Q1 2017 First Republic Bank Earnings Call
Apr 13, 2017 AM EDT
FRC - First Republic Bank
Q1 2017 First Republic Bank Earnings Call
Apr 13, 2017 / 02:00PM GMT
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Corporate Participants
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* Dianne Snedaker
First Republic Bank - CMO and EVP
* Hafize Gaye Erkan
First Republic Bank - CIO, Chief Deposit Officer, and EVP
* James H. Herbert
First Republic Bank - Co-Founder, Chairman and CEO
* Jason C. Bender
First Republic Bank - COO and EVP
* Michael D. Selfridge
First Republic Bank - Chief Banking Officer and Senior EVP
* Michael J. Roffler
First Republic Bank - CFO and EVP
* Mollie M. Richardson
First Republic Bank - Chief Administrative Officer, Chief People Officer, and EVP
* Robert Lee Thornton
First Republic Bank - EVP and President of Private Wealth Management
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Conference Call Participants
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* Aaron James Deer
Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst
* Christopher McGratty
Keefe, Bruyette, & Woods, Inc., Research Division - MD
* Kenneth Allen Zerbe
Morgan Stanley, Research Division - Executive Director
* Matthew Timothy Clark
Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst
* Steven A. Alexopoulos
JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks
* Timur Felixovich Braziler
Wells Fargo Securities, LLC, Research Division - Associate Analyst
* Travis John Potts
Jefferies LLC, Research Division - Equity Associate
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Presentation
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Operator [1]
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Greetings, and welcome to First Republic Bank First Quarter 2017 Earnings Conference Call. (Operator Instructions) I would now like to turn the call over to Dianne Snedaker, Executive Vice President and Chief Marketing Officer. Please go ahead.
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Dianne Snedaker, First Republic Bank - CMO and EVP [2]
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Thank you, and welcome to First Republic Bank's First Quarter 2017 Conference Call. Speaking today will be Jim Herbert, the bank's Chairman and Chief Executive Officer; Mike Roffler, Chief Financial Officer; Mike Selfridge, Chief Banking Officer; Gaye Erkan, Chief Deposit Officer and Chief Investment Officer; Bob Thornton, President of Wealth Management; Mollie Richardson, Chief Administrative Officer and Chief People Officer; and Jason Bender, Chief Operating Officer.
Before I hand the call over to Jim, please note that we may make forward-looking statements during today's call that are subject to risks, uncertainties and assumptions. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, see the bank's FDIC filings, including the Form 8-K filed today, all available on the bank's website.
And now, I'd like to turn the call over to Jim Herbert.
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James H. Herbert, First Republic Bank - Co-Founder, Chairman and CEO [3]
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Thank you, Dianne, and thanks to everyone for joining the call today. It was a strong first quarter with strong growth on all fronts. Year-over-year revenue grew 16% and tangible book value per share has grown 20% in the last year. We were strong across the enterprise, let me share a few highlights. Year-over-year total deposits have grown 20%. Total loans have grown 19%, and wealth management assets are up 23%, they now exceed $90 billion. Loan origination volume was very strong in the first quarter. It was, in fact, our best first quarter that we've ever had. We also have a robust backlog going into the next quarter and foresee a good spring home buying season. We're quite pleased that net interest income, our primary revenue driver, has grown 18% year-over-year.
At the current point in time, we consider ourselves to be somewhat later in the credit cycle and we're paying even additional attention to prudent lending and credit quality. To that point, our credit quality continues to be excellent. Nonperforming assets were at a very low 7 basis points. Net charge-offs for the quarter totaled only $0.5 million or a single basis point. We're also focused on remaining very strongly capitalized, which is another core strength and focus of First Republic.
Year-over-year, growth in our regulatory capital was 31%. We take an opportunistic approach to accessing capital markets, and the past 5 quarters have presented a particularly strong set of opportunities. Over the past 15 months, we've accessed the capital markets 6 times raising $1.4 billion of regulatory capital, net of the redemption of our Series A 6.7% preferred stock. On March 31, our common equity Tier 1 ratio was 11.2% and our total risk-based capital ratio was 15%, both ratios are stronger despite the overall growth than they were at the same time last year. While this strong capital position and these raises have a slightly dilutive effect on short-term earnings, it positions us very well for continued growth opportunities ahead.
As everyone knows, we tend to look long term, we play the long game, and this capital raising has been very much in that regard. We're well positioned today for growing into our current capital, along with well protected against future uncertainties. First Republic continues to succeed by executing its simple business plan: Focused on excellent credit, strong capital at all times and most important of all, exceptional differentiated client service.
