Q3 2020 First Republic Bank Earnings Call
Greetings and welcome to first Republic banks third quarter 2020, <unk> earnings Conference call.
Today's conference is being recorded hearing today.
During todays call the lines will be in a listen only mode. Following the presentation. The conference will be open for questions.
In the queue. Please press star one on your telephone keypad at any point during the call I would now like to turn the call over to Shannon Houston, Senior Vice President and Chief Marketing and Communications Officer. Please go ahead.
Thank you and welcome to first Republic banks third quarter 2020 conference call speaking today will be Jim Herbert the bank's founder Chairman and CEO Guy, Eric Hagen, President and Mike Roffler, Chief Financial Officer.
Before I hand, the call over to Jan. Please note that we may make forward looking statements. During today's call that are subject to risks uncertainties and assumptions.
For a more complete discussion of the risks and uncertainties that could cause actual results could differ materially from any forward looking statements. Please see the banks FDIC filings, including the form 8-K filed today.
All are available on the banks website and now.
And now I'd like to turn the call over to Jim Herbert.
Thank you Shannon [laughter].
Third quarter, which had very strong quarters.
Origination volume was another quarterly record.
Deposits also grew very strongly.
Wealth management assets have fully recovered.
We're growing very nicely as well.
And credit capital and liquidity remain quite strong.
This year's performance. So far continues to demonstrate the strength to more conservative well capitalized client service business model.
This is our 30 feel fear of consistent organic growth and consistent continuous profit a building.
Let me turn to three quarters strong results.
You every year total loans outstanding were up 19%, excluding PPP launch.
Total deposits grew 22% year over year.
Wealth management assets were up 20% year over year, despite the extraordinary market volatility during the period.
Yes across the board growth continues to drive our financial performance.
Total revenue grew 20% year over year net interest income has grown 19.5% year over year and tangible book value per share has increased 12.6% year over year.
Importantly, our credit remains quite strong now.
Net charge offs for the quarter were only 1.7 million and had been only 3 million so far year to date.
Nonperforming assets at quarter end were a very modest 12 basis points.
Our tier one capital leverage ratio at quarter end was a strong 8.38%.
We were very pleased in September to successfully raise $500 million of qualified tier one fixed for life perpetual preferred.
This was issued that's a very attractive dividend rate of 4.8%.
In fact, this is the lowest ever done rate ever achieved by bank for a fixed for life perpetual preferred.
In terms of our market share performance for a moment.
We recently released recently received the results of our two year or every two year cap Gemini household study.
The study looks at our growth and penetration within the high net worth household segment, which is one of the many segments that we serve but is representative of the enterprise overall.
The number of such households that we serve grew 16% per year between 2006 to 2017 and 2019.
This is very very strong growth in it compares to 11% per year during the prior two years study period.
Overall, that's a 40% acceleration and household acquisition growth rate.
As a result, our overall market share in this segment has grown very nicely over the period to nearly 5%.
Yes market share growth rate represents an 18% increase in share position in just two years, it's hard.
It's our largest to your share gain since we began doing this study in 2003.
The strong household growth reflects the continued power a first republics very differentiated service model.
In short, we take very good care of our existing clients, who in turn grow their account sizes with is continuously utilize additional services all the time and provide very strong referrals.
Just proven sustainable model has a compounding effect that continues to drive organic growth.
Overall, it was a very strong quarter as we plan for the future. We're actually very excited about the continued growth opportunities immediately ahead now let me turn the call over to Guy or Connor President. Thanks.
Thank you Jim It was indeed, an excellent quarter, that's strong client activity across the franchise.
We are delighted that this quarter's performance and our strong household growth.
Over the past several years, we have successfully scaled our culture and service model to manage and increasing household growth rate without compromising our very high standards of service and safety.
Among other things this is included.
Growing our talented and diverse workforce the linchpin of our service model by about 10% year to date.
Selectively opening new preferred banking offices to enhance our community at present.
Investing in technology to provide greater service option for our clients and to scale our service model.
And investing in infrastructure and risk management to maintain our safety and soundness.
For example, our digital banking platform works hand in hand, with the personalized service delivered by our bankers, providing a technology enabled yet customized experience for our clients.
Clients can access their trusted banking team seamlessly, but that one touch digital to human connection through our mobile app.
We have also enhanced Klein options [laughter], so sorry digitally they prefer.
From account opening to select transactions and accounts control.
Yeah also giving our colleagues more time to delight, our clients and deepen existing relationships by streamlining and automating repetitive tasks.
More customization greater access to dedicated bankers and continued service excellence drives overall client satisfaction, which in turn fuels our continued strong organic growth.
With that in mind, let me turn to an update on lending.
Loan origination volume in the third quarter was 12.2 billion, our best quarter ever.
Single family residential volume also set a new record at 6.8 billion for the quarter.
We are pleased that home purchase finance accounted for 42% of single family residential volume up significantly from 20% last quarter.
Refinance activity also continues to be very strong and.
