FRC (2020 - Q1)

Greetings and welcome to First Republic Bank’s First Quarter 2020 Earnings Conference Call. Today’s conference is being recorded. During today’s call the lines will be in a listen-only mode. Following the presentation, the conference will be opened for questions. Shannon

Thank you and welcome to First Republic Bank’s first quarter 2020 conference call. Speaking today will be Jim Herbert, the Bank’s Founder, Chairman and CEO; Gaye Erkan, President; and Mike Roffler, Chief Financial Officer. Before I hand the call over to Jim, please note that we may make forward-looking statements during today’s call that are subject to risks, uncertainties and assumptions. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, please see the Bank’s FDIC filings including the Form 8-K filed today. All are available on the Bank’s website. Today’s speakers are joining from different locations. So I would ask that you please be patient if there are any technical difficulties. And now, I’d like to turn the call over to Jim.

Thank you very much, Shannon. Good morning, good afternoon everybody. Needless to say since our last call in January, the COVID-19 pandemic has changed a great deal about the U.S. and the world. During this very challenging time, we’ve been particularly focused on our colleagues and our communities. Since 1985, First Republic’s 35 years of consistent profitability and durability has been grounded in a culture of taking very good care of our colleagues, serving our clients, while also maintaining strong capital and very strong credit, all of which continue to differentiate First Republic at this point. Our strong relationship based banking model has been built to withstand times of uncertainty and it has done so successfully. We are supporting actively our communities, many non-profits and are participating in small business administrations’ Paycheck Protection Program. Given current conditions, we are also providing prudent client-friendly loan deferrals and offer flexible terms for those clients that are directly impacted. You’ll hear more about each of these from Gaye in a moment. Now let me turn to the first quarter results. Total loans outstanding were up more than 23% year-over-year. We continue to expect mid-teens loan growth for the full year. Year-over-year total deposits grew 15% and have even built a bit stronger recently. Wealth management assets are down only 1% year-over-year in spite of market conditions. Total revenue over the year has grown 13.5%, net interest is up 11.4% and importantly tangible book value per share has increased 12% year-over-year.

Thank you, Jim. First Republic is a people first organization dedicated to serving our colleagues, clients and communities in good times and challenging times. In that regard, let me take a moment to summarize some of the precautionary steps we have taken across the organization. In the early days of the pandemic, we moved decisively to ensure the safety of our people and the continuity of our service model. In late February, before public halt orders were issued, we decided to cancel or postpone client and internal events including our Annual Sales Conference. In mid March, we quite successfully transitioned 90% of our colleagues to work from home in less than one week. In our preferred banking offices, we are closely following guidelines from public health officials. We instituted proper social distancing and are routinely sanitizing public areas and workspaces. We also implemented two week rotations for client safety and to ease the burden on our colleagues. The significant investments we have made in technology and operations over the last two years have enabled us to provide a high quality, digital banking experience to our clients. For example, our digital mortgage application now accounts for the majority of all single-family mortgage applications. It has been very effective in accommodating the high volume of loan applications in this interest rate environment. Our enhanced consumer digital banking platform has also translated into greater service convenience. Clients can now do more through our mobile apps including connecting directly with their bankers in one click. This frictionless, digital to human connection is proving to be yet another effective way to deliver highly personalized client service. This is reflected in the accelerated adoption rate of our digital platform recently. Caring deeply about our colleagues, clients and communities is who we are and we are committed to assisting those adversely impacted by COVID-19. In that regard, we are making thoughtful loan deferrals. As of April 10, client requests for such deferrals totaled less than 3% of the total loan portfolio. As Jim mentioned, we are also actively participating in the small business administrations’ Paycheck Protection Program. We have been submitting applications for several days now and recently started funding loans.

Thank you, Gaye. Let me begin by discussing the impact of CECL, which was fully adopted this quarter. Our provision for the first quarter was $62 million. This included $48 million for loans, as well as $14 million for unfunded loan commitments, which is included in other non-interest expense. For perspective, this provision expense is over four times the amount we reported in the first quarter of last year. I would note that our reserves under CECL incorporate a change in the economics forecast late in the first quarter to reflect the conditions caused by the pandemic. Maybe just a brief comment to build on what Jim and Gaye discussed earlier, our very low loan-to-value ratios are very important when we estimate expected credit losses over the future life of the loan.

Thank you, Gaye and Mike. Our time-tested and straightforward business model continues to be very focused on delivering the highest level of client service, while operating very safely and soundly. We take a very long view, which has helped us to be successful through widely varying economic conditions over an extended period of time.

