First Republic Bank at BancAnalysts Association of Boston Conference

Nov 02, 2017 AM EDT
FRC - First Republic Bank
First Republic Bank at BancAnalysts Association of Boston Conference
Nov 02, 2017 / 05:20PM GMT 

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Corporate Participants
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   *  Michael D. Selfridge
      First Republic Bank - Chief Banking Officer and Senior EVP
   *  Michael J. Roffler
      First Republic Bank - CFO and EVP
   *  Olga Tsokova

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Conference Call Participants
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   *  Geoffrey Elliott
      Autonomous Research LLP - Partner, Regional and Trust Banks
   *  Gerry Benson
   *  Kenneth Allen Zerbe
      Morgan Stanley, Research Division - Executive Director

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Presentation
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 Gerry Benson,    [1]
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 I'm Gerry Benson. And up next, we have First Republic Bank. First Republic is a commercial bank headquartered in San Francisco, provides private banking, private business banking, real estate lending and wealth management services in California and New York, Massachusetts, Florida, and Oregon.

 Presenting today for First Republic is Mike Selfridge, Chief Banking Officer. Mike joined the company in 2012. And prior to that, he was in charge of U.S. regional banking at Silicon Valley Bank, which is actually where I first met him in 1994. Joining Mike today is Chief Financial Officer, Mike Roffler, who joined First Republic in 2009 coming from KPMG as an audit partner; and Olga Tsokova, Chief Accounting Officer, who joined in 2015 from City National.

 With that, Mike?

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 Michael D. Selfridge,  First Republic Bank - Chief Banking Officer and Senior EVP   [2]
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 Yes. Thank you, Gerry. It's good to see you after all these years, and you look as good as you did in 1994.

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 Gerry Benson,    [3]
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 Yes, you think?

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 Michael D. Selfridge,  First Republic Bank - Chief Banking Officer and Senior EVP   [4]
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 Keep up the good work. Maybe you have a little more facial hair.

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 Gerry Benson,    [5]
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 A little more gray.

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 Michael D. Selfridge,  First Republic Bank - Chief Banking Officer and Senior EVP   [6]
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 A little bit. Thank you all for joining us. We're delighted to be here. Between myself, Mike and Olga, we're going to talk about First Republic, the business model; our strategy over the next 5 and even 10 years; a couple of the key metrics; and of course, what differentiates us from other institutions that you either follow or invest in.

 So just a quick recap on our third quarter. We had a very strong third quarter. Year-over-year, our revenues were up 20%. Year-over-year, our loans and deposits were up roughly 19%. We were pleased that our deposits funded the loan growth. We had a great quarter in terms of our wealth management business. And we're very pleased that our assets under management exceeded $100 billion, and it came in right around $101 billion. Loan originations were $7.2 billion. That was our best third quarter ever. And of course, a key tenet of who we are is credit quality. Our nonperforming assets were just 4 basis points.

 So when you think of First Republic, there's a few pillars that are key to our success: a business model that we think is differentiated by extraordinary client service; a culture that also empowers employees to deliver that extraordinary service, executive leadership and relationship managers, bankers that have had tenure at First Republic Bank; consistent performance over time, our mission in life is to be predictable and consistent; and of course, as I mentioned, strong credit quality.

 The model of First Republic is unique in banking for a few reasons. The single point of contact is not to be underestimated. If a relationship manager -- for example, Amy in the back there from Boston has a relationship in Boston, she'll have that relationship for life. If that relationship moves to San Francisco, New York, Los Angeles, she maintains that relationship. Unlike other institutions that tend to silo either their products, services or geography, we don't do that. What that leads to is a duration of lifetime value for our clients that you can measure in the decades.

 We have a unique structure in that, that single point of contact creates accountability. We have a credit clawback for those that do lending in our corporation. If a banker originates the loan that unfortunately goes bad, they would work that loan out. And if it was charged off, they would have a clawback that could be 4 to 7x what they earned in terms of compensation. However, having said that, most of our bankers are very skilled, credit-trained professionals. They know what they're doing. They've had a long credit track record at First Republic Bank. And also, I'll show you where the growth comes from, half of it coming from our existing clients that we know well.

