FRC (2021 - Q1)

Greetings and welcome to First Republic Bank's First Quarter 2021 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. I would now like to turn the call over to Mike Ioanilli, Vice President and Director of Investor Relations. Please go ahead sir. Mike Ioa

Thank you and welcome to First Republic Bank's first quarter 2021 conference call. Speaking today will be Jim Herbert, the Bank's Founder, Chairman, and CEO; Gaye Erkan, President and Board Member; 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 which 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 available on the bank's website. And now, I'd like to turn the call over to Jim Herbert.

Thank you, Mike. Good morning everyone. We’re off to a very strong start in 2021 with terrific growth in loans, deposits, and wealth management assets. First Republic’s differentiated business model continues to perform very well. In addition to strong earnings, we're quite pleased today to announce a 10% increase in our quarterly dividend to $0.22 per common share per quarter. This is our tenth consecutive year of quarterly dividend increases. Since 1985, First Republic’s success and durability have been grounded in a culture of taking care of each client one at a time, while continuing to operate in a very safe and sound manner. Our long-term steady approach has led to consistent success for a wide variety of environments, including this unprecedented pandemic. We are extraordinarily proud of our team's dedication, hard work, and commitment to client service and to each other throughout this period, and it's been absolutely amazing. A key part of our success is to take great care of our people who in turn take great care of the clients. We're pleased to have recently increased our company-wide minimum wage to $30 per hour, up from $25, which we instituted in 2018. The unwavering dedication of our clients is also the reason for our latest client satisfaction level as reflected in very strong 2020 Net Promoter Score. This strong score once again validates our client service model. Our Net Promoter Score actually improved during the year and remains more than twice the U.S. banking industry average. Client satisfaction among those who identify us as their lead bank is nearly 2.5 times the industry average. This satisfaction level leads to long term deep relationships, and more referrals, which are the ultimate drivers of our growth. Let me summarize briefly the first quarter results. Further loans outstanding were up 24% year-over-year. Total deposits grew 37% year over year. Wealth management assets were up 59% year-over-year, and they now exceed $200 billion. This growth across the enterprise drove a very strong financial performance.

Thank you, Jim. It was a terrific quarter that benefited from continued organic growth across the franchise leading to strong net interest income and wealth management revenues. As Jim mentioned, this is the direct outcome of the exceptional service provided by our caring colleagues and the resulting satisfied and loyal clients. Over the past year, while working mostly remotely, our high touch service model has been further strengthened by our continued focus on technology and process improvements. For example, we implemented new digital features that further empower our clients, including the ability to connect with their personal banker directly and securely through our mobile app. This digital to human service delivery provides greater convenience by allowing our clients to bank in a way that is customized to their needs. Today, more than three quarters of our clients are using our mobile app. Importantly, our clients know that there's always a trusted human at the heart of their relationship with us, even in the case of our digital experience. We are a people first organization and have always believed that our exceptional service starts with our colleagues. With that in mind, we continually do more to support and empower our colleagues so that they can be their best.

Thank you, Gaye. As Jim mentioned, we run the bank with strong credit capital and liquidity at all times. In the first quarter, we're pleased to have raised $914 million of net new Tier 1 capital, including both preferred and common stock. We issued the Series L Preferred Stock and redeemed the Series G during the first quarter. Following these two actions, we expect our quarterly dividend on preferred stock to be approximately 24 million going forward. We also raised 331 million of common equity during the quarter, and as a result, we expect our diluted share count to be approximately 179 million in the second quarter. We are very pleased with the progress of our COVID loan modifications. At March 31, COVID modifications were down more than 75% from their peak and now represent less than 1% of the bank's total loan portfolio. Let me touch on this quarter's provision for credit losses. Historically, the bank increased its loan loss reserve by approximately 20 million to 30 million per quarter as a result of loan growth. This quarter, however, we reduced our reserves by 15 million, as the loan growth related provision was more than offset by two positive factors. First was a substantially improved economic outlook since year end, which largely offset any necessary provision for loan growth. Second, was the resumption of regular consistent loan payments, following the end of the COVID modification period. For some perspective, since we adopted CECL on January 1, 2020, we have recorded 142 million of net provisions over five quarters, while only recognizing 3 million of net charge offs. Net interest income was up a very strong 5% from the fourth quarter, and 25% year-over-year. This reflects our robust growth in earning assets. Our net interest margin for the first quarter was . This is down from the fourth quarter, due to the elevated cash position resulting from our exceptionally strong deposit growth. We continue to affect our net interest margin for the full-year 2021 to be in the range of . Our efficiency ratio for the first quarter was 63.5%. We're very pleased with given the extraordinary revenue growth in the quarter and over the past year that our expenses have remained in-line with said revenue growth. We continue to expect our efficiency ratio for the full-year 2021 to be in the range of 62% to 64%. Our effective tax rate for the first quarter was 21.9%. Under current tax law, we continue to expect our tax rate for the full-year 2021 to be in the range of 20% to 21%. Overall, this was a great quarter, and a very strong start to the year.

