Q1 2022 First Republic Bank Earnings Call

Please standby.

Greetings and welcome to first Republic Bank for first quarter 2022 earnings Conference call. Today's conference is being recorded during todays call. The lines will be in a listen only mode. Following the presentation. The conference will be opened for questions to join 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 Mike <unk>, Vice President and director of Investor Relations. Please go ahead.

Thank you and welcome to first Republic banks first quarter 2022 conference call speaking today will be Jim Herbert founder and Executive Chairman, Mike Rossler, CEO and President.

Mike Selfridge, Chief Banking officer.

Bob Thornton President of private wealth management.

Oh, the silk of our Chief accounting Officer, and acting Chief Financial Officer.

Before I hand, the call over to Jim. Please note that we may make forward looking statements. During today's call that are subject to risks uncertainties and assumptions.

For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward looking statements see the bank's FDIC filings, including the form 8-K filed today all.

Available on the bank's website and now I'd like to turn the call over to Jim Herbert.

Thank you Mike Good morning, everyone I'd like to make a few introductory comments before I turn this over to the team.

Let me start by saying I'm very pleased that the board of directors has appointed Microsoft for a CEO .

Mike joined us more than a decade ago prior to the imagine buyback of the bank. His leadership contributions have been felt far beyond his previous role as Chief Financial Officer, Mike truly embodies our service culture and growth mindset.

Most importantly, this appointment ensures the continuity of our very differentiated service based business model.

Mike and our experienced leadership team have a deep understanding of what makes first republic's uniquely successful, including the empowerment of our colleagues our steadfast focus on safety and stability and our dedication to extraordinary client service.

This model has delivered consistently profitable results and strong steady growth for 36 years through a very wide range of economic and geopolitical environments.

Yeah.

In my new role as executive Chairman I look forward to leading the board engaging with our largest clients and shareholders, while focusing on our strategy corporate culture, and supporting Mike and the rest of the team as they carry the first Republic model forward.

As you can see from todays terrific earnings results the continuity of our culture and business model continues to deliver consistent very good results now, let me turn the call over to Mike.

Thank you very much Jim.

It is an honor and privilege to serve as first republics C E O.

We have many opportunities in front of us and I look forward to partnering with Jim The board of directors, our leadership team and our colleagues to continue the growth and success of first Republic.

Now, let me turn to this quarter's results.

As Jim mentioned it was a terrific first quarter.

Cross the board.

Loans deposits and wealth management assets were all up significantly from last year.

In terms of loan originations this was our best quarter ever.

At the same time credit quality remained very strong.

Nonperforming assets were only eight basis points at quarter end, and we actually had net recoveries during the quarter.

Exceptionally strong credit has been a hallmark of first Republic since our founding and it will continue to be going forward.

We are pleased to raise our quarterly dividend for the 11th consecutive year. The consistency of our dividend is indicative of our strength and stability and our continued positive outlook.

Year over year total loans outstanding were up 19, 7%.

Total deposits have grown 27%.

In wealth management assets were up 25%.

This strong growth in turn led to strong financial performance year.

Year over year total revenues have grown 23%.

Net interest income is up 22%.

While net income was up 20%.

And tangible book value per share has increased more than 14%.

Importantly, our tier one capital was up 26% as you recall, we added $2 8 billion of net new capital in 2021 in anticipation of our growth.

In addition to the strong financial performance during the quarter. We also successfully completed our core conversion the largest technology project in the bank's history.

Strategically our new core system lays the foundation for continued growth.

By further enabling digital banking innovation.

Driving the scalability of the entire enterprise in support of our bankers and wealth professionals.

And enhancing client customization and security.

As important the system strengthens our regulatory and operational infrastructure as we continue to grow.

The core conversion was a true team effort that points to the highly collaborative nature of first Republic I want to thank all of our colleagues for a job very well done.

While this major effort is behind US we continue to invest in technology to serve our clients and empower our colleagues.

During the quarter. We also released our 2021 net promoter score or NPS, an independent measure of client satisfaction.

We are very pleased that our overall NPS increased by six points to 79, our highest level ever and significantly higher than the U S banking industry average of 34.

Our consistently high scores increased across every region.

Every line of business.

In every generation of clients.

Additionally, the more clients do with us the more satisfied they are.

For clients, who consider us their primary bank or lead bank.

Our NPS increased to 88, the highest level ever.

Quite importantly, nearly two thirds of our clients now consider us their lead bank.

Our improved NPS, even during the pandemic demonstrates the strengths of our the strength of our client centric model under challenging conditions.

A testament to the dedication of our team and the effectiveness of our technology investment in recent years.

It is clear that the more challenging the environment the more client service is valued.

As we look ahead to the rising rate environment first Republic remains well positioned our balance sheet is strong and our service model continues to thrive.

Demand for client service is not cyclical.

Overall, it was a great quarter now I will turn the call over to Mike Selfridge, Chief Banking Officer.

Thank you Mike.

Let me begin with an update on lending.

Been a very strong start to the year.

Loan origination volume for the first quarter was a record $17 $8 billion.

Single family residential volume was very strong at $8 4 billion, our second highest quarter ever.

Single family volume accounted for nearly half of our total volume during the quarter.

Multifamily volume for the quarter was also very strong at $1 $7 billion also our second highest quarter ever.

This robust lending activity during the quarter highlights the strength of our markets and our clients.

This is further reflected in our loan pipeline, which is significantly higher compared to the same time last year.

We continue to expect mid teens loan growth for the full year of 2022.

In terms of credit we continue to maintain our conservative underwriting standards.

Our average loan to value ratio for all real estate loans originated during the quarter was just 57%.

Turning to business banking it was a very successful quarter.

<unk> loans and line commitments, excluding PPP loans were up 18% year over year.

During the quarter the utilization rate on capital call lines of credit decreased slightly to 40%.

This remains at the higher end of the historical utilization range.

Now, let me turn to funding.

