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First Republic Bank (NYSE:FRC)

Deutsche Bank Global Financial Services Investor Conference

May 22, 2012 10:20 am ET

Executives

Jim Herbert – Chief executive Officer

Glenn Degenaars - Senior Managing Director and Portfolio Manager, First Republic Investment Management

Pamela Joyner - Director

Michele Celestino – Managing Director

Anna Legio- Managing Director

Analysts

Dave Rochester - Deutsche Bank

Dave Rochester - Deutsche Bank

Good morning, everyone. I think we will go ahead and get started here. I am Dave Rochester. I'm the mid cap banks analyst here at Deutsche Bank.

It is my pleasure to introduce management team of First Republic Bank, its ticker, FRC. First Republic is a $30 billion asset bank, well over $4 billion in market cap. The bank is solely focused on catering to the high net worth customer segment. It has a bicoastal footprint in regions with large concentrations of high net worth customers, including San Francisco, L.A., New York and Boston, all of which combined account for just over 50% of the high net worth households in the U.S.

It has an estimated 16% market share in this segment in San Francisco, is in a process of building out a platform in Boston and New York. There is a whole lot of opportunity there which we will hear more about. I think this is easily one of the higher quality banks that I cover, among the strongest growth banks certainly in my coverage with the unique model that has really indicative of the success of this bank.

So I think with that, I will introduce Jim Herbert, Chairman and CEO. We also have with us, Mollie Richardson, Director of Investor Relations, and a number of other professionals that we will hear from today about the bank. So I think we will get a very good perspective of what the story is all about.

We will have a 5 to 10-minute presentation from Jim. We will go into a fireside chat format and then we will break it into Q&A.

Jim Herbert

Okay, great. Thank you very much. Thank you all for being here. I will be brief on my opening comments and try to get to a fireside chat and some of the other people here with me because that really is the story.

First Republic has been built on service. It's a repetitive franchise. It works on word-of-mouth. One client has a good experience, tells a friend of like-kind and we pick up another client.

Basic growth rate of the bank has been about 20% for a long time. You can look back five year, 10 year, 15 year increments. It's not because we reached to do that, our credit standards are very high and you will see that in some of the slides and we can talk about that. It's because the service provided by individuals is so unusually good that people stay with us. We have very low attrition, and they like it enough to tell their friends.

On the average, our core business is home lending, larger home lending. It has been for a long time. I started the bank in 1980, in Sunnyvale, California, stumbled in the jumbo home lending when rates were 20%. Now they are minus a decimal, and we haven’t got to zero yet but we are trying and it worked, and I am sure that 84 it’s probably just an 85, and home lending has been one of the cores of the business from the beginning.

There are a couple of basic tenets of how we operate. Very high quality people, limited number of locations, intensely focused on markets and segments, low turnover, listen to the client very carefully, very, very carefully. Almost everything we do new is the result of some client asking for something and probably in fact several clients asking for the same thing and us listening and hearing it and being comfortable doing it safely.

So, we are geographically specific. So when you invest in First Republic, you are investing in a couple of things. You are investing in very high credit quality. You are investing in the geographies of New York, Boston, San Francisco, Los Angeles, primarily, west side of L.A. up and down, Santa Barbara, George County. Those are the markets we are in. We like them, we are staying in them. We don't expect to add to them. We are opening in Palm Beach but that's a service point for New York and Boston, primarily.

So, that's our intense focus. The balance sheet is about 70% single-family. We like it as an asset class contrary to all the noise over last few years. We have had six basis points of cumulative losses in 27 years on $50 billion of origination. So it's a great asset class for us.

We sell nine products to every home loan client that we work with. So we have a deep relationship. This is old fashioned, community bank relationship banking brought large, basically. We have a wealth management division as well. Glenn’s here, he represents that and can speak with that. That has about $22 billion in it.

