Q1 2020 Earnings Call
[music].
Greetings and welcome to first Republic by first quarter 2020 earnings Conference call.
Today's conference is being of course.
During today's call the lines will be in listen only mode.
Following the presentation at the conference will be open for questions.
Join the queue. Please press star one on your telephone keypad funny points joining the call.
I would now like turn call over to shot of Houston, Senior Vice President and Chief Marketing and Communications Officer. Please go ahead.
Thank you and welcome to first Republic.
First quarter Twentytwenty conference call.
Right well be Jim Herbert the banks founder Chairman and CEO.
That's it.
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 see the banks FDIC filings, including the form 8-K filed today.
We are available on the banks website.
Today's speakers joining from different locations. So I would ask that you. Please be patient if there any technical difficulties.
Now I'd like to turn the call over to Jim.
Thank you very much and good morning, good afternoon, everybody Needless to say since our last call in January we called my team and done much has changed a great deal about the U.S. and the world.
That's very challenging times, we've been particularly focused for college and Archie Meritage.
Since 1995 first republics 45 years and consistent profit building and durable they had been grounded in a culture of taking very good care of our college, serving our call what clients. While also maintaining strong capital and very strong credit all of which continues to differentiate Turkey.
Public at this point.
Our strong relationship based banking model has been built to withstand times of uncertainty.
Has done so successfully.
We are supporting taxable our communities lending nonprofits and are participating in the small business administration to pay pack protection program.
Given current conditions, we're also providing pretty pleased friendly laser for also offer flexible terms for those clients that are directly impacted.
You'll hear more about each of these really guy.
Let me turn into the first quarter results.
Total loans outstanding were up more than 23% year over year, we continue to expect mid teens loan growth for the full year.
Year over year total deposits grew 15% and have even been a bit stronger recently.
Well no one can abstracts are down another 1% year over year in spite of market conditions.
Total revenue over the years growing 13.5% net interest was up 11.4%.
And importantly, tangible book value per share increased 12% year over year.
Safety and soundness have always been but keep part of first republics Deanna.
This is reflected on our strong capital our strong liquidity.
Sure on credit record.
For instance over the past six months, new tier one capital raised no, which approximately $500 million. This includes a common stock offering just this past January which of course at this point seems lifetime.
We always seek to we seek to always maintain enough capital to support approximately two years ago without access to the capital markets.
Importantly, we never use and will not use our capital for share buybacks.
Liquidity remains quite strong.
Hi, quite a big illiquid assets were 14.8% of total average assets.
Oh Conservative underwriting is a core pillar of the bag and a key to our results.
No charge off for the quarter war with $202000.
Non performing assets at quarter end, we're only 10 basis points.
Well perspective since July 2010, when we bought the bank back almost 10 years ago, we have had cumulative net losses of approximately $38 million.
As of this quarter around we had $542 million a loan loss reserves are 14 times coverage of this 10 year cumulative experience.
Our longstanding and ongoing focus in high quality credit is particularly important in cranes are.
Approximately 80% of our loan portfolio, because your real estate collateralized.
No the bar your ratio on this 80% is very conservative 55% overall.
Let me give me some sort of perspective.
He did more into why your ratio for single family residential loans.
Well church represent over 55% of our total loan portfolio, it's below 58%.
Our multifamily loan portfolio loans about your ratio was below 52%.
Our commercial real estate loan for loan portfolio loan divide your way show is below 48%.
Okay overall, we haven't burdening or the exposure remains the areas directly impacted by the pandemic sensors. We chose hotels. These ours collectively represent less than two and a half or set of our portfolio.
We do not have automobile loans credit card loans.
We do not like last company gas companies because she knows airlines are most other travel related businesses.
The second pillar of our.
First Republic success is quite sure that's are central to our brand. We're very pleased to report that are 2019 net promoter score, which we received part recently, it's stable at a very high 72, its level of quite satisfactory makes more than twice the banking industry average and is the driver ever growth.
Times like these successful point services, even more important and create stronger bonds with our clients.
I'd also note that Warner points, very well for an extended periods of time in many cases improved credit quality and reduces risk.
The success of first Republic model lies in the experience of our management team, which has been together many years and through many cycles and are truly outstanding very dedicated colleagues.
In short.
First Republic strength lies in our well established and sustainable culture.
Now, let me turn the call over and the Guy Arconic precedent.
Thank you Jim first Republic is that people first organization dedicated to serving our colleagues clients and communities in good times and challenging times.
In the RV Guard, let me take a moment to summarize some of the precautionary steps we've taken across the organization.
[noise] into early days of the tend to make.
<unk> decisively to ensure that safety off our people and they continue to go far service model.
In late February.
For public health orders, where he she we decided to cancel or postpone klein and internal events, including our annual sales conference.
In mid March me quite successfully transition, 90% of our colleagues to work from home in less than one week.
In our preferred banking offices were closed the following guidelines from public health officials.
We instituted proper social distancing and our routinely sanitizing public areas and works basis.
We also implemented to be quotations for Klein safety and to ease the burden on our colleagues.
The significant investments we have made in technology and operations over the last two years have enabled us to provide high quality digital banking experience to our clients.
For example.
They still mortgage application now accounts for the majority of all single family mortgage applications.
It has been very affect us in accommodating the high volume of loan applications in this interest rate environment.
Our enhanced consumer digital banking platform has also translated into greater service convenience.
