Q3 2022 First Republic Bank Earnings Call
Speaker 1: outstanding were up 24%. Total deposits have grown 19%. Wealth management assets were down less than 1% while the S&P was down 17% over the same period. Bob will touch on this more momentarily. Our growth in turn has led to strong financial performance. Year over year total revenues have grown 17%. Net interest income has grown 21% and earnings per share have grown 16%. And tangible book value per share has increased more than 11%. As Jim mentioned, maintaining strong credit and capital is a fundamental part of our culture and business model. Our credit remains pristine. Non-performing assets were only six basis points at quarter end. Net charge offs were only 1 million during the quarter. For perspective, this is just a fraction of a single basis point of our $159 billion loan portfolio. We remain very well capitalized with the tier one leverage ratio of 8.6% at quarter end. This includes a successful common equity raise in August . Turning to interest rates for a moment. As Jim mentioned, since our last call the Fed increased rates very rapidly. Additionally, the markets expectation for future rate hikes also increased. We have responded to the sharp rise in rates by providing clients with attractive deposit opportunities through CDs and money market accounts. While this client centric approach puts pressure on our net interest margin in the near term, it will allow us to retain and acquire great clients.
Speaker 1: who will stay with us and grow with us for many years to come. Year over year, our households have increased 13%. This is the strongest level of growth in three years. These new households are all seeds for the future. We are delighted with this continued strong household growth.
Speaker 1: Importantly, our service model continues to generate strong net interest income, which is a product of our strong loan growth.
Speaker 1: We have always viewed net interest income as a key driver of our business performance.
Speaker 1: Turning to markets, our urban coastal markets remain healthy and attractive. As rates have increased, residential real estate prices have come down slightly as expected.
Speaker 1: Our pipeline remains robust heading into the fourth quarter.
Speaker 1: Our Net Promoter Score of 79 is at its highest level ever.
Speaker 1: Given our differentiated level of service, we continue to see very attractive opportunities for growth.
Speaker 1: Overall, it was a strong quarter. Our business model was performing quite well, and we remain focused on the many opportunities in front of us.
Speaker 1: Now I'll turn the call over to Mike Selfridge, Chief Banking Officer.
Speaker 2: Thank you, Mike.
Speaker 2: Let me provide an update on lending and funding across our business.
Speaker 2: Loan origination volume for the third quarter was very strong at 18 billion dollars. Our second best quarter ever.
Speaker 2: A real estate secured lending remains well diversified.
Speaker 2: Single-family residential volume was robust at $7 billion.
Speaker 2: During the quarter, purchase activity accounted for 65% of single-family residential volume.
Speaker 2: Financing a home purchase is a great opportunity to demonstrate our differentiated service.
Speaker 2: And, this is typically the start of a long-term relationship with First Republic.
Speaker 2: Virtually every new lending relationship also begins with a checking account.
Speaker 2: Multifamily volume for the quarter was very strong at $2.7 billion.
Speaker 2: As a reminder, the median size of our multifamily and commercial real estate loans originated over the past two years is less than $2 million with a loan-to-value ratio at origination of less than 55%.
Speaker 2: The continued strength of our markets and our clients is further demonstrated in the robust loan pipeline heading into the fourth quarter.
Speaker 2: We now expect loan growth for the full year 2022 to exceed 20% given our pipeline and year-to-day performance.
Speaker 2: Turning to credit, we continue to maintain our conservative underwriting standards.
Speaker 2: The average loan-to-value ratio for all real estate loans originated during the quarter was just 58%.
Speaker 2: Business banking also had a good quarter.
Speaker 2: Year over year business deposits were up 19%.
Speaker 2: Business deposits represented 63% of total deposits at quarter end.
Speaker 2: Business loans and line commitments were up 15% year over year.
Speaker 2: The utilization rate on capital call lines of credit decreased to approximately 32% during the quarter reflecting the general slowdown in the private equity and venture capital sectors.