 Our markets are also a key to our success. We serve only a few carefully chosen urban coastal markets. And a little more than 85% of our markets are represented by those that have outperformed the broader U.S. economy on a very consistent basis. So if you look at San Francisco, New York, Los Angeles, Boston on this graph, what we've done here on a quarterly basis is measure the health of our markets through a regional gross domestic product. Benchmark that against the average for the U.S. GDP, what you'll see, we weighted it by our loan outstandings, we're performing about 41% better than the average for the United States. Our markets are healthy, robust, vibrant, and there's a lot of activity in our markets.

 Another important aspect. The opportunity ahead of us, we think, is substantial. One proxy, not the only proxy but one proxy of measuring our market penetration is that of high-net worth households in our markets. This would be a household with $1 million in investable assets or greater. At the time of our last study, our market penetration was only 4% on a composite basis, so 96% of the way to go. The other important interesting observation here is that if you look at the time horizon dating back to 2003, the percentage of high-net worth households in our markets has increased 12% to now 58% of high-net worth households residing in our markets. Again, substantial opportunity ahead.

 So we have the right markets, the right model. We have opportunity with market penetration. And the ultimate report card for us is client loyalty. This is the moat around First Republic: extraordinary client service. In fact, we say we're just a service company that happens to be a bank.

 One key metric which is used by many corporations is the Net Promoter Score, a measure of how likely you are to refer a client or a colleague to First Republic Bank. The average for the U.S. banking industry is 34%. For First Republic, it's about 2x that, composite, 72%. Even better, which is our mission in life, is to get you all as lead clients of First Republic. And when you are a lead personal bank client, business bank client or wealth management client, our Net Promoter Score is 82%. We think it's the highest in the industry, and it also affords us the opportunity to compare ourselves to other significant luxury brands in the world, like the Ritz-Carlton, like Apple and like Amazon.

 What that leads to is opportunity in terms of growth. I mentioned about half of our growth comes from existing clients who are thrilled with the extraordinary service and continue to bring us more of their wallet share over time. And then what happens is they start to refer their friends or colleagues. And that represents another 21% of our growth. So almost 3/4 of our growth built into this intrinsic organic growth model, with the foundation being extraordinary client service.

 With that, I'm going to play a quick client testimonial, and I'll hand it over to Olga.

 (presentation)

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 Olga Tsokova,    [7]
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 Good afternoon. Thank you, Mike. You just saw what our all-important clients think and say about First Republic. And I'm going to talk about our loan portfolio, and in particular about our all-important credit quality. And I'm also going to touch upon how we fund the growth in our loans.

 One thing we're very proud of is our strong credit quality. Take a look at the bottom of this slide. Since our founding in 1985, we have originated over $190 billion of loans, and our cumulative losses are only 17 basis points. And for the home loans, this number is even more remarkable. Cumulatively, they were only 7 basis points.

 So how does this compare to other banks? Let's say top 50 U.S. banks. Let's take a look. At this slide, the green bars are the net charge-offs for First Republic over the last 15 years, and the golden bars are those of the banking industry. Over the past 15 years, our losses were 5x less than that of the industry. And in the worst year of our losses, in the year 2009, our losses were at 48 basis points, which is, again, significantly lower than the group. And this is for the overall portfolio. And for the home loans, this number is even smaller, and you can see this on the chart. And if you compare that to 50 largest U.S. banks, our losses were 14x less than the group over the span of 15 years.

 So how are we able to achieve that strong credit result? It's a combination of 4 factors: it's our stable geographic mix; it's our stable portfolio mix; our conservative underwriting; as well as stability and longevity of our bankers.

 So let's start with the geographic mix. This slide shows over 15 years. And if you take a look at our core markets, San Francisco, New York and L.A., they consistently accounted for around 80% of the total portfolio. And as Mike said, we focus on the coastal urban markets, and we know our markets well. We've entered New York in 1999, Boston 2006 and have been carefully growing those markets. One interesting fact about us as well is about 90% of our real estate loans are located within 20 miles from one of the First Republic offices.

 Second component of our credit quality foundation is our stable portfolio mix over time. So this slide shows that our home loans, single-family plus HELOC, over the years, accounted for roughly 55% to 60% of the overall portfolio. Our clients that have home loans with us, they have their businesses, they're involved in non-profits And as a result, we see our business banking portfolio has been growing. So right now, it's about 13% of our portfolio.

 So the third component of our strong credit quality is our conservative and consistent underwriting. If you take a look at this slide, you'll see that our LTVs are very conservative. They are at 60 or lower percent, and only less than 3% of our loan portfolio is unsecured.

