First Republic Bank at Goldman Sachs U.S. Financial Services Conference

Dec 05, 2017 AM CET
FRC - First Republic Bank
First Republic Bank at Goldman Sachs U.S. Financial Services Conference
Dec 05, 2017 / 09:20PM GMT 

==============================
Corporate Participants
==============================
   *  Hafize Gaye Erkan
      First Republic Bank - President
   *  James H. Herbert
      First Republic Bank - Chairman, Chief Executive Officer (Founding)
   *  Jeffrey Bruce
   *  Michael J. Roffler
      First Republic Bank - Executive Vice President and Chief Financial Officer

==============================
Conference Call Participants
==============================
   *  Ryan Matthew Nash
      Goldman Sachs Group Inc., Research Division - MD

==============================
Presentation
------------------------------
 James H. Herbert,  First Republic Bank - Chairman, Chief Executive Officer (Founding)   [1]
------------------------------
 (inaudible) and [Ron] will join us up here in a moment.

 I'm Jim Herbert, CEO of First Republic Bank. On my left is Gaye Erkan, our President; and Mike Roffler, our Chief Financial Officer.

 I'm going to introduce also on the front row, Jeff, Jeff Bruce, who's Deputy Leader of New York. And then, Jeff, can you introduce the folks that are with you?

------------------------------
 Jeffrey Bruce,    [2]
------------------------------
 Sure. I have Daniel and [Akeel]. They're 2 of our new, what we're calling fast-track relationship managers. And we'll talk a little bit more about that as the presentation unfolds.

------------------------------
 James H. Herbert,  First Republic Bank - Chairman, Chief Executive Officer (Founding)   [3]
------------------------------
 Okay. Thank you, all. Thanks for being here. I know we're between you and drinks so we'll be as brief as we can be. But we -- obviously, we're delighted to be here following Rob Kapito at BlackRock who's a whole another matter, but we'll do the best we can.

 First Republic has really continued to grow. We are very happy with the model. We're going to go through some slides, but let me just take a second and set the stage.

 The bank has grown dramatically over the recent years and we have been able to continue to keep our quality of service up. The Net Promoter Scores are strong and the client satisfaction levels are very strong and we'll go into that more in a moment.

 But the -- basically, we're focused on a few markets: San Francisco; New York; Boston; LA; and then peripheral markets, San Diego; Portland, Oregon; and Palm Beach; and we just announced we're going to go to Jackson Hole, Wyoming. These markets have in common, rapid growth. We'll come to a slide in a moment. They have in common a depth of higher net worth individuals. And by that, I mean mostly highly educated professionals operating in urban markets that are very dense.

 We are driven by home lending, but we're driven by a lot of other real estate lending. And we'll come to something in a moment called our new student loan refinance business and our professional loan program and the Gradifi program.

 So within -- the bank grows about 20% a year. We've done it for a long time very safely. We like to think the history, I think, speaks to that.

 Let me come to -- it's a -- basically, it's a business model that's different than other banks, considerably different. It's culturally driven. The essence of the bank is its culture and its culture is predicated upon caring about the client and service and working inside in a very holistic and cooperative way with every area so that a single point of contact -- this diagram describes this. A single point of contact, be it a relationship manager, a business banker, a portfolio manager is -- delivers the whole bank. And they stay with us a very long time. One of the most amazing statistics actually is that 90% of all loans we've done since 1985 when I founded the bank have been done by bankers that are still with us.

 This is the growth of our markets. The markets, when put together in a manner that represents our lending volume, have outgrown the United States by 40-plus percent. That is not a rounding error. It's a very significantly differentiated growth rate.

 In the markets we're in, high net worth households as defined by Capgemini being $1 million in liquidity or more, are 58% of all the -- all those households in America are in our markets, whereas only 21% of total households in the markets. That number, that 58% number 12 years ago, 12 years back from '15, was only 46%. So there's been a 1% increase in the aggregation of such households in these markets per annum.

 Net Promoter Score. This we care about very deeply. This is actually our #1 report card as far as we're concerned, which is the satisfaction level of our clients. Our overall Net Promoter Score is 72. It exceeds Ritz-Carlton, JetBlue, Amazon and Apple, let alone banks. When you're -- when we are your lead bank, which is 50% of our clients, we're up in the 80s.

