Q2 2020 First Republic Bank Earnings Call
Greetings and welcome to first Republic banks second quarter 2020 earnings call.
Today's conference is being recorded.
During today's call for lines won't be any listen only mode. Following the presentation conference will be open for questions to join the queue. Please press star one on your telephone she pointed out at any point during the call.
Not to turn the call over to shut in Houston, Senior Vice President and Chief Marketing and Communications Officer. Please go ahead.
Thank you and welcome to first Republic Bank second quarter Twentytwenty Conference call speaking today will be Jim summer, the banks founder Chairman and CEO <unk> pricing.
Michael Ward Chief Financial Officer.
Before I turn the call a bunch of Jan you know that we may make forward looking statements. During today's call that are subject to risks uncertainties assumptions.
For more complete discussion of risks and uncertainties that could cause actual results could differ materially from any forward looking statements you see the banks FDIC filings, including the form 8-K filed today.
Our available on the banks website, and now I'd like to turn the call over to Jim Summer.
Thank you Shannon.
It was another strong quarter for first Republic Bank loan origination shot a quarterly record deposit and wealth management assets also grew very nicely.
And credit capital liquidity are all quite strong.
Yes, sure first half performance under very difficult conditions, again demonstrates that consistency and sustainability of our conservative client centric business model.
Before I turn the details for the quarter any take a moment to discuss this business model.
We found that first Republic bank 35 years ago. This month.
Since then first Republic hope systematically and organically grown from a single office and less than 10 colleagues with 8.8, knowing in initial capital.
So over 80 off which is over 5000 colleagues.
$128 in bank assets $156 in wealth management assets and a market capitalization of over $18 billion.
During these years, we've maintained the highest possible credit standards and we had been profitable each of the 35 years.
Enterprise values has grown at over 24% per annum during this period.
No strong 35 year perform which has been sustained and widely varying economic conditions and through numerous unforeseen events, including the current pent up.
First Republic study organic growth is a direct result.
Staying focused on our core belief that we can build an unusually successful business by consistently providing a superior client service experience.
This client service experience and actions continues to be our driver.
The accelerated application of technology.
You are already high touch service model is in fact further differentiating posh Guy will discuss it's a bit more in a moment.
We've also always believed in operating at a very safe and sound manner.
Not strayed from our stringent loan underwriting standards, nor our philosophy of maintaining ample capital and liquidity at all times.
It's actually a very straight forward operating model.
Now to life by our strong culture and by the extraordinary hard work and diligence of all of our colleagues.
Yes culture first Republic continues to be one a p. work entrepreneurship innovation and accountability.
All of which empower each of our colleagues to be their very best every day.
You have from each other and our clients.
The result is client satisfaction level major by net promoter score that continues to be twice the banking industry average.
This is the source of our sustainability in growth.
Returning to the second quarter strong results year over year total loans outstanding were up over 19%.
Not including PPP, along until about two board.
Total deposits grew more than 18% year over year.
And wealth management assets are up more than 13% year over year.
That's across the board growth drove our financial performance.
Total revenues grew 12% over the year net interest income grew 17% earnings per share of growing 13% year over year and tangible book value per share increased by 12% year over year.
Credit remains quite strong net charge offs for the quarter were 1.1 million.
And nonperforming assets at quarter end, we're only 13 basis points.
Our tier one leverage capital ratio at quarter end was 18.15.
Phil first half from 2020 has once again demonstrated the consistency of starting from first Republic simple conservative very client centric business model, Let me turn the call over to Guy <unk> President.
Thank you Jim your delighted with our continued strong performance and ability to serve our clients through these unprecedented times.
During the second quarter.
We closed a record number of loan.
Oh household 14% quarter over quarter annually.
Modified approximately 3600 loans, where our clients impacted by cold that.
And delivered over 11500, P.P.P. loans to small business and nonprofit client.
Importantly, we this is all without compromising our very high standard of service and safety.
The resilience of our business model is derived from our unique service culture as Jim described.
And at the heart of that service culture, our people.
They are care and dedication is now more valuable to our clients than ever.
This time tested People's personal auto is being reinforced and enhanced by our quick strategy.
We are investing in a child platform that enables rapid deployment of new features for our clients.
And process improvements to empower our colleagues.
In light of parts strategic vision over the past few years you have upgraded.
Home loan origination system consumer digital banking system and deposit client on boarding system. While also building shrunk in house development capability.
These investments are being utilized with greater effect to help meet the unique challenge itself today.
