FRC (2020 - Q2)

Greetings. And welcome to First Republic Bank’s Second Quarter 2020 Earnings 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. I’d now like to turn the call over to Shannon Houston, Senior Vice President and Chief Marketing and Communications Officer. Please go ahead. Shannon

Thank you. And welcome to First Republic Bank’s second 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. And now, I’d like to turn the call over to Jim Herbert.

Thank you, Shannon. It was another strong quarter for First Republic Bank. Loan origination set a quarterly record. Deposits and wealth management assets also grew very nicely, and credit, capital and liquidity are all quite strong. This year’s first half performance under very difficult conditions again demonstrates the consistency and sustainability of our conservative client-centric business model. Before I turn the details for the quarter, let me take a moment to discuss this business model. We founded First Republic Bank 35 years ago this month. Since then, First Republic has systematically and organically grown from a single office and less than 10 colleagues with $8.8 million in initial capital to over 80 offices over 5,000 colleagues, $128 billion in Bank assets, $156 billion in wealth management assets and a market capitalization of over $18 billion. During these years, we’ve maintained the highest possible credit standards and we have been profitable each of the 35 years. Enterprise value has grown at over 24% per annum during this period. This strong 35-year performance has been sustained during widely varying economic conditions and through numerous unforeseen events, including the current pandemic. First Republic’s steady organic growth is the direct result of staying focused on our core belief that we could build an unusually successful business by consistently providing a superior client service experience. This client service experience and excellence continues to be our driver. The accelerated application of technology to our already high touch service model is in fact further differentiating us. Gaye will discuss this a bit more in a moment. We’ve also always believed in operating in a very safe and sound manner. We’ve not strayed from our stringent loan underwriting standards nor our philosophy of maintaining ample capital and liquidity at all times. It’s actually a very straightforward operating model, brought to life by our strong culture and by the extraordinary hard work and diligence of all of our colleagues.

Thank you, Jim. We are delighted with our continued strong performance and ability to serve our clients through these unprecedented times. During the second quarter, we closed a record number of loans, grew households 14% quarter-over-quarter annualized, modified approximately 3,600 loans for our clients impacted by COVID and delivered over 11,500 PPP loans to small business and non-profit clients. Importantly, we did this all without compromising our very high standards of service and safety. The resilience of our business model is derived from our unique service culture, as Jim described, and at the heart of that service culture are our people. Their care and dedication is now more valuable to our clients than ever. This time tested people first model is being reinforced and enhanced by our tech strategy. We are investing in agile platforms that enable rapid deployment of new features for our clients and process improvements to empower our colleagues. In light of our strategic vision, over the past few years we have upgraded our home loan origination system, consumer digital banking system and deposit client on-boarding system, while also building strong in-house development capabilities. These investments are being utilized with great effect to help meet the unique challenges of today.

Thank you, Gaye. We are pleased with record net income of $257 million, up 15% year-over-year and record earnings per share of $1.40, up 13% year-over-year. Our provision for credit losses under CECL was $31 million in the second quarter. This included a provision for credit losses of $43.5 million related to our loan portfolio and held to maturity debt securities, which was offset by a reversal of the provision for unfunded loan commitments of $12.4 million. During the first half of 2020, we have added $91 million to our loan loss reserves, while net charge-offs were only $1.3 million. As Jim mentioned, our capital position remains strong. As of June 30, our tier 1 leverage ratio was 8.15%. this reflects two capital raises in the past nine months. In April, the Bank increased its quarterly cash dividend and we are pleased to maintain this dividend level. Our liquidity position also remained strong. HQLA was 13.4% of total average assets in the second quarter. In May, we completed a residential mortgage backed securitization, our first in many years. Loan sales have always been an important part of our business and this securitization provides yet another source of funding and liquidity. We always retain the servicing of our loans sold. Very importantly net interest income increased 16.8% year-over-year. This reflects the power of our consistent growth of earning assets. Our net interest margin for the second quarter was relatively stable at 2.7% despite interest rate volatility. We are particularly pleased the margin was down only 4 basis points compared to last quarter. During the quarter, we reduce the overall rate paid on deposits to just 30 basis points. This decline helped bring our overall funding costs down 22 basis points from the first quarter, which largely offset the 24-basis-point decline in earning asset yields. We continue to expect our net interest margin to be in the range of 2.65% to 2.75% for the full year 2020. Our efficiency ratio for the second quarter was 62%. The efficiency ratio has benefited from reduced expenses for marketing, travel and events as a result of the pandemic. Given the first half performance, we now expect our efficiency ratio for the full year 2020 to be in the range of 62.5% to 64.5%. Our effective tax rate for the second quarter was 19.4%. We continue to expect our tax rate for the full year 2020 to be in the range of 20% to 21%. Overall, it was a very good quarter.