 So how does our typical single-family borrower look like? So they have strong FICO scores. They have ample liquidity, which almost equals the loans they have with us. And the LTVs on those loans are very low. And you'll see we've been consistent and conservative in our underwriting over the years. And this shows the LTVs at origination equals our different portfolios. They're conservative, if you look at the past 7 years, but over the past couple of years, we're actually selectively tightening some of our LTVs to address the appreciation of the real estate markets we're in.

 Last component or one of the components of the strong credit quality is longevity and stability of our bankers. One interesting fact about First Republic. Since 1985, we've originated $190 billion of loans, and 90% of those loans have been originated by the bankers who are still with First Republic. And this is truly unmatched in the industry. And those bankers, they know our credit culture, they know our clients well, and Mike mentioned earlier that they also have the clawback. So the bankers are responsible for the loan's performance throughout the life of the loan.

 So we talked about conservative underwriting, so let's see how does it impact the loan growth. Over the years, we've been growing our loan portfolio. And this chart shows the past 10 years, consistently at about 19% rate. And this is, again, maintaining conservative underwriting. And this was significantly higher growth rate than the industry in general had over the same period of time.

 Let's turn to deposits. And again, same story. And Mike mentioned that majority of deposit growth comes from our existing clients and their referrals. The same is true for our funding as well. And again, deposits grew 20% over the same period of time, and they are coming from existing clients and referrals, a significant portion of those, and again, the growth rates for deposits more than exceeding that of the industry. And our deposit growth funded the growth of the loan portfolio.

 Let's look at the -- take a look at the mix of the funding sources. We use diversified funding sources, but deposits account for around 85% of our total funding. And as we take a look at the deposits themselves, we use diversified channels to bring them in. We use our preferred banking offices or branches. We generate them through the preferred bankers. For banking, these are a combination of our business bankers and preferred bankers who also bring the business through our wealth management channels. And if we look at the client type, 50% of our deposits are business deposits.

 And if we look at the checking. I'm going to show this slide shows the last 15 years. So in that period, we tripled the share of checking deposits in our deposit mix. And now it's about 60% of our overall deposits.

 And another interesting fact about First Republic. By number of accounts -- number of deposit accounts we have, if you compare this number to banks of our size or larger, we have about 1/8 of number of deposit accounts that allows our bankers to serve our clients better and to know them better as well.

 We have -- First Republic's model is high touch, and we deliver great service, which is reflected in our Net Promoter Score. And this results in solid growth and stable and consistent financial results.

 And now I will turn it to Mike Roffler.

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 Michael J. Roffler,  First Republic Bank - CFO and EVP   [8]
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 Thanks, Olga. So I'm going to touch on sort of a few of our -- I guess for us, as a 32-year-old company, maybe a few of our newer businesses. Business banking, really, this began sort of late '90s as an offshoot of our personal banking business. We followed clients to the businesses they led or that they influenced, and it's really grown over time as we continued to deepen those relationships. And now we actually, we do self-source business relationships also. But it's really, as Olga just talked about, a great source of funding for the bank in terms of deposit growth. Nearly $5 for every $1 we lend out comes from the business banking franchise in the form of deposits in largely business and checking accounts. So transactional, running the business, working capital, and it's been a great source of funding for many years.

 If I turn to the lending side of business banking, we like to think of ourselves in verticals. So we have about 10 verticals that we like. You see the larger ones here on the page. And we stick to what we know. Olga talked about our credit record and what it is we do. There's a reason that record stays as it is. We're very focused, and we like to go deep into the verticals that we understand.

 So the 2 here are nonprofit schools, typically museums, arts areas -- arts-type facilities in the markets that we're in. Think of this as the building of a gymnasium, the building of a new center where you're bridging a capital campaign. And so many of these things are -- of these organizations are backed by our clients, right? They're on the Board of Trustees. They have relationships that go deep into these cultural organizations. And so we have found a very good niche to help finance those in advance of calling capital.

 Second is private equity and venture capital. We refer to this as our just-in-time portfolio, where you're aggregating capital (inaudible) -- in advance of calling capital from your limited partners, you may make an investment you need to move quickly or, frankly, you want to administratively be good to your limited partners and only call capital once a quarter or once as needed. So we bridge finance going into an investment, typically a 90-, 120-day period, backed by very strong LPs with the uncalled capital that they're still committed to.

