First Republic Bank at Bank of America Merrill Lynch Future of Financials Conference

Nov 06, 2018 PM UTC 查看原文
FRC - First Republic Bank
First Republic Bank at Bank of America Merrill Lynch Future of Financials Conference
Nov 06, 2018 / 02:50PM GMT 

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Corporate Participants
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   *  Hafize Gaye Erkan
      First Republic Bank - President
   *  James H. Herbert
      First Republic Bank - Founder, Chairman & CEO
   *  Michael J. Roffler
      First Republic Bank - Executive VP & CFO

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Presentation
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 Unidentified Analyst,    [1]
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 This next company obviously needs no introduction but I'm going to do it anyways. So very excited to have First Republic join us this morning and with us, we have of course, Jim Herbert, Founder, Chairman and CEO; Gaye Erkan, the President; and Mike Roffler, the Chief Financial Officer. As you've seen First Republic shares have enjoyed a strong year, outperforming peers by over 10% year-to-date due to continued solid execution on revenue growth and operational efficiency, all while investing for the future. With that, thank you so much for joining us today.

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [2]
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 Thank you.

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 Michael J. Roffler,  First Republic Bank - Executive VP & CFO   [3]
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 Thank you.

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 Unidentified Analyst,    [4]
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 So before I get into our conversation, I thought I'd ask the audience about how they're thinking about the stock, if you don't mind. And so if we can pull up the first polling question please? As a current or prospective FRC shareholder, what would drive you to increase ownership of the stock? 1, FRC maintains peer-leading loan growth in the mid-teens; 2, continued outperformance in net interest income growth, which would require keeping an interest margin within FRC stated range of 285 to 295; 3, efficiency ratio improves from the current 30 -- 63% to 64% target; and 4, I view the stock as defensive and I believe it's outperformance will be greater versus peers in a downturn?

 (Voting)

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 Unidentified Analyst,    [5]
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 So we probably don't need the music while we vote but that was a great idea anyway and survey says, 50% of you said continued outperformance in net interest growth -- net interest income growth that was the most popular, the second most popular 25% say peer-leading loan growth, 19% say you view your stock as defensive and only 6% of you want greater efficiency than what's stated, a relief for you Mike. And one more question for you before to set the stage about the economy. Do you believe the U.S. economy is 1, mid-cycle. 2, late cycle. 5 seconds left on the shot clock.

 (Voting)

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 Unidentified Analyst,    [6]
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 So 69% of you say late cycle.

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Questions and Answers
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 Unidentified Analyst,    [1]
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 So I thought I would start off the question with you Jim. What you clearly have very focused in terms of customer segments and geographies. What are your customers telling you about where we are in terms of your urban coastal markets, in terms of economic growth for '19?

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [2]
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 Well I think the customer base would pretty much agree with the analysis here, which is, is probably later cycle. We're seeing some resistance in -- to prices in single-family home loans -- single-family homes. Multifamily commercial are selling a little less rapidly, really that's a stall to acceptance of a less attractive cap rate by sellers, that's what is happening. The funds that we bank, that's capital and private equity are a little concerned. Still making a lot of investments but being very, very cautious. So I would say everybody is kind of in the same mood. What we don't know I think is how much of that's around maybe the election today or other things of that nature.

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 Unidentified Analyst,    [3]
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 Is there a difference in sentiment between the East Coast and the West Coast? I think that was something that has been discussed, the New York market versus the California -- San Francisco market in particular?

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [4]
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 I don't see a lot of difference, other than the normal differences of those markets in terms of the East Coast tends to be a little more market focused and the West Coast is a little more real estate and venture capital driven. But Jean you -- we have [Jean Scuncho] here who is our Senior Relationship Manager of the bank and you bank on both coasts, how would you describe it?

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 Unidentified Company Representative,    [5]
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 I would agree with you. I think it's about the same. I think there's a little more focus in New York on the markets but other than that it's pretty similar.

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [6]
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 Go ahead.

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 Hafize Gaye Erkan,  First Republic Bank - President   [7]
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 From a real estate market perspective, there are some differences, California and San Francisco continues to be more supply constrained and then in New York, new inventories coming in strong online and days on the market is increasing, there is competition on rents in general. What used to be more of a sellers market is more turning into a buyer's market and the softening has been most in the utmost high-end now. It is creeping towards lower level. Having said that our average loans are around $1 million maybe. So we're not concerned from a credit quality perspective for our own portfolio, but there is a clear difference between the real estate markets on the west and east.

