Q3 2019 Earnings Call
Greetings and welcome to the first Republic banks third quarter 2019 earnings conference call. During today's call. The lines will be in listen only mode. Following the presentation. The conference will be open for questions.
I would now like turn the call after Shannon Houston, Senior Vice President and Chief Marketing and Communications Officer. Please go ahead.
Thank you and welcome to first Republic banks third quarter 2019 conference call speaking today will be Jim Herbert the banks, Chairman, Chief Executive Officer, and founder <unk>, Eriksson, 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 assumptions for a more complete discussion of the risks and uncertainties that could cause actual results could differ materially from any forward looking statements. Please.
The banks FDIC filings, including the form 8-K filed today.
Mailable on the banks website, and now I'd like to turn the call over to Jim Herbert.
Thank you Shannon.
Very good quarter.
Thanks continues to be quite strong across your franchise.
In fact in terms of lean originations that's required for this quarter.
I'm sure a few highlights.
Total loans outstanding were up more than 19% year over year.
Well show year over year total deposits have grown 15%.
And what you shouldn't assets are up 7%.
This strong growth led to strong financial results for Turkey interface somewhat challenging interest rate environment. Both in terms of the yield curve I was wanting somewhat newbridge.
These results reinforce once again the pole exactly.
As well as a strength.
Although our active.
Client base.
And the markets in which we operate.
Year over year total revenue growth GRI approximately 9%.
Net interest income was growing 10% and tangible book. So I appreciate her has increased 11%.
I would note the tangible will drive for sure since we bought the bank back in mid 2010 has grown is a 15% compounded annually.
Our credit quality remains very strong.
Net charge off for the quarter only 4.3 million.
We added 17.
Sure loan loss reserves due to the continued growth in Oregon.
Nonperforming assets were only 12 basis points is going down.
Down a bit from last quarter.
Capital is also very strong or tier one leverage ratio was 8% to some temporary.
And this interest rate environment net interest margins declined a bit.
However, net interest income has continued to grow very nicely mark to talk about these animals.
The low rate environment does however represent a terrific opportunity to attract high quality new households, true homemade refinance.
This was the driver of our record loan volume.
We continue to grow safely and organically.
First Republic produced net interest income growth from 10% for the quarter.
As we headed in the fourth quarter economic conditions in our urban coastal markets continue to be quite good.
The pipeline also remains very strong and we're optimistic about the level business.
Overall, it was a very good quarter.
Let me turn the call Liberty Guy Eric on prejudice.
Thank you Jim you're very pleased with our third quarter results ended consistent growth across the franchise.
Leverage nation volume was a record over $11 billion for the third quarter, which was up 18% over last quarters also record of $9.4 billion.
Single family residential volume was a record at $4.9 billion for the quarter.
I would note that the average loan to value ratio for single family residential originations during the quarter was a conservative 58%.
The decline in interest rate has shifted the mix of home loan originations two words refinance.
Refinance activity accounted for 63% of single family originated in the third quarter.
We're quite pleased that the majority of the refinances I four loans previously held at other institution.
We financed remains a great opportunity for first Republic take fly or new clients.
Most importantly credit quality remains very strong.
We continue to maintain our conservative underwriting.
Do you have not and will not compromise our credit standards.
Business banking also had a very strong quarter.
Business line commitments were at $20.6 billion.
Up 29% year over year.
This is a key metric for business banking, because it reflects our ability to acquire new client relationships and deepen existing ones.
The utilization rate of these business lines fluctuates regularly as the as noted on previous calls.
During the third quarter utilization rates decreased from 37% to 33%, resulting in a slight decrease in outstanding balances.
Turning to funding it was another quarter of very good growth.
We are pleased total deposits were up 15% from a year ago, and we continue to maintain a diversified deposit funding base.
Checking deposits remain strong.
And represented 58.5% of total deposits at quarter end.
Isn't as deposits represented 58% of total deposit.
Consistent with the prior quarter.
Turning to wealth management assets under management grew 7% year over year to $140 billion.
Our client centric culture, and our integrated banking and wealth management model continue to track very successful wealth managers.
