Q1 2018 First Republic Bank Earnings Call
Apr 13, 2018 PM UTC
查看原文
FRC - First Republic Bank
Q1 2018 First Republic Bank Earnings Call
Apr 13, 2018 / 02:00PM GMT
==============================
Corporate Participants
==============================
* Hafize Gaye Erkan
First Republic Bank - President
* James H. Herbert
First Republic Bank - Chairman and Chief Executive Officer (Founding)
* Michael J. Roffler
First Republic Bank - Executive Vice President & Chief Financial Offier
* Shannon Houston
First Republic Bank - SVP & Chief Marketing and Communications Officer
==============================
Conference Call Participants
==============================
* Aaron James Deer
Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst
* Christopher Edward McGratty
Keefe, Bruyette, & Woods, Inc., Research Division - MD
* David John Chiaverini
Wedbush Securities Inc., Research Division - Research Analyst
* David Patrick Rochester
Deutsche Bank AG, Research Division - Equity Research Analyst
* Geoffrey Elliott
Autonomous Research LLP - Partner, Regional and Trust Banks
* Jared David Wesley Shaw
Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst
* Kenneth Allen Zerbe
Morgan Stanley, Research Division - Executive Director
* Matthew Timothy Clark
Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst
* Steven A. Alexopoulos
JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks
==============================
Presentation
------------------------------
Operator [1]
------------------------------
Greetings, and welcome to First Republic Bank's First Quarter 2018 Earnings Conference Call. (Operator Instructions)
I would now like to turn the call over to Shannon Houston, Senior Vice President and Chief Marketing and Communications Officer. Please go ahead.
------------------------------
Shannon Houston, First Republic Bank - SVP & Chief Marketing and Communications Officer [2]
------------------------------
Thank you, and welcome to First Republic Bank's First Quarter 2018 Conference Call. Speaking today will be Jim Herbert, the bank's Chairman and Chief Executive Officer; Gaye Erkan, President; and Mike Roffler, Chief Financial Officer.
Before I hand the call over to Jim, please note that we may make forward-looking statements during today's call that are subject to risks, uncertainties and assumptions. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, see the bank's FDIC filings, including the Form 8-K filed today, all available on the bank's website.
And now I'd like to turn the call over to Jim Herbert.
------------------------------
James H. Herbert, First Republic Bank - Chairman and Chief Executive Officer (Founding) [3]
------------------------------
Thank you, Shannon, and thanks, everyone for joining us today. It was an excellent quarter by virtually every measure. We scaled back a bit our prepared remarks today and the number of speakers as well as our results are quite straightforward. We continued to deliver strong, safe organic growth across the board, while also providing a level of client satisfaction that was even higher during 2017 than the prior year.
Let me share some highlights. Year-over-year, our total revenue growth was 20%. Net interest income growth was 18%. And tangible book value per share increased by 12%. These results are driven by strong growth across our franchise. Total deposits are up 16%, total loans were up 21% and wealth management assets grew by 25%.
Our loan origination volume in the first quarter was $7.3 billion, by far our strongest first quarter ever. Credit quality remains excellent. Nonperforming assets were a very low 5 basis points, while net charge-offs for the quarter were a nominal $154,000. And our capital levels remained quite strong.
Turning briefly to conditions in our geographic markets and specifically home lending for a moment. We're starting to see some very modest differentiation by region. The San Francisco Bay Area, Los Angeles and Boston, all remain quite strong. Activity in New York has moderated a bit, though we still see -- we still view this market as healthy.
Across our footprint, while rents are generally down slightly, residential real estate values are holding up well. Our underwriting criteria, as always, remains quite consistent and very conservative. Overall, economic conditions in our urban coastal markets continue to be good and the clients remain quite active. We still expect mid-teens loan growth for the full year.
The emphasis that we have on safe, consistent growth also means continued focus on our regulatory and compliance infrastructure as we've noted on many previous calls. We are still making investments in our business, including enterprise risk management, AML/BSA and compliance, commensurate with maintaining our best-in-class programs. These infrastructure investments have made First Republic an even stronger institution, and we've been recognized for the effectiveness of our regulatory and compliance programs.
We also continued to invest in future client household acquisition opportunities. A good indicator of our progress in this regard is the success of our student loan refinance product, which helps younger urban professionals reduce their student debt. At the end of 2015, we had only 1,300 student loan refinance client households. Today, we have almost 13,000 such households, a tenfold increase in just over 2 years. These new household relationships represent an important part of the ongoing development of our next generation of clients. We're very pleased with the results.