Now let me turn the call over to Mike Roffler, our Chief Financial Officer.
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Michael J. Roffler, First Republic Bank - CFO and EVP [4]
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Thanks, Jim. I'd like to cover revenues, net interest income and margin, efficiency ratio, expenses related to Gradifi, along with income taxes. We're pleased to report another strong quarter of revenue growth. Revenue was up 16% compared to a year ago driven by strong activity across the franchise. As Jim mentioned, we are focused on growing net interest income and are very pleased it is up 18% year-over-year. As we mentioned on our last call, we are no longer reporting net interest margin on a core basis.
Turning to the first quarter. Our net interest margin was 3.13% compared to 3.16% in the fourth quarter. We would note that the fourth quarter included a 3 basis point benefit to the margin due to the positive impact of a special FHLB dividend. Excluding such benefit, our net interest margin has remained consistent. Also, during the first quarter, our loan yields were down by 1 basis point. This was entirely caused by reduced benefits from prepayment penalty income and purchase accounting accretion. These 2 items reduced our loan yields during the quarter by 4 basis points compared to the fourth quarter. Importantly, the contractual loan yield on our portfolio at March 31 increased by 5 basis points compared to December 31. This increase was due to the recent rise in the fed funds rate, our adjustable loan rates and new loan originations in the first quarter at a modestly higher average rate than the existing contractual portfolio yield.
Regarding expenses, the efficiency ratio for the quarter was 63%. First quarter expenses are typically higher due to the seasonal impact of elevated payroll taxes and employee benefits, which added about $14 million to our first quarter expenses. Without such seasonal increase, our efficiency ratio would have been about 61%. The first quarter was also impacted by higher expenses from the hiring of several successful wealth management teams, which Bob will cover shortly. Additionally, we incurred a full quarter of expenses from Gradifi, which we acquired in December of last year. Jason will talk more about this significant long-term growth opportunity. As we build out the platform, we expect expenses associated with Gradifi to be $3 million to $5 million per quarter through this year.
Turning to income taxes. Our effective tax rate was 17.2%. For the full year, we continue to expect the effective tax rate to be in a range of 17% to 20%. Turning to our share count. The first quarter had the partial impact of our March common stock offering. Using yesterday's stock price and ending March shares outstanding, our diluted share count estimate for the second quarter is about 162.6 million. Finally, we're very pleased to have increased the quarterly dividend by $0.01 per share to $0.17.
Now I'd like to turn the call over to Chief Banking Officer, Mike Selfridge.
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Michael D. Selfridge, First Republic Bank - Chief Banking Officer and Senior EVP [5]
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Thank you, Mike. I'll cover overall lending activity, business banking, our multifamily and commercial real estate portfolios and economic conditions in our markets. Loan origination volume was $5.6 billion during the first quarter. This was our best first quarter ever. Loan volume was up 17% compared to the first quarter of last year. Single-family residential lending volume was 40% purchase and 60% refinanced during the quarter. While loan demand is strong, loan pricing remains very competitive. As a reminder, we won't compete on looser credit standards, but we do compete on pricing to acquire new high-quality relationships and retain existing ones. In a rising rate environment as we shift more to purchase activity, our ability to execute effectively and deliver exceptional client service is a competitive advantage.
Business banking had another good quarter. Year-over-year, business loans outstanding were up 17%. Business banking also continues to be a very important contributor to the deposit franchise. Business deposits were up 22% compared to a year ago and business deposits continue to represent 53% of total deposits with an average rate paid of 6 basis points.
Our multifamily and commercial real estate portfolios continue to perform very well and credit quality remains excellent. We would note that most of our multifamily and commercial real estate loans are typically made to existing clients with whom we have a private banking relationship. The median size of these loans is quite modest, under $2 million. We apply very disciplined underwriting standards to multifamily and commercial real estate lending and our loan-to-value ratios have remained in the low 50% range. Nonperforming assets in multifamily and commercial real estate at March 31 were less than 5 basis points of such loans.
Turning to geographic markets. Economic conditions are very good across our footprint and our clients are quite active. In our largest market, the San Francisco Bay Area, the diverse and very dynamic economy continues to be quite strong. Residential real estate prices are stable with a market that remains supply constrained. While the San Francisco Bay Area represents just under half of our total loan portfolio, our markets in New York, Southern California, Boston, Portland and Palm Beach also continued to perform very well. Economic activity in our regions, overall, tends to be stronger than the rest of the United States as a whole, and we continue to benefit from this strength. Overall, we are very pleased with the quarter.