Thank you, Gaye and Mike. We are very pleased with the second quarter results, and I know I speak for Gaye and Mike and I when we say we’re particularly proud of the tremendous effort and work of our colleagues throughout the first half of this year under very difficult conditions. Overall, the first half of the year has been very strong for 2020 and we believe we have good momentum going into the second half. Now we’d be pleased to take your questions.

Thank you, sir. We’ll first go to the line of Steven Alexopoulos with JP Morgan.

Hey. Good morning, everybody.

Good morning, Steve.

I want to start on -- hi, Jim. I want to start on credit. So if you look at the loan modifications of around $4 billion. Jim, I know this is a tough question at this stage, but what’s your assessment in terms of what portion of those could become problem credits?

It is a tough question, Steve. We don’t of course really know, but we have, as you might imagine, scrub them considerably, and probably, more importantly, we know our clients very well. We know the situation very well. Suffice it to say that the vast majority of those modifications have quite reasonable loan-to-value ratios in the 50s and so we don’t expect to be very much at risk ultimately on losses. We will have some anecdotal situations but it’s our opinion we don’t have a systemic issue at this point.

Okay. That’s helpful. And then similar if a change in direction a little bit, if we look at the $2.4 billion of the COVID impact to loans that you’re calling out and you -- I assume you’ve scrubbed that too. Jim, when you look at the collateral there, how do you think about lost content in that bucket?

Again, reasonably low because the lost content for instance in the hospitality area, the loan-to-value ratios are below 50% and we have guarantees on a significant portion of them. And so, as a result, we think we’re probably okay, but we may have some work through for sure and we’ll have some losses, but it will be mostly a work through problem. And what we don’t know, of course, is who will begin payments post the deferral period but we’re actually pretty optimistic.

Okay. And then NPAs overall very low, but you did see a $40 million increase quarter-over-quarter. Can you give some color there?

Yeah. I’d say, Steve, it’s mostly a few single-family HELOCs, nothing unusual.

Okay. And then final one from me, so if you look at the $5.9 billion of single-family originations in the quarter, just doing my math given the color Gaye provided, it looks like purchases were $1.2 billion this quarter, so I guess down a little bit year-over-year. Can you give color on the purchase market and is the spring selling season delayed just given everything virtual or is it not going to be what we’ve seen in the past? Thanks.

Yeah. Steve, correct. We are seeing that the spring buying season is delayed into the third quarter if not beyond. But we are optimistic, first of all, on the refinance, if I can comment. Over half of the refinance activity is with clients from other institutions. So it’s a great opportunity, great win for us. And on the purchase side especially on the West Coast, the purchase activity has picked up nicely and great momentum. June is especially particularly strong. And we are also seeing there’s suburb purchase activity in New York suburbs to be quite active as well.

Okay.

So we are comfortable with the mid-teens loan guidance -- loan growth guidance.

Okay. Terrific. Thanks for all the color.

Thanks.

All right. The next question comes from the line of Ken Zerbe with Morgan Stanley.

Hey. It’s Ken. Good morning, everybody.

Good morning, Ken.