So, what we don't do? We are very straightforward. We don’t do proprietary trading, credit derivatives, et cetera. We don't do subprime, we never have. We don’t have any offshore business, really, of any kind. We have some offshore clients but they are doing mostly domestic-focused business.

Home loan clients. I mentioned the credit history of the bank. Our average size loan is about $1 million, 60% LTV, strong liquidity, medium net worth about $3 million, average net worth, $60 million. We have some very rich clients who still borrow and we have credit scores up in the 760s. That's the representation of everything we originate, whether we keep it or sell it. If we sell it, we keep servicing.

Very efficient operation, from a people point of view. Fairly high efficiency ratio. I will come to that in a moment but our assets per person are over two times the normal bank. The reason for that is that each transaction is fairly large. Our people are really good and everything is clean. So they can handle more.

Profits per person are also up in the same range. Net interest margin, we think stability is much underrated. We think the last couple of years have reminded everybody about that. One of our objectives is to be very stable. Our objective is to make 10% to 14%, 10% to 13% after-tax every year like clockwork and the driver on that is net interest margin. We work really hard to keep this very stable through all kinds of markets. We can talk more about how we do that.

We built the bank for many years. We were public in '86. We sold it to Merrill Lynch in '07, starting year, woke up actually close to September of '07, woke up and they had a loss in October of '07, which was a little controversial at that time as you might imagine with us among others. Anyway, we stayed inside Merrill, BofA, bought it back with a private equity backing and we closed that deal in July. We negotiated in the fall of '09, set the price in '09, bought for tangible book marked by BofA, when they bought Merrill. So the assets were face rate on the assets of about $0.96 on the dollar. All good performing assets, we could leave some behind.

We used private equity to back us. They started out at about 73%, they are down to about 32% now. So we have had an IPO in the same year that we bought it back, December of '10. We have done two secondary. So we are getting them liquid basically, rather rapidly actually.

This is the result since selling to Merrill. We went into Merrill as a $1.2 billion market cap. We are now $4.2 billion roughly. This is at the end of the quarter. At the top, the loans have grown from 8.2 to 23, about 22% growth rate. This happened through the chaotic period of '08, '09, '10, and now '11, and basically when we got inside Merrill and BofA, they got into trouble, we circled our wagons around the bank, did not give up control of anything basically.

Even things that they did take control like accounts payable, we ran the department and did a shadow department, and so when we were able to buyback, which became self evident to us fairly early that it have might happen, we made sure we knew we had everything intact. We never changed our system. So our clients never saw a merger which is terribly important that why this has worked so well.

We kept going. The second best year we have ever had on loan origination was '08. If you think about '08, but nobody else was home and Merrill actually had cash and we were doing good assets. So they turned us lose and we gathered 7,000, 8,000, 10,000 new clients, high net worth households. So it was a good year.

Revenues have grown nicely. Net income, importantly, is up 30% compounded since we sold. That's a quick summary. Maybe with that, Dave, we have some people here, maybe if I could ask them to give about a two minute synopsis of the pieces of what they might represent, Martin, would you like to start, please?

Pamela Joyner

Is this on? Excellent. So, Martin Gibson and I manage preferred banking for the New York Group.

Jim Herbert

(Inaudible) Martin, I am sure, thanks. Do you mind?

Pamela Joyner

At preferred banking, we are really the deposit experts for the business we work with, relationship managers which are here for Michele Celestino, soon to be their secondary sales component on the deposit side for both consumers and business clients. We also are a bit of a hybrid. We do have our own books of business as well. The main differentiating factor for us on the deposit side and for the other side of the bank as well is the service component.

So having a one-on-one relationship with the client from the sales process to the documentation process through the onboarding process and through their life at the bank, its one main contact. They have a direct phone number. They don’t have to go to voicemail. They can have their call answered and handled immediately. We also have a servicing group that sits in our Rockefeller Center office. So they also have direct phone numbers. A client can call and have a transaction completed immediately. There is no wait time.