 What is this -- why do we care? We care because of this slide. 50% plus of our growth every year comes from the growth of our existing clients. They do more with us and they grow larger and more complex over time. They stay with us. In the circle, you can see that our attrition level is only 2% per annum. The attrition level in banking, in general, is 8%. So we start out each year about 6% ahead of our competitors in growth. If you don't lose, it's a lot easier to grow. And by the way, if you're not losing, they give you more to do.

 Let me come to the -- come to our newer focus for a moment. Starting about 10 years ago, we started to do something called professional loan program, which are loans made to individuals that are in mostly service businesses, including law firms, accounting firms, private equity, venture capital, and for them to invest in those firms, either to invest in the funds that the firms manage or to invest in buying into the partnership. We started doing that about a decade ago. It has turned into quite an interesting business. We have about 2,500 such borrowing clients these days, although we have another 1,000 that have paid their loans off already. That turned into something called student loan refinance. We call it All-in-One. And that refinance activity is really a driver on the bank. These 2 put together represent now about 20% of our borrowing households. Two years ago, they represented a couple percent. So they have grown very dramatically.

 In the base of the whole bank, which is about $85 billion in assets, we only have 60,000 borrowing households in 30-plus years. We've added about 10,000 -- 12,000 of these households in the last couple of years. They basically are our clients that we used to get when they would come to us for their single-family home refinance at an age of about 40 or 42. This cohort averages about 35, 34. So they are the same people about a decade-ish earlier.

 This is making a very big difference and is a very substantial opportunity that has some costs associated with it. They're -- this group, as a group, is now profitable, but it hadn't been in the last couple of years and it will tip considerably more profitable this year. We're picking up about 6,000 a year, 7,000 a year. This is almost half of our growth in total households each year now.

 And then, we bought Gradifi. Gradifi is a student loan repayment platform which is a HR benefit where a company agrees that those individuals that work for you that have student loans, they will make a contribution each month. We do it for our employees. We did that before we bought the company actually. We liked it so much that's why we bought it. That the -- maybe we -- for instance, First Republic makes $100 per month contribution to repay student loans as long as you're with us. Second year, $150. Third year, $200 thereafter. It's an acquisition tool for good talent. It's a retention tool for good talent. And it also says we really appreciate what you did to get through college and get to us.

 This is working very well. When we bought them, they had 30 companies basically. Now, they have about 250 this year in 12 months. It's expensive at this point. It's losing some money. It's a start-up tech company and we're marketing it heavily.

 On the other hand, this is a feeder. If I can go back here -- I'm not going to do that. This is a feeder -- there we go. This is a feeder for the Eagle Gold All-in-One. Think about the -- everybody -- everyone that is a client of Gradifi and receives money from their company gets an email every month saying the company has paid down your loan by $100. Congratulations. And every one of those recipients is a potential All-in-One refinance for us depending on -- are they in our markets and do they meet our standards? So that's where we're going with this.

 With that, let me -- we basically also market entirely by testimonials, almost entirely. Gradifi has been an exception recently. And it's always been the clients that are the happiest with us who we use to promote to reach out to further clients.

 So with that quick introduction, let me turn this over to Gaye Erkan.

------------------------------
 Hafize Gaye Erkan,  First Republic Bank - President   [4]
------------------------------
 Thank you, Jim.

 So as Jim mentioned, our biggest report card is our Net Promoter Score, our clients' happiness and satisfaction. And our commitment is extraordinary service, one relationship at a time. While delivering truly extraordinary service, our goal is to provide consistency, safety and stability to all of our constituents. And in that regard, strong credit and strong capital have always been and will continue to be fundamental pillars driving our success.

 As a result of our consistent underwriting standards, you can see on this page, since inception, we have originated over $190 billion in loans and our cumulative losses on these $190 billion plus lending has -- have been 17 basis points. And this is not per year. This is cumulative over 32 years. In single-family residential lending, which is over 50% of our lending, $111 billion and we have had only 7 basis points cumulative losses since inception.