Since our last call. We are quite pleased to have welcomed for new wealth management teams.
In Palm Beach, Los Angeles, Silicon Valley, and the New York Metro area.
We look forward to welcoming their clients to first Republic over the next couple of quarters.
We are pleased as well, but continued diversification of our wealth management business.
Insurance and foreign exchange fees for example, our collective split up 40% year over year.
Finally, as Jim noted our client acquisition continues to be strong.
Our success in household acquisition.
And our low household attrition rate are the result of our ability to consistently deliver exceptional client service.
Our client satisfaction level as measured by the net promoter score remains more than doubled the banking industry average.
Overall, we're very pleased but the quarter across the franchise.
Now I would like to turn the call over to Mike Roffler Chief Financial Officer.
Thank you Guy, let me start with an additional comment about wealth management.
On our last call. We said, we expected to retain approximately 2 billion of assets related to the second quarter departure of some wealth managers.
In fact, we're pleased to have actually retained approximately 3 billion, while completing the resolution of their departure.
In mid September we announced the redemption of our series D preferred stock which occurs this Friday.
Following the redemption, our ongoing quarterly dividends on preferred stock will be 10.2 million.
For the fourth quarter of 2019, it will be approximately 10.7 million.
Our liquidity position remains very strong as high quality liquid assets were 12.7%.
Total average assets in the third quarter.
We will continue to maintain HQ allay to average assets above 12%.
As Jim mentioned, the inverted yield curve continues to have an impact on net interest margin.
Which declined to 2.80% for the third quarter.
The perspective since our last call. The 10 year Treasury fell from about 210 to as low as 145.
As of course rebounded a bit recently.
We currently expect net interest margin for the fourth quarter to be about to 75.
And therefore, we expect our net interest margin for the full year 2019 to be approximately 282.
Importantly.
I would note that net interest income was up 10% year over year.
Continues to be powered by our strong growth.
The efficiency ratio was 63.8% for the third quarter.
The full year of 2019, we now expect our efficiency ratio to be about 64.5%.
Our effective tax rate for the quarter was 18%.
For the fourth quarter, we expect the banks effective tax rate to be between 20 and 21%.
For the full year 2019.
We expect the effective tax rate to be about 18%.
Overall this was a very good quarter.
We continue to grow loans at a strong pace, which drives the growth of net interest income.
At the same time.
We continue to effectively manage the growth of our expenses.
Both of these contributed nicely to this quarter's 10% year over year EPS growth.
Thank you know will turn the call back over to Jim.
Thank you go and Mike It wasn't very good third quarter, and we have strong momentum heading into the fourth quarter of year.
What were the banks 34 year history, our business model have succeeded in a wide variety of yield curves and interest rate cycles.
As always we focus intensely on superior client service.
Our critic Walden capital strength also remain excellent.
We continue to execute our straightforward.
<unk> model.
Look forward to the fourth quarter. Thank you very much we'd be happy to take questions.
Thank you.
I'd like to ask a question. Please signal by pressing star one on your telephone keypad.
Using a speakerphone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
In press Star one to ask a question.
So just a moment until now every when the opportunity to signal for questions.
Our first question will be from Steven Alexopoulos with JP Morgan.
Good morning, everybody.
Well, that's going on them NIM.
Mike I appreciate the updated guidance for Q, if we assume the former poultry. Good just about two markets do you think the NIM could stabilize in the 2.75% range beyond the fourth quarter are you thinking about that.
So I think it's a good question I think one of the questions. It falls that is what will be the shape of the curve because obviously in the last week at steep into bed, which is a bit beneficial, but I think to 75 in the fourth quarter is sort of a good launch point for next year, and then will really depend on the shape of the current going forward.
Okay.
Okay. That's helpful.
Over the past year, when you look good loans from 19% deposits have lagged the 15%. So long as deposit ratio is now over 100 do you guys expect the need to ramp deposit growth like the more match loan growth moving forward.
I imagine would put some pressure on NIM.
So I'll take that one disguised speaking I, Steve Oh onto the actually very pleased that but the mid teens guidance, they've yet given before that the deposits have grown organically at mid teens change do you notice it say relationship model N b seize opportunities with our clients as they deepened differently.