And now I'd like to turn the call over to Gaye Erkan, Chief Deposit Officer and Chief Investment Officer.
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Hafize Gaye Erkan, First Republic Bank - CIO, Chief Deposit Officer, and EVP [6]
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Thank you, Mike. We are pleased with the continued growth of both our investment portfolio and deposit franchise. In terms of investments, our total securities portfolio increased to $16 billion and represented 21% of total assets at the end of the first quarter. In the fourth quarter, we achieved our long-term objective of growing high-quality liquid assets to at least 12% of average total assets. As discussed, we expect to maintain around this level now on an ongoing basis.
At the end of the first quarter, high-quality liquid assets, including eligible cash, totaled $10 billion. In terms of deposit gathering, the first quarter was another very strong quarter, supported by growth across the franchise in consumer and business banking.
Total deposits increased to $61.2 billion, up 20% compared to a year ago. We are very pleased that our growth in deposits fully funded our loan growth over the same time period. At March 31, checking deposits represented 63% of our total deposit. The average rate paid on deposits during the quarter remained at 15 basis points, consistent with the prior 2 quarters.
Private Wealth Management also continues to be a meaningful contributor to deposits, both in terms of sweep accounts as well as the growth of deposit relationships with wealth management clients.
And now I would like to turn the call over to Bob Thornton, President of Private Wealth Management.
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Robert Lee Thornton, First Republic Bank - EVP and President of Private Wealth Management [7]
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Thank you, Gaye. Wealth management had a strong quarter. Wealth management assets as of March 31 were up 23% year-over-year driven by both net client inflows and market appreciation. Wealth management fee revenues for the quarter were up 13% compared to a year ago. This quarter's fee revenues do not yet include the benefit of the significant growth in assets that occurred during the first quarter.
We're also very pleased to have added several significant wealth management teams during the quarter. Typically, we immediately incur the salary and recruiting expenses of these teams while the revenues associated follow a quarter or 2 later. And as Gaye noted, wealth management continues to be an important contributor to deposit franchise.
Sweep accounts totaled $5.3 billion and represented 9% of total deposits at the end of the first quarter. These accounts have an average balance of only $150,000 and are also highly diversified.
The robust growth in assets under management give us strong momentum going into the second quarter. We continue to see opportunities to recruit additional invest professionals to First Republic, as well as deepen our existing wealth management and banking relationships. Our relationship-based, client-focused model, which is fully integrated across our wealth management and banking teams, allows us to fully serve clients' financial needs. This integrated approach continues to be a key competitive advantage. Overall, we're very pleased with the growth in wealth management.
And now it's my pleasure to turn the call over to Mollie Richardson, our Chief Administrative Officer and Chief People Officer.
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Mollie M. Richardson, First Republic Bank - Chief Administrative Officer, Chief People Officer, and EVP [8]
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Thank you, Bob. Let me take a moment to talk about our community engagement lending initiative, our efforts to acquire the next generation of the bank's clients and our continued commitment to our people.
Our Eagle Community Home Loan Program, which offers special fixed rates, dedicated bankers and customized service to underserved minority areas continues to grow very nicely. In addition to our Eagle Community Home Loan Program, which is only one part of our overall community engagement efforts, we also focus on substantial outreach and investments in housing, financial literacy programs, philanthropy and volunteer work by First Republic employees.
Building our next generation of clients is another key focus for us as we look to continually seed the bank's future growth opportunities. We look for innovative ways to acquire new clients earlier in their careers, often before they have purchased their first home. Two such innovative and highly effective solutions include our all-in-one student loan refinance program and our Professional Loan Program, which gives employees a way to invest in their firms. Today, we have over 150 programs in place across our footprint. Together these programs provide a strong channel through which we acquire a growing number of clients each year.
Turning to our employee engagement efforts. Providing a competitive benefits package is just one way we acknowledge our extraordinary people. We recently launched a new paid family care leave benefit. All regular part-time and full-time employees who have completed at least 1 year of service with the bank are now eligible for 6 weeks of paid care family leave annually. We are also pleased to now offer health advocate, a benefit that provides access to medical support professionals and related insurance assistance. This service helps with a range of needs from finding the right doctors, specialists and hospitals to scheduling appointments and securing second opinion.
Finally, we are delighted to see enrollment in our student debt repayment benefit administered by Gradifi, continue to increase following a very well-received launch this past summer. We now have over 600 employees enrolled in this valuable benefit. Caring for our clients begins with caring for our people, and these programs are just a few of the ways in which we do so.