And provides an excellent opportunity to acquire new household.
The majority of our refinance activity comes from clients previously at other institutions.
In terms of credit we continue to maintain our conservative underwriting standards.
The average loan to value ratio for Oh real real estate loans originated during the third quarter was just 56%.
Turning to business banking loans, then line commitments, excluding the paycheck protection program were up 14% year over year.
During the quarter business line utilization remained consistent at 34%.
This is in line with our historical utilization range of mid to high 30.
As we begin the fourth quarter, our overall loan pipeline remains very strong.
Up meaningfully from last quarter.
Let me provide a brief update on our club related loan modification.
At quarter end, the dollar amount of loan modifications totaled 3.7% of the total portfolio.
As a reminder, most to find modifications made in April and May, but then initial duration of six months.
Therefore, the deferrals are scheduled to expire during the fourth quarter.
We expect the vast majority of our clients to return to normal payment at that time.
And early indications are quite positive.
In terms of funding it was an excellent quarter.
And this time, a fellow surgeons and low rates are safety soundness and differentiated service.
More highly valued by our clients than ever before.
Total deposits were up 22% from a year ago.
Checking deposits increased by over $6 billion in the third quarter and now represents 65% of total deposits.
Business deposits represented 58% of total deposits up slightly from the prior quarter.
Importantly over 85% of total funding at quarter end came from deposit.
Turning to valves management assets under management increased this quarter by 8% to $168 billion.
This growth was due to strong market appreciation plus and net client inflow of 4.6 billion during the quarter.
Also since our last call we welcomed three new valves management teams to first Republic.
Overall, it was a very strong third quarter now I would like to turn the call over to Mike Roffler Chief Financial Officer.
Thank you Guy out.
We are pleased with the record quarterly revenues of $1 billion up 20% year over year.
Earnings per share were also a quarterly record of the dollar 61.
Earnings per share did benefit by approximately nine cents from onetime or onetime items, including discounts on loans sold.
Insurance proceeds and an amended tax return refund.
Our balance sheet remains quite strong in terms of credit capital and liquidity.
Our provision for credit losses was 28.5 million slightly less than the second quarter.
In contrast, no charge offs during the quarter were only 1.7 million.
So far in 2020, we have added over 122 million to our reserves.
While net charge offs for the same period have been only 3 million.
Let me discuss our continued capital strength.
In September we were pleased to successfully raise $500 million of fixed for life perpetual preferred stock at the historically attractive rate of four and one 8%.
This was our largest equity raise however.
Well the portion of the proceeds in October we retired the hundred million dollar, 5.7% series, a perpetual preferred stock.
As a result of these capital actions, we expect quarterly preferred stock dividends to be 18.5 million beginning in the first quarter of 2021.
We are pleased to declare this quarters dividend of 20 cents per share or common stock.
2020 marks first republics ninth consecutive year of dividend increases.
Also as a reminder, first Republic does not engage in share buybacks.
Our liquidity position remains strong HQ delay was 12.9% of total average assets in the third quarter.
Including $3.1 billion of eligible couch.
Given our strong deposit growth and liquidity position, we prepaid approximately 1.4 billion of FHLB advances, which were coming due over the next two quarters.
Net interest income increased 19.5% year over year.
Our ability to grow and I, that's such a strong pace reflects the power of our consistent growth of earning assets and.
The stable net interest margin.
We are particularly pleased with the net interest margin of 2.71% for the third quarter up.
Up a basis point from the prior quarter. This.
This of course reflects our ability to deploy our strong deposit growth into well secured real estate lending instead of leaving those deposit dollars in cash and short term investments.
Driven by strong checking deposit growth the cost of funding declined by 11 basis points, which more than offset the 10 basis point decline in earning asset yields.
We continue to expect our net interest margin to be in the range of 265 to 275 for the full year 2020.
Our efficiency ratio for the third quarter was 60.7%.
Our efficiency ratio did benefit by about a 100 basis points.
From the previously mentioned one time discounts on loans sold and insurance proceeds.
We expect our efficiency ratio for the full year 2020 to be near the lower end of the range of 62.5% to 64.5%.
Our effective tax rate for the third quarter was 19.6%.
Given the positive tax refund mentioned above we expect our tax rate for the full year 2020 to be near the lower end of our range of 20% to 21%.
Overall, it was a very good quarter.
Now I will turn the call back over to Jim.
Thank you Guy on Mike [noise]. It was good overall very strong quarter with high quality growth across the franchise.
As we continue to grow we are very focused on continuing to scale our model by investing in people infrastructure and technology just.
This combination further supports our service model and sustainable growth now.
Now we'd be pleased to take any questions. Thank you.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you're using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment again.
Again press Star one to ask a question.
Well pause for just a few moments to allow an opportunity to signal for questions.
Well take our first question from Steven Alexopoulos with JP Morgan.
Hey, good morning, everybody.
<unk>.
Maybe maybe to start on NIM and follow up on the guidance that Mike just provided.
