back for a long time, the NIM has been between 3% and 3.30% for 20 years, maybe 18 years, something like that. The -- importantly, we have on our investor deck a loss adjustment NIM, which I think is the one that really matters. And it's an interesting comparison to the 50 billion-plus banks. We outperformed that by 15 or 18 basis points, I think on the average, 20-something for the last decade. But the -- it's a little harder as the yield curve gets flat is the mortgage lending. The corporate lending is not a problem obviously, it's more adjustable. And -- but on the other hand, second-line market is better for resale on single-family home loans as the yield curve gets flatter. So we have a bit of an offset, but it's a little more challenging. The real challenge in margins for anybody doing mortgage lending today is everybody's focused on the deposit beta appropriately so. But the real thing I'll be focused on if there was such a thing is loan beta and there's no change in mortgage lending rates. And so the squeeze is coming from the lending side, not from the deposit side. Or let's put it this way, the lack of adjustment on the loan side.
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [21]
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I guess, since you bring up deposit beta, last quarter, the bank -- here's a charge up in NIM historically, you can see...
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [22]
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That's the loss adjusted NIM, which we think is actually the right way to think about the game.
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [23]
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So I guess as it relates to deposit betas, last quarter, the bank did speak to customers beginning to ask, not necessarily demand, increase in deposit rates. Obviously, I think mounting deposit pricing pressure across the industry is becoming a more prevalent concern among the investor community. So Gaye, perhaps harkening back to your role as Chief Investment Officer and sort of a specialist on liability management, maybe you can talk about what First Republic is seeing on the liability side of the equation.
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Hafize Gaye Erkan, First Republic Bank - President, CIO and Chief Deposit Officer [24]
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Sure. Maybe -- let me take a minute to just -- let me take a second to just go back over 2 years what happened. So over the past 2 years, we had 100 basis points rise in the Fed Fund's target rate. So the Fed Fund's target rate is now between 1% to 1.25%. And we have increased our deposit rates on the overall deposits from 13 basis points to 18 basis points, and the deposit growth year-over-year as of June 30, 2017, was about 24%. So that equates to around 5% realized beta over the 5 years -- over the past 2 years. Our historical beta, if you go back to the latest sell-off in '04, '06 timeframe, is around 40%, 45% historical beta that we have seen. So we have lagged quite a bit. At the same time, just a note that close to 50% of our deposits are consumer retail deposits, and 1% effect on trade is just an emotional rate threshold that puts pressure on to the deposit side. So we would expect slight increases more normalizing towards the historical beta, given that we have been able to lag for the last past 2 years.
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [25]
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Okay, that's very helpful. So First Republic recently clarified that efficiency ratio expectations really going out through the end of 2018 now in that low 60s, call it 60% to 63% type range. How much discretion does the bank have that speaks nothing to revenue environment, maybe proves to be not quite as strong? How much discretion does the bank have on its investment spending to sort of continue to keep to that efficiency ratio target if maybe perhaps growth does slow a bit going forward, the economy weakened. Just curious about your perspective. I know in the past, with the banks focused on expenses and expense control, it's been surprised by all -- some opportunities, I guess, on that front. So I guess how much of the investment levels now are sort of pro-growth because you see the opportunity vis-à-vis required investment levels just to continue to maintain the current growth profile?