Now let me turn the call to Jason Bender, Chief Operating Officer.
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Jason C. Bender, First Republic Bank - COO and EVP [9]
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Thanks, Mollie. I'd like to provide some perspective on our ongoing investments in service as well as talk about the opportunity we have with Gradifi.
At First Republic, exceptional service is what allows us to grow consistently and safely. As we have discussed on prior calls, we measure our client satisfaction with our service through our Net Promoter Score, which remains more than twice as good as that of the U.S. banking industry. Client service has been at the heart of our business model and our long-term growth strategy since the bank was founded. Satisfied clients do more with us and they refer their friends and colleagues. Our ability to continually deliver this high level of service now and into the future requires ongoing investments in our people, operations and infrastructure.
For example, among other key operational investments, we will be launching in 2017 a new loan origination system. This next generation technology and the process improvements that go with it will allow us to originate loans more effectively and with greater convenience to our clients. We are pleased to support our strong safe growth while maintaining exceptionally high levels of client service through this type of consistent investment in the franchise.
Let me now take a moment to talk about Gradifi, which we acquired in December 2016. Gradifi is the leading administrator of corporate, HR-based student debt repayment benefit plans. Gradifi enables employers to make a direct monthly contribution to pay down employees student loans. As employers compete to acquire and retain talent, they increasingly realize that offering a student loan repayment benefit program is a competitive advantage. As the leading administrator of such benefit plans, Gradifi continues to add new employers and their employees each week. With Gradifi, we believe we have a once-in-a-generation opportunity to address the student debt challenge, which grows in visibility every day. Through this partnership, we can establish a position in this entirely new market and add another channel to build our next generation of clients.
And now let me turn the call back to Jim.
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James H. Herbert, First Republic Bank - Co-Founder, Chairman and CEO [10]
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Thank you, everyone. Overall, it was a good quarter marked by very robust growth across the franchise, continued excellent credit quality and a very strong capital position, in fact, even stronger than it was at this same time last year. Our culture of extraordinary client service and care continues to be the key to our growth. The growth doesn't come from acquisition of new clients as much as it comes from the growth of existing clients, and their direct referrals.
Thank you for joining the call. We'd like to open for questions now.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Your first question comes from Casey Haire with Jefferies.
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Travis John Potts, Jefferies LLC, Research Division - Equity Associate [2]
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This is Travis Potts, on for Casey. Just starting on the HQLA build this quarter, it looks like you went up to about 13.5% as a percentage of the total balance sheet. Can you just talk about the strategy there and kind of why you're growing past that 12% threshold you had talked about and kind of how high we can see that number go?
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Hafize Gaye Erkan, First Republic Bank - CIO, Chief Deposit Officer, and EVP [3]
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Sure. This is Gaye. The HQLA ratio, the HQLA level includes cash, eligible cash and cash as a component HQLA, which may fluctuate quarter-over-quarter. And actually the -- if you strip out the increase in cash from the end of fourth quarter to end of the first quarter, you would see that the HQLA ratio would be right around 12.5%. So we do expect to maintain above 12%. While cash may fluctuate, HQLA securities portfolio will be a larger component of that ratio.
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Travis John Potts, Jefferies LLC, Research Division - Equity Associate [4]
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Right. So it's kind of a little bit more about the liquidity from maybe the capital raises than anything else, all right. And then...
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Hafize Gaye Erkan, First Republic Bank - CIO, Chief Deposit Officer, and EVP [5]
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That, as well as the strong deposit growth we have seen as well. We are very pleased with the deposit growth in the quarter.
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Travis John Potts, Jefferies LLC, Research Division - Equity Associate [6]
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Got it. And then moving to wealth management. It looks like kind of fee capture rates declined a little bit across most areas. Can you talk about what you're seeing there and kind of what drove that?
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Robert Lee Thornton, First Republic Bank - EVP and President of Private Wealth Management [7]
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I guess what I'd -- this is Bob. I'd say, overall, we've experienced very strong growth in the quarter. One thing I'd probably note is year-over-year, while our assets were up about 23%, the revenues were up about 13% and that really reflects the fact that I mentioned that the asset flow -- the asset growth for this quarter was not in the -- were not in the first revenue quarter. The one thing I probably would maybe share a little bit more detail on is around the brokerage revenue. Brokerage revenue consists of our (inaudible) brokerage activity, money market, mutual funds and insurance. Insurance is growing as part of our business. And in fact, in the fourth quarter, we had quite a lot of insurance activities, people sort of met year-end planning goals, so it was a little more seasonal during the fourth quarter. There's also an expense that was previously recorded as revenue, it's now just recorded as an expense credit. So that was an adjustment of about [ $750,000 ]. So that impacted a little bit of the growth in the quarter.
