Q4 2022 First Republic Bank Earnings Call

January 13, 2023

Greetings and welcome to First Republic Bank's fourth quarter and full year 2022 earnings conference call. Today's conference is being recorded. During today's 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.

Greetings and welcome to first Republic, bank's fourth quarter and full year 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'd now like to turn the call over to Mike I O'malley, Vice President and director of Investor Relations. Please go ahead.

Thank you and welcome to First Republic Bank's fourth quarter 2022 conference call.

Thank you and welcome to first Republic banks fourth quarter 2022 conference call.

Speaking today will be Jim Herbert, founder and executive chairman.

Speaking today will be Jim Herbert founder and executive Chairman.

Mike Roffler, CEO and President.

Mike Rustler, CEO and president.

Mike Selfridge, Chief Banking Officer.

Mike Selfridge, Chief Banking officer.

Bob Thornton, President, Private Wealth Management.

Bob Thornton President private wealth management.

Olga Sokova, Chief Accounting Officer and Deputy Chief Financial Officer.

August soak of our chief accounting.

Counting officer, and Deputy Chief Financial Officer.

and Neil Holland, Chief Financial Officer.

Neil Holland, 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.

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.

We also discuss certain non-GAAP measures of our financial performance which should be considered in addition to, not as a substitute for, financial measures prepared in accordance with GAAP.

We also discuss certain non-GAAP measures of our financial performance, which should be considered in addition to not as a substitute for financial measures prepared in accordance with GAAP.

For more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and for reconciliations of the non-GAAP calculation of certain financial measures to the most comparable GAAP financial measure, see the bank's FDIC filings, including the Form 8K filed today, all available on the bank's website.

For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward looking statements and for reconciliations of the non-GAAP calculation of certain financial measures to the most comparable GAAP financial measure see the banks FDIC filings, including the form 8-K.

Today, all available on the bank's website.

And now I'd like to turn the call over to Jim Herbert.

Thank you, Mike, very much and good morning, everyone. It was a very strong year for First Republic.

Thank you, Mike very much and good morning, everyone. It was a very strong year for first Republic, our time tested business model and service culture continue to perform really well.

Our time-tested business model and service culture continue to perform really well.

In fact, it was our best year ever in many ways.

Our new 2022 Net Promoter Score, which was announced this morning, is our highest ever client satisfaction level.

Our new 2022, net promoter score, which was announced this morning is our highest ever client satisfaction level.

it's actually extraordinarily strong.

It's actually extraordinarily strong.

Our non-performing assets a year in were just five basis points.

Our nonperforming assets at year end were just five basis points.

This is low even for First Republic.

This is low even for first Republic.

Acceptable client service and our strong focused lending led to safe organic growth during the year.

Exceptional client service and our strong focus lending led to safe organic growth during the year.

In 2022, total loans grew $32 billion, a record.

In 2022 total loans grew $32 billion a record.

And we had record earnings for the year.

In uncertain times like these, an ability to continue to grow safely is quite viable and very rare.

In uncertain times like these and ability to continue to grow safely is quite viable and very rare.

Let me take a moment to provide some perspective on the current rate environment and the Fed tightening cycle as we see it.

Let me take a moment to provide some perspective on the current rate environment and the fed tightening cycle as we see it.

Since our last call about 90 days ago, the Fed has raised rates another 125 basis points.

Since our last call about 90 days ago. The fed has raised rates another 125 basis points.

At the same time, the ten-year Treasury has declined 50 basis points.

At the same time, the 10 year Treasury has declined 50 basis points.

The resulting increased rate inversion has begun to put some pressure on our net interest margin and net interest income.

The resulting increased random version has begun to put some pressure on our net interest margin and net interest income.

However, history and experience has shown that this type of inverted yield curve has a limited duration.

However, history and experience has shown that this type of inverted yield curve has had limited duration.

Cycles are just that, they're cycles.

Cycles are just that their cycles.

During the First Republic's 37-year history, there have been five tightening cycles.

During the first Republic's 37 year history that had been five tightening cycles.

We've continued to grow and prosper through them and especially after each one.

On average, over the last 40 years, the Fed has started to cut rates less than a year after the 10-year yield has peaked.

On average over the last 40 years. The fed has started to cut rates less than a year. After the 10 year yield has peaked.

The market currently expects the Fed to start cutting rates during the back half of this year, which would be consistent with prior tightening cycles and is also our current assumption.

The market currently expects the fed to start cutting rates during the back half of this year, which would be consistent with prior tightening cycles and is also our current assumption.

We are staying focused on executing our model and we remain very committed to delivering solid results through all market conditions.

The bedrock of our performance is providing truly exceptional differentiated service.

The bedrock of our performance is providing truly exceptional differentiated service mainly.

maintaining very strong credit.

Maintaining very strong credit.

delivering safe organic growth.

Delivering safe organic growth.

And the results follow.

Now let me turn the call over to Mike Crawford, CEO and President.

Now, let me turn the call over to Mike Crawford CEO and President.

Thanks, Jim. 2022 was a terrific year with record loan growth, record loan origination volume.

Thanks, Jan 2022 was a terrific year with record loan growth record loan origination volume.

record revenue, and record earnings per share.

Record revenue and.

And record earnings per share.

Let me begin by covering some key results for the year.

Total loans were outstanding. We're up 24%.

Total loans, where else outstanding were up 24%.

Total deposits have grown 13%.

Wealth management assets were down only 3%, while the S&P 500 was down more than 19% over the same period.

This strong growth, in turn, has led to strong financial performance.

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

year over year.

Total revenues have grown 17%.

Year over year.

Total revenues have grown 17%.

Net interest income has grown 17%.

Earnings per share has grown 7%.

Earnings per share.

Has grown 7% in.

and importantly, tangible book value per share has increased 11% during the year.

And importantly, tangible book value per share has increased 11%.

During the year.

As we look to a more challenging year ahead, we remain well positioned to deliver safe, strong growth through the consistent execution of our service-focused culture and business model.

As we look to a more challenging year ahead, we remain well positioned to deliver safe strong growth through the consistent execution of our service focused culture and business model.

We remain very well capitalized as a result of raising capital methodically and opportunistically over time.

We remain very well capitalized as a result of raising capital methodically and Opportunistically overtime.

Our Tier one leverage ratio was 851 at quarter end.

Our tier one leverage ratio was 851 at quarter end.

Credit quality remains excellent.

Net charge-offs for the fourth quarter were less than $1 million.

Net charge offs for the fourth quarter were less than $1 million.

For the entire year, net charge-offs were less than three million.

For the entire year net charge offs were less than $3 million.

or less than one-fifth of a single basis point of average loans.

Or less than one fifth of a single basis point of average loans.

Non-performing assets ended the year at only five basis points of total assets. As Jim mentioned, this is one of our best levels ever.

Nonperforming assets ended the year at only five basis points of total assets as Jim mentioned this is one of our best levels ever.

We do not stretch on credit quality to deliver loan growth.

Our growth is driven by consistent execution of exceptional client service, one client at a time, each and every day.

Our growth is driven by consistent execution of exceptional client service one client at a time each and every day.

Today we release the results of our 2022 Net Promoter Score Survey, our Client Satisfaction Scorecard.

Today, we released the results of our 2022 net promoter score survey our client satisfaction scorecard.

We are pleased to have achieved a record high score of 80.

This is an increase from last year's score, which was also a record at the time.

At the same time, client satisfaction has declined for the overall banking industry.

At the same time client satisfaction has declined for the overall banking industry.

In 2022, the net promoter score for the U.S. banking industry declined to only 31.

In 2022, the net promoter score for the U S banking industry declined to only 31.

Our service-focused model is truly differentiated, even more so during challenging and disruptive environments.

Our service focused model is truly differentiated even more so during challenging and disruptive environments.

During 2022, we also continued to make thoughtful investments that support service excellence and growth.

During 2022, we also continue to make thoughtful investments that support service excellence and growth.

We expanded into the Seattle area by opening our first banking location in the market.

We brought on 13 new wealth manager teams, one of our best recruiting years ever.

He brought on 13, new wealth manager teams one of our best recruiting years ever.

And we successfully upgraded our core banking system, the largest technology project we've ever undertaken.

As Jim mentioned,.

As Jim mentioned.

Since mid-November, we have been operating with a challenging yield curve.

Since mid November we have been operating with a challenging yield curve.

To help us navigate the margin pressure in the near term, we continue to moderate our expense growth.

At the same time, we remain focused on the long term and continue to leverage our reputation of exceptional service to drive new business and grow total households.

Our focus on service drives our growth. As clients stay with us, do more with us.

Our focus on service drives our growth as clients stay with us do more with us.

and refer their friends and colleagues.

And refer their friends and colleagues.

In fact, during 2022 and driven by our highest ever level of client satisfaction, total households increased a very strong 15%.

In fact during 2022.

And driven by our highest ever level of client satisfaction total households increased a very strong 15%.

This is nearly double the growth rate of the prior year.

Over time, this growth compounds, continuing to deliver shareholder value and consistent profitability as it has for 37 years since our founding.

Overtime this growth compounds, continuing to deliver shareholder value and consistent profitability as it has for 37 years since our founding.

Overall.

Overall 2022 was a very strong year for first Republic.

2022 was a very strong year for First Republic.

Now, I'd like to turn the call over to Mike Selfridge, Chief Banking Officer.

