First Republic's CEO Presents at J.P. Morgan 2012 SMid Cap Conference (Transcript)

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First Republic Bank (NYSE:FRC)

J.P. Morgan 2012 SMid Cap Conference Transcript

November 28, 2012 11:00 AM ET


Jim Herbert - Chairman and CEO

Mike Selfridge - Senior Executive Vice President

Ruth Aronowitz - Relationship Manager

Martin Gibbs - Relationship Manager


Steve Alexopoulos - J.P. Morgan

Steve Alexopoulos - J.P. Morgan

Okay. Hi, everyone. Hello. There we go. Good morning again everyone. So next up we have, and I’m Steve Alexopoulos from J.P. Morgan, cover the mid and small-cap banks. Next up we have First Republic Bank, headquartered at San Francisco, since a lot of time in New York.

These days market cap $4.5 billion. From the company we have Jim Herbert who is Chairman and CEO and founding member; Mike Selfridge who joined in February. We have two Relationship Manager’s. Is that correct? Do you guys want to introduce…

Martin Gibbs

Hi. I manage preferred banking here at New York. I’m Martin Gibbs.

Jim Herbert

Yeah. Martin Gibbs.

Steve Alexopoulos - J.P. Morgan


Jim Herbert


Ruth Aronowitz

I’m Ruth Aronowitz, Relationship Manager at New York.

Steve Alexopoulos - J.P. Morgan

Okay. Glad to have you see here today. Just, Jim is going to go into the story of First Republic, your the 24th largest bank by size in the U.S. I’d like to think of you as the second fastest growing bank in the U.S.

And one thing we always look at is, how is the model, made money for shareholders at the end of the day, that’s why everybody sitting in the room and this is a track record right, between selling to Merrill for 50% premium to market, buying the company back at a discount to fair value, can’t really beat that.

So, with that, I’ll turn it over to you Jim and team.

Jim Herbert

Okay, Steve. Thank you, Steve, very much. Let me, come up here for a second, let me quick, but we’ll go through the slides here fairly quickly and then open up for questions. And importantly, we have Ruth and Martin, here, Mike and I are going to go back and forth on the slides. But we have Ruth and Martin here to answer questions about how we actually do the business. So, I’ll -- we’ll talk to the numbers and then they can explain where the numbers actually come from.

So, very briefly, First Republic is actually a more of culture of service then it is a bank. That happens to be the business we are in. It’s about a very little turnover, very high quality people, connecting with clients, taking in clients at the higher networth range, but not super high, really we’ll come to that in a minute, and then taking very good care of them.

We sell nine products to every home loan clients for instance, most banks would be in the three to four category. We have very low client attrition, very low turnover of our people and of clients, and I think they are directly related actually.

Size wise, we are $33 billion, deposits are $26, I don’t need to read the slide to you. Our capital is very strong. We started the bank with 10 people in 1985 in San Francisco, that’s still our home market and we have about 2000 people today.

And we are in San Francisco. We are urban coastal San Francisco, Los Angeles, Santa Barbara, Orange County, San Diego, Boston, New York. We are very focused on markets and we are very focused on niche within the markets.

The fundamentals, it’s been strong leadership continuity, Katherine August-Dewilde, who is not here today, is President and Chief Operating Officer. She and I’ve been together 27 years, pretty much since the start of the bank.

I have started the bank in ’80 prior to this one, sold in ’84 and started this in ’85, and then the first bank, stumbled in the jumbo home lending, which is our core product. It’s a very simple business model, attractive geographic markets, attractive client segments.

Our core competences are two things really, credit and service, I will get to the credit record here in a minute. Last 12-month gross, just to give you an example, Steven talked about growth. We have grown at about 18% to 20% -- 22% for a very long time compounded for many years.

We also have wealth management business. It has approximately $24 billion in assets at this time. We have announced an acquisition of Luminous, which is about $5.5 billion manager, so end of year we’ll be $30 billion to $31 billion in wealth management assets.

That compliments our core banking business, which is at worth banking and it really is where our more junior clients and all the way along the line inspired to be which is in the wealth management and trust area of our bank.