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Travis John Potts, Jefferies LLC, Research Division - Equity Associate [8]
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Got it. That's helpful. And then just last one I had, on the resi production this quarter, I was wondering if you had the refi purchase split?
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Michael D. Selfridge, First Republic Bank - Chief Banking Officer and Senior EVP [9]
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Yes. The split was 40% purchase, 60% refi.
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Operator [10]
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Your next question comes from the line of Steve Alexopoulos with JPMorgan.
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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [11]
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I wanted to start on the loan originations. Given the mid-quarter update that was provided with the capital raise, it looks like March was over $2 billion of originations. Can you talk about what drove the acceleration in the back half of the quarter and are you seeing that momentum continue so far here in 2Q?
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James H. Herbert, First Republic Bank - Co-Founder, Chairman and CEO [12]
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To some extent, Steve, your numbers are about right. I'd have to check them, but it sounds about right. It was very strong, but it's also the end of the quarter that's always a little bit of a rush. But we're also -- at least in the West, March is the beginning of the spring purchase season, okay. And so you get more and more closings beginning to pick up. Then, to some extent, that number is driving our comment about what we think will be a pretty robust spring season.
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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [13]
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Okay. Jim, are you still comfortable with the mid-teens loan growth for the full year?
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James H. Herbert, First Republic Bank - Co-Founder, Chairman and CEO [14]
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Yes.
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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [15]
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Okay. And then I had a question on the margin. The yield curve is compressed quite a bit since early March. Relative to the 3.13% FTE NIM in the quarter, maybe for Mike Roffler, where is that new money NIM currently tracking?
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Michael J. Roffler, First Republic Bank - CFO and EVP [16]
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So the -- in the -- during the quarter and even in March, our loan yields were holding up pretty well. We were slightly above sort of the portfolio yield on average. Obviously, since quarter end, it's obviously changed and we'll adjust to competition as appropriate given the curve is flattened. But it held up pretty good throughout the quarter.
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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [17]
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Okay. And then deposit cost were flat again this quarter, maybe for Gaye, with a couple of fed rate hikes recently, are you seeing any pressure at all to raise deposit cost?
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Hafize Gaye Erkan, First Republic Bank - CIO, Chief Deposit Officer, and EVP [18]
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So as you have mentioned, we demonstrated our ability to meaningfully lag increases in the short-term interest rate. The past 2 quarters, you mentioned, we were stable at 15 and over the past 2 years, there were actually 3 fed hikes and they all increased by only 1 bp. Given the diversification of our deposit sources, the high level of checking as a percentage of total deposits and the relationship nature, we do expect to continue to lag increase in interest rates. While there may be very modest, light moves in the deposit rate, again, we do expect to lag meaningfully.
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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [19]
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Okay. And If I could squeeze one more in, maybe for Mike Roffler, you mentioned Gradifi, we should look for $3 million to $5 million of expenses per quarter. What was the level that we had actually here in the first quarter?
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Michael J. Roffler, First Republic Bank - CFO and EVP [20]
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It would have been just slightly under $3 million.
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James H. Herbert, First Republic Bank - Co-Founder, Chairman and CEO [21]
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Let me piggyback on that for one second, Steve. One of the things that's going on in Gradifi is that, first of all, we've just -- we only own it now for 90 days or so. We now have kind of figured out the run rates and so on. We hadn't really figured those out. And importantly, a big part of the "run rate of loss" is driven by our commitment to marketing. We could expand it or we could contract it. What's going on is that we're trying to find the middle ground on the marketing of the new product, including sales within the company, which we're beginning to get fairly good at, actually, fairly quickly, I'm delighted, in terms of our relationships with businesses that might use our service. And then we're having -- we're basically finding a balance, the proper balance for other marketing initiatives of a more classical nature. They're having a pretty good success rate on booking new clients -- new companies, but this is going to be an investment for the next couple of years for us. The thing that I think is possibly underappreciated is, it is clearly a potentially major feeder for our all-in-one student loan refinance business and we have not even tried to do that yet.
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Operator [22]
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Your next question comes from the line of Ken Zerbe with Morgan Stanley.
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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [23]
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I guess, maybe just a little more broadly on the margin. I mean, you guys within -- at least within my coverage universe as certainly being in the top half of banks with asset -- in terms of asset sensitivity. But given the couple of rate hikes we've seen, I guess the improvement in margins had been a little bit weaker than I and maybe some others have expected. And it could be, obviously, that we're just dealing with the reported and not the core anymore, but NIM. But when we think about sort of what are some of the reasons for why it's been a little bit weaker because, obviously, you're holding deposit costs down and then how should we think about sort of the expectation for NIM going forward?