Overall, it was another very successful quarter of deposit growth.

Deposits were up three 7% from year end and 26, 7% year over year.

We continue to maintain a diversified deposit funding base.

Checking deposits represented 70% of total deposits at quarter end.

And business deposits represented 60% of total deposits at quarter end.

The average rate paid on all deposits for the quarter was just five basis points in line with the prior quarter.

This led to an overall funding cost of just 11 basis points down one basis point from last quarter.

Our strategy of acquiring and growing the next generation of client relationships, which began over a decade ago continues to be very effective.

For example.

Year over year households acquired through our personal line of credit and professional loan programs were up 15%.

And we've acquired more than 5000 such households in the last 12 months.

Clients, who came to first Republic through these programs now represent fully one third of our total consumer borrowing households.

I would note. These two programs are more than self funded with deposits.

Our next generation client base has grown.

We've also continued to develop the next generation of relationship managers. These internally trained relationship managers now make up over one quarter of all relationship managers.

As Mike mentioned, our model is performing quite well and continues to drive our safe stable and organic growth now I'd like to turn the call over to Bob Thornton President private wealth management.

Thank you, Mike our wealth management business continues to perform very well despite market volatility.

Year over year assets under management grew 25%.

During the first quarter, our investment management business had a record net client flow inflow of $4 9 billion.

Our overall AUM decreased a modest 2% during the quarter due to market depreciation.

Wealth management fee revenue for the first quarter was $221 million up 39% year over year.

We remain very focused on serving our clients with financial planning brokerage Trust insurance and foreign exchange services. In addition to investment management.

This comprehensive approach benefits our clients, while also diversity diversifying our fee revenue with services that are less subject to market fluctuations.

We also continue to focus on deepening relationships with our wealth management clients by meeting their banking needs.

It's sourced from our wealth management colleagues increased 28% year over year and now represent 14% of total bank deposits.

Our integrated banking and wealth management model has continued to make first Republic, an attractive destination for very successful wealth professionals.

Since the start of the year, we've welcomed three new wealth management teams to first Republic.

Overall, our wealth management business continues to perform very well despite the broader market volatility.

Times like these are a great opportunity to demonstrate our exceptional service and acquire new households.

Now I'd like to turn the call over to overstock of our acting Chief Financial Officer.

Thank you Bob.

The consistent focus on credit capital and liquidity, we continue to operate in a safe and sound manner.

Our credit quality remains excellent as Mike mentioned during the first quarter, we had net recoveries of approximately $300000.

Our provision for loan losses for the quarter was $10 million. This modest provision reflects our underwriting discipline and excellent credit track record as well as our first of all that next.

Our capital position remains very strong.

At quarter end, our tier one leverage ratio was eight 7%.

This reflects the benefits from five successful capital raises in 2020 , one totaling $2 $8 billion on a net basis.

Liquidity also remains very strong high quality liquid assets or 16% of average total assets for the first clear.

Our net interest margin was 268% for the first square.

In line with our guidance.

We continue to expect our net interest margin to be in the range of $2 six 5% to seven 5% for the full year 2022.

Importantly, net interest income was up a very strong 22% year over year.

This is due to the robust growth in earning assets and a stable net interest margin.

Our efficiency ratio was 62% for the first square.

We are pleased to maintain a stable efficiency ratio as we continue to invest in the business.

We continue to expect the efficiency ratio to be in the range of 62% to 64% for the full year 2022.

Our effective tax rate was 22, 9% for the first quarter.

We now expect the effective tax rate for the full year 2022 to be in the range of 21% to 22%.

This slight increase is due to reduced tax benefits from the vesting of stock based awards.

Overall, the year is off to a very strong start reflecting the consistency of our model and now I'll turn the call back over to Mike Ross there.

Thank you, Jim Mike, Bob and Auger, we've had a great start to the year.

For over 36 years first Republic's business model has been grounded and conservative credit strong capital and liquidity.

Holly empowerment, and most importantly, an extraordinary level of client service.

This foundation remains unchanged.

Our model is as strong as ever and our entire team remains focused on executing each and every day.

Now we'd be happy to take your questions.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if youre using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again that is star one to ask a question, we'll pause for just a moment to allow an opportunity to signal for questions.

Okay.

Yeah.

Our first question comes from Steven Alexopoulos with JP Morgan.

Hey, good morning, everyone.

Good morning to start good morning, good morning, Mike on loan growth. So regarding the record originations you guys saw in the quarter, maybe could you unpack that a bit give us some more color of why we saw the best quarter for originations ever I don't know if there was a rush to refi or what happened there and then as rates rise how.

Much of a headwind will that likely be ink and good for the first time, many years to mid teens outlook for loan growth be at risk.

Hey, Steve It's Mike Selfridge, yes, thanks for the question.

Yeah, just to unpack it a little bit to your question I would say overall the service model is what differentiated us in the market and drove a lot of the significant growth.

Maybe a little bit of a pull forward on refi given the rise in rates, but I think it was very consistently steady, particularly in single family. Good mix of refi purchase refi was a little bit higher than normal about 58%.

But very solid in the purchase market, where you know we excel was quite strong despite limited inventory.

Capital call line activity was strong and I would say the backlog going into the second quarter is strong.

Rising rates, yes, that'll be a headwind for refi looking back historically reef.

Refi has never dropped below 40% of our total single family origination volume, we think that'll hold pretty well.

Okay.

So even with rising rates still confident in the mid teens outlook.

Outlook for the confident in the mid teens for 2022, Yeah I might just add on Steve. If you go back to a couple of the last cycles when rates have risen we've been pretty much sort of 15% to 18% loan growth and it comes back to where Mike Selfridge started with the service model being there for clients acquiring new households, and really serving.

Their needs because even in times of.

A bit of challenge in the market are a bit of challenge in the economy. We're there to serve clients every day and so that resonates and that leads to.

What's sort of the continued deepening and expansion of relationships UC.