Speaker 2: Importantly, our capital call commitments increase during the quarter as we continue to acquire new clients.
Speaker 2: Turning to funding, we are quite pleased that deposits were up 19% year over year and more than 4% quarter over quarter.
Speaker 2: Deposits continue to represent over 90% of our total funding base at quarter end.
Speaker 2: Our deposit base remains well diversified.
Speaker 2: Checking represented 64% of total deposits at quarter end.
Speaker 2: CD's accounted for 9% of total deposits at quarter end.
Speaker 2: In a rising rate environment, we typically see C.D.'s increase as a percentage of total deposits.
Speaker 2: As recently as 2019 year-end, CDs accounted for 15% of total deposits.
Speaker 2: Let me take a moment to talk about our preferred banking offices.
Speaker 2: This network of over 80 offices provides an important service delivery point for clients.
Speaker 2: helping to further drive our exceptional net promoter score and gather deposits.
Speaker 2: Our offices, on average, had over $720 million in deposits at quarter-end.
Speaker 2: Over the next year, we expect to continue to open new offices to deepen our presence in our existing footprint.
Speaker 2: Our service model continues to perform well. Our consistent, client-driven approach is driving safe, stable, organic growth.
Speaker 2: Now I'd like to turn the call over to Bob Thornton, President of Private Wealth Management. Thank you, Mike. Our wealth management model continues to perform very well.
Speaker 1: Here today, total wealth management revenues are up over 20%.
Speaker 1: In addition to investment management fees, this includes strong growth in fees from brokerage, trust, insurance, and foreign exchange services.
Speaker 1: Fees from these latter services help diversify our wealth management revenue and can help mitigate the impact of market decline on asset-based investment management fees during market correction.
Speaker 1: Despite the current market volatility that Mike mentioned, we continue to see strong net client inflows, particularly within our investment management business.
Speaker 3: Year-to-date, investment management net client inflows were up 32% versus last year.
Speaker 3: As we've noted before, our holistic approach to banking and wealth management is even more highly valued by clients during times of market volatility.
Speaker 3: We take these opportunities to engage our clients to understand their banking and wealth needs as market conditions change.
Speaker 3: Our wealth management business continues to be a meaningful contributor to banks' deposits through sweet balances and banking relationships.
Speaker 3: Our integrated banking and wealth management model also continues to make First Public a very attractive destination for successful wealth professionals.
Speaker 3: Since our last call, we welcome four new Wealth Manager teams to First Republic.
Speaker 3: This brings the total to eight teams hired so far this year, and we have additional hires planned for the fourth quarter.
Speaker 3: Overall, our wealth management business continues to execute very well.
Speaker 3: Times like these are a great opportunity to demonstrate our exceptional service.
Speaker 3: deepen existing relationships, and acquire new households.
Speaker 3: Now it's my pleasure to turn the call over to Olga Sokova, Acting Chief Financial Officer. Thank you, Bob. We'll continue to operate in a safe and sound manner with a continued focus on credit, capital, and liquidity.
Speaker 3: Our credit quality remains excellent.
Speaker 3: Year to date, our provision for credit losses was $77 million. Our charge-offs for the same period were only $2 million.
Speaker 3: Our provision reflects our continued strong long growth.
Speaker 3: Our capital position remains very strong. At core end, our Tier 1 leverage ratio was 8.6%.
Speaker 3: As Mike mentioned, this included the benefit from a common equity raise completed during the third quarter. This includes the benefit from a common equity raise completed during the third quarter.
Speaker 3: Liquidity also remains very strong.
Speaker 3: High quality liquid acids were 13.7% of average total acids in the third quarter.
Speaker 3: Throughout the bank's history, net interest income has been a primary driver of our financial results. This is true even during challenging rate environments.
Speaker 3: That interest income for the third quarter was up a strong 21% year over year. This was driven by robust growth and earning assets.
Speaker 3: Our net interest margin was 2.71% for the third quarter. This quarter's name reflects an increase in funding costs following two 75 basis point rate hikes during the quarter.