Our first question today comes from Steven Alexopoulos of JP Morgan.

Hey, and good morning, everyone.

Good morning, Steve.

I wanted to start on credit. So if we look into San Francisco and Silicon Valley economies, it looks like they are getting pretty – hits pretty hard. We have seen many, many start-ups announced job layoffs. Can you guys give us more color? Credit was obviously very good this quarter. But are you seeing underlying pressure specifically on residential real estate and commercial real estate just given the job losses we are seeing in your local markets? And then maybe, I know, Gaye you said 3% overall forbearance. How does that breakdown between residential and commercial real estate?

Steve, let me start with the answer and I’ll go to Gaye. But we also have David Lichtman, our Chief Credit Officer on with us and he also would be glad to step in. I think the – we all know that this is early days and – but the requests for forbearances are pretty good early indicator and they are fairly, they are modest, they are modest at this point. And this is where – and we are working with people very, very, I think, user-friendly. We are doing as Gaye may have mentioned six months deferrals, which we think is good to get people through challenges. We don’t want to become their problem. The older our credits holding up and this mostly has to do with our very conservative underwriting for all these years is, as you and others well know, the loan-to-value ratios are indicative of that but also behind that our credit numbers, FICO scores and on the terms of the borrowers and our liquidity positions. But let me turn this over to David Lichtman to give you kind of an overall view of the credit picture. David?

Great. Thank you, Jim, very much. Before I, Steve, specifically answer your question, I just wanted to take a moment and step back and talk about our credit philosophy, which has remained very consistent since the Bank’s founding 35 years ago and have which, for the last 25 years I have been the Chief Credit Officer. And as you know, we’ve always been a very conservative lender, we are always underwriting the borrowers’ cash flow, liquidity position and ability to repay, coupled with a very conservative advance rate and collateral. We’ve always found that the best protection of our loan principle is the low loan-to-value ratio, which currently stands at 55% across our entire real estate portfolio. The weighted average LTV for a single-family portfolio is a conservative 57%. And as mentioned earlier, our real estate portfolio is approximately 80% of our entire loan portfolio. We have found that borrowers who have higher downpayments are stronger financially which makes forbearance safe loans. Our goal has always been to underwrite to zero losses, one loan at a time. We never compete by dropping standards. We compete with high client service and price for overall relationships. Our approval process for new loans is the unique partnership between credit trained bankers who knows their clients very well and their seizing credit approvers who know our select markets very well underpinned by a callback provision that’s been in place since 1986. It’s important to note that 90% of our loans since the Bank’s founding were originated by bankers who are still with First Republic. This since then I just described has gotten us through a number of challenging times including the early 90s, the 01.com burst, the ‘08, ‘09 great recession and while we don’t know exactly how this pandemic will play out, we feel confident in the system and in the strength of our loan portfolio. And Steve, with your question about Bay Area home prices and job losses, it is a little too early to tell the rate of new home sales has declined a lot as people had been sheltered in place. But we are very confident in the strength of our borrower profile, average FICO of about 7.60, lots of post-loan liquidity and conservative advance rates to get collateral and we think this portfolio will hold up well as we go through this challenging economic period.

Okay. That’s very helpful actually and thanks, David. For Mike Roffler, I am sort of shocked that you are maintaining the prior NIM guidance and pleased by it. But can you give us a sense, where are new loan and securities yields coming in? I am trying to figure out how NIM, because guidance hasn’t changed?

Sure. You know, Steve, I think there is two parts of it is one while our loan yields have declined a bit and earning asset yields are down little bit, we’ve been able to move pretty quickly on our funding costs to match that decline. And so in the first quarter if you look at real estate loans, they came on the books at about 3.30, which was pretty close to what it was last quarter. And then I think the recent activity, given some of the drop in rates is a little bit lower than that, but not a lot. And so, the loan yield decline is really driven in part by the floating rate portfolio, which is impacted the quarter and will impact the second quarter a little bit along with a little bit business. But we are in a pretty good place where we’ve been able to reduce our funding cost to match that pretty well.

And then on securities yields, Mike?

Yes, I can chime in. So, on the securities on the HQLA, it’s about mid 2% to 2.5% and minis on a TY basis 3.25% to 3.5% compared to single-family low 3s and multi-family CRE 3% to 3.5% range on the new money.

Thank you, Gaye. And maybe just one final one on the lending side. I know that refi volumes are strong in the quarter and that will likely close in 2Q. Can you give us a sense what the volumes look like in 1Q? So if you get a sense for this pipeline and how social distancing likely going to impact the purchase market in 2Q? Thanks.