Okay. That's helpful.

And then.

On loan.

Loan yields the original view that as mortgage rates moved up a bit you might not see much benefit to loan yields I think you thought you might see spreads compressed maybe can you walk us through what youre seeing real time here and within the NIM outlook being maintained what are you expecting for loan yields as mortgage rates continue to drift up.

So Steve.

Back on the heels of strong origination volumes at the end of the quarter. We were we were originating single family just a little bit over 3% about 305.

Multifamily about 345% in commercial real estate about 365 business banking depends on the segment capital calls is the largest segment. There is probably about prime minus 25 to 50 bps.

75, depending on the situation, but and I would say its trending upward.

Yeah, I think that's the key point is starting.

Starting in the quarter, Steve I think you are getting that competition a little bit.

Very highly competitive you didn't see a lot of repricing in the early parts of the quarter and as you got later, we started to see the drift up and Thats you know, Microsoft just quoting sort of even even last week rates and it's even sort of still climbing a little bit from here.

Okay.

Guess, what I'm trying to understand the last time you gave.

Outlook for NIM for this year on the prior call you said lower end of the range are you still being lower or maybe could we push up I don't know to the upper end of the range given it sounds like loan yields are going to get a bit better here.

I think thats right based on where we see the business today and I think you are probably pushing up towards the middle.

Of the range versus the lower end of where we've been at.

Okay.

And then thanks, and then finally in terms of quite a few management transitions over the past few months, maybe for you Mike now as the CEO give us an ally what what are you folks most focused on here. What do you think you need to improve on and you know I don't know what the message has been to employees. Since you took over and then Jim I Love to hear from you too right executive.

<unk> implies youre going to be more involved than just the typical chair role. How are you thinking about this new role and what will the involvement with the company. Thanks.

Well thanks, Steve I appreciate the question as this is Jim.

The first thing I'd say is as my transition to the CFO role does not represent a strategic shift in our direction.

It represents the continued thoughtful evolution of our client focused model and the continuity of our unique service focused culture, which has been at the heart of everything we've done for over 36 years.

Oh, the bank has a very successful business model and strategy that doesn't change right, whereas we talked about in the prepared remarks. Our foundation is built on strong credit capital liquidity at all times.

And our total focus our colleagues that have come to work so far today and that are on their way in this morning is on providing exceptional client service and that then drives our growth.

In terms of improvement.

Exceptional service comes from continuous innovation that doesn't stop we will keep doing that we stay close to clients, we listen to what they need and then we empower our colleagues to go deliver.

That doesn't change and we're going to continue to invest.

In the franchise to support our colleagues and support our clients again, which drives our growth.

And maybe just a few examples right Mike Selfridge touched on acquiring and building next generation relationships are very important part of the strategy as we plant seeds for the future.

The relationship between banking and wealth management through an unsigned load again focused on client delivery.

We also look at markets, we're excited with Hudson yards coming online. We're excited that we're going into Seattle through Belvieu here pretty shortly and are already there with wealth management.

And again.

Exceptional service both in person digital online.

Continue to leverage technology and data and most importantly continue to empower our colleagues.

In terms of our employees.

Every day, we wake up and think about our current client and taking care of them.

Great care of them. They will bring you more business. They will also bring you to your next client.

And we're going to continue to be thoughtful and focused on how we invest in technology and innovation to serve clients and.

And frankly.

The fantastic people in this company are what drive the collective success and the results you see and what we've talked about so far today.

And I am extremely grateful.

Thanks to their efforts continuously and to just be a part of the team.

Just a wonderful business and our job is to now continue to build that.

And serve clients and take great care of them every day.

Okay.

That's helpful.

Steve This is Jim.

Thank you Mike just gave you the game plan basically going forward, which is really no change no major change.

My role is gonna be to work.

Worked with reward to focus on strategy, along with Mike and the whole team.

To pay attention to our largest shareholder largest shareholders and clients and also work with some of our largest bankers.

Bankers and wealth managers in terms of what can we do to help them more so I do see it as a fairly active role.

But not day to day, not fulltime Saturday Okay.

Yeah.

Great. Thanks for taking all my questions.

Our next question comes from Milan, <unk> with Morgan Stanley .

Hi, good morning.

I wanted to ask a question on.

On expenses, you kept <unk> expenses flat quarter on quarter.

Slide the negative seasonality that you would typically have.

And I know you've kept your.

Fully our efficiency ratio guidance, but I was wondering can you talk about how expense growth is tracking relative to the expectations. You had in January to what extent are high inflation and competition for talent driving higher expenses.

And you also mentioned that you completed your core systems conversion.

I was wondering yes.

That drives some incremental cost saves.

Given that it gives you more flexibility and also some costs associated with the transition should come out as we go through the year.

Sure.

In terms of efficiency ratio as I mentioned in the remarks, we continue to expect to be with Olive garden re guided range of 62% to 64% for the full year.

We're pleased to see that the pace of revenue growth at that pace.

The growth of our expenses and for the first quarter, we see the seasonal impact of higher payroll taxes and benefits, but also they have some benefit from.

Our reduced cost due to the pandemic. They have a lot of opportunities ahead of us to invest in our franchise and our colleagues in our preferred banking offices and our new technologies.

In terms of inflationary pressures in our compensation.

Our colleagues are the reason for the success of our business and we always focused on trading I'll call it fairly and compensating them properly as well. So this is why we don't expect to see much of the pressure on our existing colleagues, but with some inflationary pressures on dania colleagues that they bring on board for the core conversion.

We have.

Bounce back and in our guidance for the full year, we have completed the conversion, but we still have to maintain a system. So you'll you'll continue to see the cost around the system going forward and overall for those reasons I believe that we feel confidence with our guidance and we expect our expenses to grow in line without revenues.

Great.

Very helpful and maybe if I can follow up with a question on Securities I mean, I think securities grew 18% versus year end, which is.

It's higher than the 6% or so that we've seen in recent quarters.