For example.
Since the Pandemics again need for their digitized or deposit account opening process.
Rolled out additional mobile banking features including the ability to connect our clients because their trusted advisors with one click.
There's a lot process automation tools that help our colleagues sorry, more P.P.P. clients safely.
These advancements resulted in a nearly 50% increase in digital deposit account openings in the last quarter alone.
Saw at 200% increase India adoption of the mobile check deposit feature shifting significant branch activity on line.
We were able to close nearly as many PBP loans in one day as we do mortgages in a typical month.
Our take platform is reinforcing and scaling what is most important to our clients and fundamental card business.
The ingenuity and care of our colleagues.
This in turn results in consistent sustainable performance, even in challenging times such as B.
With that in mind, let me turn so an update on lending.
Loan origination volume in the second quarter, excluding PPP was 11.4 billion, our best quarter ever.
Single family residential volume also set a new record at 5.9 billion for the quarter.
The finance accounted for 80% of the single family residential volumes.
The majority of refinance activity came from clients previously had other institutions.
New York lease that home purchase finance activity increase quarter over quarter in particular gained momentum in June.
Multifamily and commercial real estate loan origination volume was 1.3 billion consistent but the first quarter.
Turning to business banking.
Oh send line commitments, excluding PPP were up 17% year over year.
During the quarter business line utilization decreased from 42% the 35%.
This is once again consistent with our historical utilization range of mid to high 30.
As we entered the second half of the year.
Overall loan pipeline remains very strong.
Meaningfully from this time last year.
We continue to expect mid teens loan growth for the full year 2020.
In terms of credits we continue to maintain our close served bit of underwriting standards.
The average loan to value ratio for all real estate loans originated during the second quarter wasn't just 55%.
At quarter end loan modifications totaled 4.3% of the entire portfolio.
Neither sorel requests have slowed quite substantially.
In terms of funding it was a very good quarter.
Total deposits were up 18% from a year ago.
We continue to maintain it diversifies deposit funding base.
Checking deposits increased by 3.6 billion in the second quarter.
And now represents more than 62% of total deposits.
Business deposits represents 55% of total deposits in line with the prior quarter.
Turning to wealth management assets under management increased this quarter by 13% to $156 billion.
The growth was due to market appreciation.
Gross and net Klein inflow of 2.7 billion during the quarter.
Oh, so since our last cool, we welcome to new wealth management teams the first Republic.
Overall, it was a very strong second quarter and first half was 2020.
Now I would like to turn the call over to Mike Roffler Chief Financial Officer.
Thank you guys. While we're pleased with record net income of $257 million up 15% year over year.
And record earnings per share of $1.40 up 13% year over year.
HM.
Provision for credit losses under Cecil was $31 million in the second quarter.
This included a provision for credit losses of 43.5 million related to our loan portfolio and held to maturity debt securities.
Which was offset by a reversal of the provision for unfunded loan commitments of 12.4 million.
During the first half of 2020, we have added $91 billion to our low loss reserves, while net charge offs were only 1.3 million.
As Jim mentioned, our capital position remains strong as of June 30, our tier one leverage ratio was 8.15%.
This reflects two capital raises in the past nine months.
In April the banking increased its quarterly cash dividend and we're pleased to maintain this dividend level.
Our liquidity position also remained strong HQ delay was 13.4% of total average assets in the second quarter.
In May we completed a residential mortgage backed securitization our first in many years.
Loan sales have always been an important part of our business and this securitization provides yet another source of funding and liquidity.
We always would change the servicing of our loans sold.
Very importantly, net interest income increased 16.8% year over year.
This reflects the power of our consistent growth of earning assets.
Our net interest margin for the second quarter was relatively stable at 2.7%.
By interest rate volatility.
We're particularly pleased the margin was down only four basis points compared to last quarter.
During the quarter, we reduced the overall rate paid on deposits to just 30 basis points.
This decline helped bring our overall funding costs down 22 basis points from the first quarter.
It's largely offset the 24 basis point decline in earning asset yields.
We continue to expect our net interest margin to be in the range up to 65 to 275 for the full year 2020.
Our efficiency ratio for the second quarter was 62%.
The efficiency ratio has benefited from reduced expenses for marketing travel and events as a result as a pandemic.
Given the first half performance, we now expect our efficiency ratio for the full year 2020.
To be in the range of 62.5% to 64.5%.
Our effective tax rate for the second quarter was 19.4%.