I get the range is consistent but do you think the NIM can hold like relatively steady in this 270 range heading into Fourq you.
Yeah, Steve it's been remarkably resilient or right around to 70 to 72 for the year, a and it feels like we're in a pretty good place in this range or given the new business that we're doing and some of the reduced funding cost and importantly, you know we're able to deploy our.
Deposit growth into you know strong credits that are earning a decent yield.
Okay. That's helpful and then on credit maybe for Jim. So one of the major concerns that investors have for all banks are cycles on commercial real estate, where your New York San Francisco are the number one number two concerns now that the cycle somewhat better understood here, which asset classes within commercial real estate do you see.
Most at risk and do you think things will end up losing money on commercial real estate deals in either New York or San Francisco.
HM well I think the choice of your focus on.
Commercial real estate, let's let's leave out multifamily it for a minute, let's just focus on office and retail and other sort of versions of true commercial real estate those are probably the areas. Most at risk I really cant comment you know very annoying knowledgeably on other banks are ours.
Our our lending in San Francisco, New York on commercial real estate non multifamily the loan to value ratios are all south of 50% in the portfolios and the and the size of the deals are actually pretty small they average about 5 million. So I don't think there's going to be actual losses taken.
Those properties are under a lot of pressure ranging from not very much a well run office buildings was a number of and number of tenants in them or or credit tenants.
Who retail which as we all know it's got a lot of problems.
And Jim how would you compare New York to San Francisco seems like New York's under a lot more pressure, what's your view well I think it's I think it's certainly getting a lot more press.
The bigger obviously I'm not sure I, it's hard to tell and as we know in more in the office market in New York. There are several markets actually Midtown Hudson yards downtown and those markets are functioning slightly differently. The Hudson yards is getting a fair amount of press, but of course, it's just coming online and it's a new.
Just a space in town, where we have a heavy commitment there and I will say that as it seems to me at least you know very well and those are mostly larger credit tenants.
Because of the type of space. It is I think San Francisco the rents are down commercial rents are down meaningfully in San Francisco consensus would go through this kind of up and down every once in a while.
And it sounded probably I would say the incremental rights and San Francisco are down probably 15% to 20%.
Vacancies not that I bought the rights the incremental rates are are down a lot.
Okay. That's helpful and then [noise] [noise] for final question. So on a year over year basis period end assets grew 20%, which is fairly consistent but when I think of your balance sheet at least historically loans had been the primary driver of the balance sheet and then you would back filled with deposits. If I look at the recent trends it looks like the pods.
[noise] are starting to pull the balance sheet and it's really the business bank doing that is this a temporary phenomenon tied to clients building more liquidity or do you see something changing more on a more sustainable basis, which would obviously be favorable for NIM. Thanks.
Actually let me start that answer and then pass it to guy up but.
For 35 years the driver on the bank has been its lending problems and our ability to stay with my remember 50, 560% of all of our loans every year are made to existing clients and that's our biggest growth element and then there are direct referrals are 25% another.
25% and so that's our driver and always has been only recently, we've been able to funded entirely without diving into <unk> into a wholesale markets have been it kinda, we didn't do that too much over the years anyway recently, obviously with the fed increasing its balance sheet, there's a lot of liquidity around but let me turn the guy on.
For the deposit side yeah.
Yep.
They're very pleased with the strong checking growth, especially over $6 billion and 40% quarter over quarter annualized instant deposit growth has been as a result of new households, the on the back of the Paycheck protection program businesses, giving us even more.
Charles even those who haven't necessarily done those loans, but does and the consumer account balance sizes are also higher compared to a year ago and you're seeing the growth coming in from very diversified sources that includes in addition to p. being active a professional services realized stage and are now.
Profit says well increasing in their deposit balances. So we are really pleased that the a flight to service and the safety.
Great. Thanks for taking all my questions.
Well take our next question from Bill Carcache with Wolfe Research.
[noise]. Thank you good morning, I wanted to start off with a question on your revenue growth against a backdrop of low rates and weak loan growth crushing the rest of the banking industry.
Idiosyncratic tailwinds in your business model.
Continuing to stand out can you give a little bit more color on your confidence level and the durability repeatability and sustainability of those idiosyncratic drivers of growth, even if the low rate environment and margin pressures persist and do you see any indication of that growth.
But even if not now is there any risk that you see of that growth being competed away overtime.
Well you know the growth is just kind of said in the last answer.
Is driven by our net promoter score, which is in the Seventys, which is twice the banking industry average that's just a simple way of measuring client satisfaction. So that the growth in the bank starts with the fact that we have we don't lose very many clients every year, we have about a 2% attrition most of the banking industry tends to run it.
By the heat so that's so keeping and satisfying the client you have now is the number one key to continued growth because if you keep them you grow with them on their balance their checking account grows they do more in the home lending areas cetera, and so that's the that's the driver of the growth.