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 Unidentified Analyst,    [8]
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 And Gaye, maybe I'll direct the next question to you. Mid-teens loan growth that you're looking for, given that your client view is that we're in the late cycle, and of course, folks are seeing slowing housing trends, how would you respond to questions about whether or not you can achieve mid -- how can you achieve mid-teens essentially outlook next year given all that -- those constraints?

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 Hafize Gaye Erkan,  First Republic Bank - President   [9]
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 Right. So we feel comfortable with the mid-teens guidance looking ahead for the next 12 months. Our loan growth year-over-year has been over 20%. The purchase volume remained strong, our backlog and pipeline remained strong while refi is slightly down. Business activity is strong in the private equity and venture capital call lines that are short-term capital call lines and just for the sake of just exercise -- and the prepayments are slowing down as well and the loan sales obviously we have room to slow it down if we want to do so. When you take all that into account, even if you take some conservative assumptions of refi significantly down and take down the utilization rates down to more normal levels from 38.5% down to 30% type of level, we still feel comfortable with the mid-teens loan growth.

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 Unidentified Analyst,    [10]
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 And Jim, this one is for you. There has been a lot of discussion during this conference about non-bank competition. And can you talk to us a little bit more about how your model is defensible versus -- relative to nonbanks? Essentially any entity that has excess liquidity to put to work?

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [11]
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 Well I think that the non-bank competition is so far almost entirely focused around the improvement of some process component of banking. Faster online lending, quicker better or easier access investing, et cetera. We really don't play -- we don't play that way. Our banking model is a full relationship model, always has been. We then complement it with competitive and new delivery systems. And our biggest, probably our biggest risk factor was a -- was the online banking system that we had, which was out of date. We now have solved that one with Q2 introduction. It's working very, very well, not perfect but it's working very well. The other one that -- and I don't worry about online competitive lenders that don't have deposit funding. They just don't have the cost of funds to compete. And that's going and we're improving in the student loan refinance area and we're the cheapest and best deal in the United States, bar none, and we probably always will be. And so the -- so I'm not -- we pay a lot of attention, we don't ignore them and in fact we learn a lot from it and we adopt quickly. So I think that's, -- you have anything to add?

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 Hafize Gaye Erkan,  First Republic Bank - President   [12]
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 Yes, the one thing to add to Jim's comments, we're also in mid-customization business as we are a pure play in private banking. And technology and operational enhancements are at First Republic to empower the high-touch, which is the service differentiator. So it takes many years to build the service culture through people like Jean and others that we have, amazing people that we have at the bank. So a lot of the new players who are coming in, the non-bank clients, it takes a while to be able to compete from a service perspective to build that culture and culture is our competitive advantage.

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 Unidentified Analyst,    [13]
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 As a direct follow-up to that, most investors know about your millennial strategy. What has your experience told you about what this cohort actually wants so for -- since the founding of the company, you've always focused on highly educated up-and-coming folks, right? On the brink of affluent or already affluent. And there is a misperception, I think that all millennials want to do is interact with banking through their phone. So as they experience a different type of banking experience with First Republic, how are they responding?

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [14]
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 They're responding very well but it's never one-side-fits-all situation whether it's millennial or whether it's older. We built a bank on a fairly narrow segment of people and by that I don't mean necessarily economically. I mean education, geography and our market is close to urban professionals. And there will always be people in each generation that want to do everything price based, online based et cetera. And then there are those who appreciate service and advice. And then at different stages of your life, you appreciate the advice more. What we found with the millennials that we brought in and we've got 18,000 19,000 households almost 20,000 households, that's not a starter business, put it mildly, is that among the various people that interact with us and then don't use us, probably we lose mostly over the sense of we want them to do a lot of their banking with us and they would prefer not to. That's actually fine. That's fine, there's plenty of fish in the sea. All we're looking for is 8,000, 9,000 a year households that want to deal with us in a full-service way. Our Net Promoter Score among our millennials is 85. It's the highest in the whole bank. So in fact, we seem to be delivering for those who choose us, the service they want. We're also now beginning to quite successfully do some home loan sales to those as they buy their homes and so that's actually, that's actually going very well. So I think it's very satisfactory, Mike.

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 Michael J. Roffler,  First Republic Bank - Executive VP & CFO   [15]
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 I was just going to add, I think the benefit is we're not trying to drive to one solution to do everything online. We're putting them together with someone like Jean, but if you wanted everything on your phone, you're capable to do that but then you have the connectivity to a relationship person. So you're really marrying sort of the technology and high-touch together and that has been very successful and they do want to talk to somebody.