 And our loss experience has been consistently lower than the top 50 U.S. banks. So on this page, you will see the top 50 U.S. banks' average annual losses have been 5x of those for First Republic. For single-family residential home loans, that's even more remarkable, which is 14x of our loss experience is the average annual losses that the top 50 U.S. banks have observed.

 So how do we achieve this extraordinary credit record? Stability and consistency is key to that. Number one, let's start with geographies, urban coastal markets and we have been focused on a few carefully selected markets. As you can see, we extended the time period to 2002 as a comparison. So over the past 15 years, the top 3 markets, San Francisco, New York and Los Angeles, have constituted about 80% of our lending and no major change. And one more remarkable stat, 90% of all of our loans, real estate loans have been originated within 20 miles of our PBOs of our branches.

 Talking about the consistency in the lending mix. Single-family residential lending continues to be more than half of our loan portfolio. Over 80% of our lending is real estate-secured. And please note, business lending, it has increased from 4% to 13% over the years and Mike Roffler is going to talk more in detail about that. It's the result of following our individual clients, home lending clients. When they are happy with us, they bring us to their businesses or nonprofits and that's just an extension of serving them and doing more with them over time.

 Now, let's look at the loan characteristics. As I said, strong credit is a key driver of our safe growth over time organically and we have been very conservative in terms of underwriting standards as you can see here. Our median single-family residential loan size is less than $700,000. It is 61% median LTV. And our multifamily and commercial real estate, even lower loan to value ratios at 55% and 52%, respectively. And please note, the loan sizes relative to lower loan sizes, not tall trees. And we will be competitive when it comes to pricing, especially through relationship pricing, but we will not compromise on credit.

 Let's dig deeper. In addition to collateral, great FICO score 774 when you look at the median and a high focus on post-loan liquidity. Not only the loan size median is less than $700,000, but also the post-loan borrower liquidity, the $545,000, is almost similar magnitude to the loan size. And when you look at the borrowers, even larger net worth than these numbers.

 And over time, single-family residential loan-to-value ratios have been relatively stable. And I'll comment on the absolute level, the 58%, 57% in a second. And when you look at all the other categories, the multifamily, CRE and construction, we have been tightening our loan-to-value ratios in light of what's happening to the cap rates.

 So when we look at the single-family residential, and it may be an obvious point, but it's a crucial one, so if you'll bear with me. At a 65% and lower loan-to-value ratio, in general, we look at the loan-to-value ratio as a predictor of how a loan is going to perform over time, but it's also, at the same time, a great predictor of the borrower type and the character. So a low LTV borrower is conservative, is a saver, tends to pay down their loans, in general, faster and tends to save more at a higher pace so there's the deposits or assets under management. So the single-family residential loan-to-value ratio tells a big story.

 Now, in all of that -- and I've been talking about the stability, stability and low turnover of our bankers. And, Jeff, how long have you been with us if you don't mind sharing?

------------------------------
 Jeffrey Bruce,    [5]
------------------------------
 This is my 13th year.

------------------------------
 Hafize Gaye Erkan,  First Republic Bank - President   [6]
------------------------------
 So it's relative, but normal at First Republic, so if I stop talking about my own many years that I thought, so everyone has been 20-plus, 30-plus, at least a decade at First Republic, it is one of the most contributing factors to our strong credit foundation. As Jim had mentioned, 90% of our lending since 1985 originated by bankers who are still with us. And we cannot achieve this statistic without a strong culture that is risk-focused and client-first that actually empowers our bankers to make decisions for their clients and with their clients. At the same time, we have had -- they're accountable for the risks and the decisions that they are making because the clawbacks, the credit clawbacks that we have had since 1986 puts the banker at a first loss position at the bank. So the stability of our bankers is not only key to the strong credit foundation, but it's also fundamental to the service culture and the high touch relationship model. It ensures the stability of the trusted relationships in our clients in turn.

 So in all of that, consistently executing on the -- on our simple business model, client-first and teamwork-based, we have achieved loan growth CAGR at 19% over the past 10 years. Similarly, on deposits, a 20% CAGR over the same time horizon. And last, I'm going to dig into deposits a little bit more in detail. When it comes to deposits, we are at 85% of our total liabilities are funded by deposits. And then, when you look at the non-deposit-funded liabilities, tends to be relatively, compared to banking sector, longer term. Our short-term borrowings are less than 1% of total liabilities and our total deposits as of 9/30 is at $65.4 billion.