While investing for the long term always, we remain completely focused as well on the daily execution of exceptional, differentiated client service. Our 2017 Net Promoter Score, which we've just received confirms this. The Net Promoter Score, as a reminder, measures our client satisfaction levels and willingness to refer friends and colleagues. Our newest score for 2017 stands at 75. This is up 3 points from our already very high 2016 scores. When our clients identify First Republic as their lead bank, our score increases to an industry-high 83. Both of these scores are more than twice the banking industry average and higher than many of the world's leading brands in any field.
This level of client satisfaction is the primary driver of our strong organic growth. We deepened existing relationships and acquired new households through these strong referrals from our very satisfied clients. This is the key to the growth.
Overall, we're very pleased with our quarter. Now I'd like to turn the call over to Gaye Erkan, President.
------------------------------
Hafize Gaye Erkan, First Republic Bank - President [4]
------------------------------
Thank you, Jim. Let me touch on our business model and then cover our strong performance in the quarter. Our simple, straightforward model is based on 2 core principles: Our safety and soundness and our unwavering focus on the client. The successful execution of this model has enabled us to deliver consistent results over time through a variety of macroeconomic conditions.
Safety and soundness are reflected in our robust operational controls, risk management and compliance program, strong credit quality and conservative capital and liquidity management. To that point, total net losses since 1985 are just 16 basis points, cumulative, on over $200 billion of loan originations. We maintain healthy capital ratios at all times and have a very strong liquidity profile. Our unwavering focus on the client is reflected in our high Net Promoter Scores Jim just mentioned. Exceptional client service is what ultimately powers our organic growth.
Now let me provide some detail about the first quarter. Our loan origination volume was $7.3 billion, up 30% compared to the first quarter last year. It was our best first quarter ever. Single-family residential lending, the biggest component of loan volume, was 46% purchase and 54% refinance. Residential lending is one of the key ways we acquire new households, both through purchase activity and the refinancing of loans from other institutions.
Multifamily and commercial real estate lending also had a good quarter and grew nicely from a year ago. Importantly, credit quality remains excellent. Our multifamily and commercial real estate loan to value ratios are very low at 52% and 48%, respectively. Together, these portfolios represent less than 200% of our total capital.
Business banking continues to be a key contributor to the franchise. The growth of business banking is the result of our success in taking care of our clients' personal banking needs and then following them to their businesses and the nonprofit organizations they support. During the first quarter, business loans outstanding were up 30% from a year ago. This growth was primarily driven by an increase in business loan commitments and higher utilization rates. Businesses and nonprofits have also been a strong source for deposits for us. For every $1 we have outstanding in business loans, we have more than $4 in deposits.
Turning to deposits overall, it was a very good quarter. Deposits were up 3% from last quarter and up 16% from a year ago. Deposit growth fully funded our $2.3 billion in loan growth during the quarter. We are very pleased with the strong and diversified growth across all channels and geographies. Business deposits were 54% of total deposits, the same as a year ago. Checking deposits represented 62% of our total deposits at quarter end. Sweep accounts from wealth management also remained a diversified and stable source of funding, representing 7% of total deposits for the quarter.
In terms of private wealth management, it was another very strong quarter. Wealth management assets were up 6% during the quarter and 25% year-over-year. This continued strong growth despite market-related volatility was driven by positive net client inflows from both new and existing clients. Wealth management fee revenues for the quarter were up 28%, compared to a year ago and represents 14% of the bank's total revenues for the quarter.
During the first quarter, 3 new wealth management teams joined First Republic and another joined in April. We continue to successfully recruit new wealth professionals who are attracted to our holistic and client-centric approach. Our focus on safety and soundness, coupled with our commitment to service excellence produces these strong results as seen this quarter.
Now I would like to turn the call over to Mike Roffler, Chief Financial Officer.
------------------------------
Michael J. Roffler, First Republic Bank - Executive Vice President & Chief Financial Offier [5]
------------------------------
Thank you, Gaye. I'll cover the investment portfolio; net interest margin; our efficiency ratio; net interest income; our tax rate; and finally, overall earnings per share.
Our investment portfolio totaled $16.5 billion at the end of the first quarter. High-quality liquid assets, including eligible cash, totaled $11 billion at March 31, or 12.8% of average total assets in the first quarter.
As we previously disclosed in our 10-K, we took the opportunity during the first quarter to reposition and sell $2.2 billion of intermediate and long-term fixed-rate investment securities. This sale resulted in a gain of $10.7 million during the quarter while also forgoing a modest amount of future net interest income. The net effect was a slight benefit to our quarterly results.