Thank you, Gaye and Mike. First Republic’s time tested straightforward business model remains very focused on delivering extraordinary client service while operating quite safely. The model continues to perform very well. We'd be delighted to take any questions. Thank you.

And we'll take our first question from Steven Alexopoulos with JP Morgan. Please go ahead.

Hey, good morning, everyone.

Good morning Steve.

My first question is for Mike Roffler on NIM. So, just given where liquidity levels now sit as well as the shape of the yield curve, do you think the NIM has now bottomed and Mike, how do you see the NIM trending through the year given the range you just reconfirmed?

So, the first quarter, as we mentioned was 2.67% and impacted by very strong cash levels given the exceptional deposit growth. And so, it is depressed a little because of that. If you go back to the fourth quarter for example, you know cash was about 7 billion and the margin was about 6 basis points higher, go back to that level and our margin for the first quarter is a little bit higher than 2.73%. And so, cash is elevated now. As you know, tax day has been deferred a month, so it's May 17 now. And so typically what happens is we have a liquidity buildup and then it goes out to pay the federal and state taxes until you’d see a little bit of an upward in the margin just from liquidity being reduced.

Okay. So, it sounds like NIM from here should trend modestly higher, right, as that liquidity draws down a bit.

If liquidity draws down, I think that's right.

Yeah. Okay. And then, on the loan side, Jim, for years, you pointed out that the company operates in many states that are supply constrained, right. With that said, all we're hearing now is that nationally, real estate is supply constrained. There seems to be a much more pronounced issue. I'm curious, could this constraint impair your ability to grow mid-teens this year or is it just enough share where you don't think it'll be a factor?

Good question, Steve. I think it won't be much of a factor. A couple of reasons. One, although we've done very well, we're still a small part of the markets that we're operating in. And particularly, if you think about dollar share as opposed to unit share, because a place like San Francisco is very constrained, but the prices are strong. And the movement around the sale and transaction volume is down a little bit because of supply constraint, but the pop-up in rate and prices, I think as well – as soon as COVID fades into the background will pick up volume. It's already beginning to do so. New York is a really good example of that. The volumes in New York have picked up considerably in the early part of the year. So, I think we're going to be fine.

Okay. And then maybe one final one. Maybe for you, Jim, it looks like most of the COVID impacted loans are moving back to paying full principal and interest. Are there any segments of the portfolio where you're not seeing loans on deferral, resume full payment that you would call out for us? Thanks.

Not really. The restaurants are slower and the hotels are slower, but they're coming around. And so, I think it's pretty much across the board with those two exceptions, and they're not zero. They're just trending more slowly.

Okay, great. Thanks for the information.

They’re small parts of our portfolio. Well, those are just small parts of our portfolio as you know anyway.

Yeah, got it. Thanks, guys.

And up next, we'll take a question from Dave Rochester with Compass Point. Please go ahead.

Hey, good morning, guys. Nice quarter.

Thank you. You guys had some tremendous deposit growth this quarter, well above that H8 pace, which speaks to your ability to continue to take share there. I was just wondering if you had any sense for how much of that came from stimulus this quarter. And I know 2Q deposit trends are normally a little soft with the tax base that Mike you just mentioned. I was just curious if you're still seeing some momentum in inflows there just given the economic backdrop, but you're still expecting to have this deposit growth this coming quarter, despite some of that softness? Thanks.

Let me take that. Hi. So yes, the deposit growth has been exceptional, and it was very well diversified, primarily driven by consumer and non-financial business clients, and a healthy mix of growth between new clients, as well as deepening existing relationships. I'll also add that the average account balances are up in general in the mid-teens for both consumer and business clients. Like all banks, we have been the beneficiary of the increased systemic deposit funding, but we're very well positioned because this environment has afforded us unique opportunity to engage new clients and prospects, and we remain confident in our ability to grow and fully fund our long growth going forward.

Okay, fantastic. Maybe just a quick one on the borrowing side. I know you guys have mentioned last time expecting 5 billion in maturities this year. I was just wondering about the progression on that, and then what kind of opportunity you might have based on some of those down as you roll into 2022 as well?

You know, Dave. So, at the end of March, we've got about just under 4 billion of FHLB that comes due this year. That rate is just under 1.80%, and you know three-year money right now is around 55 basis points. So, you know, if you refinance those down, there is some benefit to that to help protect the margin and keep it in that range that we just talked about.