And then they are very happy and they refer other clients. So that model has been successful year in and year out for 35 years is calm the loan the loan line who's probably compounder that about 15% to 16% for 35 years through thick and thin or the margin is a little.
More complicated because its very subject to macro conditions.
We're holding up as Mike just said better than we than we had hoped although our projections indicated we would but we were you know there's a lot of pressure here I wouldn't know tenure being up slightly recently is not it's not a negative but I think because the sustainability of it is a it's been you know is is historically.
No clear to see our job is to maintain our service quality. If the service quality is maintained the growth will be maintained.
Thanks, Jim if I may as a follow up some of your competitors have hedging programs in place that have served as a source of support for their net interest margins, particularly as we move deserved after the pandemic it but I don't believe we've seen.
You guys put on any hedges can you briefly touch on your hedging philosophy, and whether you've ever felt like you're at all competitively disadvantaged by by not putting on hedges and also since you're not receiving any hedging benefits today, you're not gonna face any future headwinds as hedges roll off but would appreciate your thoughts on just you know those.
Jim dynamics overall.
No. This is interesting conversation my <unk>, we do not hedge HM our hedge is basically a good business are done with clients out of spread and we've we've resisted hedging over the years. Many times, we've been presented with good ideas, but we just don't take them arc screw.
Currency is that over a very extended period of time hedges, sometimes increase volatility rather than decrease it.
They can go wrong or the accounting for them can go wrong and just to add to Jims comment. The organic had just first Republic is the earning asset growth coming from good then the more clients we have as long as they're happy the more deferrals, we get and that earning asset growth is a can largely offset.
Fluctuation smells like to modest fluctuations and then Ah so the and I our growth continues to be strong with our organic.
Organic growth and driven by client services Jim explained.
[laughter].
Very helpful. Thank you.
Well take our next question from Ken Zerbe with Morgan Stanley.
Great. Thanks, good morning.
Lorne can like he's actually just tell us where your new loan and security yields were in the quarter on the stuff that you put on.
Oh, so new loans, if you look at home loans, Hi, too is.
Multifamily around three and a quarter in CRT around 350, so when you sort of blended all together. We're you know just just shy of 3% and.
And security side selling them on to me said Ah 275 around to 75 that P Y and then government agency share lays around one in a quarter to one and Uh huh.
Got it Okay and then just in terms of the I guess, the one in a quarter, one and a half Nike security yields are certainly much higher and I know you have a longer duration, but.
Is it fair to assume that all things equal to your security yields just continue to I mean, it had loan yields presumably if you're you know depending on where you're putting on like just kind of creep lower I mean, I guess I'm.
Looking at the numbers and I could easily see sort of when you go to 2021 2022.
Call. It I don't know 10, 2030 basis points lower asset yields as is the movie Reprice Zephyr.
Yeah. So we do our guidance rate 2024, NIM is to 65 to 75, Ralph around the mid range, we are not giving guidance for the next year given the uncertainty in general So we typically do that in the fourth quarter call, but I would say in the news the way they look at it just overall new lending yields are coming in.
Around just around 3% on the marginal and the marginal funding cost is around 30 basis points. If you take that as a rough cut so that's right in the middle of the range for NIM and then I would also add NIM is just one part of equation for first Republic. They are strong and I add gross as he said is largely offsetting a modest fluctuations in them.
Got it okay, and just really quickly in terms of the NIM guidance I guess call. It roughly to 70 does that include the benefit of the accelerated PPV amortization from loan forgiveness.
So it it does include it but I'll say this we don't expect much of that until 2021.
At this point, we have submitted less than 50, I think to the Sps for for their approval. So it's early on in the process I think that's more of a early 21 dynamic.
Okay, great. Thank you.
Well take our next question from John Pancari with Evercore.
Morning.
Good morning, John.
I'm on the commercial real estate topic again, Jim I, just want a confirmed or did you indicate that you don't expect to take losses in that portfolio at this time.
I wouldn't I wouldn't be that I wouldn't be that cavalier about it quite a oh, we don't know yet if so if we have losses are going to be it is there going to be one at a time, it's going to be quite they the grow the loan portfolio that loan portfolio as a group is actually reasonably strong.
And it starts out because we have very low loan to value ratios, which of course means high cash flow coverage on the outside.
Right. Okay. Okay got it and then also on the commercial real estate front can you just remind us.
What percentage of your commercial real estate portfolio is in those since the more impacted areas, including office and hospitality retail.
Commercial on all of the commercial office space.
30% is in San Francisco, and 24% as in Manhattan.
And just to add the club it impacted hotel retail restaurant overall is less than 2.5% about 2.3% of our total loan portfolio and be denied modifications are even less well say around $640 million and they've done that very thing.
We have a great collateralization realized they backed over 95% and personal guarantees in most cases.
Okay got it thanks, and then just to follow up on credit as well how should we think about the loss.
Or net charge off trajectory here I know your losses were up slightly in the third quarter fair to assume that we see losses really didn't see my guess is.