Now I'd like to turn the call over to Mike Selfridge, Chief Banking Officer.

Thank you, Mike.

Thank you Mike.

Let me provide an update on lending and deposits across our business.

Bone origination volume was a record for the year at $73 billion.

Loan origination volume was a record for the year at $73 billion.

Our real estate secured lending remained well diversified.

Both single-family residential and multifamily achieved record volumes for the year.

Both single family residential and multifamily achieved record volumes for the year.

Purchase activity accounted for 54% of single-family residential volume during the year and 64% during the fourth quarter.

Purchase activity accounted for 54% of single family residential volume during the year and 64% during the fourth quarter.

As refinance activity has slowed, so have the repayment rates.

As refinance activity has slowed.

Have the repayment rates.

This provides a strong base for lung growth.

Provides a strong base for loan growth.

We continue to expect to deliver mid-teens loan growth for 2023.

We continue to expect to deliver mid teens loan growth for 2023.

I would note that loan originations have some seasonality, with the first quarter typically being somewhat slower.

I would note that loan originations have some seasonality with the first quarter typically being somewhat slower.

In terms of credit, we continue to maintain our conservative underwriting standards. The average loan-to-value ratio for all real estate loans originated during the year was just 57%.

In terms of credit we continue to maintain our conservative underwriting standards. The average loan to value ratio for all real estate loans originating originated during the year was just 57%.

Turning to business banking, we continue to deepen our relationships by following clients to the businesses they own or influence.

Our relationship-based model also leads to a strong level of referrals to new business clients.

Our relationship based model also leads to a strong level of referrals to new business clients.

In 2022, our business client base grew by 18%.

Business loans and line commitments were up 14% year over year.

The utilization rate on capital call lines of credit increased slightly to approximately 33% during the fourth quarter.

Our capital call line commitments grew 16% during the year as we continue to acquire new clients.

Our capital call line commitments grew 16% during the year.

As we continue to acquire new clients.

Turning to deposits, we are pleased that total deposits were up 13% year over year and 2.4% quarter over quarter. We are pleased that total deposits were up 13% year over year and 2.4% quarter over quarter.

Turning to deposits. We are pleased that total deposits were up 13% year over year, and two 4% quarter over quarter.

We continue to see a shift in deposit product mix.

We continue to see a shift in deposit product mix as a result of rising rates.

as a result of rising rates.

Checking represented 59% of total deposits at year end, down from 64% in September .

Checking represented 59% of total deposits at year end down from 64% in September .

And CDs accounted for 14% of total deposits at year end, up from 9% in September .

And Cds accounted for 14% of total deposits at year end up from 9% in September .

Preferred banking offices continue to provide an important service channel for our clients and drive deposit gathering.

Over the next year, we expect to selectively open new offices to deepen our presence in our existing footprint.

Our programs for acquiring and growing our next generation of client relationships, which began more than a decade ago, continue to deliver strong results.

Our programs for acquiring and growing our next generation of client relationships, which began more than a decade ago continued to deliver strong results.

In 2022, millennial households grew 17%.

In 2022 millennial households grew 17%.

These younger households are the same high-quality clients that we have always attracted and are part of our strategy to see the long-term growth of First Republic.

These younger households are the same high quality clients that we have always attracted and are part of our strategy to see the long term growth of first Republic.

As Mike and Jim noted, our exceptional net promoter score continues to demonstrate our ability to deliver differentiated client service.

As Mike and Jim noted our exceptional net promoter score continues to demonstrate our ability to deliver differentiated client service.

Let me take a moment to provide some additional detail.

For clients who identify us as lead bank, our Net Promoter Score is 87, even higher than our overall score.

For clients, who identify us as lead bank, our net promoter score is 87, even higher than our overall score.

And importantly, nearly two-thirds of our clients now consider us as LEAD Bank.

And importantly, nearly two thirds of our clients now consider us as lead bank.

Remarkably, our net promoter score increased in each of the past three years as we have dealt with a pandemic.

Remarkably our net promoter score increased in each of the past three years as we have dealt with the pandemic.

and rising levels of economic uncertainty.

And rising levels of economic uncertainty.

and as we implemented a new core banking system in early 2022.

And as we implemented a new core banking system in early 2022.

And during this time, our consistently high scores also increased across every region, every line of business, and every generation of clients.

And during this time, our consistently high scores also increased across every region.

Every line of business.

In every generation of clients.

Our high client satisfaction remains the driver of our long-term growth.

Our high client satisfaction remains the driver of our long term growth.

Now let me turn the call over to Bob Thornton, President, Private Wealth Management.

Now, let me turn the call over to Bob Thornton, President private wealth management.

Thank you, Mike. It was a very successful year for our wealth management business.

Thank you Mike.

It was a very successful year for our wealth management business.

During the year, total assets under management were down only 3%, while the S&P 500 was down more than 19%.

During the year total assets under management were down only 3%, while the S&P 500 was down more than 19%.

Investment management assets actually increase during the year, driven by strong net client inflow.

<unk> management assets actually increased during the year driven by strong net client inflow.

Wealth management fee revenue was up more than 15% from the prior year.

This includes strong growth in fees from brokerage, trusts, insurance, and foreign exchange services.

This includes strong growth in fees from brokerage Trust insurance and foreign exchange services.

The combined fees from these services increased 29% year over year.

The combined piece from these services increased 29% year over year.

And the strong growth in these products has also further diversified our wealth management fee revenue.

And the strong growth in these products is also further diversified our wealth management fee revenue.

As we have noted before, our exceptional client service is even more highly valued by clients during times of marked volatility.

As we've noted before our exceptional client service is even more highly valued by clients during times of market volatility.

We take these opportunities to engage our clients and understand their needs as market conditions change.

In fact, a key strength of our business model is our holistic approach to meeting our clients' banking and wealth management needs.

In fact, a key strength of our business model is our holistic approach to meeting our clients' banking and wealth management needs. This.

This benefits clients and has driven growth through a strong level of internal referrals and a deepening of client relationships.

In this regard, 2022 was a particularly strong year.

In this regard 2022 was a particularly strong year.

Are bankers referred over $11.5 billion of AUM to wealth management?

Our bankers are referred over 11 $5 billion of AUR to wealth management.

And deposit balances from new relationships referred by our Wealth Management colleagues during the year total more than $3 billion.

And deposit balances from new relationships referred by our wealth management colleagues during the year totaled more than $3 billion.

Wealth Management Referrer deposits and suite balances now represent over 13% of the bank's total deposits.

Wealth manager of a FERC deposits and sweep balances now represent over 13% of the bank's total deposits.

Our integrated banking and wealth management model also continues to make First Republic a very attractive destination for successful wealth professionals.

Our integrated banking and wealth management model also continues to make first Republic, a very attractive destination for successful wealth professionals.

In 2022, we welcomed 13 new Wealth Manager teams to First Republic in one of our strongest years ever.

In 2022, we welcomed 13, new wealth management teams to first Republic in one of our strongest years ever this.

This included five teams in the fourth quarter alone.

So far in 2020-2023, we've already welcomed two new wealth management teams to First Republic, reflecting our continued investment in the long-term success of this business.

So far in 2020 22023, we've already welcomed two new wealth management teams to first Republic.

Afflicting, our continued investment in the long term success of this business.

Overall, our team continues to execute very well. Times like these are a great opportunity to demonstrate our exceptional service, deepen existing relationships, and acquire new households.

Overall, our team continues to execute very well times like these are a great opportunity to demonstrate our exceptional service deepening.

Deepen existing relationships and acquire new households.

Now I'd like to turn the call over to Olga Sokova, Chief Accounting Officer and Deputy Chief Financial Officer.

I'd like to turn the call over all the Soca, Chief Accounting Officer, and Deputy Chief Financial Officer. Thank you, Bob I will briefly discuss how France have stability.

Thank you, Bob. I will briefly discuss our strength and stability.

Our capital position remains strong. During 2022, we added over $400 million of net new Tier one capital through a successful common stock offering.

Our capital position remains strong during 2022 added over $400 million of Nap, new tier one capital for a successful common stock offering.

At year-end, Tier one leverage ratio was 8.51%.

At year end tier one leverage ratio was 851%.

Liquidity also remains strong. High quality liquid acids worth 13% of average total acids S.

Liquidity also remains strong high quality liquid assets or 13% of average total assets in the fourth quarter.

the fourth quarter.

Our credit quality remains excellent. Net charges for the year were only $3 million.

Our credit quality remains excellent.

Net charge offs for the year were only $3 million.

Over the same period, our provision for credit losses was $107 million, which was driven by our strong loan growth. This is a multiple of nearly 40x.

Over the same period, our provision for credit losses was $107 million, which was driven by our strong loan growth. This is a multiple of nearly 40 Act.

Heading into 2023, our balance sheet remains strong. Now I'll turn the call over to Neil Holland, Chief Financial Officer.

Heading into 2023, our balance sheet remains strong and now I will turn the call over to Neal <unk> Chief Financial Officer. Thank you I'll get it was a very strong year, our exceptional client service and strong credit powered our safe growth or.

Thank you Olga. It was a very strong year. Our exceptional client service and strong credit powered our safe growth.

Our 2022 results were in line with, or better than, the expectations communicated at the start of the year.

Our 2022 results were in line with or better than the expectations communicated at the start of the year.