And any sense for next year as well, in terms of maturity?

Yeah, excuse me. Another, just under 3 billion at about 1.5%.

Okay, great. Thanks. And then switching to there, I know there's been some concern in the market on your ability to maintain strong loan growth trends, just given the expected slowdown and mortgage activity this year, but you guys clearly continue to execute on growing that very nicely this quarter. Can you just talk about the trends you're seeing in that market today? And what your outlook is, as purchase activity continues to ramp up here in 2Q?

Yeah, the economy rebounding has also led to continued strong demand across all of our markets. Our pipeline is up strongly year-over-year. Our six week rate logs are remain robust, they're higher than last year. And the composition of rate logs, purchase rate logs are up significantly, the refi rate logs are down slightly. But refi always constitutes a great opportunity for us to get new clients. So, we remain confident in our mid-teens guidance, because business overall is very strong.

Yeah, great. Sounds good. Maybe just one last one on margin. Were you guys seeing new loan yields at this point and in securities purchase rates just given the uptake we've seen in the curve? Thanks.

Sure. The – so the – on the marginal side, the asset side are coming in and high twos. So, single family 2.75% to 3%, multi-families and CRE more 3% to 3.5% range. And on the securities side, are high 2% around 3%, and government agents HQLA is 1.5% to 2%. So, the marginal side on the asset side coming in around 2.90%. And then the marginal cost of funding, as we have talked about the FHLB as well earlier, about 20 basis points or better. So, we remain confident on the 2.65% to 2.75% range for NIM for the year, and not to forget strong organic growth across the entire franchise. The NII is what pays the bills, the net interest income, and we have been very pleased in the strong growth and leverage offset some fluctuations in NIM.

Right. Alright, thank you very much. And up next, we'll take a question from Ken Zerbe with Morgan Stanley. Please go ahead.

Alright. Great. Thanks. Maybe first question for Mike. In terms of the reserves, if the outlook continues to get better for the economy, how much more room is in your reserves that could potentially come out? I guess, I'm just trying to figure out like how much of sort of the pandemic is still reflected in your ?

So, it's a good question Ken. So, there's on the – call it the quantitative forecasting side, where, you know, all banks are looking at an economic outlook. We're pretty much back to where we started on that aspect, pre-COVID. So, I don't think there's a lot of room on forward-looking economy, because it's been such a strong recovery. And the second thing, and this is maybe harder to see is, every prediction we made before, didn't end up as bad as you thought it might. So, the portfolio is just that much stronger. There are a few COVID modifications that have some specific allocator reserves to them, but those are relatively modest in nature from this point going forward. And so, we would anticipate if we kept growing the portfolio that there likely is some positive amount of reserve that gets recorded in future periods.

Got it. Understood. That helps. And then, in terms of the expenses, obviously it takes up higher certainly as well. Can you just talk about some of the new investments, you guys are making in a franchise, like something over the last 8 quarter, so that there is, you know, sort of the new initiatives, specifically on the technology side?

Yeah, I mean, one of the things we're doing is, we're obviously progressing through the core conversion in those costs, you see a little bit of an increase in professional fees and some of our compensation costs are tied to that. That's a big one for 2021 from a project standpoint. There's a very starting of the Hudson Yards expense in the first quarter, just in March, that'll start to pick up here in the second half of the year. And then, you know, the third one that's maybe not as self evident is, given the revenue growth that you’ve mentioned, there is a variable nature to, you know, a bit of our compensation that's tied to the revenue growth, be it in wealth management fees, of a very strong checking growth that we've talked about, and loan volume, which year-over-year, I think is up about 50%. So, all those things, sort of drive the expense growth that you see, which has matched revenue growth nicely.

Got it. Understood. And then just one last question. In terms of the deposit growth, obviously, it's incredible. I don't think there's any question about that. And you guys normally have sort of very up sloping trend when it comes to growing deposits, but when we think about the magnitude of deposits have come onto your balance sheet, like I guess in second quarter, there could be some volatility given tax payments, totally fine. But when we think about the next several quarters, can you just talk to us about some of the factors that might drive that up or down from here? I mean, outside of your normal growth. I'm just wondering, to what extent like how much, if there's any excess in there just given, I don’t know, I mean, just given what's happening with the economy where some of that growth could potentially be transitory? Thanks.

Hi. So, on the deposit side, you're right, so the tax outflows are shifted to May now, so May 15. So, we're going to see some tax outflows coming in. And some of the average and median account balances , and it's about mid-teens higher, both consumer and business side year-over-year, that is benefiting from the stimulus in the market as well. But we are very well-positioned to help manage client needs, across different macro environments with both on and off balance sheet liquidity solutions and optimizing our funding mix overall, whether it's the deposit side of Fed, which is about 90% of our liabilities and beyond.