Impacted by the pandemic in the next couple of quarters and if so is it fair to assume that that loss content has already been provided for in your reserve and accordingly, we could start to see.
Implied loan loss reserve ratio declines.
[noise]. So there's a lot of time in fact, there John but I think well you saw I mean, it's not no. It's okay, well you've seen with US and also the other banks. This morning mean provisions are a bit lower than they had been the early part of the year, which I think is what Cecil was intended to have happened when when things start to improve you're right our loss.
Has it been very low we've done a good scrub of the Covis portfolio.
And any losses that may come out of that you know, it's likely going to be in the 2021 calendar period versus you know something that pops here in the fourth quarter.
One of the things that that I think I mentioned was that our modifications were largely done in April and May and so they're now coming off modification and back to regular payment status.
And thus far it looks like we're in about 90%.
I've already come back onto their regular payment status. So they're still in the Kobe <unk> book right now, but October already has been a very good start to people just resuming their regular payments, which.
Would you can you know gives us confidence that you know the losses that Jim mentioned and whatnot, you know look to be relatively low at this point, but it'll it'll be in 2021, when it'll come home or sort of conclude.
Got it okay, Mike Thank you.
Well take our next question from Casey Haire with Jefferies.
Yeah. Thanks, good morning, guys.
Mike a couple of follow ups on the NIM just on the funding side of things. The CD book, obviously, repriced a little bit like a meaningfully lower this quarter. What is what is the opportunity for that to continue versus that 134 rate and then also the FHLB advances at 160.
Great.
Are you guys going to continue to pay down a those and what is do you see a rollover rate.
Let me, let me start on the deposit side, and then I'll turn it to Mike for the overall NIM guidance.
On the deposit the average quarterly rate was 21 basis points. This spot trade is in the low teens.
And intensify our funding cost total overall liability overall funding cost there's a lot of tools in the tool kit that'd be dynamic dynamically optimize so there's some room for improvement, but I would go back to the I'll turn it to Mike for the 265 to 75 for the year, we feel comfortable that that yeah, and then just on your comment on.
Slide show be we do have not a lot of maturities less this year. So you won't see a lot of movement, probably until next year if rates stay where they are next year, you'll see our FHLB funding costs. There is some opportunity there which leads us back to a guy a set of why sort of we're comfortable for the margin outlook for.
The rest of 2020.
Okay great.
Next question is just on the efficiency [noise].
You know if we tease out the overage on the fee side of things so it looks like the efficiency ratio.
We should see ratio came in a little under.
62%.
<unk>, what was a record origination quarter [noise].
I I know you guys aren't giving guidance on next year, but are you guys you know learning.
You know it sounds like there's an expectation that you could you could run more efficient or do we do we run back to him.
Historical efficiency ratios.
No. So I think you're right when you when you sort of tease off the one off were just under 62 for the quarter and I think for nine months were just under 62 and a half.
That has benefited a bit from Oh.
A lack of advertising and marketing and a lack of travel and any sort of client activity or client event.
There will be a point in 2021 that you'll start to see those cost tick up.
I think the stability of the margin you know we talk about this a lot. It is the ratio and the stability of the margin has also had a flow through benefit to the efficiency ratio, but I do think some of these costs that have been avoided given the pen down that will start to come back next year at some point.
Which is why we're sort of look at another update in January.
And adding to Mike VR long term thinkers and we take a long term view on the business and they're a great client service opportunities, especially right in this moment.
So now is the time for us to continue to invest in the trunk club organic business growth.
Understood.
Oh, just last question on the on the loan growth could you can you provide a little bit of color on the geography, just given you know what's going on in New York City like a I think last quarter you guys referenced.
There's a lot of you know New York City suburb activity I'm, just you know the resi mortgage [laughter] drove about 90% of loan growth by geography can you could you just provide some color there to give us some some insights.
Yeah, it's very strong so total single family residential third quarter originations vary quite strong at $6.8 billion across Oh, all of our key regions, including New York. The purchase market has been strong quarter <unk> quarter over quarter and year over year and mid choice.
That purchase activity in New York, specifically was in the suburbs and that picked up quarter quarter over quarter I'm. The re Fi activity also continues to be quite strong now representing about 58% of the total activity a and that is consistent across all of our regions saw and we've seen great activity in loss.
Angeles to that has been quite strong market, especially over the last few quarters.
Great. Thank you.
Well take our next question from Chris Mcgratty with KBW.
Oh, great. Thanks for the question.
Mike just going back to the balance sheet mix I'm in the margin dynamic you look at the last couple of years securities as a proportion of assets. It's come down from about 20 to about 15% today is there anything magical about the 15%.
Number given given the size and liquidity.
The level of liquidity, you need or could that ratio drift, a little bit lower which would support them into next year.
So one of our things that were very focused on and we talk about every quarter is our HQ olay levels, and we're always going to be above 12% of average assets. There. We also do have some securities are largely municipals that don't qualify as such so I don't know that you go a lot below 15% from here.