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 Hafize Gaye Erkan,  First Republic Bank - President   [16]
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 Just one more thing to add. What we also learned just experiencing through our millennial clients, they want flexibility and optionality. So before it was Popmoney, then it was yesterday Venmo, today they want Zelle and tomorrow I don't know what they're going to want to have. So that has been dictating as we're learning how we invest in techops, which is one word for us, it all goes hand-in-hand. The phone, online app, the mobile banking app of First Republic Bank for consumer online, we picked a platform that gives us a very agile and flexible plug-and-play platform where we can code any features. Sometimes we name the features internally after the client who ask for it, the name of the client, the XYZ feature. Let’s have it in 2 weeks’ time for the client. So that has been a great experience that we learned from the younger generation of clients that actually deems to be useful for the older generation of clients, more seasoned clients as well.

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 Unidentified Analyst,    [17]
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 Could you remind us how your household acquisition growth has trended over the past 12 months? And as that continues to improve, the word you keep saying is customization. How do you retain the high Net Promoter Scores in the customization as your households grow?

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 Hafize Gaye Erkan,  First Republic Bank - President   [18]
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 Yes, we're very pleased with our household acquisition. So the lot, which -- as a service organization, the household acquisition and retention are the 2 most important early indicators for an organization like First Republic. So we have been acquiring households at a 10 to 12 -- consumer households at a 10% to 12% growth rate, which means 2 new households per banker per month. And most of them if not half of it comes from existing clients being happy and referring. Thus the most important report card for us is the Net Promoter Score and we're at 83% for elite bank clients, which is more than double the banking sector. So when you have the large happy clients it boosts referrals from those households. So now in the last 12 months, compared to the preceding 5 years, we've been acquiring households at an 18% to 20% growth rate. So almost double, which is fascinating, and we're very pleased because the diversification of the growth. So the growth that comes into the households is one, the student loan refinancing the millennial strategy, the referrals are much more viral when they are happy. 2, deposit households, deposit only households, when you know your clients well and when you have the trust of advisors who know them for many, many years, then you can use artificial intelligence and marketing and filter it through the bankers and customize the promotions to help boost referrals and we've done that and the successes, the early successes are very promising. And then we have PWM teams coming that are also bringing new households and our bread-and-butter the single-family residential, the mortgage business that's also bringing new households. So that household acquisition rate is really one of the key metrics that we're very pleased about in addition to everything else we talk about in our earnings calls.

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [19]
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 Just to add one sense of perspective. In '14 when we started our student loan refinance business, our young professional finance business, I should say these are 90% graduate degrees, 767 FICO scores in our markets, 2 years in their job minimum and it's very tightly qualified. We had about 24% of the borrowers of the bank who're under 40 when they came to the bank. 3 years later that number is 38%. It's going to be half the bank in a couple more years. So this bank has gone from 20% -- less than the quarter to a half in about a 5-year period of time, while the rest of the bank is growing at a very rapid rate. So it's a complete transformation of the client base of the bank. It's as if we're restarting again.

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 Unidentified Analyst,    [20]
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 As a follow-up to some of the things that you're saying on household growth. Business banking, lending activity has continued to surprise the upside, especially over the past 2 quarters, due to PE and VC investment activity. As we look out into 2019, keeping in mind that a lot of investors are nervous, how should we think about investment activity? And also, remind us about the structure of those -- of the lending that you do to funds in terms of duration and because we're certainly hearing a bit of alternative structures that are being lend out there.

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 Michael J. Roffler,  First Republic Bank - Executive VP & CFO   [21]
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 So in terms of the structure, so capital call lines of credit typically are tied to one. First of all the fund size, we're never the first draw. So we always want to make sure capital has been called. And then they're very short duration. So typically 90 days and it truly is meant to be what it is which is bridge financing to bridge a capital call from the ultimate LPs and the underwriting process is very much focused on what are the underwrite LPs and what has the history been of the people running the fund. Thus far obviously it has performed extremely well. We are aware that there are some doing longer dated sort of enhancement lines that is not a business that we're -- very big at, at all, we really -- we like the shorter-term nature of it.

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [22]
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 We also have generally speaking, not always but generally speaking deep personal relationships. Jean's got a number of these private equity relationships. You were describing one earlier, where you have the bank -- the bankers of the...

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 Unidentified Company Representative,    [23]
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 .

 Right. So generally it starts with partners at the firm, we do a great job on their individual private banking needs. Then they come in and say to us, can we talk about doing other business at the firm and what we've had great success with is the -- at the non-partner level, the capital call line programs at the non-partner level. And those are the-- that's the junior generation of the PE firms that actually need the lines the most, less so at the partner level.