Turning to net interest margin. During 2018, we continue to expect to be in the range of 2.85% to 2.95% as mentioned on our last call. During the first quarter, our net interest margin was 2.97%, which includes about 3 basis points of benefit from the repositioning of the investment portfolio.
Looking at the efficiency ratio. For the full year 2018, we continue to expect to be in the range of 63% to 64% as noted on last quarter's call. We are pleased that our efficiency ratio for the first quarter was 64%, which does include about 60 basis points of benefit from the repositioning of the portfolio.
Turning to net interest income, which we view as one of our key financial metrics, it was another good quarter. Net interest income was up 18% year-over-year.
Our effective tax rate for the quarter was 19%, in line with our previous guidance. As we mentioned in the last call, we continue to expect the bank's effective tax rate to be approximately 19% for all of 2018.
Finally, earnings per share were $1.13, up 12% from a year ago.
Thank you. Now I'll turn the call back over to Jim.
------------------------------
James H. Herbert, First Republic Bank - Chairman and Chief Executive Officer (Founding) [6]
------------------------------
Thank you, Mike and Gaye. We continue to invest in the operations and infrastructure of the enterprise; future growth opportunities, which are considerable; and maintaining an exceptional level of client service. We're quite pleased with the results of the quarter and with the results of these investments as well as the strong and consistent performance.
Thank you. We'd like to open up for questions.
==============================
Questions and Answers
------------------------------
Operator [1]
------------------------------
(Operator Instructions) Our first question today comes from the line of Ken Zerbe with Morgan Stanley.
------------------------------
Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [2]
------------------------------
I guess first question, just for Mike. With the NIM guidance, the 2.85% to 2.95%, obviously, we've had sort of the long end of the curve move up a little bit over the last few months or so. Am I right to assume that the benefit of a longer end going up is offset by the balance sheet repositioning that you did? Is that the right way to think about it? I'm just wondering why it shouldn't be a little bit higher than that current range.
------------------------------
Michael J. Roffler, First Republic Bank - Executive Vice President & Chief Financial Offier [3]
------------------------------
So yes, the long end moving up has helped on some of our new lending production incrementally. I think one of the key things to look at though is the short end is also moving pretty consistently up, so the curve is pretty flat, and that leads us to sort of stay in this range for the balance of the year.
------------------------------
Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [4]
------------------------------
Got you, understood. And then maybe just going to deposit betas. We just had a different bank talk about that they're seeing an acceleration in deposit price competition. They think 2018 is going to be a lot more, I guess, more aggressive or more competitive than last year was. Are you guys -- can you just talk about some of the trends that you're seeing in your client base? And what you expect for deposit betas going forward?
------------------------------
Hafize Gaye Erkan, First Republic Bank - President [5]
------------------------------
Absolutely, and our deposit beta so far has been about 20% over the last 12 months, with some change, was 75 basis points Q1-to-Q1 across the past year, and our deposit rate increased by 15 basis points. We are pleased with the 20% beta compared to what we have seen historically, around mid-40s in terms of the beta in the past rate selloff cycles. That speaks to the strength of the checking deposits representing 62% of our total deposits. Having said that, deposit rate spot rate ending Q1 is 35 basis points, and we do continue to see the competitive pressures. But checking, which is more operational in nature, that's why the clients are here with us for the service and the relationships, is a strong lever against that.
------------------------------
Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [6]
------------------------------
Got it. And where are you seeing more of the competition?
------------------------------
Hafize Gaye Erkan, First Republic Bank - President [7]
------------------------------
So the -- if roughly speaking, let's say 62% is checking. The remainder is money market-type deposits and CDs. So CDs, we are keeping it competitive as the market rates change, and they're still attractive compared to other wholesale alternatives because we get to leverage our 70 Preferred Banking Offices, acquire households and also have it -- 50% of our CDs have a checking relationship. Great way to add duration to the liabilities over a longer fixed rate term as well as acquire households. And then money market rate deposits, we will be fair to our clients and try to keep it competitive in line with the expected Fed hikes.
------------------------------
Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [8]
------------------------------
Okay. And then just last question on expenses. Obviously, with the 63% to 64%, do you feel -- and maybe this is more of a question for Jim, but do you feel that you're having to sacrifice any additional investments that you would want to invest more for the next generation of clients, but you need to hold back because of that target ratio?
------------------------------
James H. Herbert, First Republic Bank - Chairman and Chief Executive Officer (Founding) [9]
------------------------------
No, not really, Ken. We've actually landed, I think, at a very good place. It's a good balance right now, and we're able to go forward at a pace that we can operationally handle very effectively. I wouldn't necessarily want to accelerate it.