I’ll just add to that for a second. And our emphasize something Gaye has said, there's an unusually high savings level in society and general, it shows up more consumer deposit, but it’s there in business as well. The liquidity, the general liquidity in the system from all the stimulus is ending up in the banking system. And we've gotten, I think, a bit more than our share of that, because of the way that we operate and the trust the clients have in us. But nonetheless, as Gaye has said earlier, the average account size in the bank is up. And what we don't know is, how much of that is temporary or permanent. We are guessing that a fair amount of it will be spent, and that's become economic stimulus. And that's of course, how the system works. So, the last time we've seen anything close to this was a while ago. And in fact, I've never – we've never experienced this level of stimulus before, but it will flow out into the economy in due course. So, our deposit growth in the future will not be this high.

Understood. Alright. Thank you very much.

And up next, we will take a question from Bill Carcache with Wolfe Research. Please go ahead.

Thank you. Good morning. Could you discuss what overlaying a strengthening economy and the second half of 2021 would mean for the trajectory of your growth? Could that be incremental to the trends that you're seeing now? Just curious how you're thinking about that?

It's a good question, Bill. I, you know, it's going to be supportive of growth, of course. I think that the growth rate we've experienced this quarter as a relative number is high, actually, mostly, in part because of the base we're operating with on a comparison, but also, the housing market, which is, you know the bank is still strongly driven by single family loan level volume, which we liked very much. It's a very safe asset class that we've managed to work very successfully. And I think that's going to continue. The supply constraint will be the primary limiting factor there. But we're taking share rather regularly to. I think a strong economy means stronger loan volume, generally speaking, is , hard to say, but directionally, it is stronger.

Thanks, Jim, that's helpful. I wanted to – separately shifting to expenses, I want to ask a follow-up question, you guys have expressed confidence in the 62% to 64% efficiency ratio target for 2021, but could you more broadly speak to the longer-term sustainability of that range? We've seen, over the years a bit of upward creep in your efficiency ratio for different reasons, since you guys went public, but it would be helpful to know whether you think that 62% to 64% level can hold because that would suggest that more of your top line growth can drop to the bottom line without pressure that we've seen in the past from expense growth, outpacing revenue growth, hopefully your thoughts on that.

I think the last couple years, we feel like we've been in a pretty good and consistent range, you know, 62%, 63%, 64%, you're right. If you go back to our early public days, it was a little bit lower as a smaller institution, you didn't have as many infrastructure and regulatory expectations when you're below 50 billion. So, we feel like we're in the right range, because it allows us to continue to invest further the opportunities we see ahead of us in our markets for growth. And the great client service, we continue to deliver all those things, you know, lead us to this pretty consistent range we've had the last couple of years, and feel good about given the opportunities that exist in our markets.

Understood. So, all else equal, if the rate of expense growth relative to revenues can hold in that level, then we should see more of the top line growth drop to the bottom line versus history when expenses maybe grew a little bit faster? Is that sort of a reasonable thought process?

I think so. But I think that it's also, you know, we think about stability and consistency over long periods of time, right. And so, the margin has been pretty stable, you know the last couple of years, our efficiency also. So, we're investing at the pace at which our revenues are growing to support client service, and to continue to grow the bank. And that's how we think about it.

If I could add for a second to that, if you think about it, managing growth of expenses and revenues aligned in a 15% to 20% growth company is very different than cutting expenses in a 5% growth bank in order to improve results.

That makes sense. Very helpful. If I could squeeze in one last one, just out of curiosity, has any of your wealth clients expressed interest in gaining exposure to crypto assets? Any thoughts on how you guys are thinking about the potential emergence of crypto as a potential asset class? You know, in light of the Coinbase IPO today, that would be helpful to hear just high level how you guys are thinking about it?

Sure. I'll take that one. We're approaching the crypto or digital asset ecosystem that optimal care and focus on safety, soundness, and compliance like everything else. So, we do not lend to crypto companies. Clients however they can invest in crypto related funds through their brokerage accounts where we do not give fiduciary advice of such digital assets. And we're also assessing potential costs to the partners to help our clients the regular purchase and as well as do more comprehensive aggregated reporting for those. But again, as I started, given our foundation of safety, soundness, and rapid pace of the industry evolution they're approaching it very methodically and conservative while accommodating our clients.

Extremely helpful. Thank you so much for taking my questions.

Thanks.

And up next we'll hear from John Pancari with Evercore Partners. Please go ahead.