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [24]
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 And in 5 or 10 years they're going to run the firm.

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 Unidentified Company Representative,    [25]
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 Exactly.

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [26]
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 Or other firms.

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 Unidentified Analyst,    [27]
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 So on PWM or private wealth management. Jim, what are your plans for hiring teams as we look out into next year?

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [28]
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 I think we basically hire into either individuals or teams in the private wealth area as we encounter them. We're actively looking and we got a lot of incoming inquiries now too, a lot. And we have taken the bar of revenue stream that we're willing to look at up. And so the -- but we're also very cautious because better to hire less and do it well, then to go on a spree. So we're very careful. We're pretty good at bringing 2 to 4 in a quarter if we can -- if that -- but it's not a target. If we got to 5 or 6, we probably would slow it down, because we need to onboard them properly. Their clients need to be really happy and then if the clients are happy, they're happy. And we need to know exactly what we're getting and how they operate. So we have SWOT teams that work with them when they come on board, and we have a whole system established for that. It's a very good way to grow our business. I would point out that when we bought the bank back from the Bank of America in '10, we had about half as many assets under management -- wealth management as we have in the bank. Today we have about 125% as much, 130% as much. So the proportionality of wealth management into the bank will probably continue to be larger and grow faster than the bank.

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 Unidentified Analyst,    [29]
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 Got it. So I thought I'd turn it back to the audience and ask them sort of what are the debate points on the stock, because there's been vigorous debate this year on the stock as you may have seen. Let's pull up the next polling question please? If you have reduced your exposure to FRC or sold share short over the 12 months, what was the primary reason? 1, a slowing down in the coastal housing markets FRC serves, which could be exacerbated by SALT and decelerate loan growth trends. 2, the expectation for net interest margin misses as deposits reprice faster than assets. 3, it's high touch model investment spend could lead to efficiency ratio disappointments. 4, premium valuation to peers is too high or 5, I have not reduced my exposure to FRC or sold shares short? So 5 seconds left on the clock.

 (Voting)

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 Unidentified Analyst,    [30]
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 And survey says well good, 38% of you haven't sold shares short or reduced exposure, interestingly Mike putting you in the hot seat, the next most popular answer is actually tied with 38% is net interest margin apprehension. And 15% say that the valuation is simply too high. So not that this audience is too worried about it.

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 Michael J. Roffler,  First Republic Bank - Executive VP & CFO   [31]
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 Notice number 3 is at 0%.

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 Unidentified Analyst,    [32]
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 .

 Yes, so again, good for the CFO. But let me just start off here because I do get pushback from investors. SALT is going to be very impactful for your markets. Maybe just address that now in terms of how you think it's going to pan out in 2019?

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [33]
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 It's not going to matter very much. A little to our surprise, but we did expect a little more impact from what we've seen. There's a lot of talk and there is very little action. It's not going to be 0, it's not going to be 0. But it has -- it seems to be quite age dependent. Where your job is, where your family is versus where you live. And where you're in your career determines whether you can pull out or not at this point. I think it'll accelerate slightly the retirement move to Florida and some other states. Wyoming, we're going to Jackson Hole, for several reasons and this is one of them. But it's not going to be that big a deal.

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 Unidentified Analyst,    [34]
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 So I was actually saying to an investor, where is the job? Right? You could try to move to Fairfield County as opposed to Westchester County, but you're still commuting to the same job in midtown. Right?

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [35]
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 It's hard to do the same from West Palm.

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 Unidentified Analyst,    [36]
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 Yes.

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [37]
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 Yes.

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 Unidentified Analyst,    [38]
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 So just as a follow up to that given that it's election day today, could you tell us for those that don't know what Prop 10 is? And how do you think that could impact the California real estate market?

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [39]
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 What, I am sorry?

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 Hafize Gaye Erkan,  First Republic Bank - President   [40]
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 Prop 10.

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 Unidentified Analyst,    [41]
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 Prop 10.

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [42]
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 Prop 10, I am sorry. Prop 10 in California is a rule at the state level which prohibits municipalities from establishing individually rent control rules. And there is a move in California to eliminate that prohibition at the state level and give it back to the municipalities. I think it's going to go down to defeat meaning that the state will keep the prohibition. Okay, if it didn't, that could be a risk factor. It's not a risk factor for current loans because the properties are fine. It's a risk factor for the growth of housing and it's a risk factor for what is each individual city going to do? What are the rules going to be? The polling would indicate about 60% against, 58% against. That so that would mean that there is no change, which would be a positive. So we'll see how that it turns out.