So I find that kind of a consistent service front from my team, the relationship manager team and the client service team to be an imperative point for just separating us from the rest of the banks and then as you will hear from [Ann] for the office network, our branch network, that’s a huge component of the servicing as well.

Jim Herbert

How long have you been working for us?

Pamela Joyner

I have been here for almost 12 years in New York. I joined in July of 2000. There were seven of us in the New York office and we now have about 285 in New York. So it’s been a great opportunity and a great experience.

Jim Herbert

Great, thank you. Ann?

Unidentified Company Representative

Hi, I am (inaudible). I run the Park Avenue office which was the first office of First Republic in New York. Our aim is to make sure that the clients still come in. This is our business aim, that is with their check need, their loan needs and what has happened over the years is that we still get to enlarge their relationship, to listen to the clients to hear what they have to say. I think that the key word is to listen to what they need to say.

Most of the time, they do come in, they just like express a desire, what are you all about, they ask us and when we sit down with them and we tell this is what we do, this is how we can assist you, little by little they open up and from there we have done many things from investments, from wealth management to loans and everything else.

Jim Herbert

Thank you. We are opening about, and we have a new at your office mix here now?

Unidentified Company Representative

Currently we have seven. Today, as we are opening number eight and it is at center six and this is the day, today that we are opening, so yesterday we had our very first opening and we had about 10 people that came in just asking, say, when are you opening? Welcome to the neighborhood. So we are excited for that and we have one more coming up.

Jim Herbert

One more coming up?

Unidentified Company Representative

Yes. One more coming up on 30th and Park Avenue South. We will also have 56th and Madison and we are going to have Chinatown, the first quarter of next year. So it is going to be a great experience. I am learning a little bit of Chinese. So for that I am trying, and I am going to say, I learned how to say to one of our colleagues but it has been an exciting experience and I came here in 2001.

We were about 30 people then and to see what it is today. My first day at the job, I said, it can’t be possible but what I saw within two months at the job by delivering the right service to the clients, it is possible and for that we have to thank Jim for that.

Jim Herbert

(Inaudible).

Michele Celestino

I have this mic and this mic. I guess it doesn’t matter. Can you hear me? My name is Michele Celestino. I have been with the bank about 10.5 years. I am a relationship manager and basically what that means is I am responsible for bringing on new relationships and building up those relationships and growing them, deepening them. I also meet with home mortgage products for client acquisition but not always, but that seems to be a very effective, a very successful way in which we acquire new clients.

My portfolio was primarily, exclusively high net worth individuals, their families, their privately held businesses. I have a lot of, what I call, financial entrepreneurs in the financial industry, asset managers. I also manage a team of seven relationship managers up at the Time Warner office. I think the differentiating factor when we hire and when we bring on new relationship managers that I am fully accountable, always, for the relationship, whether it is a deposit product, a credit product, investment management product, trust in estate custody, et cetera, it begins and ends with me.

I don’t hand it over to anyone and that’s a big differentiating factor in terms of the length of the relationship, the depth of the relationship and that’s what sets us apart significantly from the money centers.

Jim Herbert

Great, thank you. Glenn?

Glenn Degenaars

My name is Glenn Degenaars. I joined the firm about two years ago and in addition to my role as a portfolio manager, I also help go with the leadership role of the east cost portfolio management team. First Republic wealth management consists of primarily two divisions. It’s the First Republic Securities Company division and the Investment Management division which is the area, I am in. it’s a very simple and straightforward business model. It’s guided by three principles.

Number one, first and foremost, the service, it’s a message you will hear communicated throughout the day here.

Second is objectivity. We don’t create or sell proprietary product.

Third is customization. We provide a custom solution for our clients, starting at the $2 million level and above and it’s a great business and it’s a business we are growing pretty extensively here in New York.

Jim Herbert

Glenn, you might mention the banking value of the cross sell piece there?