Hi, good morning. This is Tom Stephens on behalf of John Pancari. I just want to ask a quick question. Regarding loan originations, there was a slight drop off in the multi-family in the quarter, just want to get your guys thoughts on when originations going through 2021, specifically regarding the multifamily portfolio, thank you.

So, we have been mostly active during safe deals, mostly refinance that experienced owner managers that value our service and our relationship model. So multifamily has been a resilient asset class on both coasts. And our rate logs are – actually the six-week rate logs are up year-over-year. So, there's strong momentum and the vacancies are coming off of the elevated levels. So there's signs of improvement that we're seeing, and it's the resilient asset class. So, we'll continue to be active in that with safe loan to value ratio, so we're very conservative as, you know, credit underwriting.

Okay, great. Thank you for taking my question.

Thanks.

And next question comes from Chris McGratty with KBW. Please go ahead.

Hey, good morning. Mike, last quarter, you talked about the efficiency benefit by about a point from COVID, and that making its way back into the run right over the course of the year, I guess, give an update for that in terms of the pace of these differed expenses that didn't occur last year, and maybe contextualizing this quarter's efficiency ratio in the guide? Thanks.

Yeah, I mean, I think this quarter’s efficiency, you know, one thing to remember too is, the first quarter is our highest period for payroll tax and 401-K, right. So, there's elevation from that that in the past is in this quarter is typically added about a percent. And then that obviously smooths out over the year. Relative to pandemic benefits, you know, they're dissipating a little bit. Travel is still down, but it's, you know, $3 million or $4 million a quarter down. So, it's not a big number. Marketing and advertising has been lower, because we have less events, that'll start to probably pick up the latter half of the year as things start to open up more. So, it's probably a little bit less than it was a year ago. One, because expenses started reducing in March last year, so your comps are starting to be more normal; and second is, obviously the revenue base is much higher, so the impact is just less.

Okay, that’s great color. And on the – just kind of switching gears, capital call loans were up nicely again in the quarter, can you just speak to, kind of your outlook for that business, given all the liquidity has been injected into the economy?

Sure. The environment for PE and VC, both fundraising, deal activity and exits continues to be very strong. The fundraising is robust, even when done virtually as cash rich investors are looking for returns. And it provides ample capital for investments with over 2 trillion of private capital dry powder to stay on the sidelines, and it feels deal-making at a pace that actually exceeds pre-pandemic levels, despite the high valuations and funds are also realizing gains via multiple channels that as equity market sales to buyers and specs. So, as a result, and as you guys know us so we are on the writing with 90 to 180 day repayment terms with very strong and with known relationships on the personal banking side. So, it feels they're pleased with the growth, continued growth and commitments, as well as comfortable with our underwriting standards.

Okay, great. And maybe one just housekeeping item. The BOLI income last couple of quarters, is this – just about the run rate, we should be using a quarter.

Yeah, we have done some purchases over the last couple of quarters and so 16 million, 17 million is a pretty good run rate.

Thanks Mike.

And up next, we will take a question from Arren Cyganovich with Citi. Please go ahead.

Thanks. I was hoping if you could touch a little bit about the urbanization trends and how that's impacting clearly. Clearly it's not impacting your growth. Are you retaining those clients that say move to, you know, on the West Coast to Idaho or East Coast to Tennessee, you know, maybe just comment a little bit about what you're seeing within multiple, I’m sorry, between single family there?

Sure. It's a complicated issue, as we all know. What we're experiencing, almost daily is a regeneration of the cities. New York, San Francisco, LA, Boston are all recovering incrementally and measurably, almost every day. Companies are beginning to announce return to office programs that are actually a little more robust, I would say, than we expected. The housing demand in the cities is now back. The prices are lower, which is a quite stimulating demand, which is good and rentals are down. And that's pulling people back in as well. There is some movement to Texas, Florida, Wyoming, etcetera, driven probably by tax policy, but also by opportunity. And that hints kind of continue. But it's not going to be the incremental element that changes a San Francisco or New York in our opinion and observation.

And in folks that are moving out of your market, clearly, it doesn't sound like there's a huge amount that you're losing, given the growth there. Are you actually retaining those customers ?

Sorry. Yeah, we do retain them. We do retain them. Very seldom do we lose them. With digital banking, free ATM service, everything else, and a banker that they trust, we keep them the distances. The distance is no longer a distance.