The model is very simple. We have client centric model. Martin and Ruth both represent that, each represent that. They are the Relationship Manager that surrounds the client and delivers to the client, whichever part of the bank that client needs. It’s an old fashion simple model that actually works but the devil is in the execution.

And it’s in their ability to understand the client read them high EQ, understanding of what they need and then delivering the piece of the bank that they need but staying engaged. And their clients would tell you that they are their banker. They don’t bank with First Republic. They bank with them. And they get the delivery of everything the First Republic has.

It’s a very simple straightforward business model. We don’t engage in a lot of stuff. This is a list of what we don’t do and we do along. But it’s very, very old fashion in a way. This is how we market. This takes less than a minute, [better than manual].


Basically, when you have service, really the only way is when everybody says they have been serviced, many do. But, the only way can really prove is testimony. So we’ve taken the testimony approach to life over the years. We probably have some end reports out here some more in the room and we use it in our end reports as well.

Let me turn it over to Mike for a minute.

Mike Selfridge

Thank you, Jim. I’ve got a couple, let see here, I’ll cover few broad things here; one is, just the market opportunity; second piece, I want to talk a little bit about our clients; and third, I’ll into a specific region that being Silicon Valley; and then lastly, I will touch on business banking, which has been a growing part of our business over the 10 years and more recently within the last few years has been exceptional.

So if you look at what we are pursuing here, Jim mentioned urban coastal metro and we like to think at market as going after the affluent households and selectively the businesses that they are affiliated with.

So if you look at the markets, we are in, in total about 20% of all U.S. households are in First Republic markets, and yet 53% of all affluent households, those as we define being $1 million in investable assets or greater within our footprint.

And so in terms of the total market share, some of you have seen these slides before, we have about 4.3% market share of the affluent households, plenty of upside. And specifically, I’ll look at just a few markets here, they are about two markets we are not looking at, these are the most sizable markets.

We have been in San Francisco Bay Area the longest. We have largest footprint there. So of the 160,000 affluent households in the Bay Area we have roughly 15.6% market share, again plenty of upside in terms of market opportunity.

Boston and New York, New York would actually be the largest market for us, market share 1.2%, plenty of upside. Many of you have asked about these numbers we -- and when the latest version of these numbers will come out we use a firm called Capgemini.

These are few years dated, more refreshing those. We’ll have those available shortly. I think you’ll find the results to be interesting. I think what you’ll see is validation of increase in our households, but further validation of the markets we are in, very good growth in the markets that we serve. And particularly, in the larger ultrahigh networth market, we’ve done very well.

As Jim mentioned, just doing what we’ve been doing has allowed us to grow organically at a very nice rate. If you look at both loans and deposits, 22% for each category over the last 10 years.

I mentioned I want to talk briefly about Silicon Valley, this about roughly a third of our offices within the Silicon Valley region, it also represents about a third of loans and a third of our deposits, and again we are seeing in the loan and deposit sides, 16% and 18%, respectively, our growth rate over the last three years.

We’ve been able to do a very good job in the business banking front, particularly with the venture capital and private equity firms, and as you know, Silicon Valley region right now is experiencing quite considerable growth based on the innovation sector that’s leading to wealth creation and if you look at the real estate market where have a nice presence and some loan exposure, prices are doing well, inventories are decreasing, multiple bids are quite frequent.

In terms of the balance sheet loan, diversification both by product and geography, about 60% of what we do is single-family mortgages. That’s an important strategy. I think Jim touched on in terms of jumbo mortgages being to hook that leads to other business for us, be it wealth management, be it business banking.

Business banking about 8% of total loans and the rest you can see on the chart here. Geographically, 51% of the loans are out of Silicon Valley or Bay Area. Although a quarter of the bank is now in the Boston and New York regions and we look forward to continuing to grow these markets.

And looking at our client, I guess, I would step back here and just note a few things. We are tracking what we think are the best clients in our markets, and so from a credit perspective, the average loan size roughly $720,000, the median, sorry, the median loan size $720. The median networth about four times that and the median liquidity of that client is about 90% of the loan amount.

Strong credit, we have, as Jim mentioned, one of our core competences is being credit, the way we underwrite, every loan is fully documented, fully underwritten, very reasonable loan-to-value and as I’ll show you, this has served us very well overtime. We’ve originated since inception about $85 billion worth of loans, roughly two-thirds of that has been in the single-family residential market.