We continue to expect our tax rate for the full year 2020 to be able to range of 20% to 21%.
Overall, it was a very good quarter.
Thank you and now I'll turn the call back over to Jim.
Thank you Guy on Mike. So we're very pleased with the second quarter results I know I speak for Guy I'm, Mike on the high when we say were particularly proud of the tremendous effort and work of our colleagues throughout the first half of this year under very difficult conditions.
Overall, the first top leaders with very strong for 2020, and we believe we have good momentum going into the second half now we'd be pleased to take your questions.
Thank you Sir once again, ladies and gentlemen, if you'd like to ask question at this time to signal by pressing star one on your telephone keypad.
Please make sure that your immune function is turned off to allow your signal to reach our equipment.
We'll pause for just a moment of everybody good opportunities a signal.
All right and once again start want if you'd like to ask the question.
For the first go to the line of Steven Alexopoulos with JP Morgan.
Hey, good morning, everybody.
Oh I'm sorry.
Hi, Jim onto start on credit.
So for longer term loan modifications of around 4 billion, Jim I know, it's a tough question at this stage.
Your assessment in terms of what portion of those could become problem credits.
You know it is a tough question, Steve we don't we don't of course really no, but we have as you might imagine scrub them considerably him probably more importantly, no or clients very well. We know the situation is very well so far I shouldn't say the vast majority of those modifications have quite reasonable alone.
The value luxury which in the fifties.
[noise] and and show, we don't expect to be very much at risk ultimately on losses, we will have some anecdotal situations, but it's our opinion, we don't have a systemic issue at this point.
That's helpful. And then you know similar but change in direction of it if we look at the 2.4 billion of the Kobin impacted loans that you're calling out and you either I assume you've scrub that to Jim when you look at the collateral there how do you think about loss content.
In that bucket.
Ideally reasonably low because of the loss content for instance in video and hospitality area. The long devaluation fell below 50% and we have guarantees on a significant portion of them and so those are resolved. When you think we're probably okay, but we may have some walk throughs for.
Sure well have some losses, but but it'll be mostly have worked through problem and.
What we don't know of course is who will who will begin payments post post the deferral period, but were actually pretty optimistic.
And then Npvs overall very low, but you did see a 40 million increase core work against any color there.
It's spread all around really there is one there's one credits at one by that went up a bit but we're not worried about the collateral yeah, I'd say, Steve it's mostly a few single family he locks nothing nothing unusual.
Okay.
And then final one for me. So if we look at the 5.9 billion of single family originations in the quarter, it's doing math given the color Guy a provide it looks like purchases were 1.2 billion. This quarter, So I guess down a little bit year over year <unk> color on the purchase market and in the spring selling season, the lead just given everything.
Actual or.
Does it not going to be what we've seen in the past. Thanks.
It's Steve Coreg very thinking that this spring buying season is delayed into the third quarter, if not beyond but we are optimistic and first of all on late we find if I can comment over half of the refinance activity is a decline from other institutions. That's a great. Okay, great win for us and on the purchase.
Side, especially on the that's goes the card just like Tivity has picked up nicely and great momentum June, especially with particularly strong and you're also seeing the suburb purchase activity in New York suburbs to the quite active as well.
So we are comfortable that the mid teens long died and script long gratified.
Okay perfect. Thanks for all the color.
Thanks.
All right. Your next question comes from the line as Kevin's therapy with Morgan Stanley.
Hey, Ken I'm good morning, everybody.
Martin County has probably just started off in terms of in them. Obviously you did there this quarter, which is great does the guidance for the 265 to 275 does that include all the accelerated amortization on the P.P.P. fees.
Oh I can think it does but I would just comment that the.
Forgiveness of the loans under PPP is likely not it's a late fourth quarter more next year event because of the changes made to extend do a 24 recovered period and then the borrowers actually have some time to apply a they don't have to run into it right away. So we think it's probably.
More next year than it is this your frankly.
Got it okay and she you haven't seen any PPP forgiveness I know, it's really early but you haven't seen anyone orange under the program.
No in fact.
We're not sure the SPD is accepting applications yet because they have an open it connectivity to their portal. So it's likely that later is going to happen.
Got understood. Okay, and then I'm just my second question in terms of.
<unk> expenses.
Obviously with travel marketing advertising expenses down I saw your update guidance, obviously, but does that moves back to more of a more normalized level say once whereas in normalized level I guess once the pandemic is over x. I'm, assuming you're at travel over more into more marketing et cetera.