Yeah, just to add to Jim's comment on that side, actually, we are doing the mobility study of our clients every year. And majority of the movement we are seeing is within our markets to reinforce Jim's point. So, whether it's moving from San Francisco or New York to places like Florida, as seen a lot of moving in and Wyoming, and some are moving from city centers to suburbs. So, we are in Manhattan as much as we're in Greenwich as well, or Fairfield County. So, we're able to serve these clients. And again, to reinforce Jim's points on digital investments and technology, for those who moved outside of our markets, which is the immaterial portion of that mobility, our continued investments, digital and technology allows us to serve them with some exceptional service, given the human trusted advisor at the heart of the relationship has many years of trust.

Thank you.

And up next, our next question will come from Casey Haire with Jefferies. Please go ahead.

Yeah, thanks. Good morning, guys. I had a question for Mike on the securities book, looks like you guys, you know, just based on the average balances in the period and that you took advantage of higher rates in March, just wondering, given the improved liquidity position, is that something that you're going to look to aggressively continue in the second quarter here, or was that just a one-time deal? Just you know, size of the securities above?

Yeah. So, as you know, we are very steady when it comes to investments. So, we have two ways: A, we look for opportunities; B, we also take into account first the lending opportunities to clients, and we want to keep it match book. So we're slightly asset sensitive. So that drives the investment philosophy on the securities portfolio. To your point, rising longer-term rates in the quarter allows us to opportunistically purchase municipal bonds in our investment portfolios. We've made about $3 billion purchases close to 3% TY, just short of it. And it's strengthened the NII growth and given the marginal funding cost, it was right in the evident the NIM guidance. Our liquidity position remains very strong, it's driven to great extent by the HQLA purchases that we are doing, as well as the elevated cash levels. That's why you're seeing 15.3% HQLA ratio today, which to some extent reflects both the purchase and the elevated cash levels. So, we feel comfortable with and above that, we're going to be disciplined to keep it above that level.

Great, thanks. And on the next gen strategy, those 35,000 households, I think you guys have said historically that, you know 10% of that has made their first home purchase. Is there expectation that that accelerates given, you know the move to, you know – for home purchases, and you know, I would think that would be – there'd be a nice tailwind for that client base to pull for that life moment.

Yeah, great question. We’re actually very pleased with the success of our millennial strategy. Let me start with your question first on the deepening existing relationships with our expanded toolkit. Actually, I'm pleased to say that now over 20% of our millennial clients are now mortgage clients of the bank, which is fantastic. So, it's up from the 10% that you have quoted. And at the same time, the millennial household acquisition continues to be strong as well, up 13% year-over-year in a year where we launched the personal line of credit products at the same time. So, the team did a great job bring that to market. So with the expanded toolkit with experienced trusted advisors, where the millennials value, the advice, and the digital to human connection and mobile first strategies that we deliver, we are confident that we are getting the same grade clients younger in their lives, which is key for private banking.

Okay, great. So, your – 20% of that household base has converted or is converting towards First Republic single family product, or is there any attrition to where you're losing that to a competitor? Like I know you guys have a 2% ?

It's in line. Yes. So, to confirm over 20% of our millennial clients are now mortgage clients, whether they did with us or we their loan. And in terms of attrition, it's in-line with our overall clientele and serves the household attrition, as well as the lead bank percentage, and the lead bank NPS for millennial households are very much in-line with our overall household, which is more than double the banking sector.

Great, thank you.

Thanks.

Up next, we'll take a question from Andrew Liesch with Piper Sandler. Please go ahead.

Good morning, everyone. Thanks for taking the questions. You’ve covered most of what I wanted to go over already, nut on the loss management front, there's been a – from what appears to be an increase in press releases of recent hires, I’m just curious like what's been the trend of conversations with wealth managers coming on and joining First Republic. Has that accelerated compared to the prior quarters? And I think that will be appreciated.

It's continued momentum on the wealth management hiring. So we hired three new PWM teams in the first quarter. And our reputation continues to be very strong, and we expect to continue to add high quality teams, but the pace of it is really, you're seeing rate reversing coming in and referrals from our existing wealth managers as well. But the pace is really driven by the cultural fit. It's really important that we are the right fit for them and they are the right fit for the First Republic culture. So that's going to be the key for the pace of the hiring, but we're seeing great – high quality teams and varying conversations.

Got it? Thanks. You’ve covered my other questions.

Thanks.

And our next question will come from David Chiaverini with Wedbush Securities. Please go ahead.

Thanks. Couple of questions for you. Starting with a follow-up on the capital call line business, so it was up in the first quarter, about 500 million, but growth slowed from the fourth quarter in which growth was about 2 billion. So, it's curious, you gave some commentary about the health of the overall like private equity, venture capital, fundraising, all of those are strong, but just curious as to what was really the driver of the slowdown in the first quarter versus the fourth quarter, particularly if this is reflective of an industry slowdown or anything else?