Glenn Degenaars

Sure. A lot of our business comes from teams like Michelle who refer their additional home loan mortgage client to us when they close on the mortgage they will see the client may have an investment portfolio at a competitor and bring us in to present our capabilities. In addition, the business also moves upstream, where the portfolio managers who are outsourcing their own business will bring in the banking side and cross sell the home loans and the banking business as well.

Jim Herbert

Thanks.

Question-And-Answer Session

Dave Rochester - Deutsche Bank

Great, thank you for that summary. I think, since you have a number of your talents and individuals here today, a good first question might be, you had mentioned in conversations with me that it had been easier for you to pull top talent from institutions. So maybe you can just talk about that and your incentive structures and I am sure its one of the big ones.

Jim Herbert

Well, I think the timing aside, that needless to say there is a little dislocation going on in the larger banks. If you think about it, you hear these numbers all the time but 60% to 65% of the banking are in the hands of four or five folks in America and that’s actually probably the more concentrated in the larger markets that we operate in, the urban markets.

So to the extent that they are adjusting their business models in anyway, their incentive models in anyway, its been easier to hire people from them for us and also I think our reestablishment as an independent entity has been particularly helpful because it’s a different model and it has value of independence and objectivity and that’s inside us, (inaudible) just mentioned.

The incentive programs we have are, 85% of the people in the bank are on incentives, objective incentives, maybe more. We have certain departments you don’t want that happening but internal audits and things of that nature, obviously. The driving incentive plan is focused on deposits and assets under management with lending as a lead.

We have had claw back on lending, we have had claw back provisions on our loan and lending program since 1986 and that actually has a lot to do with our record. Our relationship managers are paid on a transaction alone when they do it but for three years, sometimes a little longer, on unsecured its forever.

They are responsible for the credit. They help to collect if there is a problem, actually and because they have the best ear for the client what’s really going on and they have a claw back on their bonus model equal to three to six times what they made. They take the first loss. It’s always been that way.

It’s not meant to be punitive its meant to be selective. If you don’t have the confidence in your lending capacity you actually shouldn’t work for us. If you don’t feel like you, if you are not lending your own money, don’t work here either.

On the other hand, the kind of clients you are looking for is the client who is the most liquid client because you will make, generally speaking, about 60% or more of your total comp will be on non-lending. It will be on deposits. It will be on assets under management, et cetera. The most liquid clients are in fact the best credits. So it’s very circular. It’s very reinforcing. So in fact, it is a helpful targeting tool.

Portfolio managers have incentive programs as well, for us, everybody does. Every incentive program has a qualitative component, a substantial qualitative component. Most of them a team work component as well because the culture is about team work and working together and cross selling together.

Dave Rochester - Deutsche Bank

Would you say the most consistent players in the market would be the larger banks? Is that who you are up against?

Jim Herbert

Is this in terms of quality?

Dave Rochester - Deutsche Bank

Yes.

Jim Herbert

Not necessarily. Some of them are very good and some teams are very good but consistent is the word I would apply. The toughest competitor is almost always the local competitor. The Silicon Valley Bank, the Boston Private, Citi Nationals. I am missing many. The reason is they can deliver the same kind of quickness and decisiveness that we can.

Very underrated is turnover. The negative impact of turnover and not necessarily somebody leaving the firm but being promoted up, moving on. We generally have people that like what they are doing very, very much and they stay with it. They do more business, they are paid more, they have responsibility of leadership but its their bank and they want to see it grow and everyone here actually is in a leadership role but they didn’t necessarily start with us that way.

Its really is leadership, not management, in a way. So we have stability. We have turnover above 10% including the offices. Offices are about 12%, I think, branch or office systems. The banks are going to be 50% to 60% turnover.

The number one thing, you really want in a private banker is someone that knows you and cares about you. They don’t have to be a genius, some of them are but they really need to care about you, they need to be smart, they need to know the market. They need to know what you want but mostly they need to know you and care about you. That’s really important and turnover issue to a large extent.