Sure. I’ll start. Our current loan pipeline actually remains strong and is up compared to the beginning of March, 10% to 15% up and single-family residential volume is holding up nicely about a third. So, purchase volume may go down given what’s happening in the markets and refi continues to remain strong. So we feel confident with our mid-teen’s loan growth guidance.

The - our backlog at this point, Steve, is meaningfully above this point last year.

Okay. Terrific. Thanks for taking all my questions. I appreciate it.

Thank you.

Our next question today comes from Ken Zerbe of Morgan Stanley.

Great. Thanks. I guess, maybe starting off with sort of the CECL provision a little bit, you talked about that you did changed your economics variables that underlie the CECL reserve as of – really towards the end of the quarter. Can you just talk about what those variables are? And, like how much of a recession are you pricing into your CECL reserves? Thanks.

Yes, I think, Ken, we did obviously moved towards the recession-based scenario late in the quarter given what has been evolving with the pandemic and maybe just a couple things that impact our estimate of loss, a couple of the biggest ones are home price, either appreciation or depreciation. At year end, when we adopted, we had modest depreciation included in the forecast where that has now changed to be down a bit as we go forward. Commercial real estate prices also were sort of modestly increasing at year end, whereas now there is a drop in the first twelve months and even in the second twelve months of our commercial real estate prices. So that changes sort of your outlook on the recession. The things that maybe aren’t as impactful to us is they are others will be like GDP, because we don’t have a consumer credit card or auto that’s very much impacted and very sensitive to unemployment and GDP growth. We are more tied to real estate values which is why even a modest decrease in prices, it impacts us upwards in the reserve, but maybe not as dramatically as an unemployment change would.

Got it. Okay, that helps. And then, I guess, maybe a multi-part question. Just in terms of loan growth. Obviously, we've heard from some of the larger banks about commercial line draw downs. I think you mentioned your commercial utilization was 42%. It seems a little higher than what it was last quarter. Can you just talk about, are you seeing activity from borrowers sort of hoarding cash or at least or drawing down their lines? And also kind of – and just bringing work into Jim’s comment, I think you expect mid- teens loan growth for the full year, which is consistent with the way you had last year. But this quarter is very strong. Are you actually implying you are suggesting that you might see weaker loan growth in the back half of the year? So, I know that’s a lot, but, thanks.

No. Thank you. So let me start with the capital call lines. On the capital call line side, the increase in the outstandings was driven both the utilization rate at 42% as well as healthy new commitment activity. And to comment on the utilization rate that you brought up, this is mostly the GPs have chosen to space out the capital calls to their LPs just to ease the burden given the markets. But the LPS continue to be strong and our capital commitments 90 to 180 days in general and no change to the contractual draw periods with strong overcollateralization.

And - I am sorry, and then on the loan growth outlook?

Ken, let me respond to that. The loan growth outlook, we're being conservative because of the conditions, the initial backlog in the first quarter would indicate, as you imply, stronger than that. But we - I have trouble. I have been doing this a while and I have trouble envisioning that the second half of this year is going to be as strong as the first half.

Thank you.

But I still see it being pretty decent though, actually.

Okay. All right. Great. Thank you for taking my questions.

Our next question comes from Erika Najarian of Bank of America.

Good morning guys. This is Chris Morton on for Erika. Just a quick follow-up on the capital call line conversation. As we think about a potential downturn, how should we think about a potential downturn. How should we think about capital call lines? And can you remind everybody on the call the average duration of this book and whether you extend credit that helps enhance returns via leverage for funds? Thanks.

So, we don’t do IRR – to start with, we don’t do IRR enhancement lines on the capital calls. These are mainly capital call lines to bridge the capital call. So typically 90 to 180 days with very strong quality LPs – strong LPs behind it. And also, our capital call commitment to loan commitment on called capital coverage ratios are typically very strong as well. And so far, you are seeing healthy activity and continuing – GPs continuing to work through their deals in the pipeline.

And then as a quick follow-up on a resi mortgage conversation, we saw two big banks this morning see declines in common equity Tier-1. So, how should we think FRCs to perform a single-family with disruption in mortgage markets and potentially more strained balance sheet capacity from the big banks?

We are now unlikely to chase extra business. I’d like to – a big reminder that’s quite important here and it goes to Ken’s question earlier. More than 55% or 60% of our business every year is with repeat clients that are already clients of the bank. That’s where a big part of our growth comes from. That probably will not change even in these conditions. It might go down a little bit, but not much as a percentage. And so, we are less driven by what other, the competitors are doing and obviously impacts us, don’t get me wrong. But it – we are more driven by what our clients are doing and their immediate colleagues who they’ve recommended us too. That’s the main driver.