Let me take a moment to talk about the year ahead.

With a rapid rise in rates and the current inverted yield curve, we continue to experience margin pressure.

We currently expect the Fed funds rate to peak at 5% and then to gradually decline in the second half of the year.

We currently expect the fed funds rate to peak at 5% and then to gradually decline in the second half of the year.

As a result, for the full year 2023, our expected net interest margin to be approximately 25 to 30 basis points lower than the fourth quarter.

As a result for the full year 2023, our expected net interest margin to be approximately 25 to 30 basis points lower than the fourth quarter.

As a growth bank, we create value by consistently compounding our asset base, a direct result of the exceptional service we provide. Therefore, net interest income is a key metric for our differentiated business model.

As a growth bank, we create value by consistently compounding our asset base.

A direct result of the exceptional service we provide.

Therefore, net interest income is a key metric for our differentiated business model.

Despite the current margin pressure, we expect net interest income for the full year 2023 to be down only 2-5% given our continued strong growth in loans and investments.

Despite the current margin pressure, we expect net interest income for the full year 2023 to be down only 2% to 5% given our continued strong growth.

Loans and investments.

As we look to 2024, we expect continued strong loan growth in a more normalized rate environment. As a result, we expect to deliver strong, double-digit net interest income growth in line with our past performance.

As we look to 2024, we expect continued strong loan growth and a more normalized rate environment. As a result, we expect to deliver strong double digit net interest income growth in line with our past performance.

As Jim mentioned, the years following tightening cycles have historically been strong for the bank.

As Jim mentioned the years following tightening cycles have historically been strong for the bank.

Turning to expenses, for 2023, we expect expense growth in the high single digits.

Turning to expenses for 2023, we expect expense growth in the high single digits.

As a reminder, expenses are typically higher in the first quarter due to the seasonal impact of payroll taxes and benefits.

A reminder, expenses are typically higher in the first quarter due to the seasonal impact of payroll taxes and benefits.

As we discussed in Investor Day, we continue to prioritize our expenses in a way that will not sacrifice client service, growth, or safety and soundness.

As we discussed at Investor Day, we continue to prioritize our expenses in a way that will not sacrifice client service growth or safety and soundness.

We have identified.

We have identified $150 million in planned expenses that we will not incur in 2023.

$150 million in planned expenses that we will not incur in 2023.

This is already having a positive impact on our expense base and helped us keep expenses flat from the third to fourth quarter.

With respect to income taxes, the full year tax rate is expected to be around 24%.

While the current rate environment is challenging, our model is strong. We will continue to deliver exceptional client service, grow new households, and provide safe growth in 2023 and beyond. Now, let me turn the call back to Mike Roffler.

While the current rate environment is challenging our model is strong we will continue to deliver exceptional client service grow new households, and provide safe growth in 2023 and beyond now let me turn the call back to Mike Rustler.

Thank you, Neil.

Thank you Neil.

Thank you Neil. It was a strong year with record client service levels.

Thank you Neal it was a strong year with record client service levels Rec.

record loan growth, and record credit performance.

Record loan growth and record credit performance.

Our time-tested service model remains solid.

Our time tested service model remains solid.

Our entire team remains focused on executing our client service strategy one client at a time.

Now we'd be happy to take your questions.

Thank you.

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question and we'll pause for just a moment to allow for an opportunity to signal for questions.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Press Star one to ask a question and we'll pause for just a moment to allow for an opportunity to signal for questions.

We'll take our first question from Stephen Alexopoulos with JP Morgan. Please go ahead.

We will take our first question from Steven Alexopoulos with Jpmorgan. Please go ahead.

Good morning, everyone.

Hey, good morning, everyone.

Good morning, Steve.

Good morning Stuart.

So from a big picture view, if we look at the NIM outlook, it's a bit worse than what you had guided to it the investor day. And before I get into my deeper questions, what's changed since the investor day, which is driving the lower NIM outlook for the year?

Good morning, Mike So from a big picture view, if we look at the dim outlook, it's a bit worse than what you had guided to at the Investor day and before I get into my deeper questions. What's changed since the Investor day, which is driving the.

Lower NIM outlook for the year.

Yes, Steve, thanks. I think if you look at investor day, what's happened since then, and I think we highlighted this a bit in the prepared remarks, the 10-year has gone down 50, 60 basis points, and so the inversion of the yield curve has had a pretty, you know, a pretty significant increase.

Yes, Steve I think if you look at Investor day, What's happened since then and I think we highlighted this a bit in the prepared remarks, the 10 year is.

Gone down 50, 60 basis points and so the inversion.

The yield curve is a pretty.

significant impact on just rates in general. And obviously the macro environment is a thing that we can't control. The things we can control are our service levels and how we acquire households. And so with that inversion, which as we noted won't last a very long time and we are now part way through it. And so I think that is the biggest driver for the change in outlook relative to about 65 days ago.

Significant impact on just rates in general and obviously the macro environment is the thing that.

We can't control.

Things, we can control are our service levels and how we acquire households, and so.

With that inversion, which as we noted won't last.

Long time, and we are now partway through it and so I think that is the biggest driver for the change in outlook relative to about 65 days ago.

Okay. And Mike, it sounds like you're upping the expectations for expense management, and I think you got it to about a 65% efficiency ratio for 2023. Is that still intact when you put these pieces together?

Got you, Okay, and Mike It sounds like you're upping the expectations for expense management.

You guided to about 65% efficiency ratio for 2023 is that still intact. When you put these pieces together.

Because of the margin outlook, it will be a little bit higher.

but we have identified incremental expenses that will be deferred, not planned for the current year.

But we have identified incremental expenses that.

It will be deferred not planned for the current year.

Are you willing to share a new range with us?

Are you willing to share new range with us.

Yeah, I mean, just because of the revenue outside of the equation, it's just doing the math of a two to 5% decline with net interest income. About 66 to 68% with that. A guide post with high single digit growth rates of expenses.

Yeah, I mean, just because of the revenue side of the equation.

It's just doing the math of 2% to 5% decline with net interest income, it's about 66% to 68% with that.

<unk> post with high single digit growth rates of expenses.

Okay. And then just to dive in to the deposit side a little deeper. So it's pretty remarkable to see that with the rate being paid on checking balance, it's more than double from the prior quarter, but average balance still came down, about $9 billion. Can you take us behind the scenes in the quarter? What's the typical conversation you had with customers and maybe underlying the NIM assumptions?

Got it okay.

And then.

Just to dive in to the deposit side, a little deeper so it's pretty remarkable to see the rate being paid on checking balances more than doubled from the prior quarter, but average balances still came down about $9 billion.

Can you take us behind the scenes in the quarter, what what's the typical conversation you had with customers and maybe underlying the NIM assumptions, where do you see the rate paid on checking moving to and maybe where does that mix stabilize.

Well, importantly, I think there's still about $67 billion, I think, of zero-cost checking, which is operating balances and costs. Obviously, as rates have gone to 4.5%, the conversations between our clients facing people and clients have talked about, you know, where might they be able to achieve a bit better yield. And as a service organization, that's what we continue to focus on is that relationship with our clients to ensure they're leaving the right balances and checking for their operating needs.

Importantly, I think there is still about $67 billion I think of zero cost checking.

Which is operating balances and costs, obviously as rates have gone to four 5%.

Conversations between our client facing people and clients have talked about where might they be able to achieve a bit better yield and as a service organization. That's what we continue to focus on is is that relationship with our clients to ensure they are they're leaving the right balances in checking for their operating needs.

And there are other yield alternatives either in wealth management money market.

certificates of deposit, different alternatives.

If we get some deposit.

I think we communicated a low 30s data on overall deposits in the past.

Alternatives I think we communicated a low <unk> data on overall deposits in the past.

And we feel like sort of 30 to 35 is about the right range still at this point. And that's consistent with what we said before it investor day.

And we feel like sort of 30% to 35 is about the right range still at this point and Thats consistent with what we said before at Investor Day.

Okay. And then if I could just squeeze one more in, Mike. Going back to the new NIM outlook, I know Jim said in his commentary that you guys expect rates to decline more in line with the market in the second half of 2023. If rates were to move to say 5.5% range and stay there and not come down in the second half, how would that change your NIM outlook for 2023?

Okay, and then if I could just squeeze one more in Mike Don going back to the new NIM outlook I know Jim said in his commentary that you guys expect rates have declined more in line with the market in the second half of 2023, if rates were to move to say by five 5% range and stayed.

They're not come down in the second half how would that change your NIM outlook for 2023.

So it, it, the once it stabilizes. You sort of stabilize from there, so I don't think it changes it a whole lot.

So it is.

Once it stabilizes.

Sort of stabilize from there so I don't think it changes it a whole lot.

<unk>.

I think the pace of change is what has happened this year that led to the increase or the increase in funding costs.

I think the pace of change is what has happened this year that led to the increase the increase in funding costs.

And the real impact if you think about it is in the future if you leap forward to 24 and you're stable is when you'll start to see the inflection where net interest income starts to grow. Right now that looks like the back half of the year on a linked quarter basis. If the Fed delays that might delay that a quarter. But then you start to see the inflection higher thereafter.

And the real impact if you think about it is in the future. If you leap forward to 'twenty four and you are stable is when youll start to see.

The inflection where net interest income starts to grow right now that looks like the back half of the year on our <unk>.

The linked quarter basis, if the fed delays that might delay that a quarter.