Speaker 3: Year-to-date, our net interest margin is 2.73%.
Speaker 3: Given the increase in funding costs following the Fed's recent rate hikes and additional rate hikes expected this year.
Speaker 3: We now expect to be at the lower end of our guided net interest margin range of 2.65% to 2.75% for the full year 2022.
Speaker 3: This assumes a Fed Funds rate of 4.5% at year-end, which is in line with the current market view.
Speaker 3: Turning to expenses, we continue to invest in client service and regulatory infrastructure to support our girls.
Speaker 3: Our efficiency ratio was 60.3% for the third quarter and 60.9% year to date.
Speaker 3: We currently expect to be at the lower end of our efficiency ratio range of 62% to 64% for the full year 2022.
Speaker 3: Our effective tax rate was 21.6% for the third quarter.
Speaker 3: We continue to expect the effective tax rate to be in the range of 22% to 24% for the full year 2022.
Speaker 3: Overall, we continue to deliver strong financial performance which reflects the stability and consistency of our model. And now I'll turn the call back over to my crosshair.
Speaker 1: Thank you, Jim, Mike, Bob and Olga.
Speaker 1: For over 37 years, First Republic's business model has been focused on providing extraordinary client service. And we're proud to have you here today.
Speaker 1: while maintaining conservative credit and strong capital.
Speaker 1: This model has been successful in all environments.
Speaker 1: All of our colleagues at First Republic remain completely focused on serving clients each and every day.
Speaker 1: Now we would be happy to take your questions.
Speaker 4: If you would like to ask a question please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone please make sure your mute function is turned off to allow your signal to reach our equipment. Again press star 1 to ask a question.
Speaker 4: We'll pause for just a moment to allow for an opportunity to signal for questions.
Speaker 4: Our first question today comes from Steven Alexopoulos of JP Morgan.
Speaker 5: Hey, good morning everybody.
Speaker 5: Dave. I wanted to start. So with mortgage rates moving up very dramatically this year, the initial concern on your stock was that long growth would slow, right? With that said, you're now three quarters in a row, you've done over basically 20% of growth. So that's not a concern anymore. But the concern is now that either one, there won't be enough deposit funding in 2023 to fund strong long growth, right? So what's going on with QT?
Speaker 5: And if there is enough deposit funding that your NIM will just compress materially trying to fund that loan growth, right? We see the stock down over 10% right now. So my question is given the yield curve, which is likely to invert even more in coming months, you know, one, could you see a scenario where you would need to slow loan growth? And two, irrespective really of that answer, could you walk us through your NIM expectations for 2023? And how bad could it get if this forward curve does play out?ANT
Speaker 1: Thanks for the question, Steve. On your first part of that, I think you're right. I mean, with rates rising, we've continued to grow our loan portfolio. And if I stand back from that, we've always been focused on service first and foremost. And that is what has driven loan growth, frankly, in any environment. You know, when you saw 2016 to 18, the last time rates rose.
Speaker 1: We grew the portfolio at mid-teens to high teens rate year after year. We continue to price lending at A pricing because we have A credit.
Speaker 1: And one of the hallmarks of First Republic for 37 years has been pristine credit through any cycle. And right now that's very important. And as we look to 2023, the safety and stability of the whole of North America right across
Speaker 1: of the bank's loan portfolio is absolutely critical, and we continue to serve clients each and every day. And that's always been our objective, and that has put some pressure on the margin, as we talked about in the prepared remarks.
Speaker 1: because we are growing the loan portfolio and then funding it a little bit differently than we had in the past couple of years given the market forces you talk about, right? The Fed has aggressively raised rates.
Speaker 1: They've begun quantitative tightening which in September was the first month at full capacity.
Speaker 1: And so you are, you know, there is going to be some pressure on the margin here as we go into the fourth quarter and the early part of next year.