Thank you and if I could squeeze one last in. Can you guys give a quick breakdown of the industries of your student loan refi customers where they work? Thank you.

Let me turn that over to James Herbert who runs our student loan lending on our Eagle banking area.

Good morning. Majority of our clients are in the legal, healthcare, and finance industries. Industries which should fair quite well. As a reminder, let me give some thought on this client space and the purpose of these loans. Our clients are young urban professionals with an average FICO of 7.70 and average income over $200,000 and more than 85% have graduate degrees. These are consumer loans, very high quality borrowers who have been the workforce for several years on average. As a reminder, we have never done any in-school lending and these loans are only to refinance preexisting educational debt for those who have of graduated. Our refinancing offer remains very attractive with rates as well as 1.95% and a portfolio weighted average of 3.1%. We don’t charge any application origination or prepayment fees and we’ll actually rebate borrowers up to 2% of their original loan amount they repay employers. We are very pleased with the quality of our portfolio and our borrowers.

Thank you, everyone.

Our next question comes from Terry McEvoy of Stephens.

Hi, good morning. Thanks for taking my questions. First off, let me start with wealth management. Could you just talk about what impact the first quarter decline in equity values will have on second quarter wealth management? And then how this market disruption could impact the new hires going forward?

Let me just start with that and I’ll turn it Gaye. The overall wealth management activity as a company has actually held up very well. It’s a combination of the flow of new money coming in from existing clients and new clients coming into the business. Also the mix is different and I’ll let Gaye to speak. I ask Gaye to speak to the mix in our wealth management. But it’s held up very – it’s held up well given conditions. We are pleased. Gaye?

Yes, we are – as Jim said, we are very pleased with the net client inflow coming in and as far as the fees are concerned, 7 to 5 of the PW&C revenues come from FRIM investment management, which builds based on the AUM at the end of the prior quarter. So given our first quarter 2020, FRIM AUM is $60 billion. We expect our second quarter FRIM fees to be around $8 million to $9 million, so down 9% from the first quarter.

Thank you. And then just as a follow-up. In Jim’s prepared remarks, he talked about positive loan portfolio under 2.5%. Could you just turn to exactly what you are including within that 2.5%?

You are going a bit in and out, but I believe the question, Terry, was about the 2.5% of the portfolio that – so I think David, I can turn to you, but consisting mostly of some retail and other. But David, can you give us a profile breakdown?

Sure. So the – what you are referencing is the retail portfolio and the hospitality portfolio of the Bank is approximately 2.5% of the Bank’s overall portfolio. And that has an average loan size of just under $3 million and a median loan size of only $1.5 million and the weighted average LTV is 50% and the debt coverage ratio is two times. So it’s a very strong safe portfolio that will recover when the economy gets well again.

Perfect. That’s exactly what I was looking for. Thank you both.

Our next question comes from Casey Haire of Jefferies.

Thanks, good morning everyone. A follow-up on the CECL and I know this is tricky, but just trying to get a sense of how conservative the macro outlook was and driving reserve build this quarter. Do you feel like it was conservative enough that next quarter we’ll require less reserve builds understanding that loan growth will obviously play a part and it’s obviously a fluid situation on the macro front.

Casey, I think the last thing you said is probably the most relevant, because it is a fluid situation. We looked at it and we looked at house, as I mentioned before home prices are a big driver and so we felt it was a conservative appropriate view of the forward-looking economy. But obviously, things are developing very quickly. And also the government is doing a lot to try to help consumers and things like that. So you sort of have all these factors in play, but we felt it was an appropriate view of home prices at the time for this quarter.

Got it. Okay. And just, big picture question on the jumbo market competitive landscape. It does feel like the larger banks have largely backed away from competing in this space, which is beneficial for you all and from both a volume perspective and gaining share, as well as pricing. With the NIM stable outlook and you guys still expecting mid-teens growth, how much of that – do you expect that competitive landscape to remain the same for the balance of the year? Or do you expect some of the larger banks to come back into the jumbo market later on the year?

It’s Jim. I wouldn’t speculate on what they are going to be doing really. Needless to say their pullback doesn’t hurt us any. But we basically don’t chase deals. We have always been very much more conservative probably than some other lenders witness the low LTVs and the high credit scores. And so, the amount of business we do is mostly determined by our client base first and foremost and then by their direct referrals and by our ability to focus on the marketplace and take advantage of the demand that is there.