Dave Rochester - Deutsche Bank

Just switching gears to signs you are seeing in the market. You mentioned previously, you had seen some signs of stability in the early coastal housing. Maybe you can talk a little bit about that and what that means to your (inaudible)?

Jim Herbert

I will turn to Michele, maybe a little here, but the markets are pretty strong here and very stable and upticking, I would say.

Michele Celestino

This is not on. Is it on? Okay. So for the last year or so, I would say the market has been somewhat fragmented. Obviously, the very high priced, high quality properties have been very good throughout the last couple of years but what’s really started to show some good volume and some price stability is that mid tier market which for us, it sounds odd, but in these high net worth coastal markets, a $2 million to $5 million purchase price is really starting to show more stability whereas a year or 18 months ago, I wouldn’t have necessarily have said that.

The lower end or the starting point, the entry into the housing markets in our chosen markets has been very good because those price points came down to where it was more obtainable. Obviously borrowing costs are at a historical lows. So it was a very fragmented market and I am happy to say that over the last couple of months it has started to show stability in all sectors.

Jim Herbert

That’s true. That’s the New York region, primarily when the show operates but that’s true of west side of L.A., its true of Boston and it is particularly true of San Francisco, for all kinds of reasons. San Francisco is close to hot in terms of housing markets. We haven’t done a deal that didn’t have a multiple bids for several months.

Dave Rochester - Deutsche Bank

Switching gears again to the recent hiring, the branch expansion plans. Given what you have done so far and what you plan to do through the end of this year, how large can the bank grow in terms of the assets under management?

Jim Herbert

I don’t have a clue. The reality is, I wouldn’t have said we have would be this large. Our main objective is to act and deliver small. No matter how large we get. It just compounds and Michele does a great job for clients there. Martin does a great job of clients and they tell their friend of someone like kind and next thing we know we have another new client tomorrow.

About 60% to 70% of our growth comes in every year through referrals of happy clients. So the way compounding works that the larger your client base the more likely you are to have positive numbers of referrals and growth. The market that we grow the most rapidly in is still San Francisco because we have more clients on the ground.

So we have reached very much critical mass from our operating model in New York and Boston. Not to mention L.A. where we have been for a while. So it just compounds.

Wealth management is a slightly different thing. The referral system works the same but you have the influence of the market up and down to that, the psychology of the moment and so on. So there is another impact point there. It impacted our home lending a little bit but we stayed in and we have not been lending money for a single damn 27 years. We never go out of the market. Ever. ’08, ’07, we never went out of the market and that stability is very important to the full business. We try not to do jerky things. We don’t move pricing much. We do stuff very calmly if we can.

Dave Rochester - Deutsche Bank

That’s a very strong growth rates on the loan side and on the deposit side. The loan pipeline now is at an all time high. You are ramping up the business side, continuing to do that. There is very low penetration rate of the customer base that can actually use your business products. I would mention, I already know what your answer is going to be but do you think the strong growth is sustainable?

Jim Herbert

I do. The business banking growth is, we now have $9.5 billion of our deposit base which is about 40%, 35% in business banking. Five years ago, that percentage was probably 10%. So that growth has been quite extraordinary and it comes from the simplest of things.

If you think about the profile of our clients, they are influence makers. They are decision makers in both businesses and in non-profits and so we have gone from them to their businesses. We have about 10 verticals we have identified. We bank, for instance, 550 venture capital private equity funds. We bank a couple of hundred law firms. We bank 100 to 150 private schools.

We have developed verticals and every private school has got a board of directors of 35 to 50 fairly wealthy folks, some of who already bank with us probably. It is probably how we got there. So that influence center, the power of that influence center is stunning.

So our constraint on business banking has been having good business bankers and we have added a number of recently, in all markets. We also have build out the wealth management piece pretty much in all markets now. We have trust everywhere. We have opened the Wilmington Trust office recently. We needed that for the east. We are going to open a deposit office in Palm Beach early in first quarter of next year and that’s a piece we need for the New England area.