 And then professional service, investment firms, things of that nature make up the rest of it, which if you think of our client base, urban, professional, well educated, they work in law firms, they work in architectural firms, they work in private equity and venture capital firms, in sort of that arena. And so we follow the same types of businesses.

 So let's talk about the next generation a little bit. This has been a focus for the bank the last several years. And really, its genesis was more of the bank started, the jumbo home loan was our lead product. We said to ourselves, that's happening later and later in life when people are buying homes. So how do we get in front of it? The professional loan program where we help new partners, new managing directors buy in or co-invest in their firms. And so that, we've done for several years now, and it's really accelerated the last couple of years.

 That took us from one demographic of buying a new home loan to investing in your firm. And we said, can we go back even further? And the place to do that is what we call the All-in-One, which is on the left side of the page, where we refinance existing student debt into a much more attractive rate. And the goal there is obviously to help them with that -- we're going to talk about Gradifi in a minute -- help them get that paid down to where they can actually think about buying a home maybe a little bit earlier than they would have otherwise. And obviously, if we have helped them facilitate that, the goal is that they will become a lifelong client as they go through investing in their firm, buying their first home, opening wealth management. And so we're developing the next generation of clients while, at the same time, developing our next generation of relationship managers.

 We have one in the back here with us today, Sue Lee. She's out of the Boston office. And it's a cohort of around 20 people that we are developing to be our next relationship managers because as you see on the page here, we have 12,000 clients, borrowing clients, we only have 60,000 borrowing clients in the whole bank. So that's 25% of our base in a pretty short period of time, and we're adding about 5,000 to 6,000 a year. And so those clients, to get the full First Republic experience, you want to have them with a relationship manager. Well, right now, they do everything on my phone -- on their phone right here. There will come a point where they're going to want to call Sue. They're going to want to have connectivity to a banker. And so we have to be prepared for that. And so we're in the middle of developing that program to help to serve their clients because we want them to do their full life here. And that's the goal of doing the first product with the All-in-One so that expands over time.

 Gradifi. So last December, Gradifi, a Boston-based company we bought. They are focused on student loan paydowns. I think most of you have seen that ad capital or the marketing campaign on TV, yes? Show of hands. It is a problem. You could see here 44 million U.S. borrowers impacted. Student debt is a burden. Gradifi helps from a corporate offering of an employee benefit perspective in the competition for talent to offer benefits where you, the employer, help make payments on behalf of your employees to pay down their debt. So this is a great benefit. And if you think about the competition for talent and the ability to attract the best employees, you really want to do that and offer this new benefit. Innovative, it's growing by the day. There was a press release earlier today. I think we're up over close to 250 employers now on the platform. We were just at about less than 40 at the start of the year. So it is gaining traction and momentum.

 Ideally, what will happen -- this is a nationwide program, right? Any company in the U.S. could go on it. What will happen hopefully is that we will then go through the members in our footprint, and they will then have the opportunity -- we'll hopefully have an opportunity to make them be First Republic clients either through the All-in-One, deposits and ultimately a home loan.

 We are investing in this part of the franchise quite significantly, as you've seen from our quarterly results. And I know they're going to make me talk about the efficiency ratio in a moment. But it is -- it's a longer-term vision, right? We think in 5- and 10-year increments, not the next 90 or 180 days, and this is a long-term play.

 Wealth management, another part of our franchise, is contributing, growing very nicely. The fully formed franchise you see today was probably 20 -- 2009, 2010, frankly. And it's very attractive. It is a agnostic, open-architecture platform. We are not creating products with the First Republic label to sell. And that is attractive to advisers. So this growth has been from bank clients who now are wealth clients. We hire from different firms. They bring the client base with them and then just the organic growth of existing clients. We did have a couple of acquisitions in this time period, which was really the adding of very strong groups of people to the platform.

 We continue to see great opportunity because you're putting together wealth management and private banking with Amy and team in the back. That's very good from a relationship perspective, and it's attractive to the wealth management professional who is looking for that full-service offering. And here, you see the contribution to revenues that has continued to grow over time.

 Before I go on, I think that we have some metrics to sort of finish out. One of the things that drives First Republic, if you think about this, is consistent, stable results over long periods of time. And I know some of you are interested probably in -- there was a release today, right, with the tax reform bill, I guess, the first salvo, I'll call it, coming out from the House of Representatives. And this is something we've been through and the bank has been through before a little bit. There didn't use to be limitations on interest deduction, right, for home loans. It was unlimited. That was a long time ago, and houses may not have been as expensive. If you think about consumer credit, right, a home loan is the cheapest form of consumer credit, right? Unsecured loans, credit cards, everything costs more. And so what has been the experience in the past is there might be a momentary pause. You might wait, hold on, maybe should I not do this, should I evaluate my tax situation? But then that's very momentary and it's back to business. So we have experienced this before.