Okay, great. And just last one from me. The capital management and Tier-1 leverage ratio up to 846. You guys have plenty of time until you phase in the CECL adjustment. But will that – given that it is essentially lower for that adjustment? Will you guys be a little bit more aggressive in shoring up capital going forward or will it still be sort of managing to that 8% level?

We would expect to continue to manage right at that level. The main thing is, we’ve build – we tried to build a very strong vessel to go through a storm and we believe we have and we will find out fairly soon, but we believe we are in very good shape. But we will not wake up with a capital too low under any circumstance.

Great. Thank you.

Our next question comes from Arren Cyganovich of Citi.

Thanks. I just wanted to follow-up on net interest margin. I guess, from a longer term perspective if we stay in this kind of very low long-end rate environment, I would think that there would be some longer term pressure on the net interest margin because of the heavy proportion of resi and it feels like today spreads are a bit wider than they had been. Just wondering if you could just kind of comment about how your business might trend over the next few years if we are in this kind of lower for longer environment?

Sure. Thank you. This is Gaye. We feel confident that our 2.65 to 2.75 net margin guidance that we have given assuming this rate environment continues. The reason being while we are seeing some slight decline on the asset yields, we have room to improve on the funding cost side. The mid – the spot, the spot deposit rate is in the mid-30s, to give an example.

Yes, I kind of get it for this year. I guess, I am thinking about and I know you don’t – I am not asking for guidance. So I am just trying to think of just holistically your loan yields into ten years has dropped more than your deposits can possibly come down over the coming years. I am just trying to think about how you can mitigate that longer term?

Yes, Arren, it's expected to. So I don't want to go there too much. But, the home loan market, which is 55% of our loan portfolio is holding up pretty well in terms of rate, it’s good for consumers, but it’s still a decent rate. And then, the – as Gaye has mentioned previously that our investment portfolio is holding up quite well. So, at this point, and the demand for – the cautious demand for multi-family and commercial is still into kind of high-twos to mid-threes. And so, at that point, where – if that holds and it’s hard to tell if there is a further reduction in rates. But I really don’t want to speculate on that.

Yes. And just to add, the earning asset growth, so when we look our net interest income, which really pays the bills, our net interest income is driven by safe, or consistent earning asset growth. So any slight decreases in NIM over time in that type of scenario would be offset largely by the safe credit and consistent growth.

That’s a good point. And then, just lastly, it looks like you had some mortgage loan sales for the first time in a while. Was this done pre-COVID or is there actually a bid for mortgage assets and do you expect to do additional loan sales?

We intend to stay active in the secondary market although the numbers – the volume varies depending on the secondary market activity. We sold about $500 million during the quarter as you know after not selling very much in the prior quarters and as of quarter end, we have about $350 million loans held for sale on the balance sheet. So, depending on the activity, we intend to stay active. Thank you.

Okay. Thank you.

Our next question comes from Dave Rochester of Compass Point. Please go ahead.

Hey, good morning guys.

Hi, Dave.

Hey, on your deferrals, I was just wondering how you are classifying those loans, or if given the recent guidance, those are still considered pass grade. And then, in terms of the requirements from a reserving standpoint, can you just talk about that as well, if you had to bump those up at all?

Given the - both the CARES Act and the regulatory guidance, the deferrals that we are making will continue to be accruing loans. They won’t be reported as pass due or non-performing. In terms of reserve requirements, we actually hadn’t completed a lot as of March. Most of them have come in April. But it will be very much a look at as we’ve talked about in this call, the loan to values at the individual level and the individual client circumstance to decide if we need any increase to reserve or not as we get through that portfolio. But with LTVs very low, for example, if you have a 55% single-family loan and we talk about a six months deferral and a 3.5% rate, you end up at a 57% loan to value at the end of the six months. So that doesn’t drive a very much of a credit loss in that environment.

And then you mentioned six months I've seen that in the language too, but I've heard you could potentially go up to a year on those deferrals, is that right?

We are starting at the six months, because we think that’s the right level of time to sort of go through the shelter in place orders, dentist office to open backup, business that open backup and for people to get back to normal. And so we think that’s the prudent thing to do at this point in time.

And then on that, I might add to that. What we are doing is we are deferring and then we are re-amortizing over the remaining life of the loan. We are trying to be as far as consumer-friendly as possible in our deferrals. We do not want to be the problem. We want to be the solution.

Okay. And then, how much of that deferral segment is in the process of participating in the PPP with you guys? Some of that already covered at this point?

Actually, the two are generally pretty separate.