Yeah, I mean, when we look at the guidance into the update for efficiency. It was really reflective of what's happened the first half of the year and what you just touched on that marketing and travel is probably like for the next couple of quarters, but it's not necessarily a long term thing because you're right. We will start to travel we will have calling in events in the future.
Sure.
So it's really this year as like focus on we had been very comfortable range.
Up until now that we've actually improved upon as a result than not incurring some of these costs.
One issue I would point out Kevin we don't know the shut the Guy I went through a number of things that have been improved recently.
From an efficiency point of view and.
Very good that unstated is a clients have also but hey taken to a number of those approaches. So there may or may come out of this.
Some of fiction three games, but we're not sure and we certainly don't want projector yet.
Alright, great. Thank you very much.
All right next question comes the line of Aarons Forgotten Fitch with Citi.
Thanks.
Well the larger mortgage originators recently indicated they were kind of making good and more difficult to to get the jumbo loans on their platform are you seeing other competitors pulling back in and what kind of marketing does that provide for you and in the second half Fisher.
I would say, but overall, we are aware that I would say overall, it's still quite competitive.
Okay.
And then more recently, there's been some surgeon cases, obviously across the country, but also in California are you seeing any impacts your business from a from that in the recent weeks.
Oh, no because it impacted a exposure on the alongside it is limited to the 2.5% the hotel restaurant and retail said hampers half the portfolio into modifications I love, some 0.7% within that exposure and in terms of.
Our colleagues and I was working as much as we're looking forward to back in the office is going to save you had been incredibly effective working remotely in this quarter in the past where proved that so we don't need to watch Bakken.
And it does so you're not seeing any kind of demand change from mortgage or business loans related to that and recently.
Yeah, we aren't very seeing that these things I'm residential activities is remaining pretty strong our pipeline and locked pipeline are quite significantly up compared to this time last year actually on a and multifamily holding up well theories. The portion that has slowed down and are being very cautious on credit and strong deposit growth the quite active.
If it remains robust.
Okay. Thank you.
Next we'll go to Dave Rochester with Compass point.
Hey, good morning, guys nice quarter.
I do think it.
So you don't reserve calculations this quarter, what listen to the bigger economic assumptions that went into that I know real estate prices bear.
Heavier weight in your analysis, but any color you have on that in the duration of the downtime Peterson degree.
Yeah. So.
Dave you're right that it continues to be a a residential real estate, especially.
And it's really market by market, so and I'd say this our projections from 90 days ago, probably were conservative in that prices have actually held up really well and in most markets are actually continuing to increase slightly a new York is the one place where we do assume a little bit of a downtick, especially in.
In Manhattan itself, while the suburbs as Guy mentioned had been actually pretty strong recovering quite well. So I don't her last for no. Good of this year early next year and then starts is slowly increase.
We do have a more significant decline on the CRT and multifamily prices close to a double digit a price decline and then a recovery next year.
And just do on that last one is there any longer term concern.
On the multifamily side or office fundamentals and some of your markets.
The Sun multifamily.
Were largely in.
Wrench regulated and rent controlled markets.
Yeah, and as you as you've heard US talk about before we don't underwrite to the hope of new rents when departments turnover, we underwrite to rents that are in place.
And so you don't see as much turnover and you don't see lunch vacancy in the rent regulated rent control building because likely you're below market.
So he can multifamily actually has held up pretty well.
In theory, you know, that's why we underwrite to stress scenarios with low ltvs and strong cash flow coverages does it change demand for office I do think somebody has to be determined the future.
The since we were asked watches or for.
Instead wise or market rent multifamily properties in the were leases.
They've been pretty good it hasn't been down a lot from where it's been in terms overall collections. Yeah. In general multifamily is holding up quite well to add to mikes comments and intensive theory again overall, our exposure is very limited loan to value ratios very low end debt service coverage has continued to be strong.
Retail in general market commentary retail is really a week has been office needs and another year or so depending on how they a pandemic progresses to gain more visibility, but we feel comfortable with our underwriting standards in love that that minutes here.
Sounds good municipal passing along on the margin guide are you guys, assuming the existing her persist.
Are you looking pretty steep but even the curve and then how much you PV topology cost lower isn't part of that.
I'd say the curve is a pretty much at this level, we're not really assuming much steepness that should only be a benefit if it were to happen.