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 Unidentified Analyst,    [43]
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 So addressing the polling responses, I'm going to put Mike on the hot seat. Given the concerns over net interest margin misses. So another common, I think misperception is well-heeled clients are very rate sensitive. Talk to us a little bit about your checking product, and tell us a little bit more about how core operational that is and your outlook for or your strategy for deposit gathering next year?

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 Michael J. Roffler,  First Republic Bank - Executive VP & CFO   [44]
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 Yes, I can start if you want to add in. I think we're really pleased that the margin has held at the high-end of where we've projected when we started the year and a big part of that is, we talk a lot about deposit beta. It gets a lot of publicity but our loan yields have been sort of keeping lock step as our deposit betas have increased slightly but really no different than many of the large banks while continuing to grow our deposit base at multiples of that. And so I think when turning to your checking question, again we're really pleased that we've kept a checking of about 60% of our deposits and the cost only being 5 basis points because the clients that's their operational activities, right? That's their money comes in, money goes out. And Jean and team, their service level is really important when it's time to get something done. And then couple that and maybe Gaye can talk about this a little bit, we really looked at relationship through maybe some CD specials combined with checking can be a pretty attractive feature for a client and it's also good for us and that it sort of gives us some duration on the deposit side, while continuing that checking mix to be very strong. And so those things have allowed us to keep our betas pretty low. If I had gone back 2 years ago, I think we would assume they would've been higher than they're today. But the strategy and sort of working with clients in the service has kept them consistent with loan increases.

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [45]
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 Our simulation models run them at a higher rate then we're experiencing.

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 Hafize Gaye Erkan,  First Republic Bank - President   [46]
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 Right, the project that is about 45% beta and has simulations is called -- so you asked a great question that touches on multiples. So one, net interest margin is not the only part of the equation when it comes to First Republic because albeit we grow safely with our existing clients but 75% comes from existing plus their referrals, we're growing at mid-teens and above. So it's the NII growth that we really focus on which is the NIM times turning assets growth. That's number 1. Number 2, on the NIM side, it's the both sides of the equation. What are the mortgage -- where is the mortgage yields curve, the lending curve to some extent versus the deposit rates. And so far we have been very pleased with 14% growth year-over-year in deposits and a beta that is 20% year-over-year and less than that since inception of the Fed. The drivers of that is what Mike said on the 60% checking, which we assume just to be conservative in the NII simulations mid-50s type of level. So we're pleased as long as it's above that, in terms of the checking mix and that's at a 5 basis points as we've pointed out. Pretty much like a closed and non-interest bearing type of level. And then the rest with the CDs, we're super pleased A, we add duration, average origination term is about 18 months in a rising rate, it's greater at the long end of the curve. And then a lot of the CD clients, half of the time they cross service into checking relationship cause our branches, our PPO people are so good at, once they get a trial they nurture the relationship and they get the checking -- primary checking relationship. So the blended rate when you do a barbell of CD and the checking relationship is much better compared to a high yield savings or the money market that some of the competitors are going to have there which is less of a relationship product.

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 Unidentified Analyst,    [47]
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 So a lot of the economist and REIT strategists have been wrong about the tenure. As we think about the net interest margin range, and Mike, maybe this is for you, sort of what level of flatness so to speak does that forecast tolerate?

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 Michael J. Roffler,  First Republic Bank - Executive VP & CFO   [48]
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 Yes, I think we talked about it in our last call that we would trend down a little bit from where we've been but still be comfortably sort of within our range. And obviously, the Fed is probably going to do in the next 15 months, 3 or 4 more hikes. And so that seems normal to us. And the curve probably gets -- could get a little bit flatter and I think, we're still okay. There is a part of it that is just a lending competition though too, right? I think for the right A client, we're always going to be very competitive and that could put what I call non-yield curve pressure on the lending rates because we're not going to let a great client go somewhere for a 5 or 10 basis points and...

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [49]
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 Well, I think our guidance for NIM next year is 285, 295.

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 Michael J. Roffler,  First Republic Bank - Executive VP & CFO   [50]
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 Yes.

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [51]
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 That seems to be quite achievable.

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 Unidentified Analyst,    [52]
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 And how are production yields trending just...

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 Michael J. Roffler,  First Republic Bank - Executive VP & CFO   [53]
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 Pretty consistent with where they were last quarter so I think we were high 3 9s or 390 on real estate lending. We're pretty good right in there.