Speaker 1: But then the Fed will eventually get to a place where they've been successful in reducing inflation.
Speaker 1: And if you look to the other side of that hill, for example.
Speaker 1: The bank will be mid-teens percentage larger, maybe a little bit more.
Speaker 1: will be safe and have come through credit very well.
Speaker 1: And we'll be ready to go from there with a much bigger client household base because we continue to acquire clients
Speaker 5: Mike, I know you guys are looking past the hill or to the hill ahead, but could you help frame for us?
Speaker 5: you know at the margin where you think the NIM could trend to.
Speaker 5: over the near term, like how bad it could get.
Speaker 6: how bad it could get.
Speaker 1: Sure, as August said, we think we're going to be at the lower end of our annual guidance range for this year.
Speaker 1: Right, which means the fourth quarter is going to come in a little bit below that guidance range. And that's where you'll sort of start 2020 three.
Speaker 1: After that, it depends on when does the Fed stop.
Speaker 1: Right? Are they successful in getting inflation down, and could it stop in the first quarter, for example? You know, loan rates are starting to come up a little bit, and they're starting to catch up, which is a positive. But the next couple of quarters, you know, are likely to be a little bit below the bottom end of our current range as we start into 2023.
Speaker 7: Okay.
Speaker 5: That's helpful. In terms of the incremental NIM, you know, I speak to investors, a lot of them point to the CD promotions, right, which many of them actually see and scratch their heads how your NIM is not going much lower, right, when you see a 3% or 3% plus CD promotion. So at the margin, can you help us understand, you said loan yields are coming up a bit, where are current loan yields today and how does that compare to your current funding cost?
Speaker 2: Mike, I'll talk on the current lending yields we're getting, and so looking more currently single families coming in around 480 basis points.
Speaker 2: Multi-family about 550.
Speaker 2: Commercial real estate about 490 basis points. So you add it all up for real estate, it's about 490 basis points. Business banking, as you know, capital call lending is the largest segment of that. It's still maintained about a prime minus 75 to 100 basis points yield. So call it 525 to 550.
Speaker 1: Steve, I might just add, you know, CDs are only 9% of the total. So it's a very, and I think maybe we started a year at 4 or 5%. So it's only on the incremental that you're talking about that, that challenge and the pressure. And with our overall funding cost at just $55 at the end of the quarter.
Speaker 1: Yes, the incremental business is less than the current margin, but it's not as pronounced just because CDs are a much smaller proportion of the total at this point in time.
Speaker 5: And then finally, so.
Speaker 5: Mike Rothfuss, if we end up at a place where the NIM is under pretty nice pressure over the next couple of quarters, how should we think about the efficiency ratio? Does this just roll through and hit the revenue line, or are there offsets that you're planning on the expense side to keep the efficiency ratio? I don't know if 60 to 62 is a good range, because we've been at 60, or if you think we go back to 62 to 64. If you could flush that out, that'd be great. Thanks. Thanks for your time.
Speaker 1: Yeah, no thanks for the question, Stephen. You know, having been here for about 13 years and in my prior CFO role,
Speaker 1: both obviously sort of the funding and liquidity and CDs.
Speaker 1: have been deep into that many years.
Speaker 1: And also, you know, a couple times when the margin has compressed a little bit through yield curve inversions, etc. We've had to look at where we can make some adjustments to our expense base. And we would absolutely do that as we go forth. One thing I'd note is...
Speaker 1: You know, similar to other banks that have released today, you know, checking balances have come down a bit in the industry overall. A significant part of our compensation is tied to, you know, growth in checking, lending activity, asset center management, fee revenues. So as there's some change there or migration there, there is a big portion that's variable compensation. And so that also is why you saw a pretty limited growth in expenses this quarter.
Speaker 1: is reflective of that. So there are some, what I'm going to call, natural levers that occur just from the business model and the way we're structured. And then second, you know, the team has an unbelievable ability to come together to prioritize and make, you know, adjustments as necessary to adapt to the environment that we're in and we fully expect that to happen.