So if I just start off in terms of the NIM, obviously, you did better this quarter, which is great. Is the guidance for the 2.65% to 2.75%, does that include all of the accelerated amortization on the PPP fees?

Ken, thanks. It does and I would just comment that the forgiveness of the loans under PPP is likely not a late fourth quarter, more next year event, because of the changes made to extend to a 24-week cover period and then the borrowers actually have some time to apply. They don’t have to run in and do it right away. So we think it’s probably more next year than it is this year frankly.

Got it. Okay. And so you haven’t seen any PPP forgiveness, I know it’s really early, but you haven’t seen anyone starting under the eight-week program .

No. In fact, we’re not sure the SBA is…

Okay.

…accepting applications yet, because they haven’t opened the connectivity to their portal, so it’s likely a bit later it’s going to happen.

Got it. Understood. Okay. And then just my second question, in terms of expenses, obviously, with travel, marketing, advertising expenses down, I saw your updated guidance obviously. But does that move back to more of -- a more normalized level, say, once -- where is the normalized level, I guess once the pandemic is over, because I’m assuming you’re going to travel a little bit more and do more marketing, et cetera?

Yeah. I mean, when we look at the guidance, the update for efficiency, it was really reflective of what’s happened in the first half of the year and what you just touched on that marketing and travel is probably light for the next couple of quarters. But it’s not necessarily a long-term thing because you’re right, we will start to travel, we will have client events in the future. So it’s really this year is the one we’d focus on. We had been in a very comfortable range up until now that we’ve actually improved upon as a result of not incurring some of these costs.

One issue I would point out Ken, we don’t know this yet, but Gaye went through a number of things that have been improved recently and from an efficiency point of view. And buried in that and unstated is the clients have also taken to a number of those approaches. So there may come out of this some efficiency gains, but we’re not sure and we certainly don’t want to project them yet.

All right. Great. Thank you very much.

All right. Next question comes from the line of Arren Cyganovich with Citi.

Thanks. One of the larger mortgage originators recently indicated they were kind of making it more difficult to get the jumbo loans on their platform. Are you seeing other competitors pulling back and what kind of opportunity does that provide for you in the second half of this year?

I would say that overall - we are aware of that. I would say overall it’s still quite competitive.

Okay. And then, more recently, there’s been some surge in cases, obviously, across the country, but also in California. Are you seeing any impact to your business from that in the recent weeks?

No. The COVID impact to exposure on the loan side is limited to the 2.5%, the hotel, restaurant and retails, 3.5% of the portfolio and the modifications are less than 0.7% within that exposure. And in terms of our colleagues and I was working -- as much as we’re looking forward to back in the office it’s when it’s safe. We have been incredibly effective working remotely in this quarter and the past quarter proved that, so we don’t need to rush back in.

And it does see -- so you’re not seeing any kind of demand change from mortgage or business loans related to that recently?

Yeah. We are seeing that the single-family residential activity is remaining pretty strong to our pipeline and pipeline are quite significant up compared to this time last year actually. And multifamily holding up, as well as CRE is the portion that has slowed down and we’re being very cautious on credit and strong deposit growth, so client activity remains robust.

Okay. Thank you.

All right. Next we’ll go to Dave Rochester with Compass Point.

Hey. Good morning, guys. Nice quarter.

Hi, Dave. Thank you.

Hi. To your reserve calculation this quarter, what were some of the bigger economic assumptions that went into that, I know real estate prices bear sort of heavier weight in your analysis. But any color you have on that and the duration of the downturn that you’re assuming, that would be great.

Yeah. So, Dave, you’re right that it continues to be residential real estate especially and it’s really market-by-market. So and I’d say this, our projections from 90 days ago probably were conservative and that prices have actually held up really well and in most markets are actually continuing to increase slightly. New York is the one place where we do assume a little bit of a down tick especially in Manhattan itself, while the suburbs, as Gaye mentioned, have been actually pretty strong and recovering quite well. So the downturn lasts for a bit of this year, early into next year and then it starts to slowly increase. We do have a more significant decline on the CRE and multifamily prices close to a double-digit price decline and then a recovery next year.