Cumulative net charge-offs on the entire $85 billion, 19 basis points, in terms of net charge-offs. And of the $56 billion, $57 billion originated in the single-family residential market, 5 basis points in cumulative net charge-offs.

And just looking at the last 10 years, this is a comparison of our net charge-off track record compared to the top 50 banks in the United States. We have roughly 10 basis points per year on average in net charge-offs.

The industry average for the top 50 would be roughly 49 basis points. I look at that as a credit costs we don't incur. So if we were right on par with other banks that would be about $140 million in credit costs, not incurred by First Republic Bank.

Lastly, as I mentioned business banking has increasingly become an important part of the overall first republic franchise. Loans about $2.2 billion, those would be fairly concentrated in investment service firms, professional services, venture capital and private equity, and non-profit and non-profit school lending. Those categories would roughly make up about two-thirds of the business banking loan outstanding portfolio.

But importantly here is the deposit inflow, this allow -- allows us to diversify the deposit base. We get about $5 in deposits for every dollar we put out in terms of loan outstanding to business banking client. And business banking as you’ll see, I’ll hand this back over to Jim, is now about 46% of our total deposit base and we’ve seen tremendous growth in this area.

Again, going to the strategy, we’re linking or leading with the jumbo mortgage and often that might be, for example, a General Partner at a firm that then makes an introduction to the firm, to go ahead and bank the firm with various products and services we have, might be a Board member on a non-profit school and again making an introduction. So that word-of-mouth that Jim described really comes into play in this nice -- today’s nice synergies with the business bank and the private bank.

Jim, I’ll hand it back to you.

Jim Herbert

Deposit franchise is very core. Those of you who follow banking realize it’s not a financial services conference so. But this is really the business. Lending is interesting but the core franchise, the brand value is in the deposits. We have a very nice put now between business and consumer deposits and then we have two or three different channels. We have offices. We have preferred banking channel, which Martin runs and founded here in New York, for instance.

And then we have wealth management sweep accounts that are coming out of the wealth management base, which is growing rather nicely. And then business deposits are almost half our deposits. That’s important because they are the cheapest deposits. The service you have to render are sophisticated but their average size is large in terms of accounts.

Deposit mix over time has improved. We've managed to bring our CDs down, checking up that's the direction we want to go. That’s been driven largely by the growth and business banking, which is very favorable. Offices, they are out-of-date. People don’t need them. They never go in, not right.

I was with someone this morning at breakfast and he pointed out to me that a competitor of ours has come to town. I said what do you mean? They’ve been here for a decade. He said I just saw him the other day. They are opening two retail offices, co-branding. He didn’t know they’ve been here for a decade before, which is interesting.

Scalable business model, we think we have a very good model. It’s working well. We can run our efficiency ratio, cost operating, cost ratio, in the sort of 58% to 62% range. That’s a solid ratio. It’s actually lower than many competitors right now. But it’s a high touch service business and it has limitations on how inexpensively it can be operated.

You’re getting return stickiness and rapid growth. Our people -- and here is the underlying efficiency question, how many assets are your people handling and ours are handling about 2.5 times the banking average. So it’s very efficient in our profits pretax per person also about 2.5 times the industry average. The reason for that is average relationship is large and clean and we have very good people.

Our prime wealth managements grow nicely. We were inside of Merrill Lynch and be away for a while. They were not overly interested in having our wealth management grow. So that was a quiet period as well as the market conditions but has really gotten under control in the last 24 months and is doing very well. And we have added Luminous recently, which would be a good acquisition we could talk about in a minute.

Core earnings, this is really issue -- the reason we emphasize core is we did -- as Steve mentioned we did a buyback from the Bank of America-Merrill and that had some positive GAAP accounting, purchase accounting gains in it. So we tend to ignore those. They will commend income over time, commend the book value overtime over about five years, now three more to go, three to four to go. So we look at core and our objective is to increase core net interest income and as a result core net income and earnings per share quarter after quarter if we can.