Yes, and ship and I would also note that Ah foodservice things that have come out today on their earnings calls so our total funding just to take it beyond deposits because your lunch and deposit from that not every bank is as such our total funding rate was at 89 days.
This points compared to the three foodservice top three banks at 138 today disclose it's hard to 5% lower cost of total liabilities and almost three times gross.
On the deposit side, so very pleased with that.
Okay.
Thanks, Guy and maybe I missed one final one for Mike Roffler in terms of C.. So I was hoping this I get delayed but looks like it's coming.
We expect the day, one impact from seasonal for you guys and how should seasonal impact provisioning on a quarterly basis. Thanks.
Yes, so I'm we've done we're in the middle of our third parallel run at this point the impact to our reserve looks to be immaterial, Oh and the capital impact is just a few basis points.
Sort of a reminder, that our history of credit is very important when you think about the life of loan.
It could cause provisioning to be maybe a little bit more up and down in a given quarter, depending on your economic outlook, but as a growing company. We've already had a provision that's been sort of greater compared to others because of our loan growth. So I don't think the deltas that significant.
Okay.
Terrific. Thanks for taking my questions.
Thank you our next question from Casey Haire Jefferies.
Yeah. Thanks, Good morning, guys one of the touch on efficiency, obviously, a pretty good job this quarter.
I'm just wondering how sustainable is this going forward. It you know that obviously the shape of the curve is is tougher for nems margin, but you guys. Obviously did very well. This quarter. You know did you defer a lot of things are wars or you just just did better than you expected.
So we're certainly mindful of the shape of the curve in the pressure on net interest margin, it's about the pace of growth in expenses.
And we're trying to contain certain of our you know head count is slowed a little we really are deferring anything important and that has a big impact on client service, but if they're all the things that maybe can wait and we can contain ourselves. That's what we're trying to do to better match all the revenue outlook in sort of the growth in net interest income.
Okay, Great and then just on the capital front.
You know that it sounds like you guys are are not going to refinance the recent redemption I'm just wondering.
No the tier one leverage is what you guys look that way what at what point would that ratio prompt you to try to act on it and address capital.
Well, it's Jim we would Ah, we don't expect them at least immediately re real place the preferred or reducing but as you know a refunding rather as you know a we are very opportunistic when it comes a capital markets the growth of the enterprise usually dictates that we're very comfortable for capital right now Richard.
The current credit climate, but we won't be untouched, we'll watch a capital markets very carefully.
Alright, great and it just last one of the tax rate.
If I'm reading the release correctly it looks like the stock option expense benefit if memory serves it expires next next year and third quarter 20 is is the is the right tax rate around 21%.
Yeah. So the options, mostly will be exercised by the end of the second quarter in 2020, and so you're right toward a 2020, 1% is a good after that go forward.
Excellent. Thank you.
Thank you. Our next question will be from Ken Zerbe with Morgan Stanley .
Great. Thanks, good morning.
I'm sorry, Mike just a follow up on the stock option question. So it's the right tax rates 2020, 1%. If I heard you right. If I said guidance for the fourth quarter was also 2020, 1% are you assuming no additional stock option exercises.
No there's still a little bit left but they were a bit larger in the third quarter and based on what's left that benefit should drop off a bad.
Got it still sub sorry, but just to be clear on your guidance. So if the better drops off should the tax rate does the 20% to 21% include the expectation for on going your additional stock option exercises.
It does include an expectation in the fourth quarter for a very modest benefit because there aren't a lot of options left.
Got it okay. So that definitely helps and then just in terms of loan growth I mean, obviously this quarter is amazing in terms of how strong you guys grew just talked about the Alex especially for resi mortgage given the rates are still let's call fairly low.
I mean, just somebody that could continue on the resi side for leasing quarter, two or three more.
Yes, it could I mean, it really depends on rage. The as Scott indicated we were 60% refinance which is a shift over the last few quarters from 55, 60% purchase.
The refinance markets are obviously heavily rate driven.
We take aggressive advantage of them because as I indicated we can pull clients most of the quote refinances actually new clients to us coming from other banks and they are refinancing out that bank.