Clients can now do more through our mobile apps, including connecting directly with their bankers in one click.
This frictionless ditched tilted human connection is proving to be yet another aspect that's way to deliver highly personalized Klein service.
This is reflected in the accelerated adoption rate of our digital platform recently.
Hearing deeply about our colleagues clients and communities, it's who we are.
We are committed to assisting those adversely impacted by cold with 19.
In that regard, you're making thoughtful blown deferrals.
As of April 10, Klein request for such deferrals totaled less than 3% off the total loan portfolio.
As Jim mentioned, we are also active for participating in the small business administration Paycheck protection program.
Do you have been submitting applications for several days now and recently started funding loans.
To support our non profit I mean, it further yeah honored to our sponsorship commitments, even if the events for cancel due to the pandemic.
Do you have also set aside additional funds to support such organizations as appropriate.
Now, let me provide some additional comments about the quarter.
Loan originations volume was just over $10 billion.
I would note that the average loan to value ratio for all real estate loans originated during the first quarter was a conservative 55%.
[laughter] single family residential volume was three and a half billion dollars.
We finance accounted for 69% of single family residential volume during the first quarter.
The majority of the refinance activity came from clients of other institutions.
[noise] multifamily and commercial real estate lending also performed well.
Balances are up 17% from a year ago.
Turning to business banking business loans and line commitments were up 17% year over year.
The growth in outstanding balances was driven by a utilization rate of 42% as well as new commitments.
In terms of funding it was a very good quarter.
Total deposits were up 15% from a year ago.
We continue to maintain it diversifies deposit funding base.
Checking deposits increased by $5 billion into first quarter.
And now represent nearly 62% of total deposits.
Isn't as deposits represented 55% of total deposits in line, but the prior quarter.
Turning to the wealth management assets under management declined 9% from year end due to market conditions.
Our down only modestly year over year.
Yeah, we're quite pleased that nets Klein inflow of $5 billion during the quarter.
Also during the quarter, we welcomed two new wealth management teams the first Republic.
Our first quarter results demonstrate the stability and agility off our operations during this challenging time.
It also highlights the power of our service culture, and the creativity and care of far people.
Let me close by expressing our sincere gratitude to all of our first Republic colleagues now I would like to turn the call over to Mike Roffler Chief Financial Officer.
Thank you Guy a.
Let me begin by discussing the impact of Cecil which was fully adopted this quarter.
Our provision for the first quarter was $62 million.
This included 48 million for loans.
As well as 14 million for unfunded loan commitments.
She was included in other non interest expense.
The perspective this provision expense is over four times the amount we recorded in the first quarter of last year.
I would note that our reserves under Cecil incorporate a change in the economics forecast linked in the first quarter to reflect the conditions caused by the pandemic.
Maybe just a brief comments to build on what human Guy I discussed earlier.
Our very low loan to value ratios are very important when we estimate expected credit losses over the future wife alone.
In addition, a.
A reminder of a few of the things that we don't do.
Credit cards auto loans blending to oil and gas.
Airlines and pretty limited retail exposure.
For this quarter only.
Let me compare the provision undersea sold.
The previous incurred loss nothing.
Under our prior methodology.
Our provision for the first quarter would've been approximately $40 million or 22 million less than under Cecil.
As Jim mentioned, our capital position remains strong.
In January we successfully completed a common stock offering which raised 290 million in new equity.
As of March 31st our tier one leverage ratio was 8.46%.
Today, we also announced a once a increase in the quarterly dividend 20 cents per common share.
Our liquidity position also remains strong.
HQ Olay was 14.8% of total average assets in the first quarter.
The H. fuel a percentage was increased by approximately 80 basis points from the elimination of the reserve requirements by the Federal Reserve in March.
Our net interest margin for the first quarter was 2.74% up one basis points from the prior quarter.
We're pleased with the stability of our net interest margin at a time of significant interest rate volatility.
While earning asset yields were down six basis points from the prior quarter.
This was more than offset by the seven basis point decline.
In total funding costs.
Given where we are today, we continue to expect our net interest margin for the full year 2022, being the to 65 to 275 range.
Importantly, net interest income increased 11.4% year over year, reflecting our growth in earning assets.
Our efficiency ratio for the first quarter was 65.1%.
As a reminder, the efficiency ratio during the first quarter is typically elevated due to the front loaded seasonal impact of payroll taxes.
We continue to expect our efficiency ratio for the full year 2020 to be in the range of 63.5% to 64.5%.
We've been able to maintain a stable efficiency ratio, while providing a differentiated level of client service and continuing to invest in the franchise, including technology and infrastructure.
Our effective tax rate for the first quarter was 19.5%.
We continue to expect or tax rate for the full year 2020 to be in the range of 20% to 21%.
Overall this was a very good quarter.
Thank you and I will turn the call back over to Jim.
Thank you Guy I'm Mike.
Our time tested straightforward business model continues to be very focused on delivering the highest level on service well operating very safely and soundly.
We take a very long view, which has helped us to be successful for widely varying economic conditions over an extended period of time.
Let me just done by saying thank you to all of our fantastic colleagues. They are doing amazing job, while preserving our culture supporting each other and serving our clients for and that's very challenging time.
I never been more problems this organization and everybody else.
We'd be delighted to take your questions. Thank you.
As a reminder, please press star one on your telephone keypad Stasko question.