But then you start to see the inflection higher thereafter.

All right.

Got it.

Great, thanks for taking my questions.

Thanks for taking my questions.

We'll take the next question from Dave Rochester with Compass Point. Please go ahead. We'll take the next question from Dave.

We will take the next question from Dave Rochester with Compass point. Please go ahead.

Hey, good morning, guys. Just on your NIMM guide real quick, are you assuming for the funding of earning asset growth primarily CDs and borrowings at this point? Maybe you just talk about the mix there and the growth of deposits that you're thinking about. And then you did have a decent amount of run-off and non-interest bearing, which a lot of banks are experiencing at this point.

Yes.

Hey, good morning, guys.

On the NIM Guide real quick are you assuming for the funding of earning asset growth, primarily Cds and borrowings at this point.

Maybe you can just talk about the mix there and the growth in deposits that you're thinking about and then you did have a decent amount of run off in noninterest bearing which a lot of banks are experiencing at this point I was just curious.

How should we expect this type of pace to continue or do you see a level at which you would expect.

You know the.

The trend is sort of subside and then get down to more of a sticky base.

Base.

And where do you see that sort of trailing off thanks.

Yeah, maybe on that, what you're getting at is the average balance size. It has come down. So average balance is per account.

Yes, maybe on the <unk>.

Once you get out of the average balances it has come down so average balances per account peaked.

peaked probably at the end of last year. They have come down closer to their pre-pandemic levels. And then obviously, as I mentioned earlier, there's a level of operating needs that clients have to have to operate with. I think that the outlook, you know, we're going to largely fund loan growth with deposits, and then there'll be a mix of borrowings that is also utilized, just like we have in the past.

Peaked probably at the end of last year, they have come down closer to their pre pandemic levels and then obviously as I mentioned earlier, there's a level of operating needs that clients have to have to operate with.

I think that the.

Outlook, we're going to largely fund loan growth with.

Deposits and then there'll be a mix of borrowings that is also utilize just like we have in the past and the growth rate will probably be greater in Cds, then it will be in checking given where the rates are this year and that's reflected in your outlook.

Thank you.

Okay.

Okay, great. And the Navy just got capital. Tier one leverage looks good. Notice the CET one ratio did down a little bit below 9%. Was that an issue at all?

Okay, Great and then maybe just on capital.

Tier one leverage looks good.

Noticed the CET, one ratio down a little bit below 9%.

That an issue at all.

Just how are you thinking about that going forward? Thanks.

Just how are you thinking about that level going forward. Thanks.

No, no issue with our capital currently we, as always remained opportunistic and methodical.

No no issue with our capital currently we as always remain opportunistic and methodical.

relative to capital, whether it be a preferred or common.

Relative to.

Capital will be a preferred or common.

Great. And then maybe one last one on loan production rates. Maybe if you could just kind of go through the key products and talk about where your pricing loans today, that'd be great. Thanks.

Okay.

Great and then maybe one last one on loan production rates, maybe if you could just kind of go through the key products and talk about where your pricing loans today that'd be great. Thanks.

Sure. Dave, it's Mike Selfridge. I'll give you a couple of indicators here and look more, rather look more at the locked pipeline as of today. So single-family or locked pipeline, these are deals that are in the queue due to close soon. Single-family mortgages about 580. Multifamily about 5.4%. Commercial about 5.6%. And the whole locked real estate loans right now are a little over 5%, maybe 5, 10.

Sure David as Mike Selfridge will give you a couple of indicators here and look more rather look more at the locked pipeline as of <unk>.

As of today, So single family a lot pipeline. These are deals that are in the queue and.

Due to close soon single family mortgages about $5 80.

Multifamily about five 4% commercial about five 6% and the whole lot real estate loans right now are a little over 5% maybe 510 and then on the business excuse me the business banking side nothing has changed there capital call lines tend to be the larger part.

Of the pipeline and that still remains in the prime minus 75 to prime minus 100 basis point range.

Thanks for the call guys. Appreciate it.

Great. Thanks for the color guys appreciate it.

I'll take the next question from Ibrahim Humwala with Bank of America. Please go ahead.

We'll take the next question from Ebrahim <unk> with Bank of America. Please go ahead.

Okay, good morning.

Hey, good morning.

I just wanted to follow up on the margin on two things. One, I think like you mentioned, still expect the 30 to 35% deposit beta. Yeah, in the world where rates don't actually get cut and the forward curve doesn't play out, like do you, like.

I guess just wanted to follow up on.

On the margin on two things one.

I think Mike you mentioned still expect that 30% to 35% deposit beta.

Yes.

In the World, where it's don't actually get caught in the follow up call. It doesn't play out.

Just handicap the risk, I think the concern on the margin out.

Just trying to get the risk I think the concern on the margin outlook generally has been deposit cost mix shift we've heard from some of the other big banks today could be much worse than we've seen just given that we've locked that sticks with us in a long long time.

generally has been that deposit costs make shift. We heard from some of the other big banks today could be much worse.

Then we've seen just given that we've not.

tested for this in a long long time like what's the comfort level on the 30 to 35 beta holding.

What's your comfort level on that 30 to 35 beta holding.

So that is our best perspective at this point in time, given our outlook. And as Jim mentioned.

Bill.

You know as our best perspective at this point in time, given our outlook and as Jim mentioned.

this doesn't last forever given history of 40 plus years. And so the tenure is also telling you something where it's dipped to 344 as of yesterday as to where the market feels rates are moving. And so the beta could be a little bit higher if they hold an extra quarter or two. But the fact that the pace is slowing, there will be a little bit of what I call catch-up because it always is at the end of a cycle, but the pace slows because the time just passes.

This doesn't last forever given history of 40 plus years.

And so the 10 years also telling you something where it's Jeff <unk> to $3 44 as of yesterday.

As to where the market feels rates are moving.

And so the debate it could be a little bit higher if they if they hold an extra quarter or two but the fact that the pace is slowing there'll be a little bit of.

What I call a catch up it always is at the end of a cycle, but the pace slows because the time just passes and sell.

I would say that we feel pretty confident where we are.

and you know it'll be dependent upon macro outlook which is the one thing that you all know we don't control and nor does anyone else.

And it will be dependent upon macro outlook, which is the one thing that you all know, we don't control and nor does anyone else.

Thank you.

Understood. And just in terms of the margin, I'm assuming there's some benefit in the back half if you assume late cuts in your NIM guidance of down 25 to 30 bps. How should we think about the NIM trajectory? Does it fall closer to 2% by the middle of the year by the 2nd or 3rd quarter before rebounding in the back half?

Understood and just how you think.

Missed it did you talk about like in terms of the margin.

Im assuming you get some benefit in the back half as you assume rate cuts in your NIM guidance of down 25% to 30 bps.

Should we think about the NIM trajectory like does it fall closer to 2% by the middle of the year by the second or third quarter before rebounding in the back half.

No, I wouldn't go to 2%. It sort of stabilizes at the middle part of the year. And importantly... Because of the multiple.

No I wouldn't go to 2%.

It sort of stabilizes at the middle part of the year and importantly.

After you have a little bit of a dip in net interest income here in the first half, then you start to see it increase towards the back half of the year and it starts to have a real positive trajectory into 24.

After you have a little bit of a dip in net interest income here in the first half then you start to see it increase towards the back half of the year and starts to have a real positive trajectory into 'twenty four.

Understood. And just one last question around growth. I know, Jim, you've talked about market share in environments like this. Just give us a sense of is this environment any different in terms of gaining market share and how are your customers, there's been a ton of wealth destruction. How is that factoring in in terms of just the appetite to buy homes and in terms of mortgage loan growth today versus the last 10 or 15 years?

Understood and just one last question around growth.

Jim you've talked about market share in environments like this it just give us a sense of is this environment any different in terms of gaining market share and how are your customers given that there's been a ton of belts destruction. How is that factoring in in terms of just the appetite to buy homes and in terms of mortgage loan growth today versus the last 10 years.

15 years.

Well, this disruptive moment, and we all know that the mortgage market is being disrupted a little bit, is an extraordinary opportunity for us to take share.

Well.

This.

Disruptive moment.

I'll know that mortgage market is being disrupted a little bit is an extraordinary opportunity for us to take share.

The moments like this are very special. The volume of demand is lower. We all know that, although my guess is it'll pick up in the spring quite a lot. But the disruptive nature, the disruption that's going on in the mortgage market, people pulling back, et cetera, is just handing us a silver platter.

Moments like this.

Our.

Very special.

The volume of demand is lower we all know that although my guess is we'll pick up into spring quite a lot.

But the disruptive nature of the disruption that's going on in the mortgage market people pulling back et cetera is is just.

So it's on a silver platter.

And does that create some pricing power? Like as the yield curve from Mike you mentioned earlier dropped.

And does that create some pricing power like the.

The Yieldco, Mike you mentioned earlier dropped did the spreads widen on this product.

Did the spreads widen on this product?

It's not a pricing issue. It's a service issue and availability issue.

It's not a pricing issue, it's a service issue an availability issue.

But I'm just wondering, are you able to see better?

But I'm just wondering are you able to see better spreads when the yield curve or.

when the yield curve or is the pricing on these like the 580 Mike mentioned will that tend more or less with whatever happens in the yield curve.

The pricing on these like the 580, Mike mentioned.