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [26]
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Well the #1 required investment level was getting past $50 billion. We're complete with that, and it was done -- well, actually it's wholly signed off a few months actually, but it was done and we're at a run rate level with a small exception here and there about 6 months ago. We've shifted over to more discretionary investment, and we have a little catch-up to play there, but not too much. And we're rolling out a new online banking system right now, which is a fairly heavy investment. But our thinking, tomorrow we're having our annual board retreat to approve our next 5-year plan, which we do annually. We definitely think 5, and in fact, they will see a 10-year version of our thinking. And so we definitely run the bank for 5 and 10 years, not for quarterly. We pay attention to quarterly, obviously, but we really run it for 5 and 10 years. And the opportunity for client acquisition has never been better, never been better. It's extraordinary if you think about it. Is service among competitors better? Is there more concentration among competitors? Our clients are very sensitive about how they want to deal with a bank. They want new ways of dealing. Where are the millennials going? We can talk about that in a minute. So there's so many opportunities, it's just extraordinary, and then on the concentration in our markets that I mentioned previously. So we're very hesitant to not take advantage of those opportunities on a very strong base. Having said that, we've still been able to run one of the cleanest banks in America, certainly, and maybe the highest touch bank in America at a 62% basically, if you want to draw a line, efficiency ratio. And that efficiency ratio is lower than most of our peers in fact. I think Wells is 61%, but the bigger peers and the same-type peers are running in the high 60s, Northern Trust over 70%, I think. And yet we have a growth rate that's 3x or growth rate of 4x. So if we put all that together, you say to yourself, hmm, maybe not too bad. The -- here's a chart that shows some of this. So I think that -- but I would say, if I were to think about our efficiency in the interim period here in the next year or so, I think 62%. We're not going to hesitate to make the incremental investment that we think is particularly timely. When you grow rapidly, there's -- you can always trim a little here and there. We're actually reviewing things right now, but not in a heavy-handed way.
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [27]
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Okay. So we did mention sort of the bank's millennial initiatives, and there's a few of them. You have that Eagle Gold's All-in-One student loan refinancing. You have the professional loan program for professionals. And then you also have the more recent business, Gradifi, so the student loan repayments sort of benefits administration unit. So I guess, that -- seems to be a lot more focus than the bank's had in the past around millennials. Is it no longer the case that wealthy people were just flying First Republic going forward? And so maybe you can talk about what the bank believes or why the bank believes these investments are necessary today.
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Hafize Gaye Erkan, First Republic Bank - President, CIO and Chief Deposit Officer [28]
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So stability and consistency have been fundamental to our business modeling success, so let me take a moment to explain how All-in-One, professional loan program, Gradifi, links to the single-family residential home loan mortgage business. So as you know, over 50%, 55% to 60% of our lending is single-family residential mortgage lending. And home mortgage, it's a memorable experience and we thrive in on-time closings, providing the best-in-class service to these clients. Now to attract the home borrower -- home loan borrower earlier in their life cycle, in an attempt of that, we have launched the professional loan program in 2010. And professional loan program provides credits to employees who would like to invest in or with their firms. And most often, these firms are also businesses that we bank as well as banking their principals and partners. And these clients tend to be on average -- at the time of the loan origination, on average, 40 years old. Actually a significant liquidity in most cases, more than the loan amount in deposits and investment management with online banking, more than 50% bill pay and checking deposits and significant -- excellent FICO scores and similar consistent conservative underwriting standards and credit quality just like the single-family residential borrowers of First Republic. We also recognized over time that student debt affects -- student loans widely affect the younger professional. And that's why, and these student loans are usually at a relatively high interest rates like 6%, 7% in comparison with interest rate environment. So we have provided the All-in-One. We have come up with All-in-One in 2014, All-in-One student loan refinancing product to attract the next generation of clients well before, about 10 years before they're actually buying their first home. So on average, these clients are 33 years old, 15% to 20% self-funded, mostly over 90% graduate students -- sorry graduate student debts that they have, 2 to 3 years into the job, excellent FICO scores, and again, from a credit quality perspective, similar to our single-family residential borrowers. Now in -- right now, compared to 3 years ago. 3 years ago these professionals, with an All-in-One professional loan program, we didn't -- we just started All-in-One. We had 1,000 households. Now we have over 10,000 households that we have acquired through All-in-One and PLP in 3 years.
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [29]
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That's great growth.
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Hafize Gaye Erkan, First Republic Bank - President, CIO and Chief Deposit Officer [30]
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And as Jim mentioned, we only have 60,000 borrowing households in the bank after 33 years. So it represents close to 20% of our borrowing households. And the acquisition rate, because of the referrals, and these are just social media, at a much higher rate compared to a traditional single-family residential borrower. Now let me touch on Gradifi because it's all linked to All-in-One.