------------------------------
Operator [10]
------------------------------
Our next question comes from the line of Steven Alexopoulos with JPMorgan.
------------------------------
Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [11]
------------------------------
I wanted to first start on the loan side and drill down into the 1Q originations. If we look at commercial originations, they're almost 30% of total, which have basically doubled over the past year. Can you give more color on what's driving that? And is it all capital call lines?
------------------------------
James H. Herbert, First Republic Bank - Chairman and Chief Executive Officer (Founding) [12]
------------------------------
On the business side of commercial, I presume you don't mean real estate, you mean the business banking.
------------------------------
Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [13]
------------------------------
Yes, exactly.
------------------------------
James H. Herbert, First Republic Bank - Chairman and Chief Executive Officer (Founding) [14]
------------------------------
Yes. That's been driven by capital call lines. They're very active. The PE and venture capital guys are busy. And the real estate funds we have in that category, which are a lesser percentage of the total but growing, are also quite active. So I'd say it's mostly business activity level. Particularly since the tax bill, we've seen a lot of things happening that are pretty exciting, actually.
------------------------------
Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [15]
------------------------------
Following up on the tax bill, Jim. When we look at the single-family originations, they declined modestly year-over-year. And I know you said New York was a bit soft. Is this related to the impact of SALT? Is that what that is?
------------------------------
James H. Herbert, First Republic Bank - Chairman and Chief Executive Officer (Founding) [16]
------------------------------
We don't think so. New York is somewhat of a case unto itself. It's actually the opposite of the other markets. Los Angeles, San Francisco and Boston continue to be quite supply constrained, whereas New York actually is experiencing a bit of new supply and a fair amount of slowdown at the upper end, which we're all, I think, pretty aware of by now. So it's a little different market, it's had more supply developed. So I think it's a supply-demand balance. It's not really SALT. The -- I think that the pipeline that we've got is actually very strong, however. So I don't -- we don't yet see anything to be worried about it at all.
------------------------------
Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [17]
------------------------------
And then I wanted to actually talk about the margin for a second. I hear Mike's full year guidance, it's unchanged. But how are you thinking about the margin near term? It sounds like 2.94% is a starting point.
------------------------------
Michael J. Roffler, First Republic Bank - Executive Vice President & Chief Financial Offier [18]
------------------------------
I think that's right, Steve. 2.94% is sort of a normal level, call it, first quarter. And then it probably ticks a little bit down from there to sort of the middle of that range, given some of the deposit pricing that Gaye talked about. But we feel really good that the loan yields are getting a little bit incrementally better to help offset some of that. And we do have some benefit from the recent rate hike that will flow through, through the prime and LIBOR portfolios. But sort of that midpoint feels pretty good, near term.
------------------------------
Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [19]
------------------------------
And maybe just one final one for Jim. Just a follow-up on the Net Promoter Score moving up even further in 2017, which is remarkable. How does the Net Promoter Score in the student loan refinance business compare to the overall NPS?
------------------------------
James H. Herbert, First Republic Bank - Chairman and Chief Executive Officer (Founding) [20]
------------------------------
It's actually higher than the overall.
------------------------------
Operator [21]
------------------------------
The next question comes from the line of Jared Shaw with Wells Fargo Securities.
------------------------------
Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [22]
------------------------------
Maybe just following up on the deposit beta. Gaye, you had mentioned that it looks like it's been 20% so far compared to the mid-40s historically. Do you feel that this cycle, we're going to get back to that mid-40s? Or could you expect to actually maybe even see it higher than mid-40s as we go through the cycle?
------------------------------
Hafize Gaye Erkan, First Republic Bank - President [23]
------------------------------
So just in general, the beta question, I would prefer to answer in terms of the NIM guidance, is 2.85% to 2.95% for the year. Now drilling to deposits for a second on the beta. For the second quarter, as you know, the first half of the year is always more challenging from a deposit perspective than the second half of the year. And on top of it, in the second quarter, we have, as Jim mentioned, the pipeline is strong on the lending side; and on the deposit side, the anticipated tax outflows are going to happen in April and May time line. So because of that and starting at 35 deposit rate, we would expect it -- an increase, a slight increase in the deposit rate in the second quarter, followed with a strong activity in the second half of the year, just we have seen historically. So I wouldn't see a very big jump in the year-over-year from the betas that we have seen, but yet increasing towards the historical betas over time as the Fed funds normalizes.