We'll take a brief paulson all participants to opportunity to signal for questions.
Our first question today comes from Steven Alexopoulos of JP Morgan.
Good morning, everyone.
Well I wanted to start on credit. So if we look at the San Francisco and Silicon Valley economies looks like they're getting for it it's pretty hard we've seen many many startups announced job layoffs.
Hi, just give us more color credit was obviously very good this quarter, but are you see underlying pressure specifically on residential real estate in commercial real estate just given the job losses were seen in your local markets and then maybe I know Guy you said, 3% overall forbearance, how does that break down between residential and commercial real estate.
Okay do you want me, let me start with yes, or no go to a guy, but we also have David Letterman, our chief credit officer, and armed with us and ill be glad to stuff again.
I think the we all know that this is early days and but the I've done the request for forbearances or on a pretty good early indicator and they're fairly modest but modest at this point and because and we're working with people very very I think user friendly.
Doing is a guy mxnsixty six months deferrals, which we think is good to him to get people through a challenging we don't want to become their problem.
The overall credit is holding up in its mostly has to do with our very conservative underwriting for all these years is as you and others won't know [laughter]. The alone. The valuations are indicative of that but also behind that or credit numbers FICA scores and love it sounds like the borrowers in their liquidity positions, but let me turn this over to David.
When we give you kind of an overall view of the credit picture David.
Great. Thank you again very much before I on the specifically answer your question I just wanted to take a moment and stepped back and talking about our credit philosophy, which is remain very consistent the banks bounding 35 years ago and have one shot for the last 25 years I've been chief Credit Officer.
As you know we've always been very conservative longer we're always underwriting of our cash flow liquidity position and ability to repay coupled with a very conservative vathree against collateral.
As always found that the best protection of our long principle is a low loan to value ratio.
That's currently stands at 55% across our entire real estate portfolio.
The weighted average LTV for single family portfolio is a conservative 57%.
As mentioned earlier, our real estate portfolio is approximately 80% or entire loan portfolio.
We have found that borrowers have higher down payments are stronger financially, which makes for a very safe loans.
Our goal has always been to underwrite to zero losses, one loan at a time.
Never compete by dropping standards, we compete with high client service and price for overall relationships.
Our approval process for new loans is a unique partnership between credit Crane bankers, who knows their clients very well.
And our season creditor perverse, who know our select markets very well.
Underpinned by a clawback provision that's been in place and 1986.
It's important to know that 90% of our loans since the banks founding were originated by bankers were still went first Republic.
The system that I, just described has gotten us through a number of challenging times.
Including the early 90 or one dotcom boss.
Oh wait O nine great recession.
Well, we don't know exactly how this pandemic will play out.
I feel confident that its system and in the strength of our loan portfolio.
And Steve Your question about Bay area home prices and job losses.
It is a little too early to tell the rate of new home sales has declined a lot as people have been sheltered in place, but we're very confident in the strength of our borrower profile average like of about 760 lots and post on liquidity and constructed the ban.
Right got collateral and we think this portfolio will hold up well as we go through this challenging economic period.
Okay. That's very helpful actually I'm, thanks, David [noise] for Mike Roffler, I'm sort of shocked that you're maintaining higher NIM guidance. Please go ahead.
But can you give us a sense, where new loan and securities yields coming in I'm trying to figure out how NIM NIM guidance hasn't changed.
Oh sure no Steve I think I think there's two parts of it is one.
While our loan yields have declined a little bit and earning asset yields are down a little bit we've been able to move pretty quickly on or funding cost to match that decline.
Well two in the first quarter, if you look at real estate loans.
They came on the books at about 330, which was you know pretty close to what it was last quarter.
And I think the recent activity given some of the dropping rates a little bit lower than that.
But not a lot and so the loan yield decline is really driven in part by the floating rate portfolio.
Which has impacted the quarter and will impact the second quarter a little bit.
Along with a little bit of new business, but we're in a board a pretty good place, where we've been able to reduce or funding costs to match that pretty well.
And then it securities yields Mike.
Yeah, I can chime in so on the securities on H.P.L.A., It's about mid twos, two and a half for Sun and me needs on a T Y bases piano quoted the t. and they have compared to a single family loan Petite and multifamily theory, two to three and a half change on the new money.
I think your diet and then maybe just one final one on the lending side I.
No the refi volumes were strong in the corner and that it will likely close in Twoq. You can you give us a sense what the volumes look like and one Q. So if you get a sense for this pipeline and how social dispensing like are you going to impact the purchase market in twoq. Thanks.
Sure I'm I'll start our cars long pipeline actually remain strong and it's up compared to the beginning of March 10% to 15% up and single family residential volume is holding up nicely about a third so purchase volume may go down given what's happening in the markets. Every five continues to remain strong so we feel confident.
Our mid teens loan growth guidance.
The bond the backlog at this point, Steve is its nuclear bomb this point last year.
<unk>.
Okay terrific. Thanks for taking my questions I appreciate it thank you.
Our next question today comes from Ken Zerbe off Morgan.
Great. Thanks.
I guess, maybe start off this or that the Cecil provision a little bit you talked about that you did change your economic variables cousin underlie the season reserve as of you know really towards the end of the quarter can you talk about what those variables are and like how much of a recession already pricing into your your c. So reserves. Thanks.
Yeah, I think can we get obviously a move towards a recession based and Oreo late in the quarter, given what has been evolving whats pandemic.