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [31]
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Just to mention one thing. All of these borrowers are in our markets. We don't go outside our geography.
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Hafize Gaye Erkan, First Republic Bank - President, CIO and Chief Deposit Officer [32]
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And so in 2016, we came across Gradifi, which is an early-stage FinTech startup that introduced a new HR benefit to enable employers to contribute towards their employees student debt repayment from a retention, from a talent acquisition. Especially in the urban, coastal markets that we are in, that is a big deal. And there are 44 million borrowers with $1.4 trillion student debt out there that have a student loan outstanding nationwide. So we became a client of Gradifi, mainly because it was very easy to use, online platforms secure from an HR perspective, employee perspective to enable such a benefit. And we have seen the amazing positive reaction from a gratitude of our employees perspective who received that benefit, so we decided to acquire Gradifi, which, if you think about it, the members, as we call it, the employees are on the Gradifi platform, they receive these payments benefit from their employers nationwide are, by definition, student loan holders. And does it becomes a seeder mechanism in the future to the bank's All-in-One lending portfolio.
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [33]
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And they have local employer helping them pay back. And they already have 750 FICOs before local employer and before we refinance them down at 50% of the rate. They are who you want. Do we have Gradifi? The -- I'm just going to show you something here just real quick if we can run it. I don't know if we can or not. This is just 30 seconds.
(presentation)
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [34]
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That's a marketing campaign we're just starting on Gradifi. We introduced this idea of paying $100 a month, which, by the way, right now is taxable. We're working to get it like a 401(k) where it's tax-free. We introduced to them First Republic. It's very simple. If you had emailed one out, we have student loans going to this portal, sign up, it takes about 5 minutes. 300 people signed up in 12 hours. We have 780 people now on it, out of 3,800 employees. (inaudible) put it on their website. 30% of employees signed up in 24 hours. 70% of people who graduate from college today have loans. This is a really big market.
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [35]
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I guess as it relates to Gradifi, what percentage of Gradifi, I guess, participants would be potential First Republic clients? As you've gotten more involved in this process, have you come to an estimate?
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [36]
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Between 5% and 10%. And the reason it's that low is geography because Gradifi is nationwide. We don't do below $40,000 refinance at this point. And it's a little bit on the line, but it's mostly graduate degrees, which is where our focus has been. And the reason for that is it avoids the going back to school student loan interruption issue. We're working on that. We're new to the game. We're still looking at it. I would say among these 12,000 or so people or 10,000 people, we have a single delinquency.
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [37]
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Okay, great.
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [38]
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Can I just make one other point?
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [39]
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Of course, yes.
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [40]
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We have 2 Fast Track relationship managers here, Lauren and [Dewitt]. Could you just take a mic for a second. How was this going to work with what you're doing? How do you see it working real quick?
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Lauren Ehrhardt, [41]
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So I think -- can you hear it? Okay. I think this is a great program. All of these student loans refinanced is ability for companies to help gain and attract employees -- quality employees. And I think the fact that us as young Fast Track RMs, we are able to grow with the next generation of wealth. And I think invaluable to this company, I think the fact that [Dewitt] and I have worked here 5 years, we are able to be culture carriers as we grow. And as we continue to grow this organization, I think being a culture carrier is invaluable.
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [42]
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And Fatema, in the office system, we brought a number of this AIO student loan refinances in because several offices have done particularly well.
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Fatema Arande, [43]
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Yes, they have. And really, it has given us an opportunity, especially for our new bankers that have joined us that don't have really the book to build a strong relationship and be with these clients through their life cycles. And so to, I think, Gaye's point, we've seen a lot more traction in the All-in-Ones because of the social media and just people are really -- they appreciate the lower rate. Really, it's a transformation in their life.
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [44]
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And what we're doing is we're assigning large numbers of these 200, 250, 300 to Lauren, [Dewitt] and the other group -- people in the group. That's their seed base for their entire relationship manager career, which is something that current relationship managers did not have. Sorry about that, Michele, and should accelerate it considerably. And they're there primarily to catch the first home loan and build the base.