And just maybe on the last point, is there any longer term concern on the multifamily side or even office fundamentals in some of your markets?

So in multifamily, we’re largely in rent regulated and rent controlled markets. And as you -- as you’ve heard us talked about before, we don’t underwrite to the hope of new rents when the apartments’ turn over, we underwrite the rents that are in place and so you don’t see as much turnover and you don’t see as much vacancy in a rent regulated and rent controlled building because likely you’re below market. So, I think, multifamily actually has held up pretty well. And CRE, that’s why we underwrite to stress scenarios with low LTVs and strong cash flow coverages. Does it change demand for office? I do think some of that is going to be determined in the future.

Any sense to where cash collections are for going to stabilize or market rent multifamily property in New York these days?

They’ve been pretty good. It hasn’t been down a lot from where it’s been in terms of overall collections.

Yeah. In general, multifamily is holding up quite well, to add to Mike’s comments. And in terms of CRE, again, overall, our exposure is very limited and loan-to-value ratio is very little and debt service coverage has continued to be strong. Retail, in general to market commentary, retail is the weakest and office needs another year or so depending on how the pandemic progresses to gain more visibility. But we feel comfortable with our underwriting standards in multifamily and CRE.

Sounds good. Maybe just one last on the margin guidance, are you guys assuming the existing curve persists or are you looking for any steepening of the curve? And then how much do you think you need to move deposit costs lower as a part of that?

I’d say the curve is pretty much at this level. We’re not really assuming much steepness. That should only be a benefit if it were to happen. There probably is another downtick to our deposit rates. We ended the quarter in sort of the mid-20s range on a spot basis, so there should be a little benefit there, which hopefully offsets some of the continued drift that you’ll see in loan yields.

Sounds great. Thanks, guys. Appreciate it.

All right. Next we’ll go to Casey Haire with Jefferies.

Thanks. Good morning, guys. Maybe just a quick follow-up on that -- on the back of that NIM question on the reinvestment yields, HQLA and muni, where are they trending today?

Yeah. HQLA is around 1.5%, agency HQLA that is and munis are 3% to 3.25% on a TUI basis on the purchase yields and single-family residential coming in around high 2%s, low 3%s and multifamily CRE, 3% to 3.5%.

Okay. Great. And on the capital call, obviously, that was down this quarter. I mean very consistent the line utilization rates with your long-term trends. But given that sort of a unique product, what is the outlook for you in the coming quarters and what could be a challenging backdrop?

Our -- the growth -- the primary metric for growth that we look in capital call lines is the commitment growth and our capital call commitments are up 24% year-over-year and total business line commitments are up 20%. So the pipeline remains strong. The fund raising activity was in private equity in general was lower in the second quarter compared to second quarter of last year. But the private equity continues to be an attractive investment opportunity for limited partners given the lower rate and rich equity environment in the public markets. And there is around $1.5 trillion amount of dry powder in the market. So we would expect steady growth for the remainder of the year. And utilizations are the reason why the outstandings are lower. They are currently for capital call. They are currently at 36%. And as we mentioned in the prior quarter, utilizations were elevated in the first quarter as the GPs were spacing out capital calls and they returned back to the historical range we have seen mid-to-high 30s. So we would expect that to remain in that type of range.

Great. Thanks for that color. And then, Jim, just a last question, big picture question for you. We’re all reading about everyone leaving New York City and San Francisco, and departing for the suburbs and you guys are obviously in a unique perspective given your urban market concentration. Just how do you -- what are you -- given your experience and based on what you’re seeing from your client base, what do you -- how do you see this playing out? Is this more long-term or is this somewhat temporary?