Speaker 1: And so the last thing I'll close with, sorry, this is the ratio.
Speaker 1: And when the margin under pressure that does tip us a little bit higher So the 60% is probably not a good launch point for the fourth quarter and for the next year, I would say.
Speaker 5: Thanks for taking my questions.
Speaker 4: The next question comes from Chris McGrathy of KBW.
Speaker 8: Hey, good morning. Mike, just want to follow up on the deposit cost for a moment. By my math, your beta in the quarter is around 40%. Can you just remind us what your assumptions are for the full cycle and how might that beta change for Q4?
Speaker 3: Hi Chris, this is Olga. So the assumptions for the data so far we are about 12% but we believe for this cycle we will be in high 20s which is higher than we experienced in the last cycle that we said we were like 19-20% and this was given the velocity of Fed Fund rate hikes.
Speaker 3: So we expect the beta to be higher this cycle. And for some other assumptions, we expect the Fed Fund rates at the end of the year, they're around 4.5%, which includes 75 basis points rate hike in November and additional 50 basis points in December .
Speaker 3: And importantly, when we look at our... We talk about the pressure and margin, but what's important, even that doesn't change our guided NIM range for the year 2022, which reflects the consistency and stability of our model, although now we expect that rate within the range but on the lower end of the range. Chris, I'd just say...
Speaker 1: Your beta reference, I'm not sure how it's calculated, but when we look at the beta, we look at sort of all deposits, including the zero-cost checking, the non-interest accounts, so that's why the 12% is where we're at today.
Speaker 8: Thanks, I was doing just interest bearing, but appreciate that. Maybe a follow up on the asset side.
Speaker 8: Does the acid beta accelerate as you get further into this cycle? I know there's a lag given the fixed rate piece of the book, but just trying to get a sense of re-pricing, whether that starts to catch up a little bit more in the next six months. I think we usually
Speaker 2: It's Mike Selfridge. The beta, we've got about 60 basis points if you look at originations from Q2 to Q3. We get a little bit. We get more on the prime base, but it's still competitive out there. We get a little bit more on the base, but it's still competitive out there.
Speaker 2: go and grow new households and...
Speaker 2: and look for, as Mike said, A clients with A pricing.
Speaker 8: Okay and if I could just sneak one in. The last one, just the mix of deposits is getting a lot of attention for obvious reasons. How should we think about just a mix of non-interest-bearing deposits if the forward curve plays out? Like how much more?
Speaker 8: outflow risk or migration risk you presume to be in your book. Thanks.
Speaker 1: Chris.
Speaker 1: We were obviously pleased to have checking balances remain 70% more deposits for many quarters. And I think for the past nine years,
Speaker 1: We've been over 50% checking balances, and so it's been a consistently high proportion of our deposit levels. You know, so it probably could come down a little bit from here, but given the amount of working capital for both businesses and consumers, you know, it's probably not a lot lower, but probably a little bit lower from here.
Speaker 8: Okay, great. Thanks.
Speaker 4: The next question comes from Manan Ghasalia of Morgan Stanley .
Speaker 9: Hi, good morning.
Speaker 9: I just wanted to dig in a little bit on the NIMS side. I appreciate the forward guidance given where the Fed funds are going. Can you help us with the puts and takes on the funding side? First if you have it, the spot deposit rates on September 30th and then second, just in general how you're thinking about the funding avenues, right? CDs or FHLB or wholesale funding.
Speaker 9: What do you expect to do from here, given the strong loan growth that you're getting? And what sort of loan to deposit ratio would you be comfortable running at, just given where loan growth is right now?
Speaker 3: This is Olga. For spot rate and deposits, as of September 30, we were at 76 basis points. And this is really the reflection of our client-centric model where we provide attractive deposit opportunities for our clients. And we continue to diversify our deposit base, funding base. So you've seen the increase in CD, but it's still relatively low. It's higher than we had over the last few years, but it's still about 99%.