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [45]
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Great. So at this point, we'd like to go to the audience response questions, have a little more interactivity with the group here. So if you could please bring those up? And as we wait for the group to bring it up, maybe we'll ask an audience question.
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Unidentified Analyst, [46]
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(inaudible) question is, you've rolled off from the employee base or is the student (inaudible) as creating relationship to companies?
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [47]
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It's a -- the question is a student for sorts of company relationship. The Gradifi relationship is with the company. Our rest of our banking relationship tends to be with the individuals. Buried in the Gradifi relationship with the company is corporate opportunity, but we see that as a year or 2 ahead. And again, they're nationwide and we're not. We're not going to follow them nationwide. We'll only do lending in our markets, yes.
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Michele Celestino, [48]
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So actually if I may, it's -- there is great synergy with our business banking platform because we do have over 40,000 business clients where we've been had long-term relationships, so it's a great service and product for them as well as introducing them like (inaudible) example that Jim has given.
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [49]
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And actually to that point, when we took over, they had about 35 or 40 corporate clients. Now they have about 170, and most of that has come from us.
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [50]
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Okay. So the first question for the audience is do you own shares at First Republic at the moment? One, yes, we're overweight; two, yes, we're market weight; three, yes, we're underweight or not sure; or four, we don't own shares at this point. And so it will take 10 seconds to vote.
(Voting)
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [51]
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And the results from the audience are in and it shows that looks like we have some opportunity to convince investors to own a stock here as 68% aren't presently invested in FRC followed by 20% who are overweight to stock at the moment. Okay, if we can move on to the next question, please? Improvement in which factor might cause the -- or might have the greatest influence on you potentially increasing your exposure to First Republic? One, higher net interest income; two, higher fee income; three, better expenses or an efficiency ratio and positive operating leverage; four, better asset quality; five, profitability metrics being augmented; or six, higher capital return. So it will take 10 seconds to vote.
(Voting)
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [52]
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And it looks like the audience believes that an improvement in profitability would be the most likely cause of increasing their exposure followed by improving NII trends. And so I guess maybe we could talk a bit about what the bank's doing to improve profitability, Jim or Gaye?
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [53]
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If we could go to the return on -- let's go back to, Shannon, 34, 35 range. Our objective in life is to have the best possible service quality that a client can get from an American banking institution if we're in that market and we measure that by Net Promoter Score, which I'll take you back to in a second. Our second objective is to have the best quality book of credit in American banking. And our third objective is to return 10% to 12%, 10.5% to 13% on tangible common equity. We like to talk work over a very extended period of time. That's it. We do generally better in bad times than we do in good. We did extremely well in '08, '09 and '10. We did extremely well in '01, '02. We did extremely well in '91, '92, '93. We did very well in the late '80s when things were a bit of a hiccup. I started the bank before this. We did very well in '82 and '83. The reason is that we always have extra capital, and we're ready to go forward when people and when others are not and we're clean going into the problem and there will be another problem. So our philosophical base is a decade and predicated on the best service possible. The EPS growth is on Page 34 here. The next page is what I consider to be the triple bottom line growth intangible book value per share. Is that up? 35? Here we go. Nope, next one. One more. Thank you. There you go. This is the real endgame to us. And we pay dividends, a modest dividend along the way. So that's really the objective. And we -- and then on top of this, but it's not our objective, we have a growing bank because we're in growing markets. We have a formula that seems to work, and we are able to continue to attract more clients but more importantly, do more with the clients we have. Let's go back to Page 6, if we could. Shannon, please? The real driver of this whole game is Net Promoter Score, which is only a client satisfaction measurement. But if you put Page 6, I don't know if we can get there or not, together with the tangible book value per share growth, this is the lead driver to everything else. We're -- we have a client satisfaction level. This is a widely used score. I'm sure most of you have heard of it, and it's the number of clients that are net promoters minus the number of clients that are not net promoters on a scale of 1 to 5. And we're at 72. The banking industry is at 34. Ritz-Carlton's below -- is 72; Jet Blue is 67; Amazon and Apple are in the 60s. And then when you consider us your lead bank, which is a result to this literally related to the number of things you do with us, it flips at about 6 items. That's half our client base. We're at 82. If this stays -- it'll move around from year to year, but if it stays at this level of differentiation, we will win. And what happens is these clients -- go to the next page if you could please, Shannon, 7. These clients that are this happy don't leave us. The circle on the left of the Slide, 2% leave us, 10% is the industry average. If you don't have a riptide, there's a lot of future to grow. And then they give us 50% of our growth from existing clients. If you stop and think about the impact of that fact on credit, it's very powerful. If I know your credit already, I'm much less likely to make a mistake than if you're new. And then 29% of our growth on the credit side is from the referrals from people who are very happy with us. You do not refer your friend who you adore but who doesn't pay his or her bills quite the way you do to the banker you like. You're just silent. So we have a screen. We have actually checked this. The refer -- people that are referred have equal or better credit than the people that are referring them quantitatively. And so then we have to find some strangers, 13% on the loan side and it's not that hard.