They're probably is another downtick to our deposit rates, we ended the quarter in sort of the mid Twentys range on a spot basis. So there should be a little benefit there, which hopefully offset some of the continued drift to that you'll see in loan yields.
Sounds great. Thanks, guys for sure.
All right next we'll go to chasing her with Jefferies.
Thanks, Good morning, guys, maybe just a quick follow up on that on the back of that input on the reinvestment yields you know HQ Alliant Muni, where they are trending today.
Yes, H.P.L.A.'s around why don't they have percent agency H.B.L.A. that is and you need our three to three in a quarter on a T y basis.
On the purchase yields and single family residential coming in around high to slow trees, and multifamily theory to meet the tree and Uh huh.
Okay, Great and are on the capital call, obviously that was down this quarter I I mean, very consistent the line utilization rates when your long term trends, but given that sort of a unique product. What is what is the outlook for for that in the coming quarters and what what could be.
Challenging backdrop.
I didn't grow the primary metric for growth ever look had a in capital call lines and the commitment growth.
And our capital Uncalled commitments are up 24% year over year and total business line commitments are up 20% to the pipeline remains strong the fund raising activity. It was a in private equity in general it's nowhere in the second quarter compared to second quarter of last year.
But the private equity continues to be an attractive investment opportunity for a limited partners given the lower rate then bleach equity environment in the public markets and there is around one an AFE plus trillion amount of dry powder in the market. So we would expect steady Eddie growth for the remainder of the or and Utilizations are the reason why down.
Outstandings are lower they're carrying Lazard capital calls, they're currently at 36% and as you mentioned in the prior quarter utilization for elevated in the first quarter as a G.P. three spacing out capital calls and they returned back to historical range. We have seen to mid teens mid to high Thirtys have you would expect that to me that.
Type of thing.
Great. Thanks for that color and then just last question Big picture question for you.
You know, we're all reading about you know I'm, everyone, leaving or.
The New York City in San Francisco, and departing for the suburbs and you know you guys are obviously in a unique perspective, given your urban market concentration you know just how do you what do you given your experience and based on on what you're seeing from your client base. What do you. How do you see this playing out as this is this more long term or is this is somewhat temporary.
HM My guess would be in its only a gaps are of course, but my guess would be it's it's a little more in the long term versus tempered category, but we need or we and our markets include the urban centers and the suburbs around them. So we do see both sides of this equation.
You will lead to remember it's due to some extent reversal of a trend that have been going on for 215 years, where the people have been coming out of the suburbs and going into the cities. So we may have we may have the simply a pendulum coming back a bit to the center.
But the number of units of housing in the suburbs versus in the cities is gonna be the Dod driving factor, there's only so many homes in south Hampton and granted.
Versus Manhattan, and so a I see if it's an adjustment I don't see give a nice because it's a directional change for sure.
But I don't see just going to it's not going to the implication of course is that leaves a city centers hollowed out that's not going to happen.
Got your tomorrow, if it thank you.
All right. Your next question comes from the line of Erika Najarian with Bank of America.
Hey, Good morning, guys. This is Chris not doing on for Erica.
I just wanted to ask a barrier tier one leverage ratios seem to move a part of my facts and and I believe you could they prefer to operate above the 8% level. So can you just discuss how you're thinking about capital levels as we head into the back after the year. This strong loan originated origination activity continues.
Thanks.
Yeah. Thanks, we feel really good out at a it 15, we raised capital or late last year early this year and those are turned out to be very strong capital raises we continue to remain opportunistic and look at the markets, but there's nothing in the often that we feel we have to be right now because.
We've done those two raises sort of before the pandemic yet.
All right.
On to Chris Mcgratty with KBW.
Great. Thanks for question.
Like a lot of in what's been talking about tax rates given given the the deficit that were occurring as a nation.
Last cycle or when when rates were dropped there wasn't as much of an sensitivity to first probably given the structure of your earnings could you just walk through how you're thinking about potential tax sensitivity. If if some of the by proposal could given after.
Yeah. So obviously given some of the fiscal stimulus theres, a a potential in for higher tax rates in the future.
The good news is because the bank has been we've been so consistent with our tax advantaged investments municipals low income housing bank owned life insurance, all those become a little bit worth a bit more.
In a higher tax rate so it won't be a one for one percentage increase.
Maybe it's half maybe it's 60% of an increase to the rate because those benefits are all great or in a higher tax rate.
Great. Thanks.
And then second question you called out in the release look like in MSR impairment I was wondering if you could quantify the amount that was really yes.