Speaker 3: Historically, we've been in mid-teens levels, and even if we look at longer term back, it's even higher than this. So, it continues to diversify the funding base. We continue to tap into FHLB where we have a lot of capacity, but even historically, FHLB levels of funding are relatively lower compared to historically where we've been. Maybe I'll just add a little bit. Thank you for that Olga.
Speaker 1: You know, our deposits funding has been, you know, 90% of our total funding. And as Olga mentioned, CDs have become an important strategy in terms of when rates rise this fast, if you recall, as Mike Selfridge mentioned earlier, our over 80 retail offices are a fantastic service point for our clients and also have an ability with which to engage with clients, especially in times like this when CDs become much more important.
Speaker 1: As Olga mentioned, we've been in the mid-teens before, and if we go back to when I joined the bank, we were well above that in 2010. So we've been here at a point where we've got CDs as a meaningful part of our deposit base, and that would always be the first choice as opposed to wholesale. We used FHLB as an important tool, but if you can do client acquisition and deepening of relationships, that's always what we would choose first.
Speaker 1: As Olga mentioned, we've been in the mid-teens before, and if we go back to when I joined the bank, we were well above that in 2010. So we've been here at a point where we've got CDs as a meaningful part of our deposit base, and that would always be the first choice as opposed to wholesale. We used FHLB as an important tool, but if you can do client acquisition and deepening of relationships, that's always what we would choose first.
Speaker 9: Got it. So it sounds like CD is over FHLB.
Speaker 9: Got it. Okay. And just maybe on the asset side, again, it looks like security has actually grew on a Q on Q basis. Can you help us with what the runoff is or how much cash is generated through securities pay downs each quarter that you might be willing to use to fund long growth?
Speaker 1: The runoff has been pretty light. It's probably between sort of $300 million and $500 million a quarter that we would reinvest either in lending opportunities or in the securities portfolio.
Speaker 10: Great, thank you.
Speaker 4: Our next question comes from Bill Kirkharty of Wolf Research.
Speaker 2: Thank you. Good morning.
Speaker 8: Mike, Roffler following up on your NIM comments, if we assume that the Fed hikes and holds throughout 2023, can you frame maybe add anything to your your earlier NIM comments and I think we're getting lots of questions I think just around where ultimately NIM would settle under that scenario.
Speaker 1: Yes, thank you for that, Bill. I think it's a good question because they'll get to a point where they do stop, pause, possibly even reduce, and at that point, you'll continue to have a bit of an uptick in your asset yields and a leveling off of your funding costs. And that's where you should see a little bit of expansion start to grow upwards at that point when the Fed stops. If they reduce.
Speaker 1: You probably see it a little bit faster, but it's this period of the rapid rise where you see a little bit of the compression, but you're right, the two quarters from now, three quarters from now, when they're done, given the nature of the CD portfolio that we've talked about, it is a bit of a short-term issue and a short-term challenge, because the Fed will, they will get to a successful point in this battle, and at that point, it'll get better from there.
Speaker 8: Understood. And following up on your commentary around funding sources, can you remind us how much you have in off balance sheet funds that potentially you'd be able to bring back on balance sheet and what some of the dynamics are around that, what that would entail?
Speaker 3: We have about $7 billion in off-balance sheet deposits, which represents about 4% off total deposits, which can be another source of bringing on balance sheets.
Speaker 8: Is there any scenario where you'd envision selling held to maturity securities for liquidity purposes?
Speaker 1: No, this we know. Okay.
Speaker 11: Okay.
Speaker 8: Fair. And final question on your mix of debt relative to your overall funding, that's still well below 4Q19. Is it reasonable to expect that's going to gradually remix back to pre-COVID levels?
Speaker 8: Which mix of funding? Back to pre-covid? Just your debt, overall debt. Oh FHOP. Essentially, non-deposit. Non-deposit. resulting in mistakes don't need houses. Ste Call me.