My guess would be and it’s only a guess, of course, but my guess would be it’s a little more in the long-term versus temporary category. But we need to -- we -- and our markets include the urban centers and the suburbs around them. So we do see both sides of this equation. We need to remember, it’s -- to some extent it’s a reversal of a trend that have been going on for 10 years or 15 years where the people have been coming out of the suburbs and going into the cities. So we may have simply a pendulum coming back a bit to the center. But the number of units of housing in the suburbs versus in the cities is going to be the driving factor. There’s only so many homes in South Hampton and Greenwich versus Manhattan. And so I think it’s an adjustment. I don’t think it -- and I think it’s a directional change for sure. But I don’t think it’s going to -- it’s not going to -- the implication, of course, is it leaves the city centers hollowed out. That’s not going to happen. That’s just my guess.

Okay. Thank you.

All right. Your next question comes from the line of Erika Najarian with Bank of America.

Hey. Good morning, guys. This is Chris Nardone on for Erika. I just wanted to ask about your Tier 1 leverage ratio, seemed you have moved to 8.15% and I believe you prefer to operate above the 8% level. So can you just discuss how you’re thinking about capital levels as we head into back half of the year, if the strong loan origination activity continues? Thanks.

Yeah. Thanks. We feel really good where we’re at 8.15%. We raised capital late last year, early this year and those turned out to be very strong capital raises. We continue to remain opportunistic and look at the markets, but there’s nothing in offering that we feel we have to be right now because we’ve done those two raises sort of before the pandemic hit.

All right. We’ll move on to Chris McGratty with KBW.

Great. Thanks for the question. Mike, a lot of have been -- what has been talking about tax rates given the deficits that we’re incurring as a nation. Last cycle win rates were dropped. There wasn’t much of a sensitivity, of course, you have probably given the structure of your earnings. Could you just walk through how you’re thinking about potential tax sensitivity if some of the buying proposals get enacted?

Yeah. So, obviously, given some of the fiscal stimulus, there’s a potential for higher tax rate in the future. The good news is because the Bank has been -- we’ve been so consistent with our tax advantaged investments, municipals, low income housing, bank on life insurance, all those become a little bit worth a bit more in a higher tax rate. So it won’t be a 1 for 1 percentage increase, maybe it’s half maybe it’s 60% of an increase to the rate, because those benefits are all greater in a higher tax rate.

Great. Thanks. And then the second question, you called out in the release, it look like an MSR impairment. I’m just wondering if you could quantify the amount that was more logical ?

Yes. Just under $6 million in the second quarter, in the first quarter it well above $650,000. The MSR balance itself is pretty low. I think it’s about $31 million asset on the balance sheet. So it’s going to be a pretty low amount given how fast repayments are happening in the servicing portfolio.

Okay. And maybe one more if I could. Could you just remind us high level the AUM that’s priced on 630 assets and how we should be thinking about fees in the third quarter given the rebound in markets?

Yes. It’s AUM associated with First Republic Investment Management and I think that increased from $60 billion to $68 billion. So think of it as sort of low-to-mid 90s for investment management fees.

Great. Thank you.

All right. We’ll take another question. This one is from Terry McEvoy with Stephens.

Hi. Thank you. Good morning. You had a little over $2 billion of PPP loans on the balance sheet at the end of the second quarter. What amount of those funds were in total deposit balances also at the end of the quarter?

So net-net it was actually more loans than deposit given our clients are actually dispersing these funds. So it’s changing dynamically over time, it’s declining. So net-net it’s actually a negative on a -- on the loan line of deposit

Okay. And then as a follow-up question, thanks for putting in the personal guarantees on those three industry segments, restaurants being at 94%. I’m just curious out of those 955 loans, how many of those borrowers have deposit relationships with First Republic or maybe your wealth management clients, just to give you some sense and insight maybe into their ability to support those loans?

Actually, virtually all of them would have maybe not wealth management but personal banking with us. We make very few loans to people who don’t bank with us.

That’s what I expected. That’s it. Thank you.

Thank you.

All right. Your next question comes from Brock Vandervliet with UBS.