More or less with whatever happens with the yieldco.

Let me turn this to Mike, but the pricing on the acquisition of a new well-off household on a short-term asset like a four or five-year mortgage is semi-irrelevant.

Let me turn it over to Mike, but the pricing on the acquisition of a new well off household on a short term asset like a four five year mortgage is somewhat irrelevant.

You buy it you take on a new household like this they stay with you for life. Yeah, and Ibrahim I want to clarify on Dave Rochester's Comment the the lock production on the single family is for a little under 5%.

You buy it you take on the new household like this they stay with you for life.

Ebrahim I want to clarify on Dave Rochester Rochester.

Coming to the Lac production on the single family is little under 5% is what I meant to say about <unk>, but these are still as we've said in the past eight plus clients and they get very good pricing for full relationship and full service at first Republic.

is what I meant to say about 480. But these are still, as we've said in the past, A-plus clients, and they get very good pricing for full relationship and full service at First Republic.

Thank you.

That's helpful, the clarification. Thank you so much and thanks for taking my questions.

Yeah.

That's helpful clarification. Thank you so much and thanks for taking my questions.

The next question comes from Casey here with Jefferies. Please go ahead.

Our next question comes from Casey Haire with Jefferies. Please go ahead.

Yes, thanks. Good morning, everyone. Operating lever question for 24. Appreciate that the guide on NII up low double digits next year. Just wondering, just given that you guys are doing a good job on the expense front and deferring, and he bumped it up to 150 million, just wondering, do we see a catch up next year on all this expense deferral, or is there an opportunity to improve the efficiency ratio from that 66, 68, when NIM starts going the right way?

Yes, thanks, good morning, everyone.

Operating leverage question for 'twenty four I appreciate that the guide on that.

Up low.

Digits next year.

I'm just wondering just given that you guys are doing a good job on the expense front and deferring.

You bumped it up to a $150 million just wondering do we do we see a catch up next year on all of this expense deferral or is there an opportunity to improve the efficiency ratio from that $66 68.

When NIM starts going the right way.

Yeah, there's a strong opportunity in 24 to see a very strong improvement in our efficiency ratio as we're really looking for ways to optimize, prioritize, make the company even more efficient than we are today. We expect strong operating leverage into the future.

Yes, there's a strong opportunity in 24 to see a very strong improvement in our efficiency ratio as we're really looking for ways that.

Optimize prioritize make the company even more efficient than we are today, we expect our strong operating leverage into the future.

Okay, very good. On the switching gears to the loan growth, can we get a sense for how the pipeline is doing at year end versus 930? What are some elements of theictedomics Nths o.

Okay very good.

On the switching gears to the loan growth.

Can we get a sense for how the pipeline is doing at year end versus 930.

Hi, Casey, Mike Selfridge. I would say, I would characterize it as healthy. It's down from the last quarter, but it's up year over year. And obviously, there's been headwinds on the refinance side, and that's been more difficult. But there's other parts of the pipeline, I would note, that are doing very well. Business banking, for example, is at a high.

Hi, Casey, Mike Selfridge, I would say I would characterize it as healthy it's down from the last quarter, but it's up year over year and obviously.

There's been headwinds on the refinance side and that's been.

More difficult, but there's other parts of the pipeline I would note that are doing very well business banking. For example is it a high other avenues P. L. P. P lock securities lending, so again healthy pipeline going into the quarter.

Okay, thanks, Mike. And just following up on that. And Dave, on the loan growth, let me add... Oh, go ahead. No, go ahead, go ahead.

Okay. Thanks, Mike and just just following Dave on the on the loan growth I mean, they'll go ahead.

No go ahead go ahead.

I was just going to say the loan growth itself. Also note that CPRs are down and so that gives us a good base from which to grow.

I was just going to say the loan growth itself.

Note that <unk> are down and so that gives us a good base from which to grow.

Yep, and then the capital call, that came in a little bit stronger than certainly what you were sort of experiencing in November . Just any color on, is that business picking up?

Yes.

And then.

The capital call that came in a little bit stronger than certainly what you were sort of experiencing in November just any any color on is that as that business picking up.

I would say, well, you know, a little bit of improvement from 32% to 33% utilization. That's down from a year ago, which was just over 40%. So that industry is still seeing its challenge in the sense of slower velocity of deals, just like last quarter, slower pace of fundraising, but cautious, but still active investors. And there was a slight tick up in private equity activity overall for the industry.

I would say well you know a little bit of improvement from 32% to 33% utilization that's down from a year ago, which was just over 40%. So that industry is still seeing it's challenged in the sense of slower velocity of deals just like last quarter slower pace of fund raising but cautious but still active.

Investors and there was a slight tick up in.

Private equity activity overall for the industry and that drove a little bit of the utilization for us.

Okay, great. And just one more, the spot deposit costs at 1231 versus the 99 BPS in the quarter and also the spot CD costs, if you could provide that given that's a critical driver here.

Okay, Great and just one more.

The spot <unk>.

<unk> costs.

At 12 31 versus versus 90.

99 bps in the quarter and also the.

Spot CD costs, if you could provide that given thats a critical driver here.

Yeah, we ended the quarter with an average of 99 basis points and looking at where we ended spot at 1231, we were up about 30 basis points from there.

Yeah.

We ended the quarter with an average of 99 basis points and looking at where we ended spot at 12 31, we were up about 30 basis points from there.

Okay, any color on the CDs versus that 279 level in the quarter?

Okay any color on the Cds versus that 279 level in the quarter.

Yeah, it just tends to move around depending on where we're trying to position. So I don't think it's a meaningful. I think the 129 spots the right. Place to be.

Yes, it just tends to move around depending on.

Where we're trying to position so I don't think its a meaningful I think the 129 spots the right place to be.

Okay, thank you.

Okay. Thank you.

We'll take the next question from Manan Ghazalia with Morgan Stanley . Please go ahead.

We will take the next question from Manan <unk> with Morgan Stanley . Please go ahead.

Hi, good morning.

I have a question on the duration of the CD book. Some of the promo CD durations that you were offering or some of the promo CDs you were offering in the past were closer to four months. So my question is, what do you think clients doing there? Are they just rolling those CDs over for the same term or perhaps are they maybe extending the term a little bit given that you're also offering an eight-month promo rate right now?

I had a question on the duration of the CD book side.

Some of the promo CD durations that you were offering or some of the promo Cds you were offering in the past were closer to four months.

My question is what are you seeing clients doing there are they're just rolling those Cds over for the Sam.

Or perhaps maybe extending the term a little bit given that you are also offering an eight month promo rate right now.

And then if you have any comments on what the duration of.

The CD book is and what percentage will likely reprice over the course over the next couple of quarters.

Currently.

Currently I would say clients are a little more inclined on the the eight and 10 months versus shorter.

I'd say clients are a little more inclined on the 8- and 10-month versus shorter. Usually every rollover opportunity presents an opportunity for us to demonstrate our extraordinary client service. And so our bankers in the offices and are engaging with clients to talk about their needs and maybe do they want to be shorter, do they want to lock in a little bit more, do they have other cash needs.

Usually every rollover opportunity presents an opportunity for us to demonstrate our extraordinary client service and so are our bankers in the offices and are engaging with clients to talk about their needs and maybe you do they want to be shorter do they want to lock in a little bit more to have other cash needs and so I think what's important.

Is the rollover opportunity drives a conversation with the client most importantly.

Given what we talked about with the cycles earlier.

Staying in sort of a what I'll call a 4% to seven month range for US has made a lot of sense. If you believe that the cycle does rollover sort of mid year and so thats been our duration has been pretty much in that range.

Got it. So should we assume a majority of the CDs are going to reprice over the course of the next three to six months?

Got it so.

Should we assume a majority of the Cds are going to reprice over the course of next.

Three to six months.

Yes, that's a fair assumption.

Okay, great. And then maybe just related to that, you said in the past that you like CDs over FHLB funding, given that CDs are a good customer acquisition tool. Is there anything you can share there on maybe the number of new customers that you're bringing in through the promo CD offerings? And do they typically come with some checking account openings as well?

Okay great.

And then maybe just related to that you have.

<unk> said in the past that you like Cds over FHA Obi pharma. Thank God given that Cds are a good customer acquisition tool.

Is there anything you can share there on maybe the number of new customers that you're bringing in through the promo CD offerings.

And do they typically come with some checking account openings as well.

Is there a great you have in mind.

It might make more sense to pivot to FHA LD overseas. Thanks.

So I think we'd always choose the quiet first.

So I think we'd always choose the client <unk>.

on the first part there. And typically the CD pricing actually is a little bit more attractive than the FHLB, especially right now. And so those are two benefits, but the first being the client first and foremost. And absolutely when they come into an office, they experience something different versus other offices. And so our service level is meant to, one, bring them in, but second, develop a relationship where we have their checking and their primary banking.

On the first part there and typically the CD pricing actually is a little bit more attractive than the.

The FHL, especially right now and so those are two benefits, but the first being the client first and foremost and absolutely when they come into an office they experienced something different versus other offices and so our service level is meant to bring them in but second develop a relationship where we have their check.

And their primary banking and so typically.

We're able to get checking accounts on a very good percentage of those and build the relationship over time.

which is the most important because we're playing for the long-term client relationship, not just the rate offering in the current moment.

Which is the most important because we're playing for the long term client relationship not just the.

Great offering in the current moment.