Speaker 1: You know, it could go a little bit higher from here. We're very attuned to FHLB versus client. And as I said a little bit earlier, we would always choose the client first. And I think that would be our focus, first and foremost. But we do have much capacity for FHLB, for sure.
Speaker 8: Does the non-interest bearing deposit mix revert to pre-COVID levels?
Speaker 1: So I think I mentioned this before, you know, checking is 64% of deposits, which includes both non-interest and a very nominal interest we pay on checking, you know, could trend a little bit lower from here, but we feel like probably not a lot given the working capital needs of our clients.
Speaker 8: Thanks again for taking my questions. Appreciate it.
Speaker 4: The next question is from Andrew Leish of Piper Sandler.
Speaker 5: Hey everyone, good morning. Thanks for taking the questions. So I hear what you're saying on the margin guide and the efficiency ratio also being a function of that, but even to get to that low end of the range, that implies a pretty steep step up in expenses here this quarter. I guess what would be causing that?
Speaker 1: So I think it's more the revenue side that has a little bit of the challenge from the margin compression we talked about versus the expenses. You know, we, like I mentioned earlier, there is a bit of a revenue variable based compensation that will be tied to checking in particular. So I think it's more about the ratio and where the margin drives versus our total spend level, which our expense growth rate is actually on a sequential basis slower than it has been.
Speaker 5: Got it. All right that that's helpful and then Part of the long rope this year Been driven by multifamily. I'm just curious. What are you seeing in that business that? It has driven this growth of the design to to go to the portfolio
Speaker 2: I would say, first of all, opportunity with existing clients. That drives a little more than half of that business. And it's been a more strong performing asset class. So the, you look at things like occupancies in the mid 90s, rents maybe have plateaued coming off a little bit, but it's performing quite well. And we are there to serve the needs of our clients. So we're just taking care of clients one at a time.
Speaker 2: All right, thanks for taking the questions.
Speaker 4: The next question is from Terry McAvoy of Stevens.
Speaker 1: Mike, good morning. Maybe the first question, on the topic of acquiring households that Mike mentioned earlier, could you just help me understand and get a sense of offense versus defense in the third quarter within that CD growth, or is it more forward-looking given that new five-month product that I think you call the ATM rebate checking that is specifically for new customers?
Speaker 1: Terry, thanks for the question. We actually play a bit of both. One is...
Speaker 1: It's a great time to acquire clients in a period where our relationship managers, wealth managers are leaning into discussions with prospects and then we're also deepening relationships.
Speaker 1: And so the business model, if we stand back, has always been about acquiring households for the long term. And in periods of uncertainty like now, it's as good of an opportunity as any because of the strength of our colleagues and the way they take great care of clients and the reputation the bank has. And so some of the things we're doing, like you mentioned, those are definitely attracting people to the bank along with...
Speaker 1: what they hear from a service perspective of how well our reputation is in the communities we serve. Thanks, and then on a follow-up, just how are these high-yield online savings accounts coming up in your discussions with clients? And I asked, given Apple's announcement yesterday, that they're offering or will be offering interest-bearing deposit products.
Speaker 2: It's not a material competitor in our mind. And again, we're serving clients that value the relationship. And as Mike said, we're being competitive on both lending and deposits, but we're acquiring new households at a nice clip. Thank you, Mike. Thank you.
Speaker 4: The next question comes from Tim Coffey of J&E, Microsoft Research.
Speaker 12: Thank you. Morning, everybody. Thank you for taking my questions. First question I had is on the – do you have any – can you just press some color on your thoughts on tangible common equity in relation to both how the balance sheet is expected to grow this next year and the forward rate curve?
Speaker 1: Thanks, Tim. We're really pleased that in August we were able to raise capital opportunistically like we have done over many years. And growing tangible book value per share at 11% continues to support our balance sheet growth and it supports, you know, 2023.