 Especially in a rising rate environment, diversification is key and that diversification comes into play in terms of channel in which we gather our deposits. Preferred banking offices, also known as branches, and our preferred bankers who work close with our relationship managers, business bankers have been fundamental to bringing the deposit relationships to the bank. And we have also seen wealth management to be a great contributor. While the percentage have been steady at 7% to 8% of our total deposits in absolute dollars, that has been rising and now sitting around $4.7 billion. When we look at the type of deposits, it has been a healthy mix between business and consumer. Again, it's a result of individuals bringing us to their businesses and following our clients.

 Now, the one -- I'm talking about the stability. The one change that you will see in the bank when you compare it to the early 2000s is in the deposit mix. If you look at checking as a percentage of total deposits, now we are at 60% of our total deposits is in checking and it's a good mix between consumer and business as well, what it used to be in the low 20s in the early 2000s. And in the early 2000s, we were about a few years into the bank that you see today, especially in the deposit side, after we took our first checking account. And we have added personal checking, business banking and wealth management as our home lending clients have been happy with our service and they have asked us to do more with them and so we did. And as you have heard from Jim, now our All-in-One clients and professional loan program clients are asking to do more in the student loan refinancing or the PLP loans.

 With that, let me turn it to Mike Roffler, our CFO, to talk about business banking and wealth management.

------------------------------
 Michael J. Roffler,  First Republic Bank - Executive Vice President and Chief Financial Officer   [7]
------------------------------
 Thank you, Gaye.

 I think as we think about this checking chart here and show the mix change, the next chart has a big part in that too. Our business banking franchise, as Gaye mentioned, really started in the early 2000s. And it was a referral business, a home loan client, a lawyer brought us to his law firm and we started doing business with the law firm. It's been a great source of deposits and especially checking. And as you could see here, we're over 4.5x for every loan outstanding. We've got that much in dollars in deposits. So it's a wonderful funding source for the bank.

 Looking at the business banking loan portfolio. We're very focused on specific verticals. We know the types of businesses that our clients, in many cases, work in or influence and we follow into those businesses and their businesses that match up with our client base, if you think of the urban educated professional who is running a private equity firm, who is on the board of a nonprofit school. The 2 biggest portfolios there are nonprofits, where it's typically helping finance a gymnasium or a new building. And typically, they are going to have a capital campaign to pay it back over time. And in the private equity and venture capital, those are -- we call them just-in-time lines. So it's a way to make investments into a firm or into a -- instead of calling capital frequently, you can do it once a quarter. And so they're typically very short-term, 90 to 120 days outstanding. And then, a variety of professional services firms thereafter.

 Wealth management has been a big part of the franchise, especially if you think since 2010, when we came out of Bank of America Merrill Lynch, has now grown to over $100 billion of assets under management. Really focused on the continued delivery of service to banking clients, who may be doing their wealth elsewhere, so we've been referred back and forth between the bank to wealth management. And also, we have been hiring outside producers from other firms who brought their clients with them, and also gives us an opportunity for those clients to experience us on the banking side. It's been a very important contributor to the deposit franchise, as Gaye had mentioned.

 And if you think about our revenue diversity then, this is sort of the picture from 2010 until 2017, today. Used to be about 6% of revenues, and now it's up to 13%. It's going to lead to an efficiency discussion that we'll have in a moment, but we're very happy with the diversity of the revenue stream and sort of the consistency and stickiness that this leads to from a client relationship perspective.

 Turning to the net interest margin. I think you've heard it a few times from both Jim and Gaye, consistency, stability, predictability is very important to the bank's results in a growing franchise. And this chart here is a very good one to demonstrate that. Pretty consistent margin of 3% to 3.30% over multiple interest rate cycles, as you see the gold bar, which is the Fed Funds rate, and so we've been very pleased to maintain that consistency over time while growing the balance sheet, as you saw earlier, loans and deposits in the high teens to 20%. That leads to a very healthy net interest income growth, which ultimately is what pays the bills and what -- allows us to keep investing in the franchise versus this ratio.