The model is pretty well fully built everywhere now. So now it’s a care of size.

Dave Rochester - Deutsche Bank

Going back to the wealth management piece. I know you have recently been hiring PMs and what not and that hiring continues but I saw that profitability in that segment jumped pretty significantly in the first quarter versus last year. I was just wondering what are those dynamics that are driving that and should we see more of that?

Jim Herbert

Well, the assets under management have grown and the firm of First Republic Investment Management assets have grown the most rapidly and that’s our highest yield asset in terms of fee. The other that has happened is this has become about wealth management has delivered to us and we give them some credit for this in our analysis about 12% of our deposit base now, through sweep accounts and other things.

So it’s become a substantial and very stable source of deposits for us but its working very well and our market hasn’t hurt. Recently it has not been so great but in the last 12 months it has been a lot better and previously, obviously.

We have been able to hire as well. We have hired a number of new people, 30 to 40 in the last few years, portfolio managers. We hired, importantly, from all different names. So the platform, obviously, I can absorb successfully people from almost any place.

Dave Rochester - Deutsche Bank

Switching to the margin. You talked about stability is what you are going for and certainly, you saw expansion in the last quarter. This quarter, maybe a different story, if it is part of the last quarter’s expansion was investment to cash. Maybe you can talk about those dynamics going forward and the sort of maintenance to that?

Jim Herbert

Well, my bank margins are under pressure obviously. We have managed to hold up better than I actually we could. It’s mostly been a case of growth and employment of cash. One of the ways we develop that very steady net interest margin is we stay hedged. We don’t use fancy tools. We don’t understand them. So we don’t use them. We do term draws from FHLB, things of that nature.

We sell 30 year fixed mortgages even thought their yield is better and so that has created a continuing flow of cash to be reinvested again and we are still in a cash heavy position. Then we have capital. We have agreed with the regulatory because we are technically de novo. We have agreed with the regulatory and so we keep an 8% Tier 1 leverage and we are operating about 9.5 so w have some growth room.

It’s a constant fight but the bills get paid by net interest income not NIM and net interest income clearly comes from NIM but it can also come from growth but the pressure on home lending pricing is by far and away the worst that we have ever seen, any of us have ever seen. Flip side of that is, as Michele has commented, it has bumped to afford a building to staggering levels.

Dave Rochester - Deutsche Bank

I am going to start the general Q&A. We have about five minutes left.

Unidentified Analyst

I had a question, your growth has been very, very persistent over time. You see the stability and then you don’t change the pricing and how do you, obviously in macro environments, (inaudible), maybe five, how do you keep that growth as stable as you have?

Jim Herbert

We just do a good job every day for our clients and they bring in new clients. If you think about, we have about 105,000 relationships in the bank Want to go 10% this year, you need 10,000 more. We have about 500 really frontline people relationship managers, preferred bankers, portfolio managers, office leaders and so they have to get about 10, 12 years, 15 a year, one a month.

We have a lot of people out there saying good things about us. So if you think about it, if you just do the math, now it’s not easy, we work really hard at it and the main thing is, don’t screw up with the clients you now have because if you start to get negative attrition, you are dead.

You have got to grow 10% and you are losing 4% of your clients every year because you are not doing a good job you have got to grow 14%. So the first thing you do is null the 4%. The next thing you do is get new. If you don’t lose 4% you have got attrition down about 1% you have done a really good job and friend and clients are talking about it.

So they get you the new client and you have to ask. We are not passive. That’s really the way it works. We pay a lot of attention to macro but we operate day-to-day with nil. We stay with the clients we have and then we ask them for a referral. It works.

Unidentified Analyst

On the wealth management piece, is it open architecture and how easy is it to get the wealth management relationship across, given that these are high net worth individuals with potentially relationships with other wealth managers. How easy is it to get that across?

Jim Herbert

It is open architecture. Glenn, you want to speak to how easy it is to get across?

