This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha
Transitioning to have 50b+ in assets
“As you all know, institutions with over $50 billion in assets are required to operate under significantly heightened regulatory and compliance standards. We currently anticipate that our four quarter ending moving average assets will reach this $50 billion mark about the end of 2015, or roughly six quarters from now.”
costs are going up
“In terms of our expenses, as reflected by our core efficiency ratio, we currently anticipate that these incremental expenses will translate over time into an adjusted range of 59% to 62% efficiency ratio for at least a while.
Based on current estimates, we hope to be able to bring the efficiency ratio back down to 60% or below sometime in 2016. This will occur as some of the initial costs of these investments plateau, and we reach a new, somewhat elevated, expense run rate.”
FRC has a simpler corp structure
“When people think about larger institutions, they almost automatically assume a much greater complexity.
With First Republic, this is, in fact, not the case. For example, First Republic does not have a bank holding company. First Republic has only four operating subsidiaries. We have an extraordinarily simple corporate structure.”
275k accounts across the whole bank
“First Republic also services far fewer accounts and relationships than other banks of a similar size. For example, we maintain our approximately 275,000 deposit accounts in the entire Bank.”
Most banks at 50b have 5x as many accounts
“Based on public data, this number of accounts is equal to less than 20% of the number of accounts at banks of a similar size. Having fewer accounts provides us with an opportunity for much better individual account oversight and better client service.”
Banking system much more concentrated than it used to be
“The banking industry is substantially more concentrated today than it was 10 years ago. For instance, America’s four largest retail banks; Citi, JPMorgan, BofA, and Wells, today have $8 trillion in assets, controlling a staggering 54% of all banking assets in the entire country. 10 years ago, these same four banks had only a 36% concentration. For perspective, First Republic has approximately one third of 1% of such banking assets.”
NPAs just 11bps. NCOs nearly 0
“Non-performing assets remained low at only 11 basis points of total assets.”
“Net charge offs for the quarter were less than one basis point.”
Building a platform is expensive
“The increase in future expenses is primarily around compensation related to additional employees, information systems, consulting and other professional fees. We have already added staff and we will continue to do for the rest of 2014 and next year to meet these higher standards.
Based on current estimates, these higher level of staffing technology cost along with the elevated consulting fees will result in a near term increase to our efficiency ratio in the range of 60% to 62% beginning this quarter, and likely last until the end of 2015.
We expect the efficiency ratio to peak in the first quarter of 2015 given the seasonal nature of payroll taxes. Based on current estimates, we think the efficiency ratio could return to a range below 60% in 2016.”
Someone is always still refinancing for some reason
“There are always some people who didn’t refi before or people who are refinancing because they are renovating their homes or taking cash out or other reasons”
Invest in the systems you need even if they’re more expensive
“we are very anxious to stay ahead of it as opposed to get behind it, and so that forces us or encourages us to invest more rapidly in some of the systems procedure, and we are trying to frontload the people aspect of it as well to make sure they are onboard that we have got the right people that they are working together as a team and are ready to run this. It isn’t just about getting there, it’s about running it…We have found generally over the years that investing in advance is very valuable.”
The expense is probably going to be permanently higher
“The 55% to 59% is probably going to end up landing at a somewhat higher level, but hopefully not much.”
example of increased scrutiny
“Our stress testing, in terms of liquidity, we run three or four scenarios. The guidance for a larger institution is eight or nine scenarios. So, we have to build up to that and that takes a considerable additional database and quantitative capability. It also takes an ongoing reporting capability that we have, but needs to be enhanced”
You invest in us because we think ahead
“one of the reasons you all have invested in us or your clients have — and we’ve run it well over the long time is — we think ahead. And this is ahead. And we need to be not a $50 billion bank; we need to be an extremely well-run $60 billion bank and thereafter. And we intend to be as equally good in the future as we have been in the past. And that means investing heavily and spending properly at the right time. This is the right time.”