Okay. Got you. And then, on the capital call segment, I appreciate all the detail there. I was just wondering if there is any concern with just the disruption in market activity that new pipelines are slowed or there is not a whole lot of future pipeline growth. I know you mentioned they were working through it and that’s a driver for loan growth today. But in terms of just the market disruption, if there is new business that’s being added as well, new investment big sign?

Yes, so let me answer it in two-folds. You are right, as GPs work through their pipelines and deal volumes, as deal volume slow, we would expect the utilization rate to trend back to the historical levels. So, mid to high 30s. At the same time, the increase in our outstanding balances was in addition to the increase in the utilization rate also driven by healthy activity of new commitments which includes existing client doing more if it as, as well as new clients in households that we're acquiring. And we feel comfortable with the credit quality given the underwriting for the LPs and GPs and the collateralization. Thank you.

Great. And just one last one if I could. You mentioned home prices are a driver of your CECL reserve. I was just wondering what you guys are assuming at this point baking into that for any changes in home prices at this point?

So, I would just say a modest decline and it’s obviously something that we are going to be focused on as you start to see more transactions here in the second quarter. But just a modest decline sort of over the next 12 months for sure.

Okay. Is that…

And the main thing to add to that is, remember, the markets we are in, they are very supply constrained. So it’s not as just they had a lot of excess home supply to begin with.

Very good. All right. Thanks guys.

Our next question comes from Brock Vandervliet of UBS.

Thank you. Good morning. I think you hit on the characteristics of the student loan and the professional loan, finance program in terms of the types of borrowers. But could you talk about any changes in terms of the credit conditions there? What you are seeing in terms of forbearance requests? Any changes in the credit stress in those two categories?

Yes, we are very pleased with the portfolio, the performance to-date with only six delinquent loans out of over 25,000 loans and only two basis points of lifetime net charge-offs as of March 31. So far, we’ve received 935 hardship requests representing less than 14 basis points of the bank’s total loan portfolio. About 3.6% of the outstanding SLRs by loan count and just under 5% of the SLRs by dollar size. Importantly, inquiries last week declined about 35% to 50% from the prior two weeks, and we are seeing good response from our clients. Overall, we remain pleased with the kind of the portfolio and the profile of our borrowers for the long-term.

Okay. Got it. And we’ve obviously never seen a downturn like this since you’ve been in that program. What’s your sense of the ultimate take rate in those – in the forbearance option there?

I think we are seeing great reaction so far from our clients. Remember 85% of them have graduate degrees and they have average income over $200,000. So this is a very employable and reemployable borrower base from that perspective. So, I think that we are quite – we remain cautiously optimistic about how they come through this and we are pleased with the construction of portfolio on our credit standards.

Okay. Thank you.

Our next question comes from David Chiaverini - Wedbush Securities.

Hi, thanks. I had a follow-up on the payment deferrals of less than 3% of loans. Do you have a sense as to how high you expect this to go?

We really don’t. Obviously, we are in new territory for everybody. James just commented about the student loan deferral requests, student refinance deferral requests are declining as indicative a bit. We are seeing, David, we are seeing same decline in single-family homes, is that correct?

That’s correct. The single-family home request for hardship modification as well as other loan types has decreased by about 50%, quite 50%. And so, maybe this will end up in the 4% to 5% range for the entire portfolio.

Okay. And you mentioned that you are classifying them as accruing. Are you also including them in special mention or watch list?

I would characterize them as internal watch list. So they don’t need the definition of a special mention loan yet, because we are responding to client inquiry for the COVID-19. So it will just be tracked and monitored a little bit separately.

Okay. Thanks for that. And then shifting gears to deposit growth. We’ve seen in the industry that deposits kind of surged at the end of the quarter. What’s your outlook for deposits in the coming quarters?

Yes, we are very pleased with the deposit growth and especially the checking growth as well, as we have mentioned. So, the client activity continues to be strong and diversified both across client types as well across geographies. I mean, in general, second half of the year tends to be historically speaking always better than the first half. Having said that, we would expect the tax outflows to start coming in around late second quarter, early third quarter given the push on the tax deadlines. So, so far, we feel comfortable that the both availability and the diversification of our deposit funding and we’ll optimize the overall total funding base as we go.

Thanks very much.

Thank you.

Our next question comes from Chris McGratty of KBW.

Great. Thanks. Just to build on that question, is the right way to think about kind of medium-term deposit for funding, sources of funding perhaps a little bit less on the higher cost borrowing. You took the short-term down to zero. Is that the right way to think about the mechanics, Mike, in terms of next two, three quarters?

Yes, the – go ahead, Mike.

Go ahead, Gaye.