Our objective in the business is to be a steady and a highly predictable rapidly growing enterprise with a predictable return in the 10% to 12% -- 10% to 13% ROE basis core in a 1% growth, ROH, higher returns probably.

Net interest margins are very stable. We work extremely hard at this. We stay carefully matched. This goes back more than almost 12 years now. We’ve managed to stay quite steady through ups and downs. We’ve spend a lot of time on our asset liability matching.

We’re under some impression now, everybody is. So far we’ve held up but that’s getting harder. Rapid book value, the end game in banking as in most enterprises actually but in banking in particular is book value per share. We’re accreting ours 15%, 16% or better. That’s where the purchase accounting will show up rather nicely.

Enterprise value, we’ve done well for shareholders. We’ve spent a lot of time on this. We are big shareholders so we care a lot. And it’s worked out quite well for people from beginning of time but even from the two big intervals from startup to sell them to Merrill and now subsequently coming up and going public.

Private equity ownership, we worked private equity back when we came out and as a result we had high private equity almost entirely except for management and that has come down very nicely. We worked hard at it. We’ve created considerable liquidity and they are basically at about 27% down from mid 70s. So that’s worked out well.

I won’t bother with this. This is stress test. We’ve done stress test voluntarily. The reason we did that was we’re pretty good size. They are not required of us for a couple more years yet probably but we have clients who know what they are doing. They know how to read a balance sheet. So we basically undertook stress test to give them the comfort of where we stood. We came out where we thought we would at the top of the power basically of those who did stress test. That’s very helpful in our larger deposit basis.

So maybe with that, let me open for questions. Steve.

Question-and-Answer Session

Steve Alexopoulos - J.P. Morgan

Maybe I’ll start off. I’ll get my microphone working. Here we go. And we will open it up to the audience. So Jim, I mean, you guys are focused on private banking high net worth since its inception. That was the idea of the bank. It’s funny when you listen to the larger banks and even midsized banks now post Dodd-Frank where they’ve lost a tremendous amount of fees from retail clients. You’re hearing private bankings are new growth area. High net worth is our focus.

So I’m curious from your view and also maybe from Ruth, your view as a Relationship Manager, are you seeing more competition yet for your client. Are other firms coming after your people. I don’t know Ruth, if you want to comment. If recruiters are calling you, but are you seeing more of that.

Jim Herbert

Being natural by metrics.

Ruth Aronowitz

On the client front, I don’t see that we’re getting more competition. I think we’ve always had competition in New York City. I think it gets down to what we can deliver, how quickly we can deliver it and it’s the reputation. I mean, since most of my new clients come from my existing client base, they’re coming to me because they already have a recommendation.

So I don't have to even worry about that part of it. They know we can get that mortgage done quickly, seamlessly, easily and that will be done and it can move on. So competition from other institutions, occasionally you will find people who are very rate-sensitive. So you’ll always find that but since we’re relationship based, as long as we can do enough with the client, we are not going to lose a deal with a client that we want to bank over five basis points. That’s just not going to happen.

And your other question.

Steve Alexopoulos - J.P. Morgan

In terms of firms coming after…

Ruth Aronowitz

The phone rings occasionally but no interest.

Unidentified Analyst

Martin, from your point of view, I want to come to this chart in second but Martin from your point of view, same question.

Martin Gibbs

I would agree. I think from the relationship perspective on the client side, that’s where we really shine. So I think we do have competition across the board and occasionally it comes up and rate on the deposit side or in the inside. But at the end of the day, we’re very honest to say we may not be the cheapest on everything. We may not have the highest rates in everything but when you look at the whole package and you look at the saw dust that’s delivered, we think it’s worth it. And I think even if we do have a client who may try another bank, they end up coming back.

So even deals where we may have lost here or there from a rate perspective, we find that they tend to come back because they didn’t get quite what they were looking for. So I think the service really wins out on that.

On the employee sides, I have a team of 13 people that work with me as kind of the deposit experts for the relationship manager universe. And the phone definitely rings. I think from our kind of level of employee and career growth and career path, that is very attractive.

Part of First Republic, they know that even we do look internally for promotions or lateral moves or when we’re opening a new office or something like that, so I think there is tremendous career growth potential. I think we’re also given performance-based pay in our jobs where we may not have been a larger institution. So you really do feel like you’re sharing in the growth of the bank.