Just under $6 million in the second quarter in the first quarter. It was lot about $650000.
The MSR balance itself is pretty low I think it's about $31 million asset on the balance sheet.
So it's it's going to be a pretty low amount given how fast repayments are happening in the servicing portfolio.
Okay, and maybe one more if I could could you just remind us a high level he.
The U.M. that's price on the Sixthirty assets and how we should be thinking about season in the third quarter given it rebounded markets.
Yes, it's a AOL associated with first Republic investment management.
I think that increased from 60 billion to 68.
So think of it as sort of low to mid Ninetys for investment management fees.
Great. Thank you.
All right well, taking another question this one's from Terry Mcevoy with Stephens.
I think you good morning.
You had a little over $2 billion of P.P.P. loans on the balance sheet at the end of the second quarter what amount of those funds were in total deposit balances also at the end of the corridor.
So net net it was actually more loans and deposits given our client types of dispersing. These funds. So it's changing dynamic over time, it's declining so net net it's actually a negative on us on the loan lightest deposit.
Okay and then that's a follow up question. Thanks for putting in the personal guarantees on those three industry segments.
Restaurants being at 94% I'm, just curious out of those 955 loans, how many of those borrowers have deposit relationships with first Republic, or maybe or wealth management clients just to give you some sense an insight maybe into their ability to support those loans.
Actually virtually all of them would have maybe got wealth management, but personal bikes.
We make very few along some people that don't buy equipment.
That's what I expected that's it thank you.
Okay.
Alright, and next question comes from Brock Vandervliet with yes.
Hi, good morning, everyone. Thanks for the question.
Like you can just talk about resi yields they've been.
Extremely resilient down only 15 basis points. This quarter, we've heard a lot about primary and secondary.
Good spreads and it seemed to be pretty wide on the mortgage side should we on the on the primary side should we expect that to gradually come in and pressure a those yields in the second half.
So so so far they thing if I'm residential is holding up nicely, India high twos little cheese actually the six equate logs were seeing coming in slightly.
Or better than the second quarter originations just a bed oh, so we feel comfortable if it to two six to five to seven to five NIM guidance for the year I would also note that the earning asset growth. It plays a key role in our and I.
Gross as well.
Okay, and as a follow up in them.
Each area, the 300 million dollar securitization that seem like kind of a trial balloon size. Your first first one in a long time, she's end markets have yield enough to pursue that more and more broadly or not.
Yeah, I mean, what we're really pleased to re enter the securitization market in our name obviously, our loans have been securitized by others for a long time, but it was great to do we had arranged it before the pandemic and it speaks I think to the markets view of our credit quality that it continued a three.
Through and closed in May.
We look at it is another tool that we've gone to reopen from a liquidity and funding standpoint, and if the market, it's trading pretty well and if the market.
Warranted, we would consider it again, yes, but nothing on the her immediate horizon, so to speak of a securitization.
Okay, great. Thank you.
Next we'll go to Jared Shaw with Wells Fargo.
Hi, good morning.
March or.
Just looking at the at the provision should we assume that that provision as a percentage of growth stays stable as we go through the end of a year or was there any component of second quarter that was more of a gross up for for the economic.
Backdrop.
Yeah, I wouldn't say that I think you know, we're a little bit different than other banks in that we've always had a provision because the portfolio is growing.
Right. So there's typically been some level of loan loss reserve building.
While well, having pretty low charge offs, especially the last you know 510 years, especially so I think we'll always have some level and then it will depend on how the economic outlook progressive disease, or whether that goes up or down how the modifications come off of modification late in the year and do you have any you know spin.
I think instances, you've sort of gone to dig into more.
But I guess with with the color that we have right now you feel.
Yeah that that current level. Obviously is is good for new loans coming on.
Yes, yes.
Okay, and then Guy you had mentioned you know on the capital call loans, the dry powder, saying on the sidelines I guess in your view, what's what's keeping that on the sidelines ends and how fast do you think that some of that can be.
Deployed in the industry and then you know it at what point do you guys see that new fundraising or net new funds starting to be form time to drive.
Commitment growth.
Sure I'm so in general are.
Going into the pandemic there was already sizeable dry powder in the market in the P. market and then the first quarter.
Given that the GE piece, we're working out through the pipelines as well, let's spacing out wanting to space out capital calls the L.P. So there was increased utilization on the line draw those as well.