 Now this ratio is an interest to people. And last quarter, there was a bit of a down draft, really 2 reasons, I would say. One, there is a little bit of deposit pricing that has happened and it has continued modestly into the fourth quarter. But also loan yields are a function of competition, so we are very much driven by the macro environment when we look at the margin. And so it probably ticks down a couple of basis points from where it was even in the third quarter. And the reason that's important is it really runs to the next stage also. So this is our efficiency ratio over the last, sort of 10 quarters or so, 11 quarters. And you see a slight tick up recently. Really, this is sort of -- there's a multitude of what goes into this, but importantly it is a ratio, and so the revenue side is as important, frankly, as the level of our investment. But you see it here on the page; it's multiple parts. Jim talked about the investments we're making in a growing franchise and the client acquisition household that's going on in the All-in-One and professional loan program. Those are investments seeding the future of the bank, and there's always upfront cost to that.

 The other thing I'd add is when you grow revenues at 18% to 20% annually, there is generally a cost to do that also. It's not a maintaining mode like it can be at some organizations. It's very much a acquisition of new.

 And the thing that's probably that I just talked about on the margin, right, that does impact us, and so if the margin ticks down a little bit, that puts a little upward bias on the efficiency, and I think we talked about this in October during our call. You could see this tick up a little bit, 63%, maybe 64%, but if it's for the right reasons, margin, economic environment, macro environment causing that, plus the investments we're making in the franchise for the future, we think that's a very good trade-off in the current environment.

 I won't spend much time on this, but this is another way to look at margin stability that we might humor you with. Add in credit losses, right? So the green bar is First Republic and the gold bar is the top 50 banks. Sometimes people say, couldn't you get more on your loan yields. Couldn't you price better and take a little bit more risk? Well, this is why you don't do that, right? Eventually, risk-based pricing turns and you see what happened in '08, '09 '10, versus the consistency over long periods of time.

 (inaudible) we talked about leads to the revenue growth coupled with strong net interest income growth, as I mentioned earlier. And finally, culminating in EPS growth. And I might stop here for a minute, because -- just to touch on, it was on the first page, we did file a 8-K the other day on our fourth quarter results, which are all positive. But what it is, is it's sort of a repositioning of future benefits to the current year from the exercise of stock options that employees have the right to do and they're vested and they can do with obviously with the specter of tax reform coming both from a -- these are personal decisions, so personal tax reform. Employees made a decision to accelerate some of that versus when they might have otherwise done it. All of these benefits would have come to the bank by the middle of 2020. And so it's just a timing thing that moves it forward, and it was through the end of November. There could be more in December, but again, it's positive to the bank overall; it's just a timing issue. And broadly tax reform, we have optimized our tax rate, as you see from our filings and what's reported. If the rate does go to 20%, there is benefit, there still is a benefit to the bank in that environment. It may not be as much as others who haven't done anything, but there is benefit even from a lower rate overall.

 And with that, I'll close with one of the other measures we look at, tangible book value per share growth. This is sort of the bottom line and what we return. It's grown very strongly since we came out of B of A in 2010.

 With that, I'm happy to turn it to Ryan. Thanks, and I am here.

------------------------------
 Ryan Matthew Nash,  Goldman Sachs Group Inc., Research Division - MD   [8]
------------------------------
 Thanks for that, Mike, Jim and Gaye. I just wanted to follow up on a couple of things that were mentioned in the presentation. Mike touched on the tax reform there at the end. I think more interesting than the actual rate moving, if you think about it, you guys operate in some very high state tax states, and I'm wondering 2 things. One, with that combined with the potential of loss of the mortgage deductibility, not necessarily concerned so much about credit, but what do you think this means for the second order impact on your customers in terms of property values and activity?