And gives us an opportunity to bring in new households, which we take as you know historically quite aggressively because of the acquisition of.
The quality household, but you have for 20 or 30 years, it's a very special moment and so we see the opportunity lasting for at least a couple of quarters.
Perfect. Okay. Thank you.
Thank you. Our next question will be from Brock vandervliet with you'd be yes.
Oh, great. Good morning, just coming back to Steve said keeps initial question on them for for next year.
Forward curve has a a modest steepening throughout the curve, but certainly twos tens into the into year end 2020.
That would.
Bode well given your earlier comments I would think we could also see.
Some relief on the funding side as you get the full benefit of deposit repricing late in 2020.
Could you could you speak to that.
Yeah, I mean, I think as the fed has moved Oh, there is an ability I think on funding to have some slight modest reductions I think one of the things that also as part of that first question. We are growing company and so we may not have as much sort of leverage to that because your funding and growing.
Balance sheet, and a growing loan portfolio and rates are obviously, just lower overall and so that's driving strong competition and the lending book and you're not really able to raise rates a great a mile and so I think that's why we're.
You are cautiously optimistic on the curve steepening a little bit.
But still competition will be a big driver I would add to that just so the though what you saw in this quarter is the power of growth.
I would note that some other institutions that have reported this morning already had a net interest income growth that was actually negative a couple percentage points were up about eight or nine and the power of growth come through in this environment.
I'm not only do we acquire new households, but the balance sheet growth would come from the intrinsic growth through the current clients, we already have and the acquisition new households is very powerful and far out ways of a few points some compression on them.
Thank you and I in Q4, Mike should you get more other benefits in the lower FHLB costs.
Oh I'm sorry, the on they are there any short term type funding, we do it definitely it gets the benefit there and new advances were taking out as they come to as they roll off they're slightly lower than what rolls off but the bigger benefit probably doesn't come to that till the middle of next year when those start to roll off.
Great. Thanks for the color.
Thank you. Our next question will be from John Pancari with Evercore partners.
Morning.
On do you on the loan growth front just.
I appreciate the color on the residential mortgage side and everything one lets see how you're thinking about gross in the business loan growth say look like it declined on a linked quarter basis. If you can give us a little bit of color. If that was to be see private equity portfolio that impacted that and what type of trends you're seeing there. Thanks.
The the Big <unk> primary and Guy mentioned this in or conversation the prime or a metric on business banking longer term is in fact the growth of outstanding commitments.
And that's been up year over year 20, 829%. The volatility lies in the unpredictably volatile, but until the lives in the utilization of primarily are just in time lines of credit for venture capital in private equity funds, we were down this quarter like she noted that we.
What about 33% utilization versus about 37.
But the long term trend of commitments and a business banking relationships alone.
Outstanding amounts is up and it's running probably I'm over a two or three year period regularly in the mid teens low twentys.
All right that's helpful and just remind us what the new money loan yields are for that.
For the VC private equity portfolio right now.
[noise] on the capital call lines. It ranges from Prime minus 50 to prime minus hundred.
Okay, great. Thank you and then one last topic on the on the credit side I know I'm last quarter, you had to about 100 million dollar relationship that moved on to non accruals related to a spec real estate credit on the West coast, you've just give us an update on that credit if.
You've seen a resolution and then separately any other developments in the real estate portfolio worth mentioning thanks.
No other developments and girls portfolio worth mentioning actually and Ah that that particular situation is still about status quo, it's still paying its current.
And there are some action on the sale of the homes, but nothing it was close yet.
Okay. Thank you.
Thanks.
Thank you. Our next question will be from Jared Shaw with Wells Fargo Securities.
Hi, good morning.
Good morning, good so a couple of follow ups here I guess on the on the single family residential portfolio could you share with us with the new origination yield was in that portfolio as well as what percent or arms I'm in the portfolio.
They are all they let me comment on the yields on New York originations are in low trees on the single family residential to think seek rate lock yield is in line storage nation yields in the third quarter.
And the pure adjustable on the whole loans is a pretty modest percentage are typically tied to LIBOR, but it's pretty modest.