I assume part of this was deposit growth and also theres more opportunity from from higher rates.

Can you talk about like you know what duration and what kinds of securities you're putting on and also how we should expect securities growth to trend from here.

Yes, no. Thanks.

Thanks for the question. So the the securities strategy is largely two pronged as it's been.

Our H drill a portfolio we've continued to average in over time.

Continued during the quarter and given the strong liquidity and how we feel we felt it was appropriate to maybe add a little bit more than we had in 2021. For example, the second part of our investment strategy is municipal bonds, which has been.

A core part of the bank really since we bought the bank back in 2010 and have been investing in municipals from that time on and it's been a very good one.

One yield for our portfolio and number two.

The way of managing our taxes and so we've been very active in the Muni marketplace frankly every quarter for the last 12 years and that continues and if you think about the long term of first Republic, it's really about.

Investing for the future and that goes with investments right, we averaging over time.

We will continue to do so as the balance sheet grows.

The percentage of investments.

Total assets doesn't deviate a whole lot. So it's it's probably in this range is a safe one as you go forward.

Great I appreciate it thanks for taking my questions.

Our next question comes from Casey Haire with Jefferies.

Yes. Thanks, Good morning, everyone wanted to follow up on on the NIM Guide.

Holding it flat.

Last quarter, you guys talked about three hikes and cash balances elevated.

I'm just wondering you know how many hikes you're expecting.

Now and then the cash deployment was was up this quarter. So cash balances down I'm just wondering what you mean, what what's you're looking for there and then finally just deposit.

Deposit betas should we just use the last tightening cycle is as a proxy for how deposit prices trend.

So for the name, we still believe that our guided range.

Well I feel comfortable about 265% to 75% for the full year.

2022 as you know it is the cash balances decreased two 8 billion at the end of first quarter compared to 13 billion at the end of last year and it will benefit me am I in the second quarter.

Mike Selfridge talked about stay alone yield speaking app. During the later part of the coding going into the second quarter successes will benefit the NIM in terms of the beta.

As we've seen in the lifecycle of 2015 through 2019, the beta was about 19%, but as we know cycles are not the same and in the last cycle. It takes out about two years to get over 100 basis points and we think this.

This time, it will take them sooner.

To get there and that being said, we plus shown over time that.

The model produces stable and consistent results in different rate environments on the last call in January we've seen three fed hikes for this.

At this time I see him seven fed hikes going forward.

Okay, great. Thank you.

And then.

Another one on the loan growth outlook for Mike Selfridge.

I'm, sorry, if I missed this but the loan pipeline how how is that.

How is that shaping up versus.

The 12 31 pipeline.

Casey it's above the 12 31, and as I mentioned, it's up significantly year over year, and it's I would characterize it as strong going into Q2.

Okay very good and just last one from me.

You know as you guys continue to put up this this robust growth you are tracking towards.

That ever important $250 billion asset level, probably 2024, just what do you guys see as you know.

Heavy lifting that you need to do between now and then.

To keep on sides with regulators.

Yes, well what are the implications for.

Financial implications.

So thanks for the question I think the one thing I would characterize as when we went from under $50 billion to over we had to build everything.

Right and so there was a big leap at that point to get liquidity stress testing capital stress testing all built and established.

And even though now we're not subject to those $50 billion rules anymore, we still have those programs in place.

Right, we still run capital stress tests, we still run liquidity stress test so theres only enhancement from here, which we're working towards and we've done resolution planning for example, and we're still subject to that so a lot is not new in the infrastructures in place you'll have to enhance.

One of the great things about the core conversion is it will help with the data needs and also.

Faster data faster information to allow us to do these things on a more real time basis.

And so we're obviously building already but it's not as big of a leap as you would've saw like we all remember from about seven years ago. When we went over $50 billion.

Great. Thank you.

Our next question comes from Erika Najarian with UBS.

Hi, good morning, Jim It so good to hear from you again and Mike Congratulations on your new role.

My first question is you don't.

Follow up to Steve's line of questioning given the volatility in the outlook for the economy. You know there are a lot of investors that were speaking to that are newer to first Republic.

And Jim and Mike.

Perhaps you can answer this question that I'm getting you know clearly the rate trajectory at the forward curve is pricing in is much more violent and significant than we've seen.

Over the past several years and so I guess, how do you reassure future shareholders about the durability.

Alrighty of single family growth maybe up.

And this public forum, what sort of the secret sauce is and for Mike Selfridge, I think there's a big debate on what much higher rates will mean for private equity and venture capital and so given your experience here.

How should we think about you know.

Investments speed and you know them you know other.

Other financing needs as rates.

Materially and quickly.

Eric.

Excuse me, it's Jim let me start with the answer.

On mortgages.

We have I've been at this business, a long time mortgages lag a little bit as Mike was indicating.

Both mikes actually.

They are climbing fairly rapidly and what happens as they move fairly quickly as competition tends to pull back, particularly mortgage broker originations and secondary market originations those are coming to almost to a halt already and.

So our opportunity to continue to grow is greater than one <unk>.

The other thing is we're doing most of our business, 60% plus with existing clients and we still are.

The other thing is that our deposit base is entirely different now than in any prior run up where we're at almost 70% checking and 60% from business banking, which is to some extent working capital.

The mortgage business will continue.

Part of this bank I started running and 1980 and went through the early eighties and even then we made a lot of money.

As spread widened on mortgages and there was business to be done so I don't really worry about it very much.

The increase is going to be more violent than we had predicted but as all good just said we've redone our forward projections around seven increases if I have that right. We did seven increases in the NIM stays the same.

The NII still can still expand since we've set in our deck. So that's that's the mortgage piece, let me turn it over to Mike or Mike for the business fees, yes.

Yes, Erika to your question on the.

<unk>, just a little backdrop on last quarter fund raising was strong.

<unk> did slow a little bit by velocity I mean, the pace of investment in terms of dollars.