------------------------------
Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [24]
------------------------------
Okay, great. And then on the expense side, Mike, maybe you can just walk through a little bit of what we can maybe pull out of the salaries and benefits line that were 1Q discrete items, and what would be a good base from there going forward? And then a corollary to that is on expenses, how -- maybe a little update on Gradifi. And are you still hiring and growing there? Or have you stabilized the investment in Gradifi?
------------------------------
Michael J. Roffler, First Republic Bank - Executive Vice President & Chief Financial Offier [25]
------------------------------
Sure, so I'll start with Gradifi. So as a reminder, last year, it was about a $17 million, $18 million expense run rate. The first quarter was just under $5 million, so we're at a pretty consistent pace that I think we talked about, level amount that we talked about at the end of the year. So we're still investing accordingly, but at a normal run rate. On the salary and sort of bonus payroll benefits. If you look at Q1 versus the fourth quarter, we have elevated payroll tax and benefits of about $17 million compared to Q4 to Q1. Not all of that goes away in Q2, but a good portion of it does come down because of the seasonality. So probably $12 million to $14 million is a good pull out. And then the thing I'd add on that, obviously, the first quarter is when you give salary adjustments. That's not fully reflected in the run rate, so it does cause a little bit of offset there.
------------------------------
Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [26]
------------------------------
Great. And then apart from the expenses on Gradifi, just any more of an update on trends there? And the expectation for maybe profitability or a little-longer-term goal?
------------------------------
Hafize Gaye Erkan, First Republic Bank - President [27]
------------------------------
So we're pleased with the momentum we -- today, Gradifi had over 350 employers on the platform compared to 300 at the end of the year. And we are seeing more interest on the Gradifi refi as well. Having said that as we have indicated, so we are not rushing the process there. So it would be past 2019 from a profitable perspective.
------------------------------
Operator [28]
------------------------------
Our next question is from the line of Dave Rochester with Deutsche Bank.
------------------------------
David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [29]
------------------------------
Just on the deposit growth trends this quarter, I know those tend to be seasonally softer in the first half, you mentioned that. But this is the largest CD growth that we've seen in a while. I was just wondering if you think this is more of a sign of things to come on the deposit side, if we should expect more CD growth going forward, even as you get into the second half of the year, just given the competitive dynamics you're seeing.
------------------------------
Hafize Gaye Erkan, First Republic Bank - President [30]
------------------------------
So let me -- using your question, if you don't mind, let me just tell -- give the drivers of the quarter-over-quarter growth. As you said, so we are pleased that the $2.3 billion deposit growth has fully funded the $2.3 billion of loan growth. In terms of the drivers, $1.7 billion is CDs. The large portion of that is consumer CDs, so that's retail. And that comes with a fixed rate term that adds duration to the liabilities, which we consider opportunistic in a rising rate environment -- or prudent from a risk management perspective in a rising rate environment. And on top of it, 50% comes with a checking relationship, and it brings great energy to our Preferred Banking Offices to deepen these relationships and it's a great household acquisition tool that leads nicely into the second half of the quarter. So we're actually very pleased with that. Also $0.6 billion of the $2.3 billion growth came from business checking that we're also very pleased about, given that they're coming in with almost no rate attached to it.
------------------------------
James H. Herbert, First Republic Bank - Chairman and Chief Executive Officer (Founding) [31]
------------------------------
It's Jim. David, it's Jim. Let me just give a -- this CD question is kind of interesting to me because having done this for a long time, CDs are actually a very attractive product from the retail point of view. They take very little attention on an ongoing basis. They tend to roll automatically. And our CDs tend to have a kind of a new maturity in the sort of 13-, 14-month range. And for instance, this quarter, I think our average rate was about 1.4%, 1.45%, and that compares to a 1-year T of 1.95%. So actually, if you put all that together and then you take the comment that Gaye made about 50% or more starting with checking, it is -- we have 70 offices. Average size is about $300 million, $350 million, so they're very profitable. And this has been an opportunity to grow those and that channel for the bank again. And so in fact, it's a very attractive thing. It's just the CDs went out of favor at 0 rates. So we're actually delighted to see them. We're pleased to see them come back, actually.
------------------------------
David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [32]
------------------------------
And were you pricing the new CDs around that average cost of 1.40%, 1.45%? Or were they higher than that?
------------------------------
James H. Herbert, First Republic Bank - Chairman and Chief Executive Officer (Founding) [33]
------------------------------
Well, the incrementals probably, at this point, slightly higher than that. But we're following the T up. But we're lagging behind the T by 50 or so.