Okay, and then I guess when you look at the.
The 275 margin guidance is that assuming that we continue to see a the single family residential growth at the you know relative pace. It is a sort of taking a susie through the end of the year or is that more of a static analysis or where the balance sheet is right now.
It does forecast sort of volume and new business into the future and right now the pipeline in the backlog of single family is pretty strong and given where rates have been and so we do expect it to continue due to grow at a nice taste.
Okay, great. Thanks, and then.
Looking at the brokerage revenue this quarter, you know really strong quarter [noise].
Break that down in terms of you know how much is coming from new clients originations versus increased volatility and it was taking advantage of the market and done inside a good level that too.
Jump off of for the for the rest of the year.
So I think the latter thing you said it was important obviously went the volatility in the quarter. It did drive our clients to be a bit more active and look at a different products and offerings.
So it maybe a little bit high is you had in the fourth quarter, depending on what volatility would be.
But we're really pleased said it did have a very strong result for the corner.
Great. Thanks very much.
Thank you. Our next question will be from Arren Cyganovich with Citi.
Thank you on the single family said, we're seeing gain on sale margins increased for the industry yet it doesn't seem like you're kind of getting back into the motive of selling those are those mortgages or.
Is there any.
Got to maybe selling some and in helping fix some of the mismatch between them the loan originations and ER and the deposit growth.
We did he had a very small modest amount of a sale at about 13 basis point gain but the secondary market is still a bit disconnected from the mortgage origination market. So I don't see opportunistic and as you see the opportunities will definitely take advantage of that.
Okay.
And then.
I added question recently from investors are about the Unicorn valuations coming down obviously, some weakness in Silicon Valley is how would that affect your.
Is this a if at all.
Probably very little if any impact.
We don't lend into that sector directly and generally not even indirectly very much.
It's currently going to have some ripple effect on some funds, but we don't we don't anticipate any real direct effect at all.
Okay. Thank you.
Thank you. My next question will be from Aaron Deer, with Sandler O'neill and partners.
Hi, good morning, everyone.
It looks like you're starting to see little bit of some benefit and bringing down the deposit costs. I was wondering if you give us maybe with the spot rate was on deposits at September Thirtyth relative to June Thirtyth, and then also where they stand today.
So the spot trade for 930 was mid Sixtys and well you ask about the relative so last quarter. If he said low seventys and our deposit rate quarter leverage came in at 65 I'm. So the mid Sixtys spot trade for 930 does not yet fully to flag the.
ER September rate cut.
Okay. Subsequently, though done you have continued to bring that down.
Yes, but all the all revert back to the NIM and the and I I guide instead, we have provided on that that is all they said.
Okay, and then Mike you mentioned LIBOR Im just curious.
I think you guys have discussed switching to so for fun, new originations and just curious to know what you know if some of the volatility that we've seen there has caused any cause you to rethink the direction that you're going in terms of you know what what your time rates do going forward.
Yeah. So good question or just to clarify we're not a tying any loan originations are indexes to so for a maybe for just the reason you sort of hinted out is it is a bit volatile online does move around and if you think about our business being consumer based in great part that may not be a good thing.
For consumers and so obviously, we're studying it but there are other indices. So you can use like the a one year CMT for example that behaves in a much more logical fashion from our perspective, when we think consumers also benefit from that.
We had been originating on that index for the last several months.
Okay terrific. Thanks for taking my question.
Thank you. Our next question will be from Christopher Mcgratty with Ti Brent and wins.
Hi, good morning.
Mike If I look to 2020 the source of deposit growth is gonna be important for the industry. How should we thinking about the composition of getting the deposits next year I mean last year was a lot of Cds for the industry, but with rates moving down I'm wondering [noise].
Your thoughts on mix mix change.
So in 2019, a the barbell strategy, but seen checking and C. D have worked out pretty nicely. That's still continues to be case, having said that bid right at the short term rates coming down it actually looks our money market.
Taking in money market savings to be more attractive than it used to be a and also makes sense. We have discussed the other borrowing base looks more attractive to so we'll be doing it that we all they said dynamic optimization across all the funding sources and we see strong organic growth given the household acquisition and retention.