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 Unidentified Analyst,    [54]
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 Could you remind us what your business banking deposits are really like because keep in mind that this is a broad financials conference and so maybe folks are thinking business banking again, high volume level of attrition, so maybe this is one is for you Gaye.

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 Hafize Gaye Erkan,  First Republic Bank - President   [55]
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 Okay. So our deposits have a healthy mix in terms of the types of business represents about 56% or so for total deposits. The reason for the healthy mix before I dive into the diversification and then, as we follow, so Jean banks the principles or the partners who make the business happen. As Jim always says, there is no business only people, so we follow the people who make the businesses happen through the private banking relationship, which is a differentiated sort of aspect for us. So thus it's much more sticky, it's much more relationship driven because they have tested us before. As a result of that we're very well diversified just following all the different types of clients to their businesses and nonprofits. No more than 1 vertical represents more than 10%, 11% of our total deposits. While on the business lending side, private equity, venture capital call lines, short-term and nonprofits represent 2 largest verticals. On the deposit side it's fairly diversified but every vertical under 11% of total deposits. The -- on the business side, we have a multitude of funds, more than 4,500 fund families. Not just individual funds, it's multiples when you look at the individual funds. We have RIAs, real estate firms, again it just shows the diversification of our nonprofits, independent schools, and those are all. If a nonprofit wants to change their banking relationship, it's a board decision sometimes. So it is much more sticky relationships. I don't know if you...

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [56]
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 I think the only thing I would add is from a model point of view, we bank only private companies, we have a couple public companies, that's it. We have mostly private companies. At the end of the day, in private companies money goes home to somebody. So what we do is we bank their home. We bank the place it goes. Private companies, the cash in the companies it's just transactional money, just operating capital, turnover money. At the end of the day, it goes home to an individual or to investors who are in the business. And so we bank back there and come forward to the business. Most banks start here and don't go there. So they lose that piece. And it's a very different model and as a result we don't need very many clients because we do so much more with them for a longer period of the life of the dollar.

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 Hafize Gaye Erkan,  First Republic Bank - President   [57]
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 And maybe as an example to what Jim just said, we bank the lawyer who is a principal at a law firm, they bring you to the law firm. Then the next you know you're doing a professional loan program with the people with up and coming generation that the firm is endorsing as well. And then they also refer us to their own clients in case they're looking for a private bank. So that's kind of...

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 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [58]
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 Yes, excuse me and the lawyers on the board of the school and on the board of the ballet and they take you there. And then sitting around those tables are other people. So it's a follow the heart and the business of the client kind of business.

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 Unidentified Analyst,    [59]
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 So just wanted to quickly switch gears, not that there seems to be a concern for your investor base too much, but if we could pull up the next polling question? Mike I just enjoy putting you in the hot seat. What do you think FRT's efficiency ratio would be for full year 2019. 1, 64% or above? This is a reminder to levels that consensus is at 63%. 1, 64% or above. 2, higher end of 63% to 64%. 3, lower end of 63% to 64% or 4, 63% or below?

 So few seconds left to vote.

 (Voting)

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 Michael J. Roffler,  First Republic Bank - Executive VP & CFO   [60]
------------------------------
 You gave a midpoint option.

------------------------------
 Unidentified Analyst,    [61]
------------------------------
 Well, again this is a good relief for you, 57% of you say the higher end of 63% to 64%.

------------------------------
 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [62]
------------------------------
 We agree with that.

------------------------------
 Michael J. Roffler,  First Republic Bank - Executive VP & CFO   [63]
------------------------------
 It's pretty good.

------------------------------
 Unidentified Analyst,    [64]
------------------------------
 Okay, good. As we think about some of the innovation spend that you've told us about and I think you've told us that you're now in an enhancement mode rather than overhaul mode. Could you tell us about what's remaining on your check list in terms of innovation related investments?

------------------------------
 Hafize Gaye Erkan,  First Republic Bank - President   [65]
------------------------------
 So maybe the one checklist right before innovation is the core conversion that we're going through, but that's something that we've been planning and strategizing about for a while. So it's not just a new coming thing that maybe I'll let Mike to speak about on that on the timing and what not. But on the innovation front our techops spend are not to replace the high-touch. High-touch is what we know works for the last 3, more than 3 decades. And that's our differentiator. Now we use high-tech to empower high-touch at our bank. Either to make more scalable -- our service calls are more scalable by empowering our bankers who have the trusted relationships or by making it more efficient for the clients by becoming a payments hub for them. Where they have their trusted human touch, high-touch customization account and if they choose to have a mass banking account, that they can have friction-less payments. So those are the type of investments in techops. That we're intending to keep, that keeps the efficiency ratio at the 63% 64% type of level and then in terms of...