I think we have not bought as much recently, given where yields have been for some of the newer agency type instruments. We would just as soon hold it in cash for now and deployed into the lending portfolio for client demand 'cause that's really our focus is to serve clients need or client activity.
Okay, that's great.
It may be one with the with the election a couple of weeks out you know two items are getting a lot of press, one be tax rates and and other being kind of regulation.
You know like I think I asked this question last quarter about you know any thoughts on potential sensitivity to taxes with with the Biden.
With the Biden victory and then also any thoughts either growth or credit from from your student London student lending refinance business given some of the proposals that are on the ballot. Thanks.
Well the [noise].
Taxes, if you mean by your question the Arvind taxes impacting our markets on a I would say, there's a little bit of movement [noise].
Based on taxes out of the northeast and out of California to lower tax states, but mostly among people that were probably fairly ready to move already the I don't I don't think we have a comment really on the macro impact of of one candidate or another obviously, but in terms of student loan re.
Finance actually holding up very very well our volumes, we've shifted over to a broader based <unk> a personal loan or line of credit lending that product is up and running and doing well the delinquency in the portfolios is quite good it's consistent with its low it's up consistent with our single family.
Actually I'm much to our pleasure.
[music].
Oh.
[laughter].
And we'll take our next question from Brock Vandervliet with you'd be yes.
Oh, thanks very much.
I just wanted to hone in a bit on the end game with respect to these deferrals, so 3.9 billion.
It's kind of roughly 90% cure rate. So for example, say 390 400 million may not go back to normal.
Normal P.N. I payments, what becomes of those are those TD ours or those modified under 40 13.
What happens there.
<unk>, Yeah Barack so.
To the extent they are coming due this year there is an ability if it's a short term challenge.
Which in many cases it is if you have to come back for another request a we'd likely would do a short term a modification under under the cares Act.
And it would then be carried as a a continued to be accruing loan that that relief under the carriers that goes run out at your end and so after that if you need any more than you likely start to see a migration at that point because you're in totality of deferrals, one Ben you know.
Up to a year in some cases you know the other thing I'd say is this well it may go down that route.
Down that route the loan to values are still in the mid 50% range. So the loss content again is still relatively modest from what we've seen at this point in time.
And at that point, you know the or the total is about 40 basis points using that math of the loan portfolio.
Okay.
And just shifting gears over to two mortgage.
I Wonder if you could describe that 10.3 million gain aside from that it looked like the mortgage gain was.
24 basis points that looked about in line with where it had been historically, albeit you know very volatile or we kinda back to historical.
Levels there.
So on the gain that was sort of a one off we had we had previously sold some loans that during the market dislocation had an opportunity to buy them back at at a relatively attractive price, which we didn't execute upon a market since recovered.
Securitization wanted to be done by you know one of the banks and ER, we delivered into it and that's why you saw the sort of the acceleration of that that market dislocation from an earnings standpoint.
We're pleased that the <unk> the gain did improve to over 1% without that a one off this quarter I will say that you know well we don't do a lot of conforming sales we have started to do more in that.
And that market has been pretty positive given the way Fannie prices I'm still I I don't know that I declare it all the way back but it is better that.
It's running at a more consistent rate of gain than it had in the maybe the past few quarters, which it bounced around a bit.
Got it okay. Thanks for the color.
Okay.
Well take our next question from Dave Rochester, with Compass point.
Hey, good morning, guys nice quarter.
Good morning, guys. Thanks.
I wanted to start with the deposit growth. This quarter you had some really solid growth and you know it was even more impressive since you had pretty much a normal tax season hidden July for Q, It's normally a pretty strong quarter for you guys as well and I was just wondering based on what you're seeing at this point are you expecting that momentum to.
Continue.
Thank you and yes, we do expect that momentum to continue both on the consumer side on the business side, given the activity and the single family residential activity being so strong on the origination side on both purchase and refinance it gives us a great opportunity to acquire new households, because most of the Wi Fi is actually come.
From clients and other institutions that are also bringing their relationships over to us and as you pointed out second half is usually the strongest and so you would expect that trend to continue.
Yeah, Okay, Great and then just on a comment you made earlier on the loan pipeline.
It sounds like you said that was up meaningfully just from last quarter and obviously a this quarter you had some great loan growth I was just wondering what the mix of that looks like if you are still driven primarily by resi, which I would imagine that momentum still continuing but also was curious to hear about the key.
Apple called business as well, what you're seeing there.
And it sounded like you talked about utilization rates in business banking remaining fairly stable and I guess that was the case and the capital call business as well.
Yeah. So let me start with the first one the pipeline is meaningfully strong compared to both last quarter and last year and the job. When you look at the six week rate lock volumes in single family residential for example, it's a double the same time last year.
In terms of volumes are very very pleased with the strong pipeline and client activity in terms of and sings I'm not going to use it as strong purchase every five multifamily continues to be strong as well and we are very cautious on boat that service coverage and a loan to value ratios and theory is relatively speaking slower.