So the incentives are there at the bank. So it’s not an attractive place to look elsewhere or when that phone rings. I don’t think it really offers the same kind of whole picture.

Jim Herbert

Our turnover as a result really is quite low and we don’t take it for granted. We work hard at it. But our job is to -- at the senior level is to set strategy right but to create a good place to work and an exciting place to work. And if you think about it, one of the most important definitions of a good personal banker is someone that knows you.

That’s really the starting point, someone you can trust, someone who cares about you and who will take you for a meal and come back to you with how you’re doing and what can we do for your house at Greenwich Corner. Did you buy the place out on the familiarity turnover in private bankings were possible thing. And some of our competitors are known for high turnover.

Unidentified Analyst

Hi. You mentioned jumbled mortgage being the hook that really attracts the high net worth claim. But given the tremendous growth, you’ve had on the business banking side as well as the wealth management side, are you seeing that hook evolve? Have you seen new customers come into these other channels?

Steve Alexopoulos - J.P. Morgan

Mike, you will take that.

Mike Selfridge

Yeah. I will answer that. The answer to your question quite simply is yes. So it’s interesting and as Steve mentioned I joined about eight months ago, coming from another organization where I was 18 years. One thing get to, two points I want to make, because you can underscore enough the cultural piece and what makes this bank work.

I’ll give you an example of a client that we did a jumbled mortgage for seven years ago. For some reason, seven years went by and this gentleman is mine. He remembered what the bank did for him at a very critical time. He was an upcoming professional that one day would run a very well known venture capital firm.

And as of today, well now he run the business for that venture capital firm. So these things germinate over time, it clearly works. And there is something different about the jumbled mortgage in our opinion. That is much more personal than a business but when you make that personal connection, it works. And then from there -- various also I should underscore very selective in the types of business we’re going after, generally professional like I mentioned venture capital private equity.

But is that personal connection that transcends over to the business side and that’s where we’re starting to see a real nice real effect going on with the business banking front. But having said that, that exceptional service works and it works on both sides and then as you develop a relationship and get deeper with that relationship, people open up to you. They open up their finances, they open up their wealth management. They trust the organization and trust has a lot to do with it, which goes back to little bit to your question on competition. What we see in the west is quite a bit of competition and we think that will get more significant over time.

However, having said that, I think what Jim and Katherine have built culturally can’t be underscored enough, giving people the ability to make decisions, being empowered to make decisions. KYC, Know your customer regulations that many banks may struggle with, that’s in our DNA. We’ve been doing that since its inception and that’s what people want.

So the cultural element of being able to deliver service works and so that’s working very well on all segments.

Jim Herbert

Could we take this chart I have up for a second, this looks like business school chart or something, I’m sorry about that but it’s really the essence of enterprise, the top box is about 80% of the source of the growth. Why do we grow at 20% a year and the industry grows at 5%, maybe 4%. The difference is two things. Fundamentally, our clients are the outperformers in their areas, generally speaking.

If the San Francisco, proper nine counties is growing at 3%, our clients are growing at 6% or 7% that’s where they are. And so, we outgrow this. So if we had -- if we had a bay area wide banking franchise, it would grow 3% possible at market share take whereas ours will grow at 6% or 7% intrinsically.

Then we do a lot of things with those clients. So, they have a lot of opportunities to like us. They get passionate about it and they tell they are like kind friend and that’s what Ruth is talking about in terms of leads or Martin talking about in terms of leads and they come in. That’s it, that 60%, 70%, 80% of our growth, 70% minimum. The worst is hire new relationship managers, hire new portfolio managers. They bring clients for them, open new offices, focus marketing. So, it’s not a difficult strategy it’s in -- but it’s a 100% execution.

Unidentified Analyst

Jim, we listen to other banks not the large banks, but smaller banks mid-sized, you listen to them and what they say is not that dissimilar to you. You have people in the market. We focus on service like we premature the same thing over and over, but difference is the numbers right. Their numbers you look at them and they grew loans 2% over the past year and you’re like oh! Wow. You guys it’s 10 times. Is it that they don’t deliver the service that they are talking about like there is something in the market that’s happening, that’s different than what we’re hearing right to the investor community, what is it?