------------------------------
 Michael J. Roffler,  First Republic Bank - Executive VP & CFO   [66]
------------------------------
 Yes, I think we've talked about this on the last couple of calls but we've started the process of planning and doing some work around the core conversion, which will really kick off probably in earnest more next year and probably roll into the following. The timing for that is I guess somewhat fortuitous in that we have some savings coming likely in 2019 from the surcharge of the banks and so that's why we feel really good about this efficiency ratio range so to combine with our margin outlook that we can stay at a pretty tight consistent range for a longer term.

------------------------------
 Unidentified Analyst,    [67]
------------------------------
 So given that the investor base again is worried about where we are in the economic cycle. I thought I'd ask a question about credit quality. If we could pull up the next polling question please. In the next recession, how do you think FRC's credit quality will fare versus peers? 1, FRC's net charge-off rate in the next recession will be lower than peers due to superior risk management? 2, FRC's net charge-off rate in the next recession will be in line with peers due to greater exposure outside of residential mortgage or 3, FRC's net charge-off rate in the next recession will be higher than peers due to greater exposure outside of residential mortgage?

 (Voting)

------------------------------
 Unidentified Analyst,    [68]
------------------------------
 I think I know how you'll vote. Let's see what the audience has to say. Overwhelmingly 75% of you say that the charge-off rate will be lower than peers due to superior risk management, which honestly isn't a surprise. As a follow-up to it -- this, the question that I do get is that as you explore and continue to execute on the millennial strategy, right? You're meeting them with a different product set, same point different product set. How can you reassure your -- the investor base in terms of the credit quality of your new households?

------------------------------
 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [69]
------------------------------
 You know it's a really interesting question and one that obviously we wrestled with a lot as we implemented this strategy, that's why it's taken us about 4 years to be sure we were right. We've had so far 3 losses in like 16,000 loans in 4 years. They have been good years but none the less even anecdotally you would think you might have more than that. The truth is that the profile of our young millennial refinance client is actually better than the profile of our home loan client. So the only real difference is they don't have the collateral of a home and there is an age difference clearly.

 But they're about 9 -- they're more than 90% graduate degree educated in our markets. They've already proven they're out of school, have a job and have been paying 7% average student loan debt burden with a FICO score of almost 770. And we're refinancing them to about on the average 350. And so the big difference is the educational level. Our home loan client base about 55% have graduate degrees. So if you assume that graduate degrees are any predictor of stability of employment or earnings power, this cohort is about 50% stronger than our historical single-family cohort. So we think it's going to hold up very well if there are delinquencies or defaults, the big issue is you don't have collateral. But the average loan is $120,000, it's not a $1 million. The only thing about this cohort that we should actually just say is the building of First Republic over the years has been about extraordinary service, but upfront it has been about acquiring and getting trial from a household. We can take $1 of capital, not literally but figuratively, and get 8 of the millennial households or we can get 1 single-family home household. So the millennial strategy is also very capital efficient. And if you have a person when they're 32 and they're with you and they like you and the ratings are high and they've done various things with you, that was a much less expensive acquisition of a relationship in a household than pulling them away from another bank when they're 44. So -- but the most important thing is this young cohort is simply the same clients we have younger, they're the young lawyers, they're the young doctors, the young investment bankers, the young venture capitalists, et cetera.

------------------------------
 Unidentified Analyst,    [70]
------------------------------
 Just with a fancy name millennials, right? You've always met the same clients.

------------------------------
 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [71]
------------------------------
 Same clients, exactly the same clients, they're just younger. We've found a way to get them younger and that's what's important. Our standards are extraordinarily high but we will see in the downturn. We're optimistic. We have big reserves obviously, which we haven't used. But nonetheless but I think it's going to hold up very, very well. I'd be very surprised if we have anything other than anecdotal problems.

------------------------------
 Unidentified Analyst,    [72]
------------------------------
 As we look out just across the industry and maybe across the globe, hear you loud and clear about your own risk management, but what worries you about the global economy or maybe the local economies under which you operate?

------------------------------
 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [73]
------------------------------
 The global economy, I'll leave it to the Bank of America economist. We all have our concerns. But our knowledge of the local economy is pretty good and I think in the local economy what is happening is, is the credit standards are beginning to deteriorate a little bit. Home lending you can get a higher loan-to-value ratio at a inflated price point. You -- the sale of real estate is still running at 3 and 4 cap rates when in fact, it probably ought to be 5 to 6 at least. And the advanced rates are being done on the old cap rates that worries us a little bit. But it isn't anywhere near '07 in that regard, the way we see it. It's a cycle, it's a late cycle moment but it is not the craziness that occurred in the '06 and '07 in the real estate lending markets, which is what we know the best.