Volume capital call commitments grew 17% year over year and Utilizations around the mid Thirtys. So you would expect that did not meet 30, you know low fortys type of mid to high Thirtys type of range. The p. remains attractive given rich equity valuations and low rate.
And with the specs being a tailwind for the monetization of P. S. At a very seeing great activity in the P. space. In addition, I would and but the diversification on the deposit side has also come from professional services, the non financial services sectors, as well, including professional service and non profit.
Great all right. Thanks, guys appreciate it.
Thank you.
Well take our next question from Andrew Liesch with Piper Stanley.
Hi, good morning, everyone.
Thanks for taking the question. So so far this year, obviously seeing very strong loan growth. Previously you guys were discussing a mid teens pace, but with a strong pipeline you're heading into the fourth quarter or is it safe to assume that the growth.
For the year is going to be stronger than that then your initial thoughts.
Well [noise].
It'll certainly be at least the mid teens.
What you don't know is fall, while our closing rates were quite busy and closing and closing oh challenges or continue to persist in some of the some of the pieces of the train them closing.
But it should be it should be a it's more about 17% year to date.
And Ah, that's obviously, a eliminating P.P. as well which was in the into your you have to be careful to take that out.
I think we're probably mid teens high mid teens.
Okay.
Thanks, and then it sounds.
It sounds like you had some.
Good growth and new a new client inflows in the wealth management business or how does the pipeline look for adding new clients there.
Well the pipeline is a little harder to estimate because they just you know that the sales cycle in wealth management is quite different than lending a you don't have necessarily the pipeline kind of analysis that you have been lending obviously our growth comes from both of those.
Going over existing clients, adding new clients by wealth advisors and wealth managers that are already with us and bringing on new teams. The last part of the year is the slowest part of hiring of new teams generally.
Okay understood. That's very helpful and just a couple of follow up or a housekeeping questions on the fee income side, but the BOLI income for the quarter or even backing out the gain was still up substantially is this a good run rate or how should this level or Hudson December bounce around going forward.
Yeah. So there's there's two things I'd, probably pull out to get to a better run rate one would be the the claim that we had the proceeds that was just over 5 million and then each year in the third quarter, we have an annual.
Benefit from one of our policies, it's roughly $2 million call. It. So if you took those out there probably get you back to a better normalize run rate going forward.
Okay. Thanks.
Thanks for taking my questions.
And again to ask a question. Please press star one.
Again that is star one to ask a question.
Well take our next question from Aaron Scana Watch what city.
Thanks on the on the residential lending side, maybe just talk a little bit about the purchase volume.
Purchase volumes continues to be pretty good for you guys. It was 42% is what you said, but the re Fi obviously still still elevated from the low rates, how long of a runway or would you have for for it for the re Fi you know due to remain somewhat elevated in this kind of low rate environment.
Oh.
So there is they there are two sides to the reside there is the first of all the client Wi Fi and there is the non first Republic Klein Wi Fi and in these type of a rate of markman.
We do see clients, giving us more trial, a and the refinance provides and an opportunity to do so.
And overtime, our trusted advisors to deepen the relationship. So we would continue that trend we would continue to see that trend over some time, a and then the purchase activity is picking up quite meaningfully quarter over quarter, including <unk> and San Francisco Vascos as well as in New York given.
That there is more price discovery, although not complete yet, which also brings additional activity today or to the origination space.
Okay. So we're very pleased the pipeline is quite strong as it stands right now.
As well as the rate lock volume is double last year's volumes.
Thanks.
Thank you.
Well take our next question from David Long with Raymond James.
Good morning, everyone.
Good morning, sorry, Mike one on <unk>.
Yeah.
Three things the first one I had is on the deposit side is there a level of your deposits that you take it in over the last quarter or two that you may say has been simply because of the pandemic and your customers trying to keep a little bit more cash on hand, I guess I just want to know if there is of course your deposits.
It could be at risk of running off if the economy picks up stream and we get back to some degree of normalcy next year.
Yeah. So let me let me start out drifting on the consumer side, we do see the average account size is year over year or slightly up because of.
Because of that and that the business on the business side have you seen those are clients deepening their relationships as well as all of you have got.
We have gotten on the back of the P.P.P. given the service they have gotten a lot of referrals on the back of that program as well or do you expect those deposits to be stable given they have a great service and the deepening of relationships that are a bit our bankers and I'm also I wouldn't underestimate in addition to.
The service the safety and soundness of the bank in these type of times are also attracting more deposits coming in in addition, when you look at the non deposit funding alternatives given the rate MRM and there's a lot of tools in the tool kits. If we do do a dynamic optimization as part of that we switched from the barbell of C D and checking to more checking in.
Money market, given that the Cds or not that attractive from the Cline perspective from a rate perspective, but they continue to be a strong part of our business and client acquisition.