In terms of act. So that's why the Utilizations came down and there's still a sizable amount of dry powder in the system. That's being deployed now what's happening is that rates are low equity valuations in the public market rebound. They could evaluations are rich. So there is a it especially from institutional piece there is additional into.
Yes, I'm in the P. market as an attractive investment opportunities so actually the l. piece, especially if we shall be sort of looking to deploy money I'm that brings up the deal activity and due diligence is that our 8% on virtually just anecdotal talking to our clients. So you would expect the active.
Good to remain healthy and our pipeline to some extent and just like that as well, but the utilization probably in the mid to high thirtys, but it's hard to anticipate the deal timing.
Great. Thank you.
And once again, if and when that is star one or two like tougher question. We'll next go to Lana Chan with BMO capital markets.
Thanks, Good morning, and just about a phone questions slowing on.
On the X a expense side the efficiency ratio guidance I think previously you had talked about low double digit expense growth within you know efficiency ratio guidance is there any update on sort of expense growth rate.
So we're very pleased that it's probably high single, maybe low double but because of some of the savings that we do think while for the rest of the year.
It's probably a little bit lower than it was at the started here.
Okay. Thank you, Mike and then any.
It is there any risk a within the meaning security spoke didn't but where potentially seeing with Sanofi a you know p. municipalities with yeah, the economic situation.
Yes, we are meal or a credit is all of his first day on the asset side. So we have been very cautious double a weighted average is our rating and via being always keeping an eye on ratings as well as the credit quality of me any spawned by bonds. So we feel comfortable of it the credit underwriting standards.
Okay, and very limited exposure to Ed Treska sectors and significant.
Okay. Thanks, guys.
Thanks.
I will take another question. This one from Jarrett Holland with Baird.
Thanks, and good morning, I. Appreciate you taking the question I just had a few clarification first on on them I guess based on the forward curve can you help us understand the men progression is new to the second half and where you expect the margins stabilize ex TTP as we end the year.
So I you know we were to 70 this quarter and given the curve is sort of Ah, whereas sadly, we don't expect any steepening, we should bounce right around this level I think with without any sort of P.P.P. acceleration, what's happening is you're continuing to see a little.
A bit of a drift lower in loan yields a as the portfolio reprice it a little and our funding costs also have some room to move down.
As you know Cds mature FHLB matures. It gets replaced at much improved rates right now so we feel pretty stable there could be a little bit of.
Call and we're in tax season, right now so there could be a little bit of extra cash early this quarter that comes down that could cause margins to bounce around a little bit, but we feel pretty good right sort of where we are.
That's very helpful. Thanks, Mike and then just a quick one on the efficiency ratio died.
The core efficiency ratio performed very good this quarter and first half really.
Understand the power station accruals in the business mix can bounce around with wealth management, but seems like you comfortable be able to come in below that.
He's range is there anything were up year on the expense side in the back half the or that you should be thinking about.
We don't see anything lumpy in the back half of the year, we we lowered the lower boundary of the range to 62 and a half a given the first half performance in some of the things that we're just not incurring right now, but it feels like that's a good range and the other thing I'd say is is it.
If you ran the margin.
To 65 to 275 that equates to about a 2% difference in your efficiency ratio. So they are actually pretty much in line. The two together now.
Thanks, Mike I appreciate that detail.
All right next question is from David Civ rainy with Wedbush Securities.
Hi, Thanks for taking the questions and thanks for the details on page 15 of the release with alone industry information I was wondering how much of the PPP loans to hotels and restaurants went to your existing borrowers versus new relationships in the quarter.
[noise], they're very few borrowers actually loves our deposit clients and I would note that a good portion also it sort of our business, saying, it's a nonprofit say good portion where they deposit nonprofit clients are about a quarter of far P.P. loans.
But rents are nonprofit clients so limited exposure to the hotel.
Okay. Thanks for that and then my second question is on deposits you've had success in mentioned about the success with the <unk> digital account openings could you talk about the stickiness of these online accounts versus the branch sourced deposits.
Sure I actually it speaks bag it goes back to our model of doing more of it our existing clients. So what we've seen during the pandemic flight the service and safety a part of the enjoyed a part of the deposit growth is coming from clients doing more of it does and aggregate.
During their accounts did those.
And the enable them and empower them to open their accounts online if they choose to do so we also have senior hours in our box strategies in the P.O. Sundar branches, if they choose to come in but at the end all are doing not losing our clients doing more of it them anything responses.