Jim Herbert

I think its a couple or three things. Number one, it’s the intensity of our focus. We are after A and B and that’s it. We don’t get distracted with C through Z and that is a certain type of client, it’s a certain type of need. I’ve got five calls, one of them I know wants to buy that house today and they are new and they were referred by Harry, my good client that’s where I am wrong. The other four are going to wait. So, it’s the intensity of the focus and we teach this and quite frankly it’s intrinsic in the people we hire.

The bankers we hire on the average have about 15 years of experience before they get to us. So we know who they are when they come. We hired -- we grow inside but as you are growing, you growing. The other thing is markets. You can have exactly this model and what you talk and you’re not going to grow at 20%. And then back to this topline on this page. Once you establish this client base, they will outgrow for you. There is also something on no page anywhere called attrition.

If you want to grow 10% a year and you have attrition of 5% a year on your client base, you’re going to grow 15%. So, the most important clients are the clients you already have, keeping them happy, not losing them or you’re not paying attention. If that’s going on, it’s a disaster.

Number one, they are gone. Number two, they are telling people you are terrible, they left. So, keeping your clients you have is fundamental to the enterprise and then in the process of keeping them, they tell fantastic because they’re happy. So it’s all very important.

Unidentified Analyst

Yeah. I just had one point to that Jim and that’s the slide I think previous with the relationship management model, the single point of contact. And I’m not sure if you are hearing that quite a bit, but from what I’ve seen with the way other banks are structured, you’re small, you’re medium, you’re large. And if you are small, you get this channel of delivery. If you’re medium, you get this one. If you are large, you get this one. And each step along the way, you get somebody new.

And back to turnover that person may leave when they get promoted. There is a new person yet again. So the churn of the relationship manager is quite significant as compared to what I see here. This works. Somebody stays with Ruth forever.

Jim Herbert

I will actually add financial piece to this which we don’t generally talk about but since you asked a question so pointedly. We have no constraints of capital. Our legal limits $600 million or $700 million on a transaction, we never use it. Everything we do is well within that and it’s down in the $150 million or below. But there is not a client -- somebody wants a $20 million home loan for a $40 million house, done, no problem and allow the community banks that are to converted providing similar service, don’t have that checkbook.

So, we are operating. We stay quite -- on purpose we try to operate in inside -- well inside our comfort zone so that we don’t get -- we are not going to. We know who we can’t deal with. They’re really big real estate fund and needs $200 million on this building, that’s not our client we tell him straight away, need $50 million that’s not a matter.

Unidentified Analyst

In terms of just focusing on A and B and not the rest of the alphabet, you are focusing on wealth management now more than you had before you had initially sold to Merrill, right. This is the first time I remember you doing an acquisition, which is in the wealth management space. Can you give us a sense, where is this going? Is that I mean to previous point is this a new area to get high net worth? Is this to cross-sell into your existing high net worth. Who is in that area? Where are you going with that?

Mike Selfridge

This is a second acquisition in 20 years, maybe the third, I guess, and we just don’t do acquisitions. These folks are particularly good. And they have a complete geographic overlay with us, Century city Palo Alto dead on. They are going to move into our quarters actually over the next six months. And they have a profile -- client profile that is dead on us, in fact, we overlap on a number. And they don’t provide banking to them, so they won’t add as an additional thing. That’s already working quite well actually.

They also have a very good alternative products platform that has been developed that we have one as well but those who is additive to us. So, I think it should work and we do not have enough wealth managers to service all the banking piece -- all the banking clients we have because we came to wealth management behind banking about 20 years into our banking business till we get to wealth management.

And so we actually need more interface time, interface capacity to -- for Ruth or Martin to be able to mind entirely what we already have in the bank in terms of wealth management. Not just -- we need numbers but we also need range of pushing holidays because wealth management is very personal and I think they bring that.

Wealth management is a very rapidly growing part of the business. If you just add up where we are now and Luminous you get to $31 billion. We started the year at $20 billion, so it’s a 50% plus growth. It’s a good business. The money market piece of it is not profitable now but the rest is.