Exits slowed and that's an exit driven business so public markets, if they correct down.

Then the industry is going to lag a little bit, but having said that there's still a lot of room for us to grow and so even if velocity slows and even if utilization rates gravitate toward the mean, which is about 33%, 35%, there's still a base level of business being done and some of the best funds are actually investing more heavily in the down cycle because they are taking.

A more of a three to seven year.

Time horizon in terms of their investment cycle.

So I'm confident we'll still be able to do well.

Even if the economy turns in that particular segment and I just note that credit quality in that particular segment is stellar.

Hey, Erika maybe maybe one.

One last comment I'd make.

Because I like the start of your question.

Sort of in a uncertain backdrop or challenging backdrop and.

And sort of what you see in the results here in sort of our outlook during challenging times in the past.

The benefit of client service, which drives growth.

Right. So if you think about a few of the things like <unk>.

Not down very much because client inflows is driving it despite the market volatility loan pipeline and backlog remains very strong because again, we're there to serve clients when as Jim mentioned, others might be pulling back a little bit.

And continuing to deepen and increase relationships with clients, who consider us their lead bank and so service becomes even more valuable when times are challenging.

And Thats, what drives growth and staying very focused on credit safety soundness, and it's even more valuable. So it's really fundamental to the way, we operate and try to maintain sort of that.

Consistency and stability in all periods, because we want to be there for our clients.

Got it my second question is a little bit more technical and this is for Mike or and Olga.

As we contemplate the bank crossing 250.

There's a big debate in the marketplace about.

How much more liquidity you would have to add to potentially have to adhere to the liquidity coverage ratio. So.

It's a multi part question number one you mentioned that you have $29 9 billion in each key Huawei.

Our our Moody's considered level, one or level to be and just for.

A broader audience to be would count for less right.

That's right.

And so that's the first question and the second question is you know obviously the other factor of this is your outflow assumption or your deposit base of your liabilities.

We think of that 70% checking.

That you lauded for this quarter are those higher value deposits on their LCR in other words are they considered mostly operational therefore, you don't have to hold as much liquidity against them. If you would for a non operational deposit or financial institution deposit for example.

Great question, Erika and Youre right.

As a technical to the first part the municipals would be considered to be.

A good portion of our municipal portfolio qualifies as HLA and so it's it doesn't count as much as level one as you mentioned.

To the second part of your question on the deposits and the different outflows.

One of the things Thats important to one is segment is by industry type and then also youre right operational versus non operational is very important.

Where we mentioned earlier the core system and our data is very important. So we can quantify the amounts of operational and so think about lead bank.

Very important designation typically leads to they are using us for their operating activities and so a good portion of those business and consumer are going to be operational in nature less outflow.

As we've mentioned before and I think people have written about this.

The mix of deposits being diversified is also helpful. So you are not reliant on any particular industry and all of these activities are absolutely part of our strategic planning process and how we think about the deposit base as we go forward.

Got it and just to wrap this all up.

Could you maintain that net interest margin range, even as you add more liquidity to your balance sheet in anticipation of crossing 50.

So.

It's a good question and again a lot of it will depend on how much liquidity needs to be added and that will depend on the deposit base at the time. So it's hard to say how impactful it will be other than we don't believe it's it's a threatening impact and could it could it move your margin to lower end versus middle to higher up.

Probably yes, but the deposit base at the time also will have a big impact on it and what the rate environment is.

Got it thank you.

Our next question comes from Jonathan <unk> with Evercore.

Good morning.

Just a couple clarifications on some of the topics already brought up so on the on the deposit sensitivities Olga. Thank you mentioned, 19% beta prior cycle. What is your assumption now baked into your your latest outlook scenarios and has that changed.

So last cycle as it was at 19%, but for this cycle. They expect they would be slightly higher than this.

Given how fast plan.

More than 19%, yes, just a little bit given how fast given how fast the fed's going to move just a little bit but not not much.

Okay, Alright, but you don't have a quantification of what's in your assumption.

It's.

Given the deposit mix is a bit different than last time right at the 19 is all in.

It's a little bit higher than that but not not much.

Okay got it alright, thanks, Mike and then.

And then on the lending side on the capital call business.

Mike Selfridge I appreciate the detail you gave there.

You indicated the modest decline in.

Line utilization there.

Could you give us a little bit more of a near term outlook do you think thats likely to you could see that continue to gradually shift lower.

Maybe perhaps some.

Additional color in terms of.

What youre seeing in terms of.

The change in borrower behavior or appetite near term on those around those lines.

Yeah, John maybe a couple of thoughts.

As I said it was down slightly it was down from something like 41% to 40% and that's still elevated if you'd look at a longer historic view again, historically somewhere in the 33% to 35% range. So it's hard to predict it's still holding up.

Well there is still activity and I think overall and if you look at the dry powder or the industry I think it's somewhere in the eight <unk> one.

One eight trillion dollars range in the United States. So there's still a lot of dry powder to deploy which will.

Most funds will use capital call facilities to deploy capital.

Investments and then call that capital. So I think it's going to hold up well, but again velocity with likely slow with the broader economy from what I see.

Got it Okay. That's helpful and then lastly on the expense efficiency.

Sufficiency, Todd I know you reiterated the 62% to 64% Youre running around.

60% right now can you just talk about the.

Likelihood of hitting that range and what gets you there where are the.

What are the dynamics that are influencing that range remains.

<unk> 64 for your guidance versus where Youre running now.

Yes, sure the guidance.

64% includes several components first quarter as we said we had elevated.

Payroll taxes and benefits, but we were pleased that our revenues outpaced the growth of revenues outpaced the growth of our expenses.

We continued to invest in the business and our people preferred banking offices as well as technology also we had a benefit in the first quarter from lower costs due to the pandemic as they return it back to the offices, which we did later this quarter and the first quarter. We expect those costs to go back to more normal levels as will continue.

Sure. It was start doing my travel do more client events and impression events for our colleagues.