Thank you..

Thanks for taking my questions.

I appreciate it thanks for taking my questions.

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

Please go ahead.

Hi, good morning. Maybe just circling back on the expenses and the deferred expenses, could you maybe separate those out on how much of that is coming from maybe deferred hiring versus systems or technology spending versus overall marketing and general spending?

Please go ahead.

Hey, good morning.

Maybe just circling back on the expenses and the deferred expenses could you.

Maybe separate those out on how much of that is coming from maybe deferred hiring versus.

<unk> systems or.

Technology spending versus overall.

Marketing and general spending.

So, Jared, it's a good question. I think it's really broad based. So, some of it is we've hired a lot of people in the last couple of years. So, we have efficiencies from the new core system. Maybe we'll hire a little bit less in certain areas. As Mike Selfridge said, and I think Jim, mortgage volume, there's less refinance, so you need less growth in headcount there.

So Jared it's a it's a good question I think it's really broad based.

So some of it is we've hired a lot of people in the last couple of years. So we have efficiencies from the new core system, maybe we will hire a little bit less in certain areas.

Mike Selfridge said.

And Mike and I think Jim mortgage volume there is less refinance that you need less growth in head count there and so some of it is if we had projected to grow head count we're going to grow a little bit less.

Olga, I think, and Neil had mentioned this at investor day, there's some natural.

<unk> got I think Aneel had mentioned this at Investor day, there is some natural.

adjustment to our compensation levels given the mix of business we're doing, that's also factored in. And then everywhere else is a team approach in marketing, IT, everywhere, where the team really bands together and think about where's the best dollars to spend for client service.

Adjustment to our compensation levels, given the mix of business. We're doing that's also factored in and then everywhere else is.

A team approach and marketing.

Everywhere, where the team really bands together and think about Where's the best dollars to spend for client service.

and to make sure we continue to be safe and sound to grow, and that's how we're focused. For example, we've hired, already announced, two teams this year in wealth management. As Bob mentioned, that's a great opportunity for us to hire terrific people, bring them over, and have new clients come to the bank at the same time. And so it's a little bit more of prioritizing and optimizing our spend to continue to drive safe, stable growth over time.

And to make sure we continue to be safe and sound to grow and that's how we're focused for example.

We've hired already announced two teams this year and in wealth management as Bob mentioned, that's a great opportunity for us too.

Higher terrific people bring them over and have new clients come in the bank at the same time and so it's a little bit more of prioritizing and optimizing our spend.

To continue to drive safe stable growth overtime.

Okay, great. Thanks. And then, just finally for me, I guess on the securities portfolio, can you give an update on reinvestment rates and what we should expect as maybe a target securities and cash to total assets as we go out the next two quarters?

Okay, great. Thanks, and then.

Just finally for me I guess on the Securities portfolio can you give an update on reinvestment rates and what.

What we should expect.

Maybe a target securities and cash to total assets as we go out the next few quarters.

Hi, Jared. This is Olga. So if we look at our purchases in the fourth quarter, the yields on HQLAs were in low fives, and the munis came high in low six, like 6.1, 6.3. And if we look at the yields today, or just a quarter and a subsequent quarter end, HQLA remained relatively similar levels at five, five and a quarter. And munis yields load slightly from what we've seen during the quarter.

Hi, Jared this is all of that stuff will look at our.

<unk> purchases in the fourth quarter, the yields on H Kla's War and low fives.

And the Muni scheme high and low six like six brand while $6 three.

Analysts to look at the yields are today.

At quarter and subsequent to quarter end.

<unk> remained relatively level at five five and a quarter and muni fields load slightly from what we've seen during the quarter of there at five five and a half.

And we expect to keep cash at the same level of total assets through the next year.

And we expect to keep cash at the same level of total assets through next year.

Great, thank you.

Great. Thank you.

Next question comes from John Pankari with Ebercor. Please go ahead.

Next question comes from John <unk> with Evercore. Please go ahead.

Morning.

Good morning.

On the loan growth, on the mid-teens growth expectation, could you perhaps kind of break it out by loan category, what you're thinking is a reasonable expectation for growth, you know, particularly on the mortgage side, given where we're looking at rates as well as purchase activity. If you can give us a breakdown of that mid-teens and the key drivers, that would be really helpful.

On the loan growth on the mid teens growth expectation could you, perhaps kind of break it out by loan category, what youre thinking is a reasonable expectation for growth.

Particularly on the on the mortgage side, given where we're where we're looking at.

Grades as well as.

Purchase activity, if you can give us a breakdown of that mid teens and the <unk>.

Key drivers that would be really helpful. Thanks.

John , it's Mike. Yeah, mid-teens loan growth, we're comfortable with that. I would say the mix is going to be consistent as it has been in years previous. So...

John It's Mike.

Yeah mid teens loan growth, we're comfortable with that I would say the mix is going to be consistent as it has been in years.

So.

nothing unusual there and where it's coming from. Jim mentioned the disruption going on. It's never been a better time to acquire clients of First Republic and that's true for the lending side as well. We were pleasantly surprised that even refi mix was 36%. Keep in mind, those are new households as well. The majority of those refis are other banks, clients that we acquire.

Nothing unusual there and where it's coming from Jim mentioned, the disruption going on it's never been a better time to acquire.

Clients of first Republic, and that's true for the lending side as well we were pleasantly surprised that even refi mix was 36% and keep in mind. Those are those are new households, as well the majority of those refis are other banks' clients that we acquired.

So, nothing unusual in terms of the mix.

So nothing unusual in terms of the mix.

Okay. All right. And then, separately, on the fee side, I'm just wondering what non-interest income growth expectation do you have baked into that 66 to 68 percent efficiency range? And then, more specifically, can you kind of give us some color on how you think about growth that is likely in investment management and brokerage investment fees? I'm curious what type of upside you see there and maybe what your base case assumption is for the S&P and how it could impact their wealth management revenue.

Okay, Alright, and then.

Separately on the fee.

Side, just wondering what not.

Noninterest income growth expectation do you have baked into that 66% to 68% efficiency range.

And then more specifically can you kind of give us some color on how you think about growth that is likely in investment management and.

Brokerage and investment fees I'm curious what type of upside you see there.

And maybe what your base case assumption is for the S&P and how it could impact their wealth management revenue.

This is Bob, maybe I'll start. So we're looking, the first quarter we're looking at investment management fees somewhere in the range of $150 million. And that reflects in part, we had a number of team hires late in the year that we hadn't fully reflected. We got some of the benefits, S&P's up since September 30th, and new team hires. So we look for this year to be a pretty strong year in terms of our overall growth in investment management fees and total wealth management fees.

This is Bob maybe I'll start so we're looking at the first quarter, we're looking at investment management fees somewhere in the range of 101 hundred $50 million.

And that reflects in part we had a number of team hires late in the year that we haven't seen fully reflect where we got some of the benefit.

S&P is up since September 30th and new team hires. So we look for this year to be a pretty strong year in terms of our overall growth in investment management fees in total wealth management fees, yes.

Yeah, John , and if I just stand back for total non-interest income, we'd expect it to be in the double digits, which is inclusive of wealth management is a big part of that. And then the other items that we also have had, you know, loan fees, deposit fees, etc.

Yes, John and if I, if I just stand back for total noninterest income we would expect it to be in.

Double digits, which is inclusive of wealth management is a big part of that and then the other items that we also have had.

Loan fees deposit fees et cetera.

Okay, got it. Thanks, Mike. My last question is just around the...

Okay got it thanks, Mike and then my last question is just around the.

The LTV comment, I know you mentioned 57% loan value on all your real estate loans that you had produced. I guess that was, I think, over the year. But maybe if you can give us a little more color on commercial real estate. What is the LTV at origination in your commercial real estate portfolio? And more importantly, do you have an indication of what the refreshed LTV is in that?

The LTV comment I know you mentioned, 57% loan to value on all of your real estate loans.

And you had produced.

I guess that was I think over the.

Over the year, but maybe if you can give us a little more color on commercial real estate was the what is the LTV at origination and your commercial real estate portfolio and more importantly, what is do you have a indication of what the refreshed ltvs in that portfolio.

portfolio.

John , it's Mike. The last two years, and that would go for today, the median LTV on commercial real estate origination has been about just under 50%, about 46%, to be precise. Median size, about $2 million.

John It's Mike the last two years and that would go for today, the median LTV on commercial real estate.

Real estate origination has been about just under 50% about 46% to be precise medium size about $2 million.

Thank you.

Okay.

Okay, do you have a refreshed LTV for your commercial real estate book to try to give us an idea of how the.

Okay do you have a refreshed LTV for your commercial real estate book to try to give us an idea of how the.

how that book is positioned here as we start to see pressure on office and other areas.

How that book is positioned here as we start to see pressure in office and other areas.

Yeah, no change from our conservative underwriting standards. We have always been conservative and cautious, even more cautious, and I even think our clients are more cautious. So, just expect very conservative underwriting.

Yes, no change from our conservative underwriting standards, we are have always been conservative and cautious even more cautious and I, even think our clients are more cautious so.

Just expect very conservative underwriting.

Okay.

Thanks, Mike. Appreciate it.

Got it okay. Thanks, Mike appreciate it.

We'll take the next question from Bill Kargache with Wolf Research. Please go ahead. We'll take the next question.