So, we would – yes, we would expect our deposit activity to continue. In addition to that, we do also keep an eye on the overall funding as well. So, for instance, when we did the senior debt earlier this year, the – when you take all the pieces and the FDIC assessment benefit into account, the all-in cost was actually pretty much on top of some of the FHLB advances. So it was pretty cost-effective to do that. So, that’s what I meant when I said, we’ll look at the overall funding. And then, when we look at availability is definitely there as well as the deposit rates are trending downwards which is helping the NIM outlook, thus the 2.65% to 2.75% guidance given the mid-30s spot deposit rate we are expecting.

Great. Thanks. And maybe if I could just sneak one more in other expenses. I think you guys talked about the ability at Investor Day to kind of slow discretionary spend if the environment changed and obviously we have changed. Maybe sources of potential pullback in expenses over the next few quarters to stay within the efficiency guide that you laid out? Thanks.

I think similar to how we’ve talked about in the past, we are looking at things that are going to continue to help improve client service and our infrastructure by investments and we are going to keep making those. But there are things we can pull back on we mentioned earlier, reduction in events both internal and external that will have a benefit here as we go forward during the year. And then also, what I call other projects that maybe can be better put off to later. So we do manage that very actively to make sure we are doing the right things to help clients serviced in our infrastructure.

Okay. Thanks much.

Our next question comes from Lana Chan of BMO Capital Markets.

Thanks. Good morning. A question around CECL again in terms of, I think you mentioned you did build in a recessionary scenario into your modeling forecast. And then assuming that there is a recovery probably modeled in the back half of the year. I am wondering if the recovery takes longer to take hold, I mean, is there a risk that we see in other potential CECL build in 2Q?

So we’ve been very conservative at our March 31st estimates of loss reserves and obviously as the economy develops or the recovery develops and takes hold, we’ll update that accordingly. But I think it’s probably too early to say, because what’s that recovery going to exactly look like, but we do expect more, I’d say in the second year of a forecast recovery versus any time in the first.

Great. Thanks. That’s helpful. And then, just another modeling question, Mike. On the personnel line, the payroll taxes this quarter, how much do you estimate that elevated personnel?

Probably about $15 to $18 million.

Okay. That’s all I had. Thank you very much.

Our next question comes from Garrett Holland of Baird.

Good morning. Thanks for taking the questions. You've covered most of them. But I just had a follow-up on the net interest margin outlook. How should we think about the quarterly NIM progression within the context of the full year guide? Even with the funding cost offset, should we expect a much larger decline in Q2 following the recent action by the Fed?

So I think, we are really pleased at 2.74 in the first quarter and the ability to be stabled even up a basis point. It probably trends several basis points lower from here, but still well within our guidance range. There is going to be a little bit of a decrease in our loan yields because there is a lag from the Fed moves that impact the prime portfolio. And so that’s now fully reflected into the second quarter. But as Gaye mentioned, we’ve been able to reduce our funding cost quite well to keep us inside our range, but probably just a few basis points down from where we are in the first quarter.

That’s helpful. Thank you.

Our next question comes from Jared Shaw - Wells Fargo Securities.

Hi, good morning. Just on the provision, it looks like the provision rate for new loans is around 1%. Is that a good rate that we should use for new growth going forward? And then if you’d also address what the provisions are on the unfunded commitments at least at a similar rate and the balance of unfunded commitments?

So, I’ll start with unfunded commitments. I do think that’s a little bit of a jump given the change in economic outlook and some higher utilizations assumed as we go forward. So the higher utilizations is a one-time thing a little bit and then it will be driven by what’s your estimated loss going forward. So that’s probably larger than normal in the future. And on the percent of runrate, yes, 1%. I’ll trust your math, but it’s hard to say just because it will depend on sort of how the economy develops in the future, whether it’s at that level or a bit lower in the future.

Okay. Thanks. And then on the capital call lines, Gaye, I know you said 90 to 180 days is typical duration for those. Are you seeing any extension in duration from lines were drawn as we went through the end of 2019?

No. We are not.

Okay. Thank you.

Thank you very much.

Our next question comes from Brian Foran of Autonomous.

Hey. Good morning. I guess that you just talk to clients and especially at the high-end of your customer base, I mean, banks, a lot of people with really significant wealth who are going to be following regardless of the exact timing of the recovery and stuff. But when you talk to them, the general mood you pickup that the world is on sale and now is the time to invest or is the general mood more – we don’t where this thing is going. It could be a depression. Now is the time to hunker down. And I am sure there is a range. But you do have a unique window into – in for people with very significant wealth. I am just curious what you are hearing from those clients?