And especially as I think about expense growth to be in line with the girls without revenues.

Yes, I might just add we're really pleased that we've been sort of at the low end at 62% of our range.

While continuing to deliver.

Extraordinary service to our clients.

Continue to add to our colleague base and invest in the franchise for the future one of the things that we're always doing is investing for future growth and fueling future client needs and and what they want of us and so I think it's really important that we maintain that consistent sort of range, while we continue to invest and also.

Sort of deliver good stable consistent returns and we're pleased that the level and it would be great to stay at the lower end.

Where we've been the last few quarters and we're really we're pleased with that while continuing to invest.

Got it thanks, Mike take your $60 or 62 now.

Thanks for the color I appreciate it.

We will take our next question from Dave Rochester with Compass point.

Hey, good morning, guys nice quarter, and Jim good to see back and Mike Congrats on the promotion, it's definitely well deserved.

Wanted to go back to the margin.

Got it let me go back to the margin guidance was wondering how youre thinking about the deposit growth trajectory from here do you have baked into that and I. Appreciate the detail on the loan yields can you just talk about yields in the securities you bought this quarter. What are you seeing those purchase yields today I would imagine they are even higher now that'd be great.

Hey, Dave Mike Selfridge, I'll start with deposits and hand, it over to Mike and Auger.

Yes.

Olga mentioned, the deposit beta and actually I'd point, you to sort of our ability to grow deposits on historic cycles of rate hikes to.

2016 to 2018, we still grew deposits, 18%, even going back further 2004 to 2006, we grew deposits at 25%. So I think our ability to acquire new households, the service model that Mike talked about the seeds, we planted in areas like the next generation of households, and relationship managers.

The mix business to deposit 60, 40, the channel private banking wealth management, which is now a large driver of deposit growth.

Business banking relationship managers, I think you put all that together and we're confident in our ability to to grow the deposit base and grow it to keep pace with the mid teens loan growth.

Yes, maybe just on investments for a minute you're right Dave the yields today.

<unk>, our fourth quarter, roughly and that was probably just under 4% in the first quarter.

And <unk>, if you think of sort of a three to four year duration as you know call it three and a quarter now and was probably.

Started the first quarter in the low twos and rose to the low threes.

So call it $2 50 to $2 75, so you're definitely seeing the benefit in new investment from the uptick in rates.

Yeah, well it makes sense appreciate the color and then are you guys thinking about cash levels from here or where is your comfort level on that bottomed out since we saw decent drawdown in that this quarter.

Hi, Dave the cash decreased a fan of the first quarter to email in prostate Haynesville anyway had sandoz filed last year and <unk> is about 4% of total assets, which we see more as more normal level for us.

So that's one of the main fairly steady from here I would imagine.

Sounds good.

And then just switching to the multifamily segment. It sounds like you guys saw big acceleration of <unk>.

Production there, we definitely saw that the growth this quarter.

You mentioned, a little bit of a pull forward in loan production just in general given the rate move and we've heard that there would you be actually a decent refi boom going on.

Right now the New York City multifamily market I was just wondering if you guys had seen any evidence of that and maybe you could just give an update and what youre seeing in that segments and multifamily just across your footprint.

And how your pipeline looks in that particular segment that'd be great.

Yes, we were pleased with the second best quarter ever in terms of the $1 7 billion originated it's a little lumpier, but I would say overall multifamily is performing well as an asset class investors are looking for it because rents and vacancy rates have rebounded generally in our bigger markets to pre pandemic levels.

And.

What else can I say, there I don't I don't know if there's a little bit of a pull forward. There just like the refi on single family, but not a whole lot and so I think it's just steady as she goes as it relates to multifamily in.

Just reminding you again, our median size of what we've originated looking back through the pandemic is less than $2 million loan to values at origination about $55, 60% strong debt service coverage ratio with recourse not deviating at all from our strong.

Stellar credit standards.

Alright, great. Thanks for the detail guys.

Our next question comes from Ebrahim <unk> with Bank of America.

Hey, good morning.

Just wanted to follow up on you.

Mike you talked about growth.

Growth out into the loan book relative to rates I just wanted to get your perspective in terms of how do we think about.

<unk> market remains stalled and you have a significant correction in tech stocks.

And in the private markets, what does that mean, when you think about just lack of wealth creation and what that means for more lending client acquisition.

Expected in terms of clean.

Can you make if you look back how has that played out in terms of Oh, Oh for the bank.

Well first of all I would say given given our locations are Boston, New York Silicon Valley L. A we are an innovation centers and that is alive and well despite ups and downs of cycles I don't think it's going to impact our business at all the service model that Mike mentioned again, a little more than half of our growth coming from existing clients and.

Put it in perspective with market share Thats generally on accumulative basis less than 5%, we still have opportunity to grow despite the slowdown in the IPO market.

I'd also add that.

Yeah.

Premier hitting that a little bit of <unk>.

Because of the slowdown people buy less homes are not as active in the reality of it is that Marcus renter.

Typically supply constrained there.

There are more buyers than sellers at any time and so even if you have a few less buyers that don't have the liquidity or didn't have the expected liquidity. There still are plenty that are looking.

And typically not enough supply in the markets, which is why you see strength in multifamily and things like that because.

To Mike's point. These are innovation centers that people still want to be in.

And so they're going to live somewhere.

Okay.

Got it and understanding that you have a lot of market share opportunity in these markets like you mentioned.

Give us a sense of the pipeline any new markets that youre looking at or growing beat Texas, Florida cases their relatives migrating.

Well given the market share stats that I just mentioned, we can still grow this franchise.

Very well just going deeper in our current markets, but as far as Newmont first of all we're pleased with the growth and in.

In all of our markets.

Florida, we're investing more in Florida, we have a new location I think we mentioned last quarter in Bellevue, Washington, Bob in the wealth management side, let us there and Thats a we believe that's a significant opportunity and then of course just growth in our in our existing markets as well.