------------------------------
David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [34]
------------------------------
Yes, okay. Great. And then I guess going forward, if there is a little bit of a shortfall on the core deposit funding side for 2Q, just typically, you see some stronger loan growth, but to your point, typically deposit growth is a little soft. Would you expect to fill in that gap with more of that CD-type product? Or would you term out in FHLBs, which you've done historically occasionally, just to match asset liability with funding?
------------------------------
James H. Herbert, First Republic Bank - Chairman and Chief Executive Officer (Founding) [35]
------------------------------
We might do the latter. Our approach to CD, we started building -- rebuilding our CDs about 1.5 years ago now as we saw rates beginning to turn. And we've -- when we've taken a very methodical approach to it, somewhat as is our way. We are growing CDs $7 million to $8 million a day, basically, very methodical. And so we would not adjust that rate by any meaningful increment in response to a kind of a temporary shortfall. We see this as a very steady Eddie kind of base building.
------------------------------
David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [36]
------------------------------
Okay, appreciate that. Just one last one on expenses, if I could. I know you're reiterating the 63% to 64% efficiency ratio guide for this year. Was just wondering how you see that carrying into 2019, just given your goal to grow the wealth management business faster than the bank, and the wealth management business is a higher-efficiency-ratio type business. So any thoughts there would be appreciated.
------------------------------
Michael J. Roffler, First Republic Bank - Executive Vice President & Chief Financial Offier [37]
------------------------------
Yes, Dave. We haven't gone out that far in terms of outlook and guidance. You're right. If wealth management continued to grow and become a bigger part of the overall revenue base, that does put pressure on it. But we're really comfortable in this range for the balance of this year.
------------------------------
Operator [38]
------------------------------
Our next question comes from the line of Aaron Deer, Sandler O'Neill.
------------------------------
Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [39]
------------------------------
I guess following up the repositioning of some of the securities book, and I'm curious to know, of the new purchases that you're making today, what kind of duration are you putting on? And to what extent are you continuing to use munis, given the tax law change? And some of your thoughts there.
------------------------------
Hafize Gaye Erkan, First Republic Bank - President [40]
------------------------------
Sure. The redeployment of the sale of the securities, which from a timing perspective, (inaudible) we're very, very pleased going to the second quarter, it'll be into lending and investment opportunities opportunistically. And given the rising rate environment, it was great timing for that. So in terms of the HQLA, it's similar duration as we have been buying, and we're committed to the 12% HQLA ratio as we've always been. And we're seeing somewhere around 3.5% to 3.75% type of yield for the similar 4- to 5-year duration paper in the HQLA space. Regarding munis, again, we'll be opportunistic as we go and we will be comparing it to the lending opportunities as we go.
------------------------------
Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [41]
------------------------------
Okay. And then on the expense side, it was just -- obviously, you guys are still investing in a lot of different areas of the business. I'm wondering if there's a way to kind of prioritize those in terms of how you would stack rank the priorities. Is it wealth management, then the student loan business, technology, regulatory compliance? Do you think about it in those terms? Or is it just kind of a multi-faceted effort?
------------------------------
James H. Herbert, First Republic Bank - Chairman and Chief Executive Officer (Founding) [42]
------------------------------
It's interesting. Let me take one second on this conceptually. We have a very established core bank which kind of represents the highly satisfied home loan based urban professional client that we have, ranging in age from mid-40s to mid-60s, probably. And from them come other elements. The 3 growth elements in the bank are wealth -- that are outgrowing that core, if you can separate them, and it's a little hard, but just conceptually. The 3 that are outgrowing the core are wealth management, business banking and the student loan refinance, the young generation, including our Professional Loan Program. If you take those 3 elements and consider them separately, they're growing in the low 20s to mid-30s percent range. So what's happening is that we're expanding outwards our age ranges of the company. The younger is the obvious one. The somewhat less obvious is the older and wealthier clients through the wealth management growth. Each one of these has an investment component. The business banking has the least investment component. It's highly profitable. We're not -- we're adding products, of course, but basically, the cost there is the operating cost of onboarding good new clients. And we invest in systems, but that's not -- that's kind of ongoing. If you go to the other 2, wealth management, clearly there's an investment there as we bring on new teams, and they need to ramp up always, and the efficiency ratio is different there, as we all know. But the capital requirement is very low. If you go to the young end of the spectrum and the PLP and the student loan refinance, there, you have an investment. And the investment is in the form of the fact that a young, new client breaks even at about 15 to 18 months, and then forever after, is highly profitable. And so as that grows rapidly, you have a large base of unprofitable clients that turn profitable about 1.5 years into their lives. So what's happening is as we build our base, as I said in the presentation, we went from 1,300 to 13,000 in 2 years. Now we now have a base of 13,000. So the next 8,000 will begin to be carried by the earlier ones that are turning to profit. We also have some marketing in there. The other thing that's on top of that is Mike's comments about Gradifi, and Gradifi is another form of that young client acquisition activity and it has a steady loss run rate in the kind of $15 million, $16 million, but it will turn to profit, we think, in '19, maybe '20, but soon. In the meantime, we don't mind it because we're acquiring relationships at a very rapid rate. So that's kind of the overall picture. So you have 3 elements growing faster than this, what I think of as the core bank, which is business banking, wealth management and the young client acquisition. That's where the investments are going. What's coming out of that is a lot of knowledge about data needs, about service needs, et cetera. We got a tremendous feedback loop on both ends, and we're using that to drive our technology investments and our continuous process improvement. So it's all working together very well. And what you see as a company that has a growth rate on the surface of kind of 18% to 20%, but elements inside of that are ahead of that and pulling it forward.