Maybe just a couple things that impact our estimate of lost a couple of the biggest ones are home price either appreciation or depreciation at year end. When we adopted we had modest depreciation included in the forecast where that has now changed to be down a bit as we go forward.
Commercial real estate prices also were sort of modestly increasing at yearend, whereas now.
Theres a drop in the first 12 months and even the second 12 months.
All of a commercial real estate prices, so that changes sort of your outlook.
On the recession, the things that maybe arch is impactful to us as they are others will be like GDP, because we don't have a consumer.
Credit card or auto that's a very much impact it into very sensitive to unemployment and GDP growth.
For more tied to real estate values, which is why even a modest decrease in prices.
Impacts us upwards in the reserve, but maybe not as dramatically as unemployment rate change was.
Got it Okay that helps and then I guess, maybe multipart question just in terms of loan growth.
Obviously, we've heard from some of the larger banks about you know commercialized draw Downs I think you mentioned your commercial utilization was 42% seems a little higher than what it was last quarter. He's talking about you are you seeing activity from borrowers sort of hoarding cash or at least are drawing down their lines and also kind of.
And just really work into Jim's comment I think you expect mid teens loan growth for the.
Full year, which is consistent with what you had last year, but this quarter is very strong are you actually flying you're suggesting to you might see weaker loan growth in the back half of the year. So I know, it's a lot but things.
No. Thank you so let me start with the capital call lines on the capital call lines side, the increase and outstanding floods, driven both the utilization rate at 42% as well as healthy need commitment activity.
And Ah needs to comment on the utilization rate that you brought up this is mostly did she piece.
Has chosen to space out the capital calls to their Lps just sees the burden I give it back given the markets, but they all teams continue to be strong and our capital commitments at 90 to one database in general and no change to the contractual developed periods, but strong overcollateralization.
I'm, sorry, and then on the loan growth outlook.
And we'll be let me respond to that one growth outlook, where we're being conservative because of the conditions.
The initial backlog in the first quarter with indicated fueled by stronger than that but we might have trouble you I've been doing this so while I have trouble invasion of to second half of this year is gonna be a strong suffer stuff.
But I think.
Yeah, I still shaping pretty decent though actually.
Okay, Alright, great. Thank you for taking my questions.
Our next question comes from Erika Najarian of Bank of America.
Good morning, guys. This is Chris Nordling on for Ericsson.
Just a quick follow up on the capital call on conversation as we think about a potential downturn, how should we think about capital call lines. You can you remind everybody on the call. The average duration of this book and whether you extend credit that helps enhance returns the leverage for farms.
Thanks.
So we don't do I need to start, but we don't the IR enhancements line I'm on the capital calls these are mainly capital call lines to bridge the capital call. The typically nine to 180 days, it's very strong quality LP.
I'm, a strong Lps behind it and also our capital coal commitment to loan commitment a uncles capital coverage ratios are typically very strong as well and so far if you're seeing healthy activity and and continuing to treat piece continuing to work through their deals and the pipeline.
Thank you and then as a quick follow up I'm Gonna, let your mortgage conversation, we sell to big banks. This morning seed declines in common equity tier one so how should we think that's probably see superform single family with disruption in mortgage markets interdependency more extreme balance sheet.
Hi study from the big banks.
We're not likely to chase extra business.
So a big reminder, that's quite important here and it goes to Ken's question earlier.
More than 55 or 60% of our business every year as with repeat clients that are already going into the bank, that's where a big part of their growth come from that probably will not change even in these conditions might go down a little bit than not much as a percentage so were less driven by what other competitors are doing it obviously impacts as they get me wrong, but.
We're more driven by what our clients are doing and their immediate colleagues who they recommend it was too that's the main driver.
Thank you and if I could squeeze one last thing can you guys give a quick breakdown of the industry.
Of your student loan we saw customers, where they work so thank you.
Let me, let me turn that over to Oh, James Herbert who runs our student loan or lending on our Eagle banking area.
Good morning majority of our clients are in the.
Legal healthcare and financial distress industries, which should chair quite well.
Reminder, let me give some club problems as client base and the purpose of these loans are clients are young urban professionals.
With the average like old Sevenseventy.
Average income over 200000 and more than 85% a graduate degrees.
Consumer loans, the very high quality borrowers who had been the workforce for several years on average.
A reminder, we've never done and in school lending and these loans are only to refinance preexisting educational debt for those are gradually.
A refinancing offer remains very attractive rates as low as 1.95% kind of portfolio weighted average of 3.1%.
We don't charge any application origination or prepayment fees will actually be baseball was up to 2% of their original amount that we pay in four years.
We're very pleased with the quality of our portfolio and our borrowers.
Thank you everyone.
Our next question comes from Terry Mcevoy Stephens.
Good morning, Thanks for taking my questions.
First off let me start with wealth management could you just talk about what impact the first quarter. The decline in equity values will have on second quarter wealth management, and then I don't know.
As markets assumption.
Hi, I'm forward.
Let me just start with that and then I'll turn it is a guy on the overall well my son activity as a company is actually held up very well for the combination of of the flow of new money coming in from existing clients and new clients coming into the business also the mix is different not like Guy. This is a lifestyle.
So to speak to the mix in our and our wealth management, but it's held up very well.