No plans for other geographies at this stage.

Got it thank you and Jim welcome back.

Thank you very much.

Okay.

We'll take our next question from Andrew Liesch with Piper Sandler.

Hey, good morning, everyone, Jim will come back and Mike Congrats on the promotion and great to see you.

Question on the single family originations in the quarter.

Just some breakdown on structure, we released five one arms seven one arm what was the mix of what the what your originated.

Yes, we don't break it down by that category, but generally speaking.

Amongst our hybrids and I would say five seven and 10 ones and then we do some 30 year fixed rate as well.

And that's always been consistent with with our client base.

Right right.

And then I guess with rising rates I think historically the duration on your single family book has been around three and a half years, how do you expect that to shift how much.

You may get extended out a little bit further what dynamics at play do you.

Or do you think or what dynamics do you think will be at play here.

Yes, Andrew it will definitely extend a little bit and that's not unexpected we see repayment rates will will dip a little but it wont extend as much as one might think just by looking at the primary rates because the client base is very active right.

They they go and buy a second home or they buy a larger home and so it's not as a drop off in terms of repayment rates extending duration as one might think but we've been running at 19%, 20% CPR that will flow into the teens.

As you sort of get through this refinance and this this rush that Mike Selfridge talked about earlier, but it's not a big a duration extension that you normally would see in a mortgage lender.

Got it okay.

Very helpful.

Covered all my other questions. Thanks, so much I'll step back.

Our next question comes from Bill <unk> with Wolfe Research.

Thank you good morning within the commercial real estate portfolio as you look across your customer base. How do you see the risks that high quality tenants and in class a properties will continue to abide by the by their lease obligations through the end of their lease terms, but ultimately not renewed because they simply don't need as much space.

<unk>.

So a couple of maybe just from an industry perspective, and in our larger markets like New York San Francisco CRE commercial in general is more challenged obviously with the <unk>.

<unk> vacancies are somewhere in the 20% range for first Republic Thats not the case, we're doing smaller deals and and they're holding up well. So the you did point out one important point from an industry perspective leases are generally longer than carrying.

Carrying owners through through a cycle return to office as a tailwind and then from our perspective credit quality is strong and we're being very selective.

The best opportunities.

Got it Thats helpful.

Separate question some banks are expecting a more pronounced decrease in deposits across the system as the fed begins to reduce the size of its balance sheet, but it sounds like you expect the impact on first Republic to be relatively modest can you go into a little bit more detail on what gives you confidence in your ability to sustain deposit growth at levels sufficient.

To support your loan growth without much of an increase in your deposit betas relative to the last cycle.

Yes, Thanks, Bill I think the thing that gives us confidence is if you come back to this the service model in our business model.

Even in periods of rising rates in the past, we have grown deposits, 15% to 18% relatively consistently and if you look back to 2015 19 that was the case.

And the reason for that is even though the fed is acting.

Service doesn't stop and so we are deepening relationships, we're adding new households, we're adding new wealth management teams, which bring households, and so that activity.

Leads us to continue to grow our deposit base.

<unk> seen that time after time and it comes back to fundamentally our business model is attached to service and and doing what clients have asked of us and that doesn't ever stop.

Okay.

Understood. That's really helpful. That's it for me.

It's great to hear you back and healthy Jim and let me also offer my congrats to you Mike. Thank you.

Thank you.

We'll take our next question is from Terry Mcevoy with Stephens.

Hi, Good morning, I was just wondering in your conversations with clients are they asking about higher deposit rates I did notice last week you began a CD special I think 11 months and I didn't know if that was in response to those types of conversations or two to maybe fund some of the loan growth that we've talked about on the call.

Yeah.

Thanks, Terry periodically we run.

Deposit special it's a little bit of testing in this a little bit in response to ask but it is not a.

Driver of anything at this juncture I would say that that client conversations are probably started but with only one fed hike and at 50 basis points Theyre not significant at this point in time.

I would say, let me just add that we won't run into much of that conversation until we get up into a full digital moves.

They've gone up a percent or so then that's going to matter because of the money market mutual funds or would bring about the question.

We also have a great deal of money swept off the balance sheet.

Mike would know that number better than I, but I think we're north of $10 billion.

Right that's right.

Ah.

Our solutions for clients, both on and off balance sheet, and we've really expanded that capability in the past and it exceeds $10 billion now.

Which again provides great optionality both of the bank and for the clients.

Okay, and then just as a follow up what's the best way to think about the second quarter investment management fees in the equity markets were down in the first quarter, but you also continue to have new client inflows.

This is Bob.

You hit on the key thing we have very strong net client inflows, we had a record net client inflow for the first quarter I think will be about 160 in investment management fees for the first quarter.

And I would also just highlight that even though we have a typical blended fixed income and equities most of our pricing on our client portfolios as a blended fee. So.

The moves don't make that big a difference as you think.

Great. Thanks, everyone.

Yeah.

We will take our next question from Jared Shaw with Wells Fargo.

Hi, good morning, Thanks for taking the question.

Maybe starting with Microsoft Bridge, you gave us the.

Yields on loans at quarter end do you have those numbers for the for the average for the quarter.

I don't have them off the top of my head I want to say the average somewhere around 311 totality of originations.

Okay across all across all of the products across all products correct. Okay.

Okay, Great and then.

Looking at the allowance level.

50 basis points year loans is this is this a good floor to assume as we are.

As we go forward that that.

The allowance won't go much lower than this or is there still room for that to.

Move down.

As a ratio of the provision the provision levels, we had a modest provision in the first quarter, but what drove it it was our strong credit track record as well as our portfolio mix and if you look at our first of all that growth about 80% of the loan growth on the balance sheet came from single family loan. So that is why.

That is one of the drivers of the levels of provision whereby 50 basis points now, but as you know that's useful introduces some volatility the provision levels.