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Michael J. Roffler, First Republic Bank - CFO and EVP [24]
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Ken, I think I'd say 2 things. One, you're right, the core gap maybe transitioned, and I think I talked about this in the comments. Just this quarter alone, a little bit of less prepayment income and purchase accounting accretion knocks the loan yields down by 4 basis points, which is not insignificant. When you add those 2 together from a dollar standpoint, it's $5 million lower in revenue this quarter versus Q4, and so that is a meaningful number. Second, the other thing I'd comment is we always have focused on stability and consistency over long periods of time, and so issuing 30-year subordinated debt in the quarter does have a little bit of a carry cost to that. In the fourth quarter, we extended some of our Federal Home Loan Bank, fixed rate term advances, those things have an early cost, but then they protect you in the future. And the last point I'd make is our sensitivity has always been a bigger impact in year 2 than year 1 given a growing balance sheet of loans and a growing balance sheet of investments, and we're focused on stability over time when you look at our charts sort of 3 to 3.25. And importantly, growing net interest income is really what allows us to keep investing in the business and the franchise, and that's where our focus lies.
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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [25]
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Got it. But on a go forward basis, is 3 to 3.25 still the right kind of range to think about? Because, obviously, you get the asset sensitivity piece from higher rates, but I totally understand like extending out liability duration, et cetera.
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Michael J. Roffler, First Republic Bank - CFO and EVP [26]
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Yes. We are focused on stability of that range, that's absolutely correct.
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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [27]
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Okay, perfect. And then just on the expense side, obviously, a little higher this quarter. Just if you can just dumb it down for me a little bit, like, what's the right range going forward from here? Because I think last I heard it was in the low 60s, is 63 in the low 60s?
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Michael J. Roffler, First Republic Bank - CFO and EVP [28]
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So we would consider 63 to be in the low 60s, yes. It is elevated a little bit this quarter because of the seasonal payroll taxes, so we do feel like low 60s is still the right range for us to operate in.
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James H. Herbert, First Republic Bank - Co-Founder, Chairman and CEO [29]
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Ken, it's Jim, let me make just one added point on the last point. We've got 2 investments that are going on that are a little elevated from our normal. Gradifi we just went over. The other one is Bob Thornton's comment on wealth management. First Republic has succeeded in becoming, thanks to Bob and his team's efforts primarily, but the whole organization, a particularly desirable place for teams -- wealth management teams to migrate to. Those teams are coming in. We had 3, I believe, Bob in the first quarter in a fairly meaningful way. When you hire teams, you always have upfront cost. And if you look at it on a 12-month, 4-quarter basis, the first quarter of hire is always negative on a team. So the more we bring in in any given quarter, the more we are investing in the business. And then the second quarter kind of breaks even. The third quarter you make money. Fourth quarter, you're off to the races. And so it's about a 1 year activity if you think about each team you add. The more "opportunity" we have, the more we're going to incur that kind of expense pressure upfront. So we're -- as you know, we play the long game. And the long game is to get the best teams you can possibly get in here when you can get them. And so we don't mess around with timing. We just bring them in when we can.
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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [30]
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Understood. But I guess I would sort of also imply that as you keep hiring teams, you're also going to keep the sort of upward pressure on efficiency, so I would imagine you're going to add more teams over time.
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James H. Herbert, First Republic Bank - Co-Founder, Chairman and CEO [31]
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That's correct. And that's what we were -- that's the point I was trying to make, you said it very well. And the other thing about those teams is they generally don't get to cross-selling banking for a while because they're focused entirely on bringing their book over. But what we're having is extraordinary success in cross-selling into the banking side over a period of a couple of years.
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Operator [32]
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Your next question comes from the line of Chris McGratty with KBW.
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Christopher McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [33]
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Maybe looking for a little bit of color on the originations in the commercial business portfolio, down a little bit sequentially and also the net growth in the loans outstanding for this. Is this primarily private equity capital call or any kind of change in the business, would be great.
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Michael D. Selfridge, First Republic Bank - Chief Banking Officer and Senior EVP [34]
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So on the C&I side, no change in the business and the first quarter tends to be a little bit slower for us. It was quite an active fourth quarter. Capital call line activity, the utilization rate dropped another percent and I would note though that the commitments year-over-year are up 22%. We're acquiring new clients, and we feel good about the pipeline where it stands today. Is that your question on the C&I side?