What I'm getting conditions were please god yeah, we have varied it as Jim said, they're very pleased with the med Klein inflow coming in and as far as the fees are concerned seven to five Festa Pwc revenues.
Come from friends mismanagement, which builds based on the AIU I'm at the end of the prior quarter said, given our first quarter 2020 Fame and you land is $60 billion, we expect our second quarter friend piece to be around $8 million to $9 million, so down 9% from the first quarter.
Thank you and then just as a follow up in Jim's prepared remarks.
<unk> told you understand that has person could you. Please go ahead.
What you are keeping within two minutes person.
Hi, I'm, you're going to get in and out but I believe the question Terry was about a the that's going to have for some of the portfolio that.
I think David I can turn to you, but consisting mostly of some retail and other but David can you give us a profile breakdown.
Sure. So the Oh, you're referencing is the retail portfolio and hospitality portfolio of the bank is approximately 2.5% of the banks overall portfolio and that has an average.
Loan size of just under 3 million and immediate alongside of only one to half million.
And the average LTV is 15% and the debt coverage ratio is two times, that's a very strong say portfolio that will recover when the economy gets flowing again.
Perfect that's exactly what I was looking for thank you both.
Our next question comes from Casey Haire of Jefferies.
Thanks, Good morning, everyone I'm follow up on the pharmacy, so I.
No. This is tricky, but I'm just trying to get a sense of how conservative they're tough macro outlook was ER and driving reserve build this quarter or do you feel like it was conservative enough that.
You know next quarter or you can will require less less reserve build understanding that loan growth will obviously play a part time, it's obviously a [noise].
Fluid situation about on the macro crop.
But I can't see I think the last thing you said, it's probably the most relevant because it is a fluid situation.
We looked at it.
We looked at house or as I mentioned before home prices are a big driver and so we felt it was a conservative a appropriate view of the forward looking economy, but obviously things are developing very quickly.
And also the government is doing a lot to try to help.
Consumers and things like that so you sort of have all these factors in play, but we felt it was an appropriate view of home prices at the time for this quarter.
Got it Okay, and just big picture question on the Jumbo market a competitive landscape it does feel like to [noise].
The larger banks have largely backed away from from Ah from competing in the space on the topic, which is beneficial for for you all and humbled to volume perspective, and [noise] and gaining share as well as a as pricing [noise].
What do the NIM stable outlook can you guys still expecting mid teens growth how much of that do you. Just do you expect that competitive landscape landscapes remain the same for for the balance of the year or do you expect [noise].
Some of the larger Baxter to come back into the jumbo market later on there.
[noise], Yeah, I I wouldn't speculate on what they're going to be doing a really.
Needless to say, they're pull back doesn't hurt us sunny a but we basically don't pay deals we have always been very much more conservative problems in some other lenders witness the low LTV is in the high credit scores and so the amount of business, we do mostly.
Determined by our client base first and foremost and then by their direct fruitful and by our ability to up to focus on the marketplace and take a and take advantage of the demand that is there.
Okay, Great interest just last one for me the [laughter] <unk> capital management, you know tier one leverage ratio up up to 846.
So you guys had plenty of time, so you phase and the seasonal adjustment, but boy that you know given that.
It is essentially you know lower for for that that adjustment will you guys be a little bit more aggressive in showing up capital going forward or would still be I'm sort of managing to that that 8% level.
We would expect to continue that man right at that level. The main thing is.
Bill we've tried to build.
A very strong of vessels would go through a storm and we believe we have and Ah we won't we will find out a fairly soon but we believe were very good shape for it but we will not wake up with a with a capital to love under any circumstance.
Great. Thank you.
Our next question comes from Arren Cyganovich I'm safety.
Thanks, I just wanted to follow up on a net interest margin.
I guess.
But a lot longer term perspective, if we stay in this kind of.
Very low long and rate environment, I would think that there'd be some kind of longer term pressure on that in interest margin because of the heavy before she knows ready and it feels like today.
Spreads are wider you know than they had been so just wondering if you could just kind of comment about how your business might trend.
Over the next few years before and it's kind of lower for longer environment.
Sure I'll take it this is guy had to beat feel confident that our team takes a five to seven to five net interest margin guidance. They they have given assuming this is rate environment continues.
Reason being blogger and seeing some slight decline on the asset yields we have room to improve on the funding cost side as they made a the spot. This thought deposit rate is in the mid Thirtys to give an example.
Yeah, I kind of get it for the true for this year I guess I'm thinking about and I know you don't I'm not asking for guidance I'm, just trying to think of just holistically.
Yields and in the 10 years has dropped more than your deposits can possibly come down.
You know.
The coming years I'm, just trying to think about how you can mitigate that you no longer term.
They that's always is projected to so I don't want to go there too much but the home loan market, which is a 55% of our loan portfolio is holding up pretty well in terms of rate is good for consumers that it's still a decent rate and and then the as Guy mentioned previously the our investment portfolio.
It was holding up quite well so at this point when the demand for the cautious demand for more with family and commercial is still in that kind of like to the mid threes and so at that point or for that holds out you know our until there's a further reduction right, but I really don't want to speculate on that.
Yeah, and just to add the earning asset growth. So when we look our net interest income the trailer pays the bills. Our net interest income is driven by safe.
Consistent earning asset growth, so and it's like decreases in them over time and that type of scenario would be offset largely by they save credits and consistent growth.