For example, this quarter some of the economic scenarios have worsened because of the worsening economic environment, but it didn't have a significant hit back on the provision, but giving out great credit track record and the portfolio composition the levels of provision candidates at current level or it can even go below where we are now.

Do you have with the with the.

With the provision or I'm, sorry, what the allowance level was just for the SSR Suez is 80% of that growth is coming from that lower.

Or is that higher quality.

Bucket, that's all high quality, but you know what I mean, it's you.

In terms of the actual allocated allow.

The allowance being lower what's what's.

What's the allocation for <unk>.

It's pretty low.

I wanted to say 10 or 11 basis points.

And that is look at our history and our importantly, our underwriting.

<unk>.

55%, 60% loan to value over time, even with.

A flat housing price appreciation, you don't see much change or much loss content in those loans and so it is a pretty low percentage and so if that drives most of your growth do you see a lower provision, which you saw this quarter.

Aaron It's Mike if I can just clarify the number I gave you on the originations for all loans is just under 3%. So it's right around where the total loan yield is for the portfolio.

Okay, Alright, great. Thanks, and then just finally for me.

The past you all have mentioned wanting to have sort of two years of growth capital.

Under your belt do you feel do you feel that you're.

At that point, given the silver bus growth outlook or.

Our reserve into the the two year Christian there now.

I think we feel very good given the $2 8 billion net that we raised in 2021.

That's one of the reasons we.

Went early in many cases like we did last year.

The markets were a lot more receptive than they are currently and so we feel good about our positioning today, we obviously remain opportunistic and we do want to continue to look forward to ensure the capital basis, there to allow us to serve clients.

The future but.

But right now we feel pretty good with where we're at.

Yeah.

Great. Thanks, very much thanks for taking my questions.

Our next question comes from Chris Mcgratty with K B W.

Good morning.

This is Chris O'connell filling in for Chris Mcgratty.

Most of my questions have been asked but just wanted to circle back on the margin discussion.

You guys give comments about cash coming down, particularly towards the end of the quarter.

Loan origination yields are above the portfolio yields.

Securities origination yields are coming in higher as well.

Along with it.

Better deposit profile than previously.

Everything kind of points to you know.

Improvement in the margin from here.

And you guys are kind of starting at close to the midpoint of your guide. So I guess, what's what are the factors that are pushing.

Pushing back on that or not having you guys.

Commit to being you know.

At a higher point in the NIM range.

Thanks for the question and comment I think you hit on a lot of good points with.

Cash levels being down a little bit that is a it's a boost to the margin.

But obviously it doesn't impact net interest income a whole lot.

And so when we think about sort of the forward look the most important thing. We're here to do is again serve clients.

Competition for loans drive some of that and it continues to be a competitive market for the clients that that we've continued to acquire and serve over time and so I think there's a little bit of of that baked in and also the second as you know.

The fed is going to move a bit faster than they had last time and again in the interest of serving clients. We're going to continue to do that but now stand back from all of that.

Right and what we're focused on is generating consistency and stable results, while maintaining safety and soundness at all times and so you are there to serve clients.

At the prevailing market and that's what we're here to do and we're going to continue to do that and if we deliver can.

<unk> margin consistent efficiency with a growing balance sheet that leads to the net interest income growth you saw this quarter and have seen.

Over many quarters in our history, which then enables investment in the future planting seeds for growth and it sort of continues to propel us into the future and so that's how we more think about it versus a <unk>.

Quick margin expansion that frankly may not repeat.

As you get further out, whereas client service and client growth that will repeat.

Yeah.

Understood I appreciate the color there.

And then just one last touch up.

On the capital call utilization.

Were referring to before.

40% this quarter versus 41 or 42% last quarter.

What is the historical range on kind of the high end and low end for that.

Yes, low range is about 33% high range in the low forties 42, I would say it was in the higher end of the range, maybe a little higher.

And the average is probably around 35%.

Yes.

Got it.

That's helpful. That's all I had thank you.

We will take our next question from David <unk> with Wedbush.

Hi, Thanks, only one left for me is housekeeping the income from investments in life insurance was down about 50% from fourth quarter to first quarter can you talk about the run rate and outlook there.

Hi, David for income from investment in life insurance last quarter, and the fourth quarter, we had a benefit which was recognized which increase the income and this quarter because of the volatility of the markets. We are seeing some decrease in mark to market for some of our Bali <unk>.

<unk>.

Got it thank you very much.

Yeah, David on a go forward its probably in more of a 'twenty to 'twenty. Two if you have a stable market outlook.

Helpful. Thank you.

Yeah.

We will take our next question from Tim Coffey with Janney Montgomery Scott.

Great. Thanks, good morning, everybody.

See last quarter, we just talked about.

The plan to open six new offices by the Middle of 2023, given the trajectory of kind of what we're seeing in this quarter top line.

Is there a chance that those plans could be accelerated or expanded.

Yes, we're still confident with that with that number we've got a second office opening in Jackson.

As I mentioned, we're opening in Bellevue, we're very excited about that last year we.

Landed in New York, We'll open a few more in New York. So I think that's still a consistent message.

Okay. Those are my questions. Thank you.

And we have no further questions at this time I'd like to turn the conference back to Jim Herbert and Mike Ross, Sir for any additional or closing remarks.

Thank you very much thanks, everybody for their time today.

I'd just like to make a very fundamental point the model is fully intact as this quarter.

Quarter improves and the leadership of the company has never been stronger.

I think theyre coming volatility is going to prove out once again the value of the stability and strength of the model now let me turn it to Mike.

Yes, no thanks, Jim and thanks, everybody for the questions.

It really is a great terrific start to 2022, our colleagues have done an absolutely fantastic job staying focused on the client and delivering.

We've got strong growth opportunities ahead, the markets remain active in our client base remains very strong and so we're really optimistic about 2022 and the opportunities ahead of us and with that thank you for all the interest and have a wonderful day.

Okay.

And that does conclude today's conference. We thank you for your participation you may now disconnect.

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