Glenn Degenaars

Sure. On the open architecture front, I think it is important to clarify true open architecture versus open architecture with revenue share arrangements. Our platform is full open architecture. We do not enter into revenue share arrangements with any of the managers we use. So when we put forth a manager, it’s in the client’s best interests, it’s not that we are getting paid by that manager.

In terms of cross selling, the service driven model is what leads to the client coming to us on the wealth management side as well. If the client has a pleasant experience on the closing of the mortgage with Michele on his to the banking business to (inaudible) and Martin, we are going to get a shot of going in there and presenting the wealth management side.

So we are getting a lot of looks and we are getting a lot of opportunities get in there and talk to these folks. I think once we are in there, the platform and the personnel sell it itself. So I think the penetration is going to continue to improve as well.

Jim Herbert

What he just did is exactly how it works. It’s a complete team. We have a single point of contact in the bank. If someone comes in to Glenn, then Glenn basically quarterbacks him pretty much forever unless they chose to move which sometimes happens but very seldom.

They may go to Michele for banking and actually the banking calls may come to Michele but its Glenn’s source and our comp program covers that. So that single point of contact is very important but they bring in the team members and we have an internal open architecture. You can choose any team member you want.

If Glenn thanks that the bank that matches up with you might be Michele then he calls on Michelle. If he thinks its Martin, he calls up Martin, so he can align, so the person that hears best and sees personality best aligns. It's called private banking. It's about people.

Unidentified Analyst

Just as a follow-up to that. I understand the cross-sell we did in existing retail banking product. I guess, what I am asking is, are you seeing that ability to actually get into the investment side of the bank. That's a very, very different.

Jim Herbert

Yeah. It's working.

Unidentified Analyst

(Inaudible).

Jim Herbert

No. It’s actually right and it's working reasonably well. Last year, about 25% of our loan clients pulled down some wealth management product. Mind you, probably a third of them, at least, were not at that the stage where they really needed that.

As we do a lot of (inaudible) lending about 18% of our units. We did three quarters worth $1 billion Fannie Freddie last year. We don't take the approach that we are born rich. We finance very young first home buyer.

Michele Celestino

I just wanted to comment in terms of acquiring clients and then selling investment management. I think one of the most successful components when I sell is increasingly high net worth people are very frustrated with proprietary product. They've all been sold rather unsuccessfully and that has become a very frustrating piece and we did not offer any proprietary product.

High net worth people also are paying fees not only investment management fees but also on a proprietary product fees. So that's been a differentiating factor for me. Just wanted to point that out.

Jim Herbert

Big one. The objectivity of that is clear to people.

Unidentified Analyst

(Inaudible) you are selling loan to the market, are those securitized or are they sold to. I assume they are jumbos. They are not Fannie.

Jim Herbert

They are jumbos. Yes. The answer is, they use to be securitized, when they were secured in market. Although the Redwood Trust deals, the two Redwood Trust deals that have been done have been half of our product. We know Redwood very well.

We sell, we have a flow. We've put a package out the other day for bid and we got nine bids because of the quality of the asset. There is no problem, so we could sell half the portfolio in 48 hours.

Unidentified Analyst

(Inaudible).

Jim Herbert

We keep servicing. We always keep servicing, because that's the client relationship, and we'll never sell servicing and actually we are have very stringent servicing agreements. You can't pull servicing unless its fraud and you can't solicit with the client, cannot talk to the client.

It's just an asset. We've had that for a year. As we service for about 30 different people and we keep servicing, servicing collection are in the same office building alignment with (Inaudible) Iowa, because it's about client relationship, and the people are servicing the loans, have direct contact with the relationship mangers or the bankers all the time.

Dave Rochester - Deutsche Bank

All right. That's all the time we had. Thank you very much.

Jim Herbert

Thank you all very much.

Dave Rochester - Deutsche Bank

Appreciate it.

Jim Herbert

Okay. Thank you.

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