------------------------------
 James H. Herbert,  First Republic Bank - Chairman, Chief Executive Officer (Founding)   [9]
------------------------------
 It's a very good question. We don't think it means very much on property values. It's clearly not positive, though, but it's not going to be a large negative. The reason is that most of the markets we operate in, New York, San Francisco, Boston, L.A. are supply constrained. That's the primary driver on value and so that isn't going to go away. Will it be a slowdown of purchasers, and maybe it'll be 2 bids instead of 3? Easily could happen. In fact, I would think it probably would. But the other thing is, in terms of the volume of mortgage activity, as Gaye pointed out, I think our average, our median is about $700,000. So if they end up halfway between $500,000 and $1 million, I don't think that matters much.

------------------------------
 Ryan Matthew Nash,  Goldman Sachs Group Inc., Research Division - MD   [10]
------------------------------
 Got it. Maybe a question for Gaye. One of the things Mike talked about was that you could see the margin drift down a little bit. I'm just more curious, when you think about what's happened, last quarter we saw deposit growth pick up 7 basis points, you are still outperforming peers on the beta front with around 11% beta. I guess, what was it about -- Jim, you talked a lot about some -- 100 basis points being kind of the level that clients kind of wake up and think they need to deploy cash, and how do you think about things evolve over the next hundred? Do we start to trend towards that historical 40 to 45 (inaudible)

------------------------------
 Hafize Gaye Erkan,  First Republic Bank - President   [11]
------------------------------
 Sure. And your numbers are spot on in the write-up. Depending on whether you look out the last 12 months or last 24 months, our actual beta has been between 10% to 15%, and we have lagged quite a bit. And our -- it is our trust-based relationships in the bank. And you have heard from Jeff, several of those -- most of his clients, just like anyone else, any other banker, are many long-term clients, they do a lot with us over the years. So what happens is when it's the first hike, 25 basis points, you do your -- you earn a lot in your business so you don't really care as much. You don't call your bank, "Are you giving me 25 basis points?" When it's 1% and you're owning a business or you are the C-level executive, then conversations start happening, especially if it's an excess cash position. So from that perspective you wanted to be fair to all of our clients and maybe we didn't do it clearly alluding to 1% emotional threshold. It is a threshold where the conversations happen, so last quarter, we have just calibrated ourselves after lagging for a couple of years on the money market deposit side and on the sweeps from the fiduciary responsibility perspective.

 Now looking forward, as Fed Funds rate normalizes itself, post-2018, a hike in December, potentially 2 to 3 hikes into 2018, wherever it may normalize, call it 2.25%, 2.5%. So banks will want to pay exactly Fed Funds or lower than that. And over time, they've seen historically, and there'll be a model in our NII, 40% to 45% of a cumulative beta. And that's one side of the equation, and maybe let me turn it to Mike to talk about NII and NIM because we're a growth company. We grow in total assets 15-plus percent, so there is 2 sides to the equation.

------------------------------
 Michael J. Roffler,  First Republic Bank - Executive Vice President and Chief Financial Officer   [12]
------------------------------
 Yes, no, I think that's right. Part of the growing balance sheet at a 3% to 3.30% NIM allows us to sort of continuously increase our net interest income, which allows for the investments in the franchise we're talking about. And when we run our simulations, actually, our deposits have been -- have done very well. The yield curve, it's pretty flat. And so loan pricing is obviously a function of competition also, and so that's where some of the challenges have been. We do feel like the client acquisition, however, is very strong, and for the right client, best client, we are continuing to be very competitive in the market.

------------------------------
 Ryan Matthew Nash,  Goldman Sachs Group Inc., Research Division - MD   [13]
------------------------------
 You talked a lot about a lot of the different growth opportunities that the bank is pursuing, Gradifi, Eagle All-in-One, professional loan program. Can you just talk about how big you think these opportunities can be, and how they differ from the traditional process where a customer do things like fast track RMs versus a traditional older customer that the bank has historically pursued.

------------------------------
 James H. Herbert,  First Republic Bank - Chairman, Chief Executive Officer (Founding)   [14]
------------------------------
 It's very interesting. The student loan business, of course, is -- outstanding student loans are about $1.3 trillion, $1.4 trillion, 44 million borrowers, 70% of all graduates of colleges come out with student loans. So the opportunity is enormous. I think ourselves and others that are in the student loan refinance business maybe have refinanced $20 billion or $30 billion. So there's room for growth. What we do is we focus intently on our markets. What we've done with the folks here is to talk about handing -- we've want you -- [Dan], could you tell us -- we've handed you all -- you've just come out of a training program, been with the bank 4 or 5 years. We've handed you a couple of hundred loans?