------------------------------
 Unidentified Analyst,    [74]
------------------------------
 And remind us how First Republic typically does when we do hit the cycle and excess capacities drain from the system?

------------------------------
 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [75]
------------------------------
 We have traditionally done pretty well in troubled moments not that we wish for them because we don't. Because you always have issues but we go into them clean on credit and well capitalized. This is why we run our capital with a 2 year buffer at all times. I want to be able to grow at 15% per annum for 2 years with no new capital. Because that is the time that others will pull back or go a little cold and we have client acquisition and client service opportunities that are quite extraordinary. So if you stay but that really necessitates a fundamental of the bank. We have a 5 and 10 year operating vision at all times. Quarters, we report quarters, not that they don't matter, they do. But we don't even think annually, we think 5-year and 10-year plans. We now do a 5 and a 10-year plan with our board. And the reason is that sometime in that period of time there can be a downturn you got to be ready. We -- our objective is consistency, 11%, 12% ROE. 10%, 13% ROE all the time.

------------------------------
 Unidentified Analyst,    [76]
------------------------------
 What does First Republic look like 5 years from now?

------------------------------
 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [77]
------------------------------
 I think more of the same, I think more of the same. I think technologically it would be much improved. I and Mike, the whole team are doing a fabulous job of bringing us forward and keeping up. I think the millennial -- the millennials some of them won't be millennials then and I don't know how the heck do you ever graduate, I guess not, but you do move on. Why -- that cohort will be more than half the bank. And that's really exciting.

------------------------------
 Hafize Gaye Erkan,  First Republic Bank - President   [78]
------------------------------
 By households.

------------------------------
 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [79]
------------------------------
 By households, by households, sorry not by size. And that I think what margin continues to be a larger portion of the bank.

------------------------------
 Unidentified Analyst,    [80]
------------------------------
 Great. Thought I'd...

------------------------------
 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [81]
------------------------------
 No new markets.

------------------------------
 Unidentified Analyst,    [82]
------------------------------
 No new markets?

------------------------------
 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [83]
------------------------------
 We're going to Jackson Hole, that's it.

------------------------------
 Unidentified Analyst,    [84]
------------------------------
 I thought I'd leave some time for the audience to ask questions, any follow-up from the audience?

------------------------------
 Unidentified Analyst,    [85]
------------------------------
 So in 5 years, 50% of your customers could be millennials. Do you have the right product set today for that 50% or are you going to have to expand your product set. For example, JP Morgan has been very successful with the Sapphire card for example. Millennials love it. How do think about your product set -- and then what does the bank look like because of that intensity?

------------------------------
 Hafize Gaye Erkan,  First Republic Bank - President   [86]
------------------------------
 The answer is we have been doing a lot of focus groups talking to them what they need, the 2 areas are the investments and the financial planning. So we have already rolled out the Eagle Invest our own robo -- Eagle Invest, the robo-advisors that we're using to the employees as well as to some of the clients and that will be fully launched and rolled out within 2019. A financial planning light for the clients and then who -- whoever wants to customize would have a much more comprehensive one, first-time home mortgage program for certain clients for the right credit. Again, those are all the available tools for the client.

------------------------------
 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [87]
------------------------------
 We're doing pretty good job of it, I think, the Sapphire card, we're not a credit card company -- bank because we don't have the size and client base and this is one of the larger banks in the country, we don't have 100,000 borrowers.

------------------------------
 Unidentified Analyst,    [88]
------------------------------
 But it seems, I'm glad you hit on that point because another theme in this conference is the self-directed wealth management product. So we've had SoFi here and Betterment. I think that seems to be a high demand for the millennial cohort. And when is a wider rollout of that product do you anticipate?

------------------------------
 Hafize Gaye Erkan,  First Republic Bank - President   [89]
------------------------------
 During the first half of 2019.

------------------------------
 Unidentified Analyst,    [90]
------------------------------
 First half of 2019, great. Well if any more questions in the audience. Thank you so much for your time, I appreciate it.

------------------------------
 James H. Herbert,  First Republic Bank - Founder, Chairman & CEO   [91]
------------------------------
 Thank you.

------------------------------
 Hafize Gaye Erkan,  First Republic Bank - President   [92]
------------------------------
 Thank you.




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