------------------------------
Operator [43]
------------------------------
Our next question comes from the line of Chris McGratty with KBW.
------------------------------
Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [44]
------------------------------
Mike or Jim, a question on capital. It's been about 6 months since you've come for equity -- the common equity, that is. With you reiterating the growth outlook, how are you thinking about when the right time might be to come back? And also maybe a comment, any thoughts on perhaps running the bank a little bit more levered, given the thaw in the regulatory environment?
------------------------------
James H. Herbert, First Republic Bank - Chairman and Chief Executive Officer (Founding) [45]
------------------------------
I guess our comment on the latter is we are almost pathologically conservative. And so the better things get, the more nervous I get. So we generally will not lever up, even if kind of allowed to. I think the -- on the other hand, we're well capitalized right now. The profitability is strong, and touch wood here, the credit quality is extremely strong. And as a result, I think we probably don't need capital for several quarters, at least.
------------------------------
Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [46]
------------------------------
Okay, great. And then maybe a question on competition. Heard a lot of banks, smaller banks, talk about the opportunity out in the West Coast, given the dislocation in one of the larger banks. I think you hired someone away from their wealth management business recently. Can you comment, twofold, one on whether this is going to accelerate growth or support growth for the company? And also, what it maybe having -- what the impact might be on loan yields on your loan competition, given somebody pulling back?
------------------------------
James H. Herbert, First Republic Bank - Chairman and Chief Executive Officer (Founding) [47]
------------------------------
Well, I don't think -- we're all aware of the challenges over there, although I have an enormous respect for the organization. I think that it's not meaningful, to be honest with you. I mean, it's not going to -- it's not a negative, but it's not really much of a positive overall, I wouldn't think. And we certainly wish them well in working through their problems.
------------------------------
Operator [48]
------------------------------
Our next question is from the line of David Chiaverini with Wedbush Securities.
------------------------------
David John Chiaverini, Wedbush Securities Inc., Research Division - Research Analyst [49]
------------------------------
A question on resi mortgage origination volume. You mentioned in the prepared remarks that 54% is refi. I was wondering, do you expect rising rates to impact the refi biz for your customer base?
------------------------------
James H. Herbert, First Republic Bank - Chairman and Chief Executive Officer (Founding) [50]
------------------------------
Refi will slow down a little bit, but as we tried to say in the text, and maybe not as clearly as possible, a large part of what we call refi is, of course, refi at other institutions bringing in new clients to us. So in fact, refi is a client-acquisition opportunity as opposed to what one might imply a refi of our own paper. Of course, we do that, too.
------------------------------
David John Chiaverini, Wedbush Securities Inc., Research Division - Research Analyst [51]
------------------------------
So we can expect that to stay roughly 50-50 between purchase...
------------------------------
James H. Herbert, First Republic Bank - Chairman and Chief Executive Officer (Founding) [52]
------------------------------
Yes, it's been 50-50 through a lot of different conditions over a long time. It goes, it flips between 55-45 and the reverse.
------------------------------
David John Chiaverini, Wedbush Securities Inc., Research Division - Research Analyst [53]
------------------------------
And shifting to the securities repositioning. Was the strategy behind that sale to shorten duration?