------------------------------
Unidentified Company Representative   [15]
------------------------------
 Yes, I've been handed a couple hundred borrowers and I'm tasked with reaching out to them, growing the relationship, telling them so much more what we can do on top of their student loans. Oftentimes they're not familiar with the other products that First Republic has, so it's been great getting to know them and letting them know about that.

------------------------------
 James H. Herbert,  First Republic Bank - Chairman, Chief Executive Officer (Founding)   [16]
------------------------------
 This group of people that we're doing has a FICO score of 767. They borrow about 133 -- $133,000. They have about 4 products with us. They've been working 2 years or more. On the average, they're about 32. So they are just the clients we've always had, younger. And about 15% of them already have homes. I would point out that FICO score was servicing a loan that is more than twice as expensive as ours, so we're enhancing them dramatically. But this, the magnitude of this is stunning. And we're still trying to fully feel out how far it can go. But I might add, we have one delinquency in the portfolio of 12,000 loans. And so it's a very interesting opportunity.

------------------------------
 Ryan Matthew Nash,  Goldman Sachs Group Inc., Research Division - MD   [17]
------------------------------
 Maybe one more question from me, then I'll open up to the audience for a question or 2. One of the big themes we've been talking about is regulatory relief, and if you think about the bank, you're obviously growing very, very fast, $85 billion, I'm sure -- if I do the math, you'd be over $100 billion in the not-so-distant future. Growing 200% per year. But First Republic, it's interesting that you're not technically a SIFI, you don't go through a CCAR, but you spend -- did spend a lot of time building out a lot of these things for regulatory compliance. I guess, when you think through all the things LCR, living will, anything that you think if the world changes could provide some relief for the bank to shift some resources into more growth-oriented investments?

------------------------------
 James H. Herbert,  First Republic Bank - Chairman, Chief Executive Officer (Founding)   [18]
------------------------------
 Well, 2 quick things. We're sort of done investing in that area. Obviously, we have a run rate cost. So the investment period is over. So we've shifted our investment to improving the bank, and that's actually going extremely well. The living will is the one that comes to mind. And possibly a somewhat lighter touch DFAST, which we do instead of CCAR anyway. But actually I will say that most of the improvements that have come out of these rules have been favorable. The -- and we intend to fully stay with them. Would we continue to grow them or enhance them? We may be able to slow down that a bit, but mostly, I think, the costs are baked in. I think the movement of the SIFI, for those who are not through it yet, is a pretty big deal. We're already there and I like the way it improves the bank, actually, and that's just the truth of it. But the incremental investment is probably done.

------------------------------
 Ryan Matthew Nash,  Goldman Sachs Group Inc., Research Division - MD   [19]
------------------------------
 Maybe I'll open it up if there's a question or 2 from the audience. Jimmy?

------------------------------
Unidentified Analyst   [20]
------------------------------
 Just a quick question. It's Jimmy [Hanna]. This is maybe more for Mike or Jim or Gaye. The 63%, maybe 64% efficiency ratio, are you just thinking about how in fourth quarter it might go up a touch? I understand maybe some of the revenue aspects, but on the expense side, I also understand the investments. Some of the investments you've been doing is in Bob Thornton's group, adding individuals and teams. What's the pipeline there? Are there still the same good opportunities to bring over people?

------------------------------
 James H. Herbert,  First Republic Bank - Chairman, Chief Executive Officer (Founding)   [21]
------------------------------
 Let me take that if I can. The investment -- and both Gaye and Mike alluded to it, but the shifting of the bank towards wealth management a little more as a percentage of total, that if you looked at the slides, the bank's growing about 20%. Wealth management is growing about 30%, so clearly we're tipping a little bit. Wealth management clearly carries a higher efficiency ratio, about 80% to 85%. And so that's tipping the thing a bit. And -- but the opportunities are considerable. We brought in a number of teams recently from all over the Street. The -- I think it's getting better, the opportunities for hiring, and we're having a lot of conversations. Because we represent a very safe place to go where you want to have a full platform and really good private banking, and that's fairly unique. That's fairly unique. Doesn't appeal to everybody, but we don't need everybody. We just need a few really good teams 5, 6, 8 times a year.