We'll take the next question from Bill <unk> with Wolfe Research. Please go ahead.

Thank you. Good morning. I wanted to follow up on the NIM commentary. Your net interest spread is down to 174 basis points versus.

Thank you good morning.

I wanted to follow up on the NIM commentary your net interest spread is down to 174 basis points versus euro.

your name at 245 basis points, how would you address the growing divergence across those metrics including concerns that the net interest margin will eventually converge with the spread?

Your NIM at 245 basis points, how would you address the growing divergence across those metrics, including concerns that the net interest margin will eventually converge with the spread.

Well, Bill, I think that the big thing that, you know, difference between those two items is the spread doesn't factor in the nearly $67 billion of noninterest. So we're much more focused on, as we talked about earlier, net interest income. Versus what the, you know, the margin will be and so the divergence doesn't. You know, really concern us at all.

Well Bill I think that the big thing that difference between those two items is the spread doesn't factor in the nearly $67 billion of noninterest. So we're much more focused on as we talked about earlier net interest income.

Versus what the the.

The margin will be in so the divergence doesn't.

Really concern us at all.

Okay, and then on that topic is we sort of think about like remixing, you know, the CD mix, you've moved back closer to pre-COVID levels, but there's growing concern that we could see CD mix revert to pre-GFC levels in this rate environment. Your mix of CDs was just over 30% of deposits back in 2010. You know, how are you thinking about like the remixing of, you know, non-interest bearing deposits, essentially the mix of non-interest bearing deposits coming lower and CDs remixing higher.

Okay, and then on that topic as we sort of think about like Remixing.

The CD mix, you've moved back closer to pre COVID-19 levels, but there is growing concern that we could see CD mix revert to pre <unk> levels in this rate environment in Europe makes a Cds was just over 30% of deposits back in 2010.

How are you thinking about like the remixing of noninterest bearing deposits essentially the mix of noninterest bearing deposits coming lower than Cds remixing higher.

Any thoughts around that would be helpful? Yeah, there is a level of operating accounts that our business clients and consumers do need. And we, as we mentioned earlier, average balances are approaching and starting to close in on pre-pandemic. We have run CDs higher in the past, and some of our outlook that we provided earlier does reflect that we expect that to continue here into 2023.

Any thoughts around that would be helpful.

There is a level of operating accounts that our business clients and consumers do need and we as we mentioned earlier average balances are approaching and we are starting to close in on pre pandemic.

We have run cd's higher in the past and some of our outlook that we provided earlier does reflect that we expect that to continue here into 2023.

And as we mentioned earlier its a terrific way to get trial with new households, and continue to deepen our relationship with clients and so it's a tool the bank is used for.

37 years, and some periods you just use it a lot less and others and now is one of those periods, we're using it more.

Thank you.

Understood. If I may, with a final question on, you know, you guys have historically done very little with derivative financial instruments. With the yield that you're earning on cash now roughly in line with your loan yields, does that dynamic influence in any way whether you consider putting on swaps or at all change how you thought about the use of derivatives?

Understood if I may.

With the final question on.

You guys have historically done very little with derivative financial instruments.

With the yield that you're earning on cash now roughly in line with your loan yields does that dynamic influence in any way, whether you would consider putting on swaps or at all change how you thought about the use of derivatives.

It does not.

Okay.

Thank you for taking my questions.

Helpful. Thank you for taking my questions.

Next question will come from Erica Nadurian with UBS. Please go ahead.

Next question will come from Erika Najarian with UBS. Please go ahead.

Hi, good morning.

My first question is for Mike Roffler. I think that how the market is responding to.

My first question is.

For Mike Rossler I think that.

How the market is responding to.

you know, your guidance today is a clear indication that the expected difficulty.

Your guidance today is a clear indication that the expected difficulty in 2023 and are looking ahead to 'twenty four and to that end.

in 2023 and, you know, are looking ahead to 2024. And to that end, could you share with us what you envision to be the future of the world?

Could you share with us what you envision to be the <unk>.

the natural efficiency ratio for First Republic as we put more volatile rate moves behind us. We think about a more normal investment cycle and also contemplate the impact of HQLA build to a modified LCR goal.

Natural efficiency ratio for.

For first Republic, as we think of as we put more volatile rate moves behind us.

We think about a more normal investment cycle and also contemplate the impact of each.

<unk> build too.

A modified LCR.

Cool.

Thank you, Erica. I think you're right to look forward to 2024. And I think when you get through this period where the margin and net interest income is a bit under pressure and then you go forward after we stabilize, when the cycle turns, you'd come back to sort of a 62 to 64 range, which is where we've been for many years.

Thank you Eric I think you are.

Right to look forward to 2024, and I think when you get through this period where the.

The margin and net interest income is a bit under pressure and then you go forward.

After we stabilize when the cycle turns you would come back to sort of 62 to 64 range, which is where we've been.

For many years.

And as a follow-up there, obviously in 2024, we've had a lot of questions about the pandemic, and we've had a lot of questions about the pandemic, and we've had a lot of.

Thank you and as a follow up there.

Obviously in 2024.

the investors are starting to think about cuts to fed funds. And to that end, right, it's been a while since we've seen a terminal rate above zero. How should we think about where your deposits would settle to, deposit costs would settle to relative to the terminal rate, right? We're just, we've been so used to, you know, where deposits have dropped relative to zero.

The investors are starting to just think about cut the fed funds.

And to that end right.

It's been a while since you've seen a terminal rate above zero, how should we think about where your deposits would settle to deposit cost would settle two relative to the terminal rate right. We're just.

So used to.

Deposits have trough relative to zero and when we've looked at other points historically deposit cost tend to trough above.

We're fed funds troughs, so perhaps give us a sense of how you how much you think you can cut deposit costs is fine.

The fed starts easing.

Erica, thanks for the question. It'll be very mix driven, right? And so one of the things that we've talked about is that through 2023, checking ends up about 50% of our deposits by the end of the year, which continues to be extremely valuable.

Eric Thanks for the question and it'll be very mix, driven right and so one of the things that we've talked about is that through 2023 checking ends up about 50% of our deposits by the end of the year, which continues to be extremely valuable.

from a relative cost perspective to wherever the terminal rate ends up.

From a relative cost perspective to wherever the terminal rate ends up.

and that's reflective of deep client relationships and the growth in the business banking. And then money market and CDs will again depend on client appetite and where do they want to lock in possibly for CD versus money market. And it's hard to project what.

And that's reflective of deep client relationships and the growth in the business banking.

And then money market and Cds will again depend on client appetite and where do they want to lock in possibly for CD versus money market.

And it's hard to project what.

that will be just because the mix does shift from time to time like it has now. But I think the most important thing is the value of the checking with the terminal rates above zero continues to be very strong relative to going forward.

That will be just because the mix shift from time to time like it has now but I think the most important thing is the value of the checking with the terminal rates above zero continues to be very strong relative to going forward.

Thank you.

Thank you. Eric, as Jim, I might add for a little bit, to give a little historical perspective, we, the long term, as Mike said, the long term checking, if you go back many years, even when we bought the bank back, but even before that, tends to be in the 50, 55% range, and the CDs range between sort of 10 and 20% of total. It is a mixed issue. And in between that is the money market.

Okay.

Thanks, Eric its Jim if I might add for a little bit.

Give a little historical perspective there.

The long term as Mike said, the long term checking if you go back many years, even when we bought the bank back with you, but even before that tends to be in the $50, 55% range in the Cds range between 10, and 20% of total it is a mix issue and then between that as for money markets.

At what rate they land, it's hard to predict. But the mix is actually the driver. It was an abnormal mix when checking went up into the high 60s.

At what rate they land, it's hard to predict.

But but the mix is actually the driver we got it was an abnormal makes when checking went up into the high <unk>.

Got it. And it's good to hear from you, Jim.

Got it and it's good to hear from me Jim.

Thank you.

I'll take our next question from Chris McGrady with KBW. Please go ahead.

We'll take our next question from Chris Mcgratty with Kb EW. Please go ahead.

So great. Just a quick modeling question. Most of the margin questions I think have been addressed. The BOLI run rate, any help there? I know you lowered the tax rate a bit, but any help? I know there's some seasonality quarter to quarter, but kind of a full year comment on BOLI income would be great. Thanks..

Okay, Great just a just a quick modeling question most of the the margin questions I think have been addressed.

The bully run rate any any help there I know you lowered the tax rate a bit but any help I know theres, some seasonality quarter to quarter, but kind of a full year comment on bully income would be great. Thanks.

Hi, Chris. So in the fourth quarter, we have a couple of items that contributed to increase from the third quarter of the year. One, we had a benefit from the life insurance policy, which we realized in the fourth quarter. And also, we had a positive impact from market to market on some of our insurance contracts. And just to remind you, I think we brought it up on one of the last goals that we used to offset some of the increases and changes from our benefit costs.

Hi, Chris So in the fourth quarter, we have couple of items that contributed to increase from the third quarter last year.

Why do I had a benefit from the life insurance policy, which we realized in the fourth quarter and also we had a positive impact from mark to market on some of our insurance contracts and just to remind you I think we brought it up on the last part of the last calls that we use to offset some of the.

Increases in changes from all benefit costs. So those are the components kind of attributed to the change from the third.

change from other.

And yes, if you think about the run rate for the quarter, removing...