Got it. Thank you for that color and then the second question on Slide 21, you break down some of your business exposures in more detail maybe can you provide a bit of color on what types of loans are included in the aviation the professional service and clubs and the membership buckets, just those seem like a <unk>.
They carry maybe a little bit higher risk just just a curious what exactly you're talking about in those areas.
I'll take that to the aviation, it's mostly airplane finance to our higher net worth private clients.
Mostly guaranteed so I don't know that there there was and of course, the the market value on the aviation assets is actually quite determinable.
Professional service firms those tend to be a guaranteed partner guaranteed lines of credit to law firms casual accounting for and that sort of thing and and then we have some and then clubs would be there aren't aren't very many of those but to the fund their lending in there would be probably up to <unk>.
Some of these improvement type of loan with a with a first trustee.
Got it. Thanks I appreciate that additional color Thats, all I had thanks.
Thanks.
Well take our next question from Jared Shaw with Wells Fargo.
Hi, good morning.
Good morning, Gerard I'm just gonna.
Just go back to the theory or deferrals I'm, assuming that the loan to values at origination I guess did you comment on what the impact of a continued cash flow disruption is on on some others see or read categories that are more risks at the office and retail and hospitality have you seen any.
Any impact on on valuations are going to see sales are through re appraisals.
Well you know the its a good question and then of course there are there. It's I would say this is not clearly determined yet to be to be accurate on the other hand, what we're noticing is that there are beginning to be price discovery in the form of deals now on the hotels as well as Ah office building.
More hotel properties, and some retail properties and the the price discovery and hotels would indicate this is anecdotal, but it's beginning to mount up in the kind of 30% range and up slightly a higher maybe on a on a non branded its inner city facility, but.
And the office space or haven't been very many transactions. So it's hard to call they're down clearly a they sell they sell a cap rate on on on a free cash flow.
The cap rates have come down they the interest rate drop however is also catching them.
And so well I think was being overlooked is everybody is looking at the gross revenues on these buildings and forgetting that they carry cost from DAT is down substantially too.
So it's it's really more a case of getting more transactions in order to discover it but I don't think I don't feel overly exposed given our very conservative loan to values going in were below 50% on the portfolio in each case and in Manhattan were actually below 40.
And we have guarantees on about half of it.
That's great color. Thanks, and then I guess, maybe a time with that how is the the.
Environment of working from home change your thoughts of the need for office space for the bank.
For the bank and you know does that change your thoughts on Hudson yards and potentially looking at other bigger projects like that.
Let me take that kind of overall and then ask guy to speak on the specifics but.
We.
Hudson yards rental activity leasing activity surprisingly enough is holding up reasonably well I think everybody's aware of Facebook, taking the entire Moynihan station, that's part of Hudson yards really a 750000 square feet. They were in negotiation before cobot head. They recently signed a lease.
Yes, it was down about 10% to 11% from the original negotiations and they took the whole building and it's you know it's all high Tech obviously, a high tech enterprise regular leasing in other buildings is actually proceeding slower than it was but it is proceeding on the general rates are down about 10% to 15%, we're not at all concerned about Hudson yards actually.
Hi, it's gonna be delayed in its in its delivery delayed in its optimization, probably about a year by the time. This is Don we don't know because we're not out of those yet obviously in terms of our own use let me turn the guy and what's your what were thinking in terms of our own offices. So.
So during Corvidae primary focuses safety, if our clients and colleagues so about 25% of our colleagues isn't the rotational program.
And are obvious our preferred banking offices are fully open with the exception of to where they're on the campus of employers that they're also working from home sales or fill in business in our branches.
As and our plans for openings on the P.B.O.'s. We do expect to go ahead with the opening therefore offices the P.B. office in Hudson yards in the next 12 to 14 months and in the next 15 months. So you would expect to open about six new offices in New York City area.
We just opened Portland into third quarter, and so we are looking forward to serving our clients in those offices.
Great. Thank you.
Thanks.
Well take our next question from David Chiaverini with Wedbush Securities.
Hi, Thanks, I had a question on the tax rate so.
Back in 2017, when the corporate tax rate was reduced to 21% from 35% first republics tax rate. They didn't really change much I was wondering you know after the election, if the corporate tax rate were to increase to 28% to what extent could that impact first republics hatchery.
Ah so Dave Thanks for the question you're right about back in 2017. So the bank has had a pretty optimized to tax efficient portfolio between municipal securities low income housing a bank owned life insurance.
And so as a result, if it's let's say, 28%, where the new corporate tax rate.
That would be a 7% increase in the federal rate.
Our <unk> rate would go up about 4% because those investments would have greater value.
From a yield perspective, when looking at our overall taxes.
Great. That's all I had thank you.
That concludes today's question and answer session. At this time I will turn the conference back to Jim Herbert for closing remarks.
Thank you very much everyone were delighted to have you on today, we we're delighted with the flow of business. So backlog is strong and we expect to continue to have a strong a rest of the year. Thank you very much have a good day.
This concludes today's call. Thank you for your participation you may now disconnect.
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