Hi. Good morning, everyone. Thanks for the question. Mike, if you could just talk about resi yields, they’ve been extremely resilient, down only 15 basis points. This quarter we’ve heard a lot about primary and secondary mortgage spreads and it seemed to be pretty wide on the mortgage side. Should we -- on the primary side, should we expect that to gradually come in and pressure those yields in the second half?

So far, correct me, single-family residential in the high 2%s, low 3%s, actually the fixed rate great loss we are seeing coming in slightly better than the second quarter originations just a bit. So we feel comfortable with the $265 million to $275 million NIM guidance for the year. I would also note that the earning asset growth, it plays a key role in our NII growth as well.

Okay. And as a follow-up in the mortgage area, the $300 million securitization that seemed like kind of a trial balloon size, your first one in a long time. Do you see the markets have healed enough to pursue that more broadly or not?

Yeah. I mean, we’re really pleased to re-enter the securitization market in our name. Obviously, our loans have been securitized by others for a long time but it was great to do. We had arranged it before the pandemic and it speaks, I think, to the market’s view of our credit quality that it continued through and closed in May. We look at it as another tool that we’ve gotten to reopen from a liquidity and funding standpoint and if the market is trading pretty well and if the market warranted, we would consider it again, yes, but nothing on the immediate horizon, so to speak about securitization.

Okay. Great. Thank you.

All right. Next we’ll go to Jared Shaw with Wells Fargo.

Hi. Good morning.

Good morning, Jared.

Just looking at the provision, should we assume that that provision as a percentage of growth stay stable as we go through the end of the year or is there any component of second quarter that was more of a gross up for the economic backdrop?

Yeah. I wouldn’t say that. I think we’re a little bit different than other banks in that. We’ve always had a provision because the portfolio is growing, right? So there’s typically been some level of loan loss reserve building, while having pretty low charge-offs especially in the last five years, 10 years especially. So I think we’ll always have some level and then it will depend on how the economic outlook progresses as to whether that goes up or down. How the modifications come off of modification late in the year and do you have any specific instances you’ve sort of got to dig into more?

Well, I guess, with the color that we have right now you feel that that current level, obviously, is good for few loans going on?

Yes. Yes.

Okay. And then, Gaye, you had mentioned on the capital call loans, the dry powder sitting on the sidelines. I guess, in your view, what’s keeping that on the sidelines and how fast do you think that some of that can be deployed in the industry? And then at what point do you guys see that new fundraising or net new fund starting to be formed to drive new commitment for us?

Sure. So, in general, going into the pandemic, there was already sizable dry powder in the market, in the PE market. And then the first quarter, given that the GPs were working out through the pipelines, as well as spacing out -- wanting to space out capital cost to LPs, so there was increased utilization on the line drove those as well. In terms of -- so that’s why the utilizations came down and there’s still sizable amount of dry powder in the system that’s being is that rates are low. Equity evaluations in the public market rebound. Equity evaluations are rich. So there is -- especially from institutional PE. So there is additional interest in the PE market as an attractive investment opportunity. So actually the LPs especially institutional LPs are looking to deploy money. That brings up the deal activity and due diligences that are 80% done virtually, just anecdotally talking to our clients. So you would expect the activity to remain healthy in our pipeline to some extent reflects that as well, but the utilization probably in the mid-to-high 30%s. But it’s hard to anticipate the deal timing.

Great. Thank you.

We’ll next go to Lana Chan with BMO Capital Markets.

Thanks. Good morning. Just a couple of follow-up questions. One on the expense side, the efficiency ratio guidance, I think, previously you had talked about low double-digit expense growth, with the new efficiency ratio guidance, is there any update on sort of the expense growth rate?

So we’re very pleased that it’s probably high-single maybe low-double, but because of some of the savings that we do think we’ll have for the rest of the year, it’s probably a little bit lower than it was at the start of the year.

Okay. Thank you, Mike. And then any -- is there any risk within the muni securities book given what we’re potentially seeing with some of the municipalities with the economic situation?