 And they're -- if you think about borrowing money on a home loan at 3% versus taking that liquidity and using it and not do a home loan, they're going to take that liquidity because I think you can invest it elsewhere at better than 3%, right? And so will there be the cases? For sure, but I don't think we view it as one that totally stops the business and drives things to a halt, right? There will be demand in our market. And the other thing I'd say is this: our activity and our growth is driven by the strength of the market and the activity of our client base more so than tax deductibility, right?

 Now the other thing is there's a corollary. Tax rate at 20% is good for corporations, right? That's good for other economic activity. And they haven't even gotten to the personal side yet -- and there could be changes. So I think we think of it as that activity benefits us more so than maybe a limited deduction here and there. Obviously, it just got released, so we're still studying. But I didn't want to wait because I know it would be the first 3 questions.

 So I'll run through a few metrics here. Efficiency ratio, I think we've been pretty clear. We're investing in the franchise. We just talked about Gradifi, All-in-One, wealth management, new relationship management development. Those investments are made in advance of what you'll see from a revenue growth perspective. And so there is a cost to that, so we're very comfortable in the 62% range that we talked about most recently. And we think that's still the right thing to do, especially when you think of the opportunities in our markets that are ahead of us.

 Net interest margin, this is sort of the year-to-date picture. Notice the band, 3% to 3.30% roughly. A few years, it was a bit higher than that, but pretty consistently 3% to 3.30%. We're very comfortable in this range while growing, while investing and continuing to deliver a strong stable return.

 And so most recently, there has been some pressure, right? And I think we talked about that about 3 weeks ago now. A lot of it is driven by the competitiveness of loan pricing, extremely competitive for A-quality credit and A-type borrowers. And so our deposit, our liability pricing pretty much behaved as we had expected to. But our loan pricing, just competition has driven to be very competitive. And we can make a choice, right? You could do less, but is that shortchanging the next 90 days for the next 5 or 10 years? Because this is a -- it's an acquisition of a client that should be here for a very long time that we will benefit from.

 Okay. Another way that you might look at this, we'd encourage you to look at, when we talked about -- Olga went through the credit statistics, our loss adjusted net interest margin. Simple, take the margin I showed you on the last page and subtract net charge-offs. Do that for the top 50 banks, and what you see here is that we're 28 basis points better on average than the top 50 banks over a long cycle. So it's -- they're pretty good early in the cycle. And then you see what happens in '08, '09, '10. Now we're back to pretty good because credit, pretty benign in most cases. This is an example of what I just mentioned, consistency, predictability in all environments.

 The other thing this allows us to do is, '08, '09 or '10, we're in the market, we're not out of the market, dealing with -- on our own portfolio of issues. We can be there -- Sue can be there to answer the call for our clients. Yes, we'll do that. Yes, we can do that. Whereas it doesn't always happen when you're dealing with the trough in '09 and '10.

 Okay. The last charts, I think, are just some revenue growth, continues to be very strong and healthy at 14%. Net interest income growth, this is a little bit longer horizon, about almost 10 years, roughly 20%, which is consistent with the loan and deposit growth that Olga mentioned earlier. Earnings per share growth is a little bit shorter period.

 If you think about -- I'm going to go to the last one. So there's the bottom line. Tangible book value growth, which is a reflection of that earnings growth, a reflection of periodic capital activities, a reflection of -- this chart here goes from 2010 when we bought the bank back at a discount, that did accrete to book value. And this is what's created and what the bank really is. And so growing tangible book value consistently, predictably stable over time is really the bottom line. How do you do that? Consistent ROE. Once in a while, we do raise capital. Just recently, markets were strong, and we like to do very small bite-size, don't rock the boat, it was about 1.5% of shares. Couple days trading volume absorbs it, and we go back to business. That's always done in advance of what we see as growth opportunities and growth coming.

 The simulation charts, this is still June 30. We talked about this at earnings. A big part of this is growth in balance sheet that benefits us especially in year 2 because we've done a lot of business at the prevailing rates. Hopefully, those prevailing rates can be a little bit higher.