That’s an interesting question and we don’t of course have any near or perfect view of it. But generally speaking, I think they are very conservative. This is new for everybody self-evidently so. And so, I think what’s happening is, if they are watching and deciding, economic downturns are one thing but the pandemic is quite another and there is really not an experience base among even our client base. On the other hand, I wouldn’t call them – I would not call them excessively depressed either. They are active. They are doing things. We are still getting home purchases. We are getting some multi-family purchases. We are certainly – but the stock, as Gaye has been speaking about deposits, the amount of money in our sweep accounts is up to as a percentage of the account. So that indicates our conservatism there. But I would say that it’s very cautious continued activity, is the way I would describe it, but very cautious.

Thanks.

Our next question comes from Tim Coffey of Janney.

Thank you. Jim, you’ve always talked about wanting to be aggressive and improving the client base when other banks are starting to pull back. Are you seeing any indication that other banks are starting to pull back in a way that you could improve your client base?

Well, I think, so let me just focus on the word improve for a second. Our concept there would be to acquire new households and get trial for First Republic. And in that regard, I think there is always opportunity in the disruptive moment to get people to try something new and if they are not with us now possibly they would consider coming with us for whatever reason. So, we think that that opportunity, the acquisition of new households definitely is in this situation. But we are not excessively focused on it. We are really focused on the clients we already have and taking very good care of them and obviously protecting the credit of the bank and as we mentioned earlier, the PPP program is a significant short-term, but significant effort. And so - but I think there will be opportunity in this as institutions are distracted by one thing or another.

All right. Well, thank you very much. My questions have been asked and answered.

Our next question comes from Ken Zerbe of Morgan Stanley.

Thanks for the follow-up. Jim, actually just willing to follow-up on your comment just and about the PPP program. Can you just talk about the impact that we could potentially see in terms of fees. And then I just want to make sure I understand that’s right. I mean, is that second quarter could see significantly higher fee income given the PPP. I think the loans are only outstanding for like a couple months. So that could boost loan balances and then after that loan balances fall or those - that piece goes away. Is that the right way to think about it?

Ken, it’s a big – perfectly frank, we are still trying to figure it out ourselves. What we’ve been focused on is, and Gaye has been leading this effort and doing an extraordinary job with a whole team of people including Jason Bender and others in the organization, is to take care of the clients and get this brand new program out. I think it's worth us all reminding ourselves it's only about 10 days old, and an agency took on a brand new and very large thing here. And many banks have stepped up to the credit I think of the banking industry in general. They have stepped up by in large numbers to do something they do not normally do. The fees are, honestly we haven’t focused on them. They are very secondary to getting the job done well and what we see is, what we see is, mostly trying to get them close and of course the money as we know being committed rapidly. So we do need that. Then this program is going to need additional funding for sure. But let me turn to Mike here for a second to talk about how the flow of the activity might be on the balance sheet and for income.

Yes, they are – Ken, obviously because it is so new, there are lots of questions being asked about the income stream and the fee stream. And so, I think it’s very likely that that fee is part of the loan you’ve originated, which typically means you recognize it over the life of the loan, which could be anywhere from a short period of time to possibly two years. And that fee also is typically recognized within your net interest margin. So, I think there is something to develop here and get clarity on. But as Jim said, our focus right now has been to get the clients through the process so they can take advantage of the program appropriately that the government has put together.

Let me add one thought. We've been designing how we respond to this since we are not an SBA lender, have not been one for at least a decade. We’ve reached out to two or three very good partner participants that are in the business. And so, some of our business have probably a half of it, roughly maybe a third to a half is going through third-parties that we are referring it into. We felt that was a better way to get up and running quickly to get our clients the best possible service. We will not be collecting fees on that portion of the business or very modest fees they will be collecting that and we are quite happy with that. What’s happened is that's been very helpful to us being able to deliver for our clients.

All right. Great. Thank you.

Ladies and gentlemen, that concludes today’s question and answer session. I would now like to hand the call to Jim Herbert for any additional or closing remarks.

Thank you all. Thank you very much for the time and the good questions. I’d just remind everybody that we’ve always built the bank on a very conservative base. We are very cautious lenders and have been for a long time. For many, many years, you can be careful in your credit, and you sometimes wonder, are you being too careful? Then something like this happens and you are delighted you have been. So, we try to build a very strong ship with a lot of capital, good credit and client closeness and knowledge of the client base and we think we are in a – we think that’s the case as we sit here today. Thank you very much for your time today. We appreciate it. Good bye.

Ladies and gentlemen, that concludes today’s conference call. Thank you for participating. You may now disconnect.