Speaker 1: Thanks, Tim. You know, we're really pleased that in August , we were able to raise capital opportunistically like we have done over many years. And, you know, growing tangible book value per share at 11% continues to support our balance sheet growth. And it supports, you know, 2023.
Speaker 1: growth that, you know, will be coming as a result of service. So we feel like we're in a really good place right now. We're not as exposed as others to the, you know, available for sale, market to market challenges that I think are showing up in a lot of the numbers today. We feel like we're in a really good place, capital-wise and tangible book-wise.
Speaker 12: Then a question on expenses this next quarter, specifically to say compensation, it's not unusual to see a 5 to 10 percent sequential increase in that line item. Are you suggesting that it could be at the low end of that range or even lower?
Speaker 1: Yes, even lower.
Speaker 7: Okay.
Speaker 12: And then in terms of looking at the fees from wealth management business, I recognize it does take some time to move assets over and given when billing is done in the beginning part of the quarter. Is there any kind of insight you can give us on kind of what that number might look like for 4Q?
Speaker 2: This is Bob. I think you're right. It's a little bit of a mix of how many accounts open during the quarter and when in terms of the fees we collect. It's also a little bit of a mix. We had a little bit of a shift, a little bit more to fixed income. But I think we look at for the fourth quarter, probably between 135 and 140 of investment management fees.
Speaker 7: Okay, okay.
Speaker 7: Okay, okay. I appreciate those are my questions. Thank you.
Speaker 4: And the next question comes from Jared Shaw of Wells Fargo.
Speaker 4: And the next question comes from Jared Shaw of Wells Fargo. Hi, good morning.
Speaker 13: I guess first I'm warning you, hey sorry can you hear me? I guess on the CDs you know where you reference the 15% as a total percentage of the total mix in the past. Could you see that going higher than 15% sort of as we're through this cycle with customer demand there?
Speaker 1: I think it's hard to say but I think that gives you a perspective when the Fed peaked we were around 15% it's probably a good rule of thumb that we could end up there given our continue to focus on serving clients and the products that they're interested in now also.
Speaker 13: Okay, and then, you know, when you look at a lot of the CD specials you have right now, it seems like it's a little shorter duration, four and five month products. I guess what's the expectation for when those mature and we're potentially in a higher rate environment? Will that just sort of roll into another shorter duration option or would you look to extend duration on some of those CDs? I don't know how it's going to turn out. So..." You don't know what it's going to sound like.
Speaker 5: One of the reasons we're staying short is that historically most of the run ups like this last for not a long period of time. The steeper they are the less long they last.
Speaker 5: And basically what's going on here is a temporary problem on the margin coming from the steepness of the run-up. We're funding it with CDs. We have a very, very strong capacity to raise CDs. Funding is not an issue. And basically we're sticking to our game plan of growing the bank and bringing in great clients. And the mortgage book will catch up in a relatively short period of time, in a few quarters. And so basically we want to stay short on the CDs in order to ride the other side of money.
Speaker 13: for parts of the year there.
Speaker 10: Is
Speaker 1: No, we think 62 to 64 is, given what we know now, pretty good. And obviously, the first quarter tends to be a little elevated, but during the year, we think it'll be in that range as we look at it currently today.
Speaker 13: Thank you. I appreciate taking the questions.
Speaker 4: At this time I will turn the call back to Mike Raffler for any additional or closing remarks.
Speaker 1: Thank you for joining us on the call today everybody and we would just like to reiterate just a few points that First Republic was built on a service model for clients each and every day. This continues to drive our strong growth through all environments and this medium term pressure will pass and as we mentioned earlier when you get forward and get through this kinda difference...
Speaker 1: The bank will have double-digit more households and continue to receive referrals and serve clients well and come out of this even stronger than we are today given our continued, pristine credit through the cycle.
Speaker 1: Thank you and have a great day.
Speaker 4: That concludes today's conference call. We thank you for your participation and you may now disconnect.
Speaker 14: Goodbye and is.
Speaker 14: You You
Speaker 14: You You