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Christopher McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [35]
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Exactly, yes.
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Michael D. Selfridge, First Republic Bank - Chief Banking Officer and Senior EVP [36]
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Okay.
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Christopher McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [37]
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And then maybe just a quick one on the gain-on-sale margin, obviously, a small component of the earnings. But in terms of the gain-on-sale margin going to 50 basis points, any color in terms of whether this is a sustainable level or should we be expecting that kind of the 10 to 20 that we've been seeing for the past year or so?
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Jason C. Bender, First Republic Bank - COO and EVP [38]
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10 to 20 is probably a more realistic range going forward. But as we've commented on other calls, that gain on sale can bounce around a bit from quarter-to-quarter just based on market rates.
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James H. Herbert, First Republic Bank - Co-Founder, Chairman and CEO [39]
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If we can keep breakeven or better in a rising rate environment, we're really happy.
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Operator [40]
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Your next question comes from the line of Matthew Clark with Piper Jaffray.
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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [41]
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First one on expenses, the comp line, I know you talked about the seasonality this quarter. But with a full run rate of Gradifi in that $3 million to $5 million range and thinking about how that transition from first to second has been in the past, I mean, should we assume flattish to maybe slightly up on the comp line, is that fair for 2Q?
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Michael J. Roffler, First Republic Bank - CFO and EVP [42]
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Yes. I think that's right. Typically, you've seen it come back a little bit from less payroll taxes and then impacted by either production volumes or new people. So it's sort of flattish to slightly up, makes sense.
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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [43]
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Okay. Okay. And then on the coverage ratios, reserves, down a basis point. I think you guys had talked about in the past being that 60 to 65 basis point range, is that still the goal going forward?
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Michael J. Roffler, First Republic Bank - CFO and EVP [44]
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Yes. I think we've been sort of 58, 59, 60. It's really a function of mix of portfolio, as Mike Selfridge mentioned. Business loans were just up modestly. They, obviously, get a higher reserve factor than single-family does, so it's more mix driven, but we feel good in this range going forward. And it could tick up a little bit if mix changes.
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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [45]
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Okay. And then just on the wealth management side, it does appear that your revenue is tied to that AUM, wasn't fully recognized, at least that increase in the first quarter, I assume that's coming. But can you talk about the opportunity to pick off more teams, it sounds like -- and where they're coming from, it sounds like you might be winning some from [ wells ] of late but just curious what the opportunity is there and what inning we might be in?
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Robert Lee Thornton, First Republic Bank - EVP and President of Private Wealth Management [46]
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I think one of the reasons why we've been very successful to attract teams from that best firms on The Street and around the country is really because we have a model that delivers all the capabilities and sophistication of services of sort of the biggest firms, but really have the benefit of a boutique great banking services, that's very attractive to advisers. And as you saw, we had 3 very strong hires this year. We have a strong pipeline of additional hires. I just think we're a unique option for teams and I think we'll still see some very good hiring opportunity as we move throughout the next 12 months.
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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [47]
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Okay. And maybe just a housekeeping one. Do you have the taxable equivalent adjustment in the quarter, we can back into it but it'd be great to have it on a dollar basis.
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Michael J. Roffler, First Republic Bank - CFO and EVP [48]
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Sorry, I do not have that right in front of me.
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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [49]
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That's okay. I'll follow-up.
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Operator [50]
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Your next question comes from Jared Shaw with Wells Fargo Securities.
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Timur Felixovich Braziler, Wells Fargo Securities, LLC, Research Division - Associate Analyst [51]
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This is actually Timur Braziler, filling in for Jared. I guess, my first question just, again, circling back to the addition of the wealth management teams. Can you identify how many teams were actually brought on and how big their book of business was at their prior institution?
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Robert Lee Thornton, First Republic Bank - EVP and President of Private Wealth Management [52]
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We hired 3 teams. We generally don't talk about how the book -- large the book was but what, I would say is, it did have a meaningful impact on our growth and assets in the first quarter, but notwithstanding that we still had strong net client full growth in the first quarter.
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Timur Felixovich Braziler, Wells Fargo Securities, LLC, Research Division - Associate Analyst [53]
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Okay. And then, I guess, just generally speaking, what's the typical timeline that new teams within wealth management are expected to bring their book of business online with you guys?
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Robert Lee Thornton, First Republic Bank - EVP and President of Private Wealth Management [54]
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As Jim mentioned a minute ago, when we hire a team, it generally takes a couple of quarters for them to bring over the book that we expect for them to bring from their prior firm.