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [54]
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Okay. Perhaps we're on to the speed round of our audience response question. I think we have 2 more to get through and we'll see if we can do -- we could bring those back up. So the third question for the audience is what's the greatest risk to invest in First Republic in your view? One, loan growth decelerating; two, NIM pressure intensifying; three, greater than anticipated deposit cost pressure; four, elevated expenses; five, the consensus efficiency ratio remaining below FRC's stated target; or six, something else, and for that, we can say above average fee multiple perhaps. So why don't we take 10 seconds to vote on these choices?
(Voting)
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [55]
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And the results from the audience are in and it reveals that about 35% of the audience believes loan growth is potentially decelerating as a risk followed by an above-average valuation multiple which is obviously a high-cost problem to have at this point. And so we'll move to the next question, please. So the next 2 years in your view, is First Republic more likely to acquire a smaller bank, enter into a merger of equal transaction, sell to a larger bank or 4) refrain from M&A entirely? And we'll take 10 seconds to vote. I think I know the answer to this one, but we'll see.
(Voting)
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [56]
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And the results are in and they show that -- bear with me momentarily. 83% of the audience is not bank (inaudible) First Republic will engage in M&A, probably a good debt in our view. So why don't we open up for one audience question. You guys have been very patient, so we do appreciate it.
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Unidentified Analyst, [57]
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So given your geographic footprint, do you know if your clients are heavily kind of exposed to any industry, say, the tech sector may be with your footprint there, either lending or wealth management side? Do you have any data?
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [58]
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Well, we have quite a lot of data. Our largest concentration, if you want to call it that, is a very broad version of financial services, okay? If you think about it, San Francisco, New York, Boston. And that runs with the gamut from investment bankers to asset managers, to securities lawyers, et cetera. And we probably would have them under lawyers, but they're tied to it, obviously. The technology is down about #3 or #4, I think?
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Hafize Gaye Erkan, First Republic Bank - President, CIO and Chief Deposit Officer [59]
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Yes. Well, in terms of lending, direct technology or biotech exposure is less 0.1% of the total loans outstanding, you'll find it on Page 24, and very well diversified from a business verticals perspective. So we have close to 10, if not more, different verticals in our business banking.
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James H. Herbert, First Republic Bank - Co-Founder, Executive Chairman and CEO [60]
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Well, also in the business banking in 1 second, the biggest -- the second biggest that we do is non profits. So we follow our clients. The model is simple, we get someone as a private client. We do everything we can for them, then we follow them to their business if it's a business we're comfortable in and are good at, which is a list of about 9 verticals. And then we follow them to where their heart is, which is their children's school, their community organization, their church, their synagogue, whichever. And we do a lot of that banking. And it's been very a good to us. It's very good for the community. We believe in it very strongly. And obviously, there's lots of people there we would also like to bank.
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Hafize Gaye Erkan, First Republic Bank - President, CIO and Chief Deposit Officer [61]
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And for every dollar business lending, we get $4.5 in deposits.
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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [62]
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Please join me in thanking First Republic. There will be a breakout in the Gibson Suite immediately after this presentation.
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