That's that's a good point and then just lastly, it looks like you had some some mortgage loan sales for the first time in a while it was just done pretty cold there do you actually bid for for mortgage assets and do you expected to do additional loan sales.
The the intent to stay active in the second that market all though the numbers the volume varies depending on the Oh secondary market activity. We sold about 500 mine during the quarter as you know I'm after not selling very much in the prior quarters and as of quarter end being about 250 million loans held.
For example on the balance sheet, so depending on the activity mean tend to stay at that thank you.
Okay. That's it.
Our next question comes from.
Dave Rochester of Compass point. Please go ahead.
Hey, good morning, guys.
Okay.
On your deferrals was just wondering you know how your classify knows what I'm score is given the recent guidance those are still considered pass grade.
And then in terms of the requirements. Our reserving standpoint can you just talked about that as well if you had to bump those up at all.
Given the both the carriers act in the regulatory guidance. The deferrals that we're making a will continue to be accruing loans, they will be reported well as past due or [noise].
Performing.
In terms of reserve requirements, we actually haven't completed a lot as of March most of whom I've come in April.
It'll be very much a look at high as we've talked about in this call the loan to values at the individual level, a and b on any individual clients circumstance to decide if we need any increase to reserve or not as we get through that portfolio well with LTV is very low for example, if you have a 55% single family loan.
And we talk about a six months deferral at a 3.5% rate.
You end up at a 57% loan to value at the end of the six month.
That doesn't drive off a very much of a credit loss and that in that environment.
Then you mentioned six months I've seen on the language too, but I've heard you could potentially go up to a year on those deferrals is that right.
The worst starting it at the six month, because we think that's the right level of time, just sort of go through the shelter in place orders.
Dentist office to open back up business they'll come back up and for people to get back to normal and so we think that's the prudent thing to do at this point in time.
And then.
Hi, Mike.
I might add to that what we're doing we're deferring and then we're re amortizing over the life remaining wife alone, we're trying to be as fives consumer friendly as possible and our deferrals, we do not want to be the problem, we want to be the solution.
Okay, and then how much of that deferral segment is a in the process of participating.
In the P.P.P. would you guys if some of that already covered at this point.
Actually that who are generally pretty separate.
Okay Gotcha, and then on the capital call segment. Appreciate all the detail. There was just wondering if there's any concern with just the destruction of market activity that new pipelines.
Our or slowed or there's not a whole lot of future pipeline growth I know you mentioned they were working through it and that's a driver for.
Loan growth today.
But in terms of just the market disruption if if there's a new business. That's that's being added as well new investment Exxon.
Yes, So let me answer than in a twofold.
You're right as GE piece works through their pipelines and deal volume says the volume slow we would expect the utilization rate the trend back to the historical levels of mid to high Thirtys.
The same time be increase in our outstanding balances was in addition to be increasing utilization rate also driven by healthy activity of new commitments, which includes exist incline doing more of it does as well as new clients and household stay very quite acquiring and beat feel comfortable that the credit quality given down they're writing to Dow piece and cheap.
And the Collateralization. Thank you great and just one last one if I could you mentioned home prices are a driver of your Cecil Reserve was just wondering what you guys were assuming at this point baking into that for any changes in home prices at this point.
So I just say a modest decline and it's obviously something that we're gonna be focused on a as you start to see more transactions here in the second quarter, but just a modest decline sorta over the next.
You know 12 months for sure.
Okay is that going on with that.
Let me think guys about his number the markets where young they're very supply constrained. So it's not as if they had a lot of excess a home supplied to begin with.
Yep.
Very good all right. Thanks, guys.
Our next question comes from Brock Vandervliet of yes.
Thank you good morning.
I think you a you hit on the characteristics of the student loan and the professional loans managed program.
In terms of the types of borrowers but.
Could you talk about any changes in terms of the.
The credit conditions, there, where you're seeing in terms of forbearance requests any any changes in the credit stress in those two categories.
Yeah, we're very pleased with the portfolio the performance to date with only six delinquent loans out of over 25000 loans and will need two basis points of lifetime net charge offs.
On March 31st.
So far we've received 935 hardship requests.
Representing less than 14 basis points other banks total loan portfolio.
About 3.6% outstanding I still large by loan count and just under 5% about solars by dollar size.
Importantly, inquiry last week declined about 35% to 50% from the prior to reach and we are.
We're seeing good response from our clients.
Overall, we remain pleased with the kind of the portfolio on the profile of borrowers to the long term.
Got it and you've obviously never seen it.
A downturn like this since you've been in that programmable, what's what's your sense of the ultimate.
Take rates and those.
Parents option there.
We're seeing great reaction, so far from our clients number 85% of them have graduate degrees and them at the gym comes over $200000. So this is a very employable and read employable.
Borrower base not perspective, so I think that were quite you are remain cautiously optimistic about how they come through this and we're pleased with the construction of portfolio and our credit standards.
Okay. Thank you.
Our next question comes from David She have Verine of Wedbush Securities.
Hi, Thanks, [laughter] had a follow up on dependent deferrals of less than 3% of loans do you have a sense as to how high you expect us to go.
Well you know, we really don't obviously, we're a new territory for everybody James's comments that the student loan deferral requests student refinance that for all request or or or declining. It was indicative of that we're saying they wouldn't that we're seeing at the same decline and single family homes is that.
Correct.
That's correct the single family home request for Hartshorne modification and as well as other loan types has decreased by about 50% not quite 50%.