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Timur Felixovich Braziler, Wells Fargo Securities, LLC, Research Division - Associate Analyst [55]
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Okay. That's helpful. And just going back to the commentary that Jim had provided on the various geographies. Looking at the loan growth this quarter, was it fairly split geographically to your current concentration, 50% in kind of the San Francisco area and 50% other? Or are there any other geographies that, on a relatively basis, all of a sudden look more attractive versus some of your other ones?
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Michael D. Selfridge, First Republic Bank - Chief Banking Officer and Senior EVP [56]
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No. I would say, overall, it was split, just as you suggested and sort of supports the mix of the loan portfolio overall. The opportunity's in all of our markets, I will note that.
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Timur Felixovich Braziler, Wells Fargo Securities, LLC, Research Division - Associate Analyst [57]
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Okay. Great. And just I guess one last one for Gaye maybe, looking at the excess cash balances during the quarter, how fast should we expect those to be deployed into either securities or loans? And is the expectation if it's going into securities to be going into a similar type of structure as prior HQLA build? Or is there an opportunity to maybe diversify the investment portfolio into some other products?
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Hafize Gaye Erkan, First Republic Bank - CIO, Chief Deposit Officer, and EVP [58]
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It is a question especially given that we're going into the second quarter, and the second quarter is the tax season just from a deposit perspective. So given the tax seasonality, we would expect just historically speaking, the cash balances use towards that -- into that seasonality. And the second half tends to be a lot stronger in terms of the deposit growth than the first half of the year due also -- due to also average balance growth -- average account balance growth as well.
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Michael J. Roffler, First Republic Bank - CFO and EVP [59]
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I might add one point as this goes back to our margin discussion too. The team is extremely disciplined on investing and lending. And if we carry a little bit of excess cash balances for a little while, we don't let it burn a hole in our pocket because it's much more important for the long-term thinking and averaging over time than it is to sort of put the money out immediately.
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Robert Lee Thornton, First Republic Bank - EVP and President of Private Wealth Management [60]
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This is Bob. I just wanted to add one more thing just to be clear about your question about the teams. While it takes a quarter or 2 to bring the assets over, I just want to remind you that we're also not billing on those assets until the 4 following quarters that they're recorded. So effectively, what's really coming a quarter after each quarter end when we have the assets all recorded.
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Operator [61]
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Your final question comes from the line of Aaron Deer with Sandler O'Neill + Partners.
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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [62]
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Bob, you gave some good color on the wealth management revenues relative to the AUM. It sounds like the accounting changed, the higher insurance component and then just kind of the natural revenue lag there kind of accounts for maybe a little bit below what people would have expected given the AUM hike. I'm wondering too if -- has the recent price cuts by some of the wealth management competitors in the space, is that impacting your thoughts on the outlook there in terms of the fee schedule or anything?
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Robert Lee Thornton, First Republic Bank - EVP and President of Private Wealth Management [63]
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No. I think, again, we look at investment -- managing the assets is a key part of what clients pay us for, but I also think they pay us to be their trusted adviser. And given the number of things we can bring to those clients in deposit services, liquidity in the balance sheet, we haven't seen erosion in our fee pricing.
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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [64]
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Okay. And then there's some good color on the expectation for the strong spring selling season and Mike Selfridge, you mentioned a pretty good outlook for the C&I pipeline. How about on commercial real estate and multifamily, can we get any guidance on your expectations for growth in those books?
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Michael D. Selfridge, First Republic Bank - Chief Banking Officer and Senior EVP [65]
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Let me just say, overall, the pipeline is strong and it's about where it was at the end of last quarter. It's hard to say on commercial and multifamily, those tend to be a little bit volatile. I will say, and as I mentioned in my remarks, half our growth is coming from existing clients, they're quite active. It's still, call it, inventory constrained so it's hard to find good deals, but they're out there working hard in finding them. So we -- I would say we feel good about our future prospects in multifamily and commercial real estate.
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Operator [66]
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This concludes our Q&A session. I would now like to turn the call back to Jim Herbert, Chairman and CEO.
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James H. Herbert, First Republic Bank - Co-Founder, Chairman and CEO [67]
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Thank you very much. Thanks, everybody, for tuning in on the call today. We're very pleased with the growth of the quarter. Obviously, there's some minor issues going on, but they're really minor. And long term, we're particularly pleased with the capital we've been able to raise and now we expect to go deploy it. Thank you very much.
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Operator [68]
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This concludes today's conference call. You may now disconnect.
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