Great.
And one more on on the spot rate I'm wondering guy could you talk about securities purchase in the quarter. The yields that you purchased a in Q3 and maybe what you're looking at today. Thanks.
Thank you. So he has purchased a about $2.1 billion and total securities. A this is the for older run off and that was about call. It mid three and mostly in the I mean, some nice and some h. Kelly.
And net net the growth was about 1.2 billion dollar and the mess and portfolio.
And that was Q3 now how about you kind of where the rate drops and recently how those are they still kind of in the mid threes or maybe low threes.
Yeah for the H.P.L.A. more high twos.
And for me, a that would be treated santa quarter percent.
Great. Thank you.
Thanks.
Thank you [laughter] question will be from Matthew Clark with Piper Jaffray.
[noise] wanting.
First question just on the other noninterest expenses just wondering if there's anything unusual in that line item this quarter.
Nothing unusual it's a reflection sort of our containment you know when you hire a few lets people you have less recruiting costs, you have less sort of internal events and so it's been a real conscious effort on part of the team to really focus on what has the most value for internally for our colleagues.
To add I would just say everybody in the bank has done a fantastic job and that speaks to the entrepreneurial spirit of course Republic, where grade prioritization, everyone pitching and then being really agile.
Okay, and then just on.
Operating expense growth for this year it looks like you're going to you could come in slightly below your.
Prior guidance of low to mid teens growth.
For this year. Thanks can you speak too.
Expense growth for next year, knowing that there's going to be some step ups for the expansion into Hudson yards, just give us a range of expectations maybe.
Yeah, so on on Hudson yards.
No the the costs so to speak will probably not start till late 2020, and even more fully in 2021. So I don't think that causes a big step up next year or we're going to end this year sort of in the low double digits.
It looks like a little bit less than as you mentioned on low teens for next year, obviously, we're still going to try to contain ourselves while continuing to invest in the franchise.
I'll have sort of more to say I think as we get towards end of the year on a relative growth percentages.
Okay, just last one for me.
On the.
So we never trade on on originations not just SFR, but can you give us the overall rate in the portfolio.
This quarter.
Yes, if you look at real estate lending, which is obviously a bulk of all we've we do it's about three in a quarter.
And then when you factor in business banking and others and it goes up you know sort of 10 12 basis points from there.
Great. Thank you.
Thank you. Our next question will be from Lana Chan with BMO capital markets.
Thank you good morning, <unk>. They did your margin guidance in fourth quarter, including a potential October rate.
Okay.
It does include one more rate cut for the year, yes.
Okay. Thank you and then I guess.
A question on your brokerage fees any potential impact from the discount for going down to hear on conditions.
Oh, so very little we do not earn a much in the way I think it's less than a million dollars from online commissions and obviously, we will be asking accordingly.
Compared to what's happened in the market in there in the near future.
Alright, Thanks, Mike.
Thank you. Our next question will be friend, David you've rainy with Wedbush Securities.
Hi, Thanks, a question about your commercial real estate office portfolio with co working space companies haven't come under pressure with the we work IPO delayed how much of an impact if any do you expect to slow down in the growth of co working space to have on your office portfolio.
I'm.
Probably not very much we have we have no. We work go spaces any billings were blown on.
So that particular situation has no impact on us at all.
To the extensive they're not going to grow in commercial real estate for wireless if oh, it'll take a little it'll put a little space of Muslim them back on the market, but I don't think it's gonna be much of an impact to be honest with you.
Okay. Thanks, and my follow up could you provide an update on your Milenio strategy and the student refined products.
The there shouldn't be if my product in the professional loan program products are going very well on track a this year, they're running about the same as last year, which is which was a tremendous growth here and the deposit to loan ratio inside that portfolio was stronger this year than it was which is indicative of before.
Back to the that we are their full service back worse, we're right around 25000, such households at this point into bank and we actually couldn't be more delighted with the progress so far that whole activity.
Thanks very much.
[noise]. Thank you at this time I'd like turn the call back over to Jim Herbert for closing remarks.
[noise]. Thank you very much thanks, everybody for listening today, we appreciate it.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
[noise].