So maybe this will end up in the 4% to 5% range for the entire portfolio.
Okay, and you mentioned that your classifying them as that's accruing are you also including them in special mention or or watch list.
Oh, I would characterize them as a internal watch list. So they don't meet the definition of a special mention rolling yet.
Because we're you know responding to acquire Klein inquiry for the <unk>. The covert 19, so they'll just be track and monitor it a little bit separately.
Okay. Thanks for that and then shifting gears to deposit growth we've seen in the industry that deposits kinda surge at the end of the quarter, what's your outlook for deposits in the coming quarters.
Yes, we are very pleased with the deposit growth and especially the checking growth as well as you have mentioned so it's going to decline activate it continues to this trial again diversified followed it Chris Cline types as well as across geographies.
I mean in general second half of the second half of the year tends to be historically speaking always better than the first half getting having said that you would expect the tax outflows to start coming in around late second quarter early third quarter, given the push on the on that on the tax deadlines. So so far the.
First of all that they both availability and the diversification of our deposit funding and go optimize the overall total funding phase as we go.
Thanks very much.
Thank you.
Our next question comes from Chris Mcgratty of KBW.
Great. Thanks.
Building on that question is the right way to think about kind of medium term deposit funding.
Sources of funding, perhaps a little bit less on the higher costs borrowing like the short term down to zero is that the right way to think about the mechanics, Mike in terms of you know next for three quarters.
Yeah, they maybe.
Well go ahead Mike.
Like I don't we would leave me yeah, we would expect ours, our deposit activity to continue.
In addition to that we do Oh, so keep an eye on the overall funding as well so for instance than we did the senior debt.
Earlier this year. The then you take all the fees and FDIC into some benefit into account. The all in cost was actually pretty much on top of a that some of the FHLB advances say looks pretty close to affect us to do that so thats, what I meant when I said well look at the overall funding and then when we look at Vail.
Abilities that family there as well as the deposit rates are trending downwards, which is helping the NIM outlook does the two six to five to seven to five guidance given that mid thirtys spots deposit rate they expect things.
Great. Thanks, and maybe if I could sneak one more in on expenses I think you guys. All talked about the ability at Investor day to kind of slow discretionary spend 50 environment change and obviously, we have changed maybe.
Many sources of potential pullback in expenses I'm over the next few quarters to to stay within the decision to guide I was you laid out.
Yeah, I think similar to how we've talked about the past we're looking at things that.
I'm going to continue to help improve client service or infrastructure.
Investments and we're going to keep making those but there are things we can pull back on we mentioned earlier a reduction in events.
Both internal and external that we'll have a benefit here as we go forward during the year and then also what I call. Other projects that maybe you can be better put off to later, so we do manage that very actively.
To make sure we're doing the right things to help clients servicing or infrastructure.
Okay. Thanks.
Okay.
Our next question comes from a lot Chen of BMO capital markets.
Thanks, and good morning.
Around T cell again in terms of I think you mentioned you get filled in a recessionary scenario a into your modeling for cash I'm, assuming that Sammy interest recovery, probably modeled in back half of the year I'm wondering if you know.
Recovery takes longer to take hold I mean, you can embrace that we see another potential c. so build in to Q.
So we've been very conservative Aydar March 31st estimates of loss reserves, and obviously as the economy develops or the recovery develops and takes hold we'll update that accordingly, but I think it's it's probably too early to say because of what's that recovery going to exactly look like but we do expect.
More I'd say in the second year of a forecast recovery versus anytime in the first.
Great. Thanks, that's helpful. And then just another modeling question, Mike I'm on the personal line to payroll taxes. This quarter, how much do you I'm asking me that.
David personnel.
Oh, probably about a 15 to 18 million.
Yes, I have thank you very much.
Our next question comes from Direst Holland of Baird.
Good morning, Thanks for taking the questions have covered most of them, but I just had a follow up on the net interest margin outlook.
How should we think about the quarterly been progressing into context for your guide.
Either with the funding cost offsets you, we expect a bunch to argue decline in Q2.
While the recent actually by the fed.
So I think.
We're we're really pleased that to 74 in the first quarter on the ability to be stable, even up a basis point you probably trend stuff you know several basis points lower from here, but still well within our guidance range.
There is gonna be a little bit of a decrease in our loan yields because there's a lag from the fed moves.
The impact the prime portfolio and so that's a fully reflected until the second quarter, but as Guy mentioned, we've been able to reduce our funding costs quite well to keep us inside our range, but probably just a few basis points down from where we are in the first quarter.
That's helpful. Thank you.
Our next question comes from Jared Shaw of Wells Fargo Securities.
Hi, good morning.
Just on the provision it looks like the provision rate for new loans is around 1% decide to good rate that we should use for me growth going forward and then if you could also address or at the.
Provision drone unfunded commitments items other similar rate and the balance of unfunded commitments.
So I'll start with unfunded commitments I do think that's a little bit of a jones given the change in economic outlook, a and some higher utilizations assumed as we go forward.
So the higher utilization does a onetime thing a little bit and then it'll be driven by what's your estimate a loss going forward. So that's probably larger than normal in the future and on the percent of a run rate.
Yes, 1% of trust your mouth, but it's hard to say just because it will depend on sort of how that calling me develops in the future, whether it's at that level or a bit lower in the future.