------------------------------
Hafize Gaye Erkan, First Republic Bank - President [54]
------------------------------
It was -- so it was risk management driven. So in light of the rate environment as well as the recently enacted tax code changes, we have reexamined and optimized our portfolio, clearly, from a risk management perspective. And in doing so, the impact of duration was slightly shorter and it also slight improvement to the TEY. And we're looking to the redeployment. But all in all, we continue to stick to our guidance of NIM 2.85%, 2.95%. And it was a onetime opportunity, given the adoption of the new hedge accounting guidance that enabled us to do that.
------------------------------
Operator [55]
------------------------------
Our next question comes from the line of Geoffrey Elliott with Autonomous Research.
------------------------------
Geoffrey Elliott, Autonomous Research LLP - Partner, Regional and Trust Banks [56]
------------------------------
I guess you talk about efficiency ratio quite a lot, but can you help us get a better sense on expense growth? It looks like it's kind of running low 20s right now. I mean, is that the sort of pace that continues? Or how much scope is there for that to move around?
------------------------------
Michael J. Roffler, First Republic Bank - Executive Vice President & Chief Financial Offier [57]
------------------------------
So it is at low 20s in the first quarter here. I think if we look at some of the things we talked about with mid-teens loan growth and the investments we're making, it probably comes down on an absolute percentage growth basis to get closer in line with revenue growth during the year. Part of the growth year-over-year is that last year, we had some acceleration, so when you're comparing that, naturally, it's a bit higher earlier in the year. But it should come down a little bit on a quarter-over-quarter, year-over-year basis as we move throughout 2018.
------------------------------
Geoffrey Elliott, Autonomous Research LLP - Partner, Regional and Trust Banks [58]
------------------------------
And just kind of following up on that, the 63% to 64% range, it's much narrower than you've given historically, and it feels pretty narrow for a company that's growing so fast. I mean, does it make sense to -- I guess, why does it make sense to think about it in terms of such a narrow range rather than give yourself a bit more scope to either invest more or kind of pay it back, depending on the situation?
------------------------------
Michael J. Roffler, First Republic Bank - Executive Vice President & Chief Financial Offier [59]
------------------------------
It's a good question, and I think going back to maybe an earlier question, we think the pace of investments that we're making, we're not shortchanging anything. We feel that the margin's in a relatively consistent range. So given that outlook, we think a narrow band for this year makes a lot of sense.
------------------------------
Operator [60]
------------------------------
Our next question comes from the line of Matthew Clark with Piper Jaffray.
------------------------------
Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [61]
------------------------------
Wondering about the other expense line this quarter relative to the fourth quarter, that decline. And what was driving that?
------------------------------
Michael J. Roffler, First Republic Bank - Executive Vice President & Chief Financial Offier [62]
------------------------------
So it would be a variety of things, a little bit lower recruiting cost, a little bit lower in terms of internal events. The fourth quarter is always a bit busier seasonally if you look at some of our expense lines, marketing along with this. But just really being disciplined about where some of these things are being invested and spent.
------------------------------
Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [63]
------------------------------
Okay. And then on the expense guide, I think, you gave last quarter, it sounds like the growth coming down. Is mid- to high-teens still your expectations for the year?
------------------------------
Michael J. Roffler, First Republic Bank - Executive Vice President & Chief Financial Offier [64]
------------------------------
From the dollar standpoint, that's right.
------------------------------
Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [65]
------------------------------
Okay. And then just on loan yields, I guess how do you think about the loan yield outlook, given the lift that you should be receiving from prime and LIBOR and then the competitive pressures that might mitigate seeing some of that?
------------------------------
Hafize Gaye Erkan, First Republic Bank - President [66]
------------------------------
Sure. The -- just to give perspective, the real estate loans that we booked in Q1 were in the mid-3s, so 3.5%, around 3.5%. Recent rate locks a bit higher than that, if it helps.
------------------------------
Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [67]
------------------------------
Okay. So I assume you expect some uptick here going forward.
------------------------------
Hafize Gaye Erkan, First Republic Bank - President [68]
------------------------------
All in, so second quarter all in, great season pipeline, depends on the rates. Deposit side, obviously, as we have told, competitive pressures. So 2.85%, 2.95% captures in terms of NIM guidance for the year.
------------------------------
Operator [69]
------------------------------
Thank you. At this time, I will turn the floor back to Jim Herbert for closing remarks.
------------------------------
James H. Herbert, First Republic Bank - Chairman and Chief Executive Officer (Founding) [70]
------------------------------
Great. Thank you all very much for joining us today. We appreciate it. Bye-bye.
------------------------------
Operator [71]
------------------------------
Thank you. This will conclude today's teleconference. Thank you for your participation. You may now disconnect your lines at this time.
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------