Yeah. We are -- our credit is always first stay on the asset side. So we have been very cautious, AA weighted average is our rating and we have been always keeping an eye on ratings, as well as the credit quality of munis bond-by-bond. So we feel comfortable with the credit underwriting standards.

Okay. Thank you very much.

And very limited exposure to at-risk sectors in significance.

Okay. Thanks, guys.

Thanks.

All right. We’ll take another question, this one from Garrett Holland with Baird.

Thanks. Good morning. I appreciate you taking the questions. I just had a few clarifications. First on NIM, like stays on forward tariffs, can you help us understand the main progression as we move to the second half and where you’d expect the margin stabilize ex-PPP at the end of the year?

So I -- we were 2.70% this quarter and given the curve is sort of where it’s at and we don’t expect any steepening, we should balance right around this level, I think, without any sort of PPP acceleration. What’s happening is you’re continuing to see a little bit of a drift lower in loan yields as the portfolio re-prices a little and our funding costs also have some room to move down as CDs mature, FHLB matures, it gets replaced at much improved rates right now. So we feel pretty stable. There could be a little bit of call it we’re in taxes right now, so there could be a little bit of extra cash early this quarter that comes down that could cause some margin to bounce around a little bit, but we feel pretty good right sort of where we are.

That’s very helpful. Thanks Mike. And then just a quick one on the efficiency ratio guide, maybe core efficiency ratio at the core very good this quarter and first half really and understand the compensation accruals and the business mix can bounce around wealth management. But you’re looking comfortable be able to come in below that mid-60%s range. Is there anything lumpier on the expense side on the back half of the year that we should be thinking about?

We don’t see anything lumpy in the back half of the year. We lowered the lower boundary of the range to 62.5% given the first half performance and some of the things that we’re just not incurring right now, but it feels like that’s a good range. And the other I’d say is this, if you ran the margin up to 2.65% to 2.75%, that equates to about a 2% difference in your efficiency ratio. So they’re actually pretty much in line with 2% together now.

Thanks, Mike. Appreciate that detail.

All right. Next question is from David Chiaverini with Wedbush Securities.

Hi. Thanks for taking the questions and thanks for the details on page 15 of the release with the loan industry information. I was wondering how much of the PPP loans to hotels and restaurants went to your existing borrowers versus new relationships in the quarter?

Very few borrowers actually, most are deposit clients and I would note that a good portion also -- a third of our business lane is a nonprofit. So a good portion where the deposit nonprofit clients about a quarter of our PPP loans that went to our non-profit clients, so limited exposure to the hotels.

Okay. Thanks for that. And then my second question is on deposits. You’ve had success and mentioned about the success with the digital account openings. Could you talk about the stickiness of these online accounts versus the branch source deposits?

Sure. Actually, it speaks back -- it goes back to our model of doing more with our existing clients. So what we have seen during the pandemic flight to service and safety. A part of the -- a majority part of the deposit growth is coming from clients doing more with us and aggregating their accounts with us. And we enabled them and empowered them to open their accounts online if they choose to do so. We also have senior hours in our box strategies in the PDOs in our branches if they choose to come in. But at the end are doing -- not losing our clients, doing more of it and being responsive to them and the referrals that are coming in from the clients, whether it’s digital or PDO, they are the same robust trusted relationships that are coming because of the service our colleagues provide. So we feel comfortable with this stickiness and stability regardless of the channel. It’s just more of an empowerment of our colleagues and clients.

Great. Thanks very much.

Thank you.

Okay. Your next question comes from the line of John Pancari with Evercore ISI.

Good morning.

Good morning.

I know you’ve given us the -- you have given us the LTV in your slide deck given your release for your commercial real estate portfolio and you indicated that they remain very low. Do you have those LTVs that are updated for the current backdrop or the origination? I know you’ve disclosed the 46% for CRE and 53% for multifamily, do you have updated?