So actually, both are outstanding and commitments went up. And both commitments went up and the utilization went up. So, it'd be outstanding is up because of those two factors. So, we are seeing continued growth, the deal activity, and the variations from quarter-to-quarter it also changes. But again, as I said earlier, we are seeing tremendous growth and the environment is quite strong on all fronts, whether it's fundraising, deal activity, or exits. And we're seeing a healthy mix of existing clients deepening more relationships, but the fund formation and the deal activity in general, it does fluctuate from quarter-to-quarter, but it's continued growth year-over-year, as well as quarter-over-quarter.

I think also, one thing I highlighted earlier is the 90 to 180 day term. So, if – I think David you references a big quarter from September to December with some of the roles are getting paid back in the first quarter, right, because of the short duration of the draw, they come back. And so I think when you consider that even growing as we did, continues to show the strength and depth of the market.

Yep, that's helpful. Thanks for that. And then shifting gears, you mentioned about how the – it sounded as if the pricing on loans is consistent in the first quarter versus the fourth quarter. And that's despite the 10-year treasury yield increasing nicely. I was curious if you can comment on how much of a timing lag there could be, before we see an improvement in loan pricing, particularly on the mortgage product?

Yes. To your point, it does lag, the lending rates to mortgage rates to treasury yields sell off. So, year-to-date we have seen mortgage competition continue to be strong, which kept the pricing stable. So, rates have been very much in-line with the beginning of the year. That said, we'll see a benefit eventually as the yield curve steepens. And especially as a multifamily activity continues to gain more traction and more momentum, but again, we do A+ credit with A+ pricing, a lot of relationship pricing there. So, we're pleased that the marginal yields, the high twos, coupled that with about 20 basis points on the funding side on the marginal funding side. So, that falls right in the NIM guidance statistics to . That's coupled with strong safe organic earnings asset growth, the net interest income follows.

Thanks very much.

Thank you.

And our next question will come from Jared Shaw with Wells Fargo Securities. Please go ahead.

Hi, good morning, everybody. Yes, most of the stuff we've said, I guess, like just circling back on the provision going forward, you referenced the 20 million to 30 million sort of standard provision for growth. You know, as we look at origination activity, so being stronger, and maybe a shift where non-single family residential makes up incrementally bigger parts of that origination, that's still the right range to use, or should we be looking at like maybe more than 54 basis point range during to account for growth?

Yeah. So, I think the 20 to 30 does sort of give you that latitude if the mix were any different. I think we've been, I think this quarter 70% of our growth was single family. And that obviously has a pretty low reserve estimation on it. And you actually did mention something else. We're – on January 1, 2020, we were 54 basis points of reserved loans, and we're right back there. At this time, this feels like the right range. And then depending upon mix, it could go down or up ever so slightly, most likely.

Okay. Great. Thanks. And I guess maybe just looking at the pipeline today, you mentioned 65% of single family origination with refi, is that – are we already seeing that sort of bleed out in the pipeline here? Did most of that happen at the beginning of the quarter, or is there still a little bit of rate from all in the, you know, in the pipeline?

Yeah. We see that as well, that refi usually picks up a bit as rates are going higher as well. But overall, when you look at some last year, so our refi rate laws have declined slightly from last year. But at the same time purchase rate logs have shown tremendous growth, which is almost double what they were from a year ago. So, and there's a strong spring buying season coming in. We talked about the economy rebounding. Refinance does slow down over time as rates are going up. But it has a natural floor because we do a lot of refinance of clients, new clients for the bank from other institutions. So, overall, given all these dynamics, we remain confident in our mid-teens long guidance for the year.

Thank you.

Thanks.

And next we will hear from Brock Vandervliet with UBS. Please go ahead.

Hi, good morning. I wasn't going to make . On the wealth management side, a couple of people have touched on this just very strong growth. I just want to make sure our model doesn't get off sides with your own expectations. Is there anything else you would call out as special this quarter in terms of the balance growth that we should know, going forward?

So, let me start with the AUM growth and I'll turn to Mike for the fee side. So, it's very much in line. So, we have seen majority of the growth come in from net client inflow, deepening existing relationships, as well as the net client inflow coming in from the new hires. And about a third of our AUM growth came in from the market change. When I look at quarter-over-quarter, and on the fee side, we have seen tremendous growth across all the .

Yeah, maybe just one sort of cleanup thing, since you sort of referenced it that way Brock. The first quarter, if you recall, last quarter, we had a year-end performance fee from one of our funds that we operate. This quarter there's a modest adjustment to that, because we sort of finalize year-end numbers and review it. That added just under $4 million to our investment management fee this quarter that, you know, we’ll recur. So, your starting days is probably closer to 115 instead of 119, as you go forward. And then factor in AUM growth on top of that. And just as a reminder, most of that, you know, most of that 4 million does fall through our expenses also.