Okay. Thanks, and then on the capital call lines. Your Guy I know you said 90 to 100 gig hundred 90 days is typical duration for those are you seeing any extension in duration from lines that were drawn as we went through the end of I'm not trying to 19.
No we're not.
Great. Thank you.
Thank you very much.
Our next question comes from Brian for I'm Autonomous.
Hey, good morning.
Just as you just talked to clients and especially the high in your customer base. I mean, he brings a lot of people really seem to be well you know who is gonna be falling regardless of the exact timing with the recovery and stuff, but when you talk to them.
And we'll need to pick up at the world's on sale and now it's a timing bats, or the general move more you know.
We don't know where this thing's going you could be a depression on hunker down and I'm sure. There's a range, but you know you do have equally known to be very well can you just curious what.
You're hearing from those claims.
It's an interesting question then we don't of course have they were in Europe Africa view of it.
But generally speaking I think they're very conservative this is new for everybody self evidently so and so I think what's happening is that they're watching and deciding economic downturns are one thing, but the pandemic is quite another and there's really not an experience base out there and then even our client base.
The other hand, I wouldn't call them I would not call them.
Excessively depressed either their active they're doing things were still getting home purchases.
We're getting some multi family purchases or certainly and but the stock and Sky has been speaking about the pauses the amount of money in our sweep accounts, it's up to as a percentage of the account so that it takes your conservatism there.
But I would say that is very cautious continued activity is the way I would describe it but very cautious.
Thank you.
Our next question comes from Tim Coffey of Janney.
Good thank you.
Yes, you've always talked about wanting to.
You guys vendor and.
Improving the client base when other banks is starting to pull back or you are you seeing any indication that other banks are starting to pull back in a way that you could improve your client base.
Well I think let me just focus on the word improved for a second our concept there would be to acquire new households, and get trial for first Republic and in that regard I think there's always opportunity and a disruptive moment to get people to try something new and.
If they're not with US now, possibly they would consider coming with us.
For whatever reason.
So we think that that opportunity the acquisition new households, definitely is in this situation, but we're not excessively focused on it we're really focused on the clients. We already have been taking very good care of them.
And obviously protecting the a the credit as a bank and as as we mentioned earlier. The PPP program is it's a significant short term, but significant effort.
And Oh, so, but I think there will be opportunity on this as institutions are distracted by one thing or another.
Thank you very much that's my questions have announced it passed an answer.
[laughter].
Our next question comes from Ken Zerbe <unk> from Morgan Stanley.
Hi, Thanks, a follow up Ginger actually just one follow up on your comment just stand about the PPV program.
Can you just talked about the impact that we could potentially see and in terms of fees and then I just want make sure I understand this right. I mean is it that second quarter could see significantly higher fee income given the P. P T.
I think the loans are only outstanding for like a couple of months, so that could boost loan balances and then after that loan balances fall or they get those piece that piece goes away is that the right way to think about it.
You know can be perfectly Frank we're still trying to figure it out ourselves what we've been focused on is and guys. Because he was African doing extraordinary job with a whole team of people, including Jason vendor and others in the organization.
Yes to take care of the clients and get this new brand New program out I think it's worth us all reminding ourselves. It's only about 10 days old and doesn't agency took on a brand new on very large sitting here I had many bags of stepped up to the credit I think of the banking industry in general they have stepped up by in large numbers to do something bigger not normally do.
The fees are honestly, we haven't focused on them, they're very secondary to get into the job done well and what we see is what we see is mostly trying to get them close to kind of course, the money is as we know being committed rapidly. So we do need to this program.
Going to need additional funding for sure, but let me turn to Mike's here for a second to talk about how the flow of of the activity might be on the balance sheet entry income.
Yeah, there Kevin obviously, because it is so new there are lots of questions being asked about.
The income stream in the fee stream and so I think it's it's very likely that that fee as part of a loan you've originated which typically means you recognize it over the life of the level.
Which could be anywhere from.
A short period of time to possibly two years.
And that fee also is is typically recognized within your your net interest margin.
So I think there is something to that to develop here I get clarity on but as Jim said, our focus right now a husband is ticket the clients through the process.
So they can you know take advantage of the program appropriately to the government has put together.
Let me I'm only had one thought we and deciding how we respond to this since we are not that'd be a lender have not been one for at least a decade, we reached out to two or three very good partner participants.
That are individuals and so some of our business, but probably a handful of roughly maybe maybe up there or do I have is going through third parties that will before and get into we felt that was a better way to get got up and running quickly to get our clients. The best possible service, we will not be collecting fees on that portion of the business.
Very modest fees and they will be collecting that and we're quite happy with that what's happened is actually very helpful to us being able to that level for our clients.
Alright, great. Thank you.
Ladies and gentlemen that concludes today's question answer session I wouldn't I like the hand, the call to Jim Herbert for any additional or closing remarks.
Thank you all thank you very much for the time and the good questions I'd, just remind everybody that we've always they'll come back on a very conservative base, we're very proud cautious lenders and happened for a long time.
For many many years you can be careful in your credit you sometimes longer you being through careful that's something like this happens we are delighted you have been.
So where we try to build a very strong shipped with a lot of capital good credit and clients took place listen and knowledge of the client base and we think we're in we think that's the cases, we as we sit here today.
Thank you very much her time today, we appreciate it good bye.
Ladies and gentlemen that concludes today's conference call. Thank you for participating you may notice.
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