Those are at origination, John, and so they’re not currently updated. Yeah, and in many -- in much of the portfolio given the age they have gone up since origination before starting to come down at this point.

Okay. Got it. Thanks, Mike. And then related to that on the commercial real estate side, I know industry commercial real estate delinquencies have jumped sharply for CMBS facilities and when you look at some of that data there’s a pretty sharp spike that we’re seeing. Are you seeing any signs of distress or to that magnitude in your portfolio that -- and if so, was it being kind of staved off by the forbearance? So if you can just give us a little bit of that backdrop what you may be seeing? Thanks.

As far as our port -- our CRE portfolio is concerned, very low loan-to-value ratios. For example, if you look at the second quarter originations as an example, it was at 43% LTV and very strong debt service coverage. So given the strength of the cash flows and the collateral, we feel comfortable with the credit quality of our CRE portfolio. And these are smaller loans, these are not large loans, so average sizes are quite small as you can see in our investor presentation.

Okay. And then my last question, and sorry, if you’ve already talked about it, but the decline in the investment advisory fees in the quarter, how much of that was tied to the market, as you noted in the release versus asset flows?

It would have been tied to the market and it’s based on March 31st values. So it was already sort of locked in at that point. Client flows have been positive sort of both first quarter and second quarter.

Got it. Okay. Thanks, Mike.

All right. We’ll take a follow-up question from Ken Zerbe with Morgan Stanley.

Great. Thanks. Hey, Mike. Just actually I had a follow-up question to Jared’s question on provision expense. I think I heard you say that this quarter’s provision expense was indicative of kind of where it should be going forward. First part of my question is, are you talking about the $30 million reported or the $40-plus million of sort of core exit the reversal?

Yes. It’s a fair question. I’d say $40 million is probably the upper bound. Again, it depends on the economy and how it progresses.

Got it. Okay. And then the second part of the question is like and I know First Republic is very unique in the sense that you just don’t have credit losses. But can you elaborate how much of the $40 million, are you talking about this quarter, last quarter, actually related to sort of CECL adjustments versus just your needing say $40 million of provision expense to account for the lifetime of losses on the new loan originations. If you break those pieces out, that would be really helpful?

Yeah. So it’s -- that’s a very complicated thing to do to be perfectly honest with you. So, because there are there are probably five different elements that go into the reserve. Growth would not have been $40 million, I will say that. Growth is typically a much lower amount and then it’s been adjusted higher given the changing economic outlook.

Okay. So presumably if you assume $40 million continues then you’re assuming the economy gets worse every single quarter going forward, are you say, it doesn’t…

Like…

… I just want to make sure I understand that in context with CECL.

So go back to what I said, it was an upper bound, which means it could be lower also.

Got it.

But we do have growth that does play into that.

Understood. Okay. That helps. Thank you very much.

All right. And we did have one more question we’ll take that from Brock Vandervliet with UBS.

Oh! Thanks for the follow-up. I know in the past you’ve kind of more aggressively scaled up and down your CD exposure and you touched upon this that there may be further scope to ramp that down. Could you talk a little bit more about that as it did drop $2 billion or so in the quarter?

So CDs still remain an attractive funding strategy. It’s part of our attractive funding strategy and more than half of the time, we end up deepening our relationships with our CD clients given the amazing service our colleagues provide. What we have seen during the pandemic is a flight to service and safety. So the strong checking growth coupled with the strong money market savings and check -- money market checking growth. So that’s why we have been paying less attention in our CD promotions and let that to roll-off as they mature. And the raise -- the remaining term has come down significantly as well, which is less than five months right now in the CD portfolio.

Less than five months. Okay. Got it. Thank you very much.

Thank you.

All right. It looks like we have no further questions at this time. So I would like to return the call back over to Mr. Jim Herbert for any additional or closing remarks.

Yeah. Thank you all very much for your time today. We appreciate it. Have a good day.

That does conclude today’s conference. We thank you everyone again for your participation.