Okay, great. I appreciate that color. And so the similar question on occupancy, which has been very well controlled, you mentioned the Hudson Yards Office a couple times in the prepared remarks, can you dimension that expense?

Yeah, so our occupancy rights been pretty consistent the last few quarters, 56 million, 58 million. There is a modest amount in March in the way we recognize rent costs for Hudson Yards. It will ramp in the second quarter more fully. So, you'll probably see occupancy jump. Let's call it 8 million, roughly from today's first quarter level.

Got it. Okay, great. Thank you. That's it. Very helpful.

And up next, we'll hear from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Great. Thanks for taking the questions. Gaye a question for you. Just a clarification on some comments you made earlier. With the shape of the curve, the steepness of the curve the way it is today, would you expect earning asset yields to slowly grind higher over time?

Yeah, with the yield curve steepening, that is what we are looking forward to. But as I said, competition has been quite strong. So that kept pricing credit stable at the beginning of the year. So that's why the high twos, the range has been kind of where the asset side deals have been coming in on the real estate side, but I mean, the when you take 10 year Fed Funds today, compared to a year ago, compared to no steepness in 2019, that really shows how strong competition has been. And we're doing A+ credit and relationship pricing. We're seeing more of the relationship coming through to us, given the service, extraordinary service our colleagues have provided during the pandemic. But again, small fluctuations in that NIM is largely offset by the strong safe organic growth across the franchise, which we have tremendous growth opportunities across all the foreign markets.

If I could add to that, just for a second. If you look at our investor deck on Page 34, we have a long historical NIM chart in there. And that's really worth noting .At this point, we're at a low point in that history at 2.67. But the high point is also about 3.15, 3.13. So we operated in a pretty narrow and stable range. That's one of the keys to the franchise is this long-term stability and predictability.

Right, good. It gets to my next question. It's maybe a bit of an odd question. But what do you think would have to happen for deposit costs and funding costs to start to go back up? It just seems like there's so much liquidity that maybe even arise in short rates wouldn't send your funding costs back up. But what would have to happen for that to move back up?

Well, let me answer this. So, the stimulus obviously, we talked about the average balance and the median balances being up compared to a year ago, it's kind of translated through the savings rate in the accounts. So that could basically, to some extent reverse itself. More competition for funding as rates are going up, but again, you know, as we listen to the Fed Chairman, that it's going to be a while before the short-end of the curve coming up. But hypothetically speaking, alternative, whether it's money markets, mutual funds, or other alternative competition in there, that could also yield to higher costs, but putting costs aside for a second. And the person checking is much higher than we used to have at over 6% to 7%. So that's kind of driven by the stimulus as well, to some extent. So, we're now going to have, you know, 37% year-over-year growth, which is kind of driven by stimulus. But at the same time, we have expanded our toolkit so much on the funding side deposits and beyond. We remain A+ credit on the asset side, and the safety and soundness of the bank, the funding has not been an issue, it's just a matter of the pricing, as you point out.

The matching – the core matching and the enterprise, asset liability matching within the case at a rising rate environment, benefits us slightly on that interest income and margin. And the primary reason is the thing I mentioned, which is a high percentage of checking. It looks positive in the near term, that's certainly true. And then, just one bigger picture, maybe for you, Jim, but the industry in general has a bit of a near-term loan growth problem, and it's not been a problem for you clearly. But there's this view that there's a lot of pent up demand in commercial and seen pipelines building and that we're going to see a lot of this loan growth pickup once the reopening really gains traction. Are you seeing elements of that in your business? I understand your mid-teens growth, and it's a mosaic of growth. But are you seeing elements of that in areas like commercial, for example?

No. A bit, but not too much, yeah. But we’re – a lot of the commercial loan business is really done in the CMBA market and outside the banking system too, and insurance markets. So, the banking system does not see at all the same share of commercial lending, real estate lending that is, that it used to see. I think our growth comes from client service. If you, again in our investor deck, but about 80% or more of our lending is either to existing clients every year that are doing more business with us, that's about 50% to 55%. And another 20% to 25% is their direct referrals. So, to some extent, we march inside of our business and their referrals, and not so much in the general market. And that's why our growth rate can be fundamentally different.

Okay, thanks for taking my questions. I appreciate it.

Thank you.

This concludes the Q&A portion of the event. I will now turn the call over to Jim Herbert.

Thank you all very much for taking the time today. We appreciate it. Have a good day. Bye-bye.

This concludes today's call. We thank you for your participation. You may now disconnect.