Unidentified Analyst

If we look at City National, I think there is 17% of revenues from wealth management and you are 6% or so today. Is it realistic could you ever get anywhere that’s a quote in terms of contribution to revenue?

Jim Herbert

The problem is outgrowing the bank’s growth. If the bank grew at this rate that City National is referring at, we would get there. But it grows at twice that rate. So, actually outrunning our bank is the challenge. Money are -- the revenues from our wealth management piece is actually going on very nicely but they don’t outrun the bank. So, the percentage relationship is likely to stay a bit the same, maybe accelerate little of things to Luminous or few other things. But I think it’s hard to nice problem.

Unidentified Analyst

Yeah. One other things I want to add on it, we only have a few minutes left. Everybody is talking about the fiscal cliff and obviously taxes are part of that but goes on this morning’s, again beating the drum of and paying less than secretaries so tax rates need to go up on the wealthy, which is your segment right. When you think about what looks like its going to happen in 2013. How does that impact the behavior of your clients or do they move business overseas like, how you’re thinking about this playing out?

Jim Herbert

I think two fundament aspects, number one rate, they are going to have a little less -- they are going to have a little less liquidity because we’re going to pay more taxes. They are going to need more advice. Strategies get more complicated. And number three, I have the great confidence at Wall Street and we and other’s will develop the products that deal with us.

And number four, real estate is a very important part of the answer investing in and earning real estate and we are seeing that move already. The other one, I would add by the way is Southern California leased the whole bunch of folks are looking at Wyoming and Nevada. Actually, we have already financed storms in tax free states in the last 30 days. California is going to be a little disappointed in their net revenues.

Unidentified Analyst

In terms of New York, I mean your 1% share, I think when you launched in San Francisco you thought you could get to 2% to 3%, you’re at 16%, right. How do you think about market share in New York is 2% to 3% again the target and…

Jim Herbert

Martin and Ruth, how we’re doing?

Ruth Aronowitz

I think we are growing everyday. We are adding clients all the time. Well, I think this is a lot we can do.

Martin Gibbs

I think we’ve been really focused on increasing this share of households over the last couple of years and so kind of factor the hook question, one newer hook that I found to be exciting is this partner loan program that we’re doing with some of the financial service, law firms, CPA firms, where we can provide loan to the individuals within that company and that has increased our share of households dramatically.

And its with that what I kind of call the up and coming generation those that are going to need their first mortgage going to get marry, going to have children, going to need wealth management and planning going forward. So, those people typically are entrenched somewhere at the onset. So, when you give someone their personal loan or you get in with them early. I find that they stay pretty true to you going forward.

So, I think those types of things we’re all thinking about. I am trying to figure out how to continue to grow that share of households, because there is a lot of opportunity in New York, but I think we are focused on one of the best ways to do that in our targeted areas.

Jim Herbert

Our market share is up a bit here.

Mike Selfridge

Coming to Martin’s comments just in terms of if there is only so many of us and so many branches in New York and almost $0.5 million high net worth households, lots of opportunity, we do well over time we think. But to your question about tax changes, the partner loan program that Martin just mentioned has been a real nice opportunity for us to be strategic and ground a few hundred households with one program and because of tax law changes, we actually may see more business out of this.

Folks are used to differ fees and put it into funds. We’ll now see long-term capital gains, taxed at ordinary income rates. There is no incentive to draw fees what do they do. They look to bank like us. They provide these kind of programs. So, interesting that out of the changes that are coming down the pike with the economy fiscal cliff tax law changes, we will see some opportunities out of those.

Jim Herbert

And their impact so far has been increased liquidity and increased transactions. People moving quickly but that’s in anticipation after effect, I don’t know.

Unidentified Analyst

Right. While we’ve seen dividends recaps have been and you have pretty sizable BCP, so I imagine that some at least near-term opportunity?

Jim Herbert

There is a lot of near-term opportunity. The longer-term is going to await the details of whatever they do. I have a lot of faith, but the entire United States will and all the profession will respond interestingly to whatever they do.

Steve Alexopoulos - J.P. Morgan

All right. I think we’re out of time. Thanks a lot, Jim.

Jim Herbert

Thank you very much. Thank you.

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