------------------------------
 Ryan Matthew Nash,  Goldman Sachs Group Inc., Research Division - MD   [22]
------------------------------
 Question at the back.

------------------------------
Unidentified Analyst   [23]
------------------------------
 Mr. Herbert, you mentioned in the mortgage interest deduction, that's probably not going to be a problem, slight negative. But what about state and local taxes? It's hard to kind of change those unless you sell your property. On the mortgage interest deduction, you can put up more cash and so forth; can you comment on that? On your single-family residential?

------------------------------
 James H. Herbert,  First Republic Bank - Chairman, Chief Executive Officer (Founding)   [24]
------------------------------
 Are you're talking about SALT? So the whole tax, yes, it's a problem. I live in California and New York. I go back and forth, and I'm a California resident but I spend some days here and they split me. And it's going to be a negative for those states, I think. And obviously, the -- one of the underlying intents is to see if it disciplines their activities at all. I'm not sure it will, quite frankly. But I think that San Francisco and New York aren't changing. However, they are what they are. They're fantastic places. L.A., Boston, I mean these cities have such power and such draw. That -- I don't think it changes the migration in or out. As you get -- if you're going into retirement it may cause you to think about it, but you go where the jobs are at the end of the day, and these jobs are still -- these job markets are still very strong. Will this help the states? No, it won't. It'll clearly hurt them. And there'll be an offset at some point of some order of magnitude. It is interesting on that chart that I showed earlier, the higher net worth families that are -- have moved into the markets we're in. It's not that they moved. In many cases, they were created there. They moved there, and folks like myself are not leaving there, and so it's a combination of things that's occurring in these very, very vibrant urban centers that is very exciting actually. I think the tax bill impacts it a little bit. You hear a lot about people thinking about are they going to move. I think very little of that happens, personally.

------------------------------
 Hafize Gaye Erkan,  First Republic Bank - President   [25]
------------------------------
 If I may add real quick. In those markets, we only have 4% market share, and that's only in terms of high net worth individuals, in addition to the younger professionals. And while they're on the tax -- proposed tax law changes, another topic that I didn't mention is the repatriation, obviously, so there is, depending on the research that you're reading, between $1.5 trillion to $2.5 trillion to potentially come in cash into the U.S. 60% of that money is also in the markets within our footprint in terms of the companies headquartered there. So there's a lot of moving pieces. And net-net, it looks like it could stimulate additional activity.

------------------------------
 Ryan Matthew Nash,  Goldman Sachs Group Inc., Research Division - MD   [26]
------------------------------
 Great. Well, we've already run over, so please join me in thanking the team.

------------------------------
 James H. Herbert,  First Republic Bank - Chairman, Chief Executive Officer (Founding)   [27]
------------------------------
 Thanks, Ryan.

------------------------------
 Michael J. Roffler,  First Republic Bank - Executive Vice President and Chief Financial Officer   [28]
------------------------------
 Thank you.




------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the 
Transcript has been published in near real-time by an experienced 
professional transcriber.  While the Preliminary Transcript is highly 
accurate, it has not been edited to ensure the entire transcription 
represents a verbatim report of the call.

EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
editors have listened to the event a second time to confirm that the 
content of the call has been transcribed accurately and in full.

------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other 
information on this web site without obligation to notify any person of 
such changes.

In the conference calls upon which Event Transcripts are based, companies 
may make projections or other forward-looking statements regarding a variety 
of items. Such forward-looking statements are based upon current 
expectations and involve risks and uncertainties. Actual results may differ 
materially from those stated in any forward-looking statement based on a 
number of important factors and risks, which are more specifically 
identified in the companies' most recent SEC filings. Although the companies 
may indicate and believe that the assumptions underlying the forward-looking 
statements are reasonable, any of the assumptions could prove inaccurate or 
incorrect and, therefore, there can be no assurance that the results 
contemplated in the forward-looking statements will be realized.

THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------