After them a end the referrals that are coming in from declines with its digital or P.O. They are the same robust trusted relationships that are coming because of to service. Our colleagues provides so you feel comfortable that this stickiness instead blood to regardless of the channel. It's just more of an empowerment off our colleagues and client.
Great. Thanks very much.
Thank you.
Okay. Next question comes from the line of Johnson <unk> carried with Evercore ISI.
Good morning.
Or you've given us the did you give us the LTV to know in the in your slide deck in your release for you or commercial real estate portfolio. When you indicated that they remain very low do you have whose lpvs I'm better updated.
For the.
Current backdrop worried they origination I know youve disclosed a 46% for CRT and 53 for multifamily do you have updated.
Those are at origination John and so they're not currently updated.
Yeah and in many it much of the portfolio given the age they have gone up since origination before starting to come down at this point.
Okay got it thanks, Mike and then.
Related to that on the commercial real estate side, I know industry commercial real estate delinquencies have jumped sharply tours CMBS facilities and when you look at some of that data that's a pretty sharp spike that we're seeing are you seeing any signs of distress or could that magnitude in.
Your portfolio that and if so is it being kind of staved off by the forbearance I'm. So if you can just give us a little bit of that.
Backdrop would you maybe seeing thanks.
As far as I put our theory portfolio is concerned I'm very low loan to value ratios. For example, if you look at the second quarter originations as an example, it was at 43% LTV and very strong bed service coverage is so given the strength of the cash flows and the collateral they feel comfortable that the.
Credit quality, so far theory portfolio.
And these are smaller loans. These are not large loans. The average sizes are quite small as you can see an argument that present nation.
Okay, All right and then my last question and sorry, if you've already talked about ability.
Decline on the investment.
Advisory fees.
In the quarter, how much of that was tied to the market as you noted in the release versus a asset flows.
It it would have been tied to the market and it's based on March 31st values. So it was already sort of locked in at that point.
Client flows have been positive sort of both first and second quarter.
Got it okay. Thanks, Mike.
All right once again, everyone that star one if you'd like to ask a question.
A follow up question from Ken Zerbe with Morgan Stanley.
Great. Thanks, Hey, Mike just actually I had a follow up question. Just your its question on provision expense I think I heard you say that this quarter's provision expense was.
Indicative of kind of where should be going forward first part of my question is are you talking about a $30 million reported or the 40 plus million dollars of sort of core ex the reversal.
Yes, it's a it's a fair question [noise] <unk>.
I'd say 40 is probably the upper bound again, it depends on the economy and how it progresses.
Got it Okay and then the second part of the question is like and I know first Republic is sort of very unique in the sense. They just don't have credit losses.
But can you elaborate how much of a $40 million that you took you this quarter last quarter actually related to sort of seasonal adjustments versus just eating say $40 million provision expense to account for the lifetime losses on the new loan originations.
Take those pieces I'd be real helpful.
So that's a very complicated thing to do would it be portfolios <unk>. So you know because there there are probably five different elements that go into the reserve.
Growth would not have been 40 million I will say that.
You know growth is typically a much lower amount and then it's been adjusted higher given the changing economic outlook.
Okay. So presumably if you assume 40 million continues then you're assuming the economy gets worse every single quarter going forward. So it doesn't like lags why trend might have been context to see fulfill.
So go back to I said, it was an upper bound which means it could be lower also but we do have gross that does you know play into that.
Understood. Okay that helps thank you very much.
All right and we did have one more question, we'll take that some brock vandervliet with CBS.
Oh thanks.
I know in the past you've kind of more aggressively scaled up and down your sheedy exposure and you touched upon this that there may be further scope to to ramp that down could you.
Talk a little bit more about that as it did drop a 2 billion or so in the quarter.
Yes, so Cds do remain attractive funding and strategy it as part of our attractive funding strategy and at more than half wants to tie the endowed deepening our relationships that RC declined even the amazing service our colleagues provide what we have seen during the pandemic is a flight.
Service and safety, so they strong checking growth coupled with the strong money market savings and check money market checking growth. So that's why we have and they have been paying less attention and RCD promotions and Ah and let that to a and Ah roll off.
They mature a and b to raise the remaining time has come down significantly as well, which is less than five months right now and to see the portfolio.
Okay got it thank you very much.
Thank you.
All right. It looks like we have no further questions at this time sort of like turn the call back over to Mr., Jim Herbert for any additional or closing remarks.
Oh, Thank you all very much for your time today, we appreciate it good day.
That does conclude today's conference we thank everyone again for their participation.
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