 And lastly is some performance against indices. And you see here, relative to S&P and KBW since our IPO in 2010, not quite twice outperformance, but close.

 And with that, I think we are happy to take questions for a few minutes because I think we have a few minutes.

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Questions and Answers
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Unidentified Analyst   [1]
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 I had a question about historical growth right now as you grow that. Any sense as to what that might look (inaudible) 15 years with this (inaudible)?

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 Michael J. Roffler,  First Republic Bank - CFO and EVP   [2]
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 Sure. So the question around student loan -- the student loan refinance. Is it about 1% to 2% of loans currently? What could we see it growing to? So we don't really set -- there are no growth targets or no goals given to relationship managers for lending. We do as much good business that we see in front of us. And it has grown from a very low amount to what it is today. It could be a little bit more of the portfolio in total, but the mix that Olga went through doesn't change a lot over longer periods of time. So I wouldn't expect it to change a whole lot. It'll become a little bit bigger just because it's growing a little bit faster than this portfolio but not demonstrably. Yes, sir?

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Unidentified Analyst   [3]
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 (inaudible) I think you guys didn't implement the new loan processing system. Or is this a benefit along those lines? I'm just wondering, a lot of us think about you guys invested a lot in the growth of Gradifi, All-in-One, wealth management business still do a lot of the expenses, but when I think about trying to understand maybe there's some things you are doing that have savings such as this new loan system. Is there any way that you can talk through maybe what's the cost of originating a loan today versus what it was then on the old system? I mean, is there a way that you can help me think about how, if you guys are getting more efficient?

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 Michael J. Roffler,  First Republic Bank - CFO and EVP   [4]
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 Sure. So around the cost of the new loan origination system that we're doing and what's the cost sort of today versus the old system and is there any efficiency from that? The thing I'd say about this right now is that both on that and on the conversion of our online and mobile, which we've talked about before, right now, you don't see it because you're in this middle of conversion. So you're actually on 2 platforms while you're migrating to one. And so right now, you're sort of adding cost to the mix. What should happen is as that phases out end of this year into next year, you will be on one platform, so some costs will go away. And then you have the cost of operating in a new platform. The cost in dollars may not be different, but it may be an efficiency or productivity gain that we see because not only do you put a new system in, but you reengineer the process a bit, so paperless, more automated features, which should lead to better client experience because closing times can get better, right, or the documentation process can get better. And so where that ultimately leads to is, do we hire a little bit less headcount, right? You don't see that right away because you're in the middle of this conversion process, which actually has sort of extra built-in costs in it. But if you go out a ways, that should occur into the future. Yes, Geoff?

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 Geoffrey Elliott,  Autonomous Research LLP - Partner, Regional and Trust Banks   [5]
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 (inaudible) have been talked about (inaudible) over the long term (inaudible) Efficiency ratios on my end (inaudible) efficiency ratio (inaudible)

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 Michael D. Selfridge,  First Republic Bank - Chief Banking Officer and Senior EVP   [6]
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 So the question is, how do we feel about the efficiency ratio? Would we run it higher than the 62% guidance that we gave last quarter? And let me take you back to kind of pre-$50 billion for us and the spend that we were doing where you saw the efficiency ratio increase to the 60-plus range, which was building infrastructure, second, third line of defense. Today you look at the spend, and we spend a lot of time as a team looking at sort of the low 60s efficiency ratio but investment for growth. So I think it's more of a function of the growth ahead of us and how quickly do we want to take advantage of that growth. So when we've talked about areas like technology, the digital experience, wealth management, we would love to do a lot more there, that tends to press a little higher on the efficiency ratio. So I think that's going to be a balance, but the initiatives today are much more growth oriented.

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 Michael J. Roffler,  First Republic Bank - CFO and EVP   [7]
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 And I would put a fine point on it. If you did invest in wealth and it went above 63, no problem with us. And so that balance does exist. But if you could accelerate that and then go and above, I think we'd look at that and say, is that trade-off worth it? And we -- again, we think 5 or 10 years, it might be worth it. So it's not an absolute ceiling, so to speak. Ken?