Third quarter and yes, if you think about the run rate for the quarter removing that.

those two items I would say.

still within 2022 and will end in a quarter.

Those two items I would say still all within 2020 to acquire.

Acquire.

Okay, thanks.

Okay. Thanks.

Thank you.

Yes.

We'll take our next question from Terry McAvoy with Stevens. Please go ahead.

We will take our next question from Terry Mcevoy with Stephens. Please go ahead.

Thanks. I was wondering if you could add some more color on the new offices in 2023, certain markets that you think present the best opportunities and strategically is the near-term focus on deposits and or kind of capturing some of the market disruption that Jim mentioned earlier on the call.

Thanks, I was wondering if you could add some more color on the new offices in 2023 certain markets that you think present, the best opportunities and strategically as the near term focus on deposits and or kind of capturing some of the market disruption that that Jim mentioned, Jim mentioned earlier on the call.

Terry, the answer is yes. We are capturing a lot in terms of the disruption that Jim mentioned, but we're focused on relationships and with relationships comes the full breadth of what we offer. We probably expect maybe around six offices over the next year or so, existing footprint. And then as Mike mentioned in his remarks, we're delighted to have expanded into Bellevue, Seattle and we expect good things out of that region.

Terry the answer is yes, we are capturing.

A lot in terms of the disruption that Jim mentioned, but we're focused on relationships and with relationships comes the full breadth of what we offer we probably expect maybe around six offices over the next year or so existing footprint and then as Mike mentioned in his remarks, we're delighted to have expanded into Bellevue Seattle.

And we expect good things out of that region.

One last question, checking account attrition in 2022, did that differ at all from that, I think it's that 1% longer term average you guys put in the investor presentation.

Great and one last question checking account attrition in 2022 did that differ at all from that I think it's at 1% longer term average you guys put in the investor presentation.

No, it did not.

No it did not.

Thank you.

That's good to hear. Thanks for taking my questions.

Okay.

That's good to hear thanks for taking my questions.

We'll take the next question from Andrew Leish with Piper Sandler. Please go ahead.

We'll take the next question from Andrew Liesch with Piper Sandler. Please go ahead.

Thanks everyone. Good morning. Just a question on credit. Everything else has been asked and answered. Are you seeing anything concerning out there? And when you do expect credit to return, which areas of the portfolio would you expect to see the most stress? ThisP Frosting – May 5, 2016

Thanks, Hi, everyone. Good morning.

Just a question on credit and everything else has been asked and answered are you seeing anything concerning out there and when you do expect credit in turn what areas of the portfolio would you expect to see the most stress.

Andrew, it's Mike. We.

Andrew It's Mike we.

I feel very good about our positioning right now in credit. We don't expect any issues going forward, so the answer is it's business as usual from our perspective. And Mike noted the credit quality in his remarks and look at the three basis points of net charge-offs over a 23-year period. So sticking to our knitting, being cautious, selective, focusing on relationships. Great. You've covered everything else. Thanks so much. The next question comes from David Smith with Autonomous. Please go ahead. Good morning. Thank you for taking my question. I had a question about the wealth management team profitability. You've been adding a lot of teams there lately, both last year and even the first few weeks of this year. Historically, how long is it before you tend to see these teams reach their run rate profitability? How long does it take to ramp up there? Yeah, it's actually relatively quick, usually within a year to 18 months. And that's really a function of the fact that the teams we hire generally have a lot of traction with their clients. And then also we're getting the deposit benefit from those teams as well, which has been quite successful. Got it. Thank you. That concludes today's question and answer session. At this time, I will turn the conference back to Mike Roffler for any additional or closing remarks. Thank you everyone for joining us on today's call. We're optimistic about the future and continue to look forward to the year ahead. Have a wonderful weekend. This concludes today's call. Thank you for your participation. You may now disconnect.

Feel very good about our positioning right now in credit.

We don't expect any issues going forward. So the answer is it's business as usual from our perspective as Mike noted the credit quality of his remarks and look at the three basis points of net charge offs over a 23 year period, so sticking to our knitting being cautious selective focusing on relationships.

Great. You've covered everything else. Thanks so much.

Okay.

Great.

Everything else. Thanks, so much.

And the next question comes from David Smith with Autonomous. Please go ahead. Please go ahead and unmute yourself.

And the next question comes from David Smith with Autonomous. Please go ahead.

Good morning. Thank you for taking my question. I had a question about the wealth management team profitability. You've been adding a lot of teams there lately, both last year and even the first few weeks of this year. Historically, how long is it before you start to see these teams reach the run rate profitability? How long does it take to ramp up there? Yeah, it's actually relatively quick, usually within a year to 18 months, and that's really a function of the fact that the teams we hire generally have a lot of traction with their clients. And then also, we're getting the deposit benefit from those teams as well, which has been quite successful. Got it. Thank you." And that concludes today's question and answer session. At this time, I will turn the conference back to Mike Roffler for any additional or closing remarks. "Thank you, everyone, for joining us on today's call. We're optimistic about the future and continue to look forward to the year ahead. Have a wonderful weekend." This concludes today's call. Thank you for your participation. You may now disconnect.

Good morning, Thanks for taking my question I had a question about.

Wealth management team profitability, you've been adding a lot of.

It seems there lately both last year and you did the first few weeks of this year historically, how long is it before you tend to see these teams reach their run rate profitability.

How long does it take to ramp up there.

Yeah, it's actually relatively quick, usually within a year to 18 months, and that's really a function of the fact that the teams we hire generally have a lot of traction with their clients. And then also, we're getting the deposit benefit from those teams as well, which has been quite successful. Got it. Thank you. And that concludes today's question and answer session. At this time, I will turn the conference back to Mike Roffler for any additional or closing remarks. Thank you, everyone, for joining us on today's call. We're optimistic about the future and continue to look forward to the year ahead. Have a wonderful weekend. This concludes today's call. Thank you for your participation. You may now disconnect.

Yeah, it's actually relatively quick usually within a year to 18 months and Thats really a function of effect that the teams. We hired generally have a lot of traction with their clients and then also we're getting the deposit benefit from those teams as well which has been quite successful.

Got it. Thank you.

Got it thank you.

And that concludes today's question and answer session. At this time, I will turn the conference back to Mike Roffler for any additional or closing remarks. Thank you, everyone, for joining us on today's call. We're optimistic about the future and continue to look forward to the year ahead. Have a wonderful weekend. This concludes today's call. Thank you for your participation. You may now disconnect.

And that concludes today's question and answer session. At this time I will turn the conference back to Mike <unk> for any additional or closing remarks.

Thank you, everyone, for joining us on today's call. We're optimistic about the future and continue to look forward to the year ahead. Have a wonderful weekend. This concludes today's call. Thank you for your participation. You may now disconnect.

Thank you everyone for joining us on today's call, we're optimistic about the future and continue to look forward to the year ahead have a wonderful weekend.

Yeah.

This concludes today's call. Thank you for your participation. You may now disconnect.

This concludes today's call. Thank you for your participation you may now disconnect.

you Boo

Uh-huh.

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Okay.

Yes.

Okay.

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yeah.

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Other avenues, PLP, PLOC, securities lending. So again, healthy pipeline going into the quarter.

And so some of it is if we had projected to grow headcount, we're going to grow a little bit less.

And that drove a little bit of the utilization for us.

Where do you see the rate paid on checking moving to and maybe where does that mix stabilize? Thanks.

I can't define how a period or an existence like this continues to change and I've been to some of its biggest firms in the United States, which I look to as business leaders. server to enterprise and more. So, my particular topic question is how have farms been year ended? The product gets on time line moment,oka. We've heard thousands of about mass growth trends.

And so I think what's important is the rollover opportunity drives a conversation with the client, most importantly. Given what we talked about with the cycles earlier, staying in sort of what I'll call a 4- to 7-month range for us has made a lot of sense if you believe that the cycle does roll over sort of mid-year. And so that's been our duration has been pretty much in that range.

So those two components contributed to the change.

Thank you.

Thanks.

And as we mentioned earlier, it's a terrific way to get trial with new households and continue to deepen relationship with clients. And so it's a tool the bank has used for, you know, 37 years. In some periods, you just use it a lot less than others, and now is one of those periods we're using it more.

I was just curious, how should we expect this type of pace to continue, or do you see a level at which you'd expect the trend to sort of subside and then get down to more of a sticky base that's remaining? Where do you see that sort of trailing off? Thanks.

And then on the business banking side, nothing's changed there. Capital call lines tend to be the larger part of the pipeline, and that still remains in the prime minus 75 to prime minus 100 basis point range.

And when we've looked at other points historically, deposit costs tend to trough above, you know, where fed funds troughs. So, you know, perhaps give us a sense of how you, how much you think you can cut deposit costs as the fed starts easing.

And the growth rate will probably be greater in CDs than it will be in checking, given where the rates are this year, and that's reflected in our outlook.

I would now like to turn the call over to Mike Ionelli, Vice President and Director of Investor Relations. Please go ahead.

And is there a rate you have in mind, you know, at which it might make more sense to pivot to FHLB over CDs? Thanks.

And then if you have any comments on what the duration of the CD book is and what percentage will likely reprice over the course of the next couple of quarters.

And so typically we're able to get checking accounts on a very good percentage of those and build the relationship over time.

And there are other yield alternatives either in wealth management, money market.

And so I would say that we feel pretty confident where we are.

They were at five, five and a half.

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