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 Kenneth Allen Zerbe,  Morgan Stanley, Research Division - Executive Director   [8]
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 In terms of the deposit balance, is there (inaudible) large commercial customers are a little more price-sensitive and demanding more rates? You guys have sort of a unique high net worth retail customer base. Can you talk about your experience, like where are you seeing more of that pressure (inaudible)

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 Michael J. Roffler,  First Republic Bank - CFO and EVP   [9]
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 Yes. It's a good question. So it's about deposit costs and corporate client versus wealth management versus high net worth and sort of where does it equalize from here. We're really happy that in sort of 4 hikes, I think our deposit costs are up 12 basis points. So it's been a pretty low beta. We always believed, as I think much of the industry did, until the Fed got to 1%, just above 1%, you probably have a pretty low beta. And that's what's played itself out. I think as we now get above 1% and if the Fed is really headed towards 2% next year, there have been what I'll call the acceleration of discussion on deposit pricing. There are now alternatives, right? Money market funds, treasuries. And so corporate clients, larger ones, have engaged in those discussions. And that is part of the increase you see in some of our deposit pricing. On the money market, I think we talked about this, there were some adjustments we had made. We had lagged for quite some time, and we did make some adjustment there in the second quarter. I think it'd be more normal adjustment from here versus what that was, somewhat of a catch-up or one time. But I think the further you get away from 0, the more normalized pricing you'll see compared to where it's been.

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 Michael D. Selfridge,  First Republic Bank - Chief Banking Officer and Senior EVP   [10]
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 So -- and I would just add one more point to that. The -- obviously, it's been a little tricky with a flat yield curve. So we haven't been able to make it up on the other side of the equation, which is loans, although we did say in the earnings call that we are starting to reprice some of our new originations, but you won't see that for maybe 4 or 5 months out. So we're sort of in this period here of transition where short rates are going up, long-term rates are staying a little flat. For us, we had emphasized net interest income and growth is really what's paying the bills at the end of the day. So our pursuit of new households and retaining existing ones and maximizing our net interest income has been important to us.

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 Michael J. Roffler,  First Republic Bank - CFO and EVP   [11]
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 Is there one more?

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 Michael D. Selfridge,  First Republic Bank - Chief Banking Officer and Senior EVP   [12]
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 Yes, one more, yes.

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 Michael J. Roffler,  First Republic Bank - CFO and EVP   [13]
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 One more?

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Unidentified Analyst   [14]
------------------------------
 Yes. Just as I think about the business model for the long term, so you guys really tailored the business in the high net worth. And you've had -- you've got a great client base, strong high-net worth client base, where, going in the future, it's diversifying a little bit away from that segment into All-in-One product maybe like Gradifi. Can you just -- is there any way to measure the profitability of the -- what I would call the legacy-type clients versus the clients of tomorrow? And I know that's really open ended, but is the client of tomorrow going to be more profitable than the legacy-type clients?

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 Michael D. Selfridge,  First Republic Bank - Chief Banking Officer and Senior EVP   [15]
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 Question is if the client of today and the millennial base is going to be as profitable as this segment we serve today on the high-net worth side. The answer is we think so, and that's why we're putting so much attention on this. The thing to think about with kind of the average age or median age of our First Republic client being in the 50s, takes time to make money and accumulate wealth, that's the client segment that we've served, although I should clarify, we're not just the bank for high-net worth individuals. That's maybe 45% of our total households. So we also serve upwardly mobile urban coastal professionals and the millennials. So at the end of the day, what we want to do is if we historically met our client through the single-family mortgage, people are deferring purchases later, maybe 10 years later, starting families later, getting married later, what was the new product opportunity for us to meet our client literally a decade in advance? And that's where student loan refinance came in, and it's been an absolute success for us. It's an opportunity to get the whole relationship. And then when and if they're ready to buy their first house, who is there? First Republic Bank. So it goes back to client loyalty, Net Promoter Score and measuring relationships in decades. And if you do it on that basis, I think it's a very attractive ROE.

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 Michael J. Roffler,  First Republic Bank - CFO and EVP   [16]
------------------------------
 No. I would say the common -- just to close -- the common theme as we think of our -- this client base that we're attracting now, many of them are what the bank was originally founded on if you think about it. They were the young entrepreneurs at the time who was looking for a bank. The well-established person was already at a bank. And so this is our sort of reincarnation a little bit of what First Republic was 32 years ago and attracting the urban, well-educated professional who is in the early stage of their career and is going to grow significantly as they continue to progress through their career.

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 Gerry Benson,    [17]
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 Okay, we got to wrap it up, but thanks to Mike, Mike and Olga and First Republic.




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