First Republic Bank (FRC) 2017 Q3 法說會逐字稿

Greetings, and welcome to First Republic Bank's Third Quarter 2017 Earnings Conference Call.

(Operator Instructions)

I would now like to turn the call over to Shannon Houston, Deputy Chief Marketing and Communications Officer.

Please go ahead.

Thank you.

And welcome to First Republic Bank's third quarter 2017 conference call.

Speaking today will be Jim Herbert, the bank's Chairman and Chief Executive Officer; Mike Roffler, Chief Financial Officer; Gaye Erkan, President; Mike Selfridge, Chief Banking Officer; Bob Thornton, President of Private Wealth Management; Jason Bender, Chief Operating Officer; and Mollie Richardson, Chief Administrative Officer and Chief People Officer.

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

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

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

Thank you, Shannon, and thanks to everyone for joining our call today.

It was a strong quarter.

Year-over-year, our revenues grew 20%, and tangible book value per share has increased more than 16% in the last year.

We're very pleased with the continued growth of our private wealth management franchise, in particular.

Wealth management assets are now over $100 billion, a true milestone.

It's worth noting that less than 7 years ago, at the end of 2010, we had only $17 billion in wealth management assets.

This is a 31% per annum increase.

Importantly, fee income from wealth management as a percentage of our total revenues has grown from 6% to 13% since then.

Growing this part of our franchise continues to be a key strategic priority for the bank as we go forward.

Bob Thornton will speak more about this in a moment.

Let me share a few other highlights from the quarter year-over-year: Total deposits increased 19%.

Total loans outstanding were up 19%.

Net interest income increased 20%.

This was, in fact, our best third quarter of loan origination volume in the bank's history.

And very importantly, as always, credit quality remains excellent.

Nonperforming assets were only 4 basis points.

Our capital levels also remained very strong.

We're pleased to announce that we do plan to open a new office in Jackson, Wyoming, likely sometime in 2019.

Similar to our Florida office initially, which we opened in '13, our Jackson office will provide a service touch point for our clients -- existing clients from both coasts, who live or vacation in the area.

The growth of loans, deposits and wealth management assets is the product of our continued focus on exceptional service and building for the long term based upon holistic relationships one client household at a time.

Overall, we're actually quite pleased with the quarter.

Before I turn the call over, let me speak about the wildfires in California for a moment.

As you've undoubtedly seen, fires have been burning throughout the Northern California wine county and in several locations in Southern California for the past several days.

Our first priority, as always, is the safety of our colleagues and our clients.

We've been fully focused on taking care of those who need our help.

At the same time, we've continued to assess the situation, and we have teams on the ground coordinating our activities in the region.

Our 2 Preferred Banking Offices in Northern California wine county are currently open, and they're serving clients.

Thus far, we have identified 28 single-family home properties and 2 wineries that are clients of ours, that have been damaged by the fires.

All are fully insured, although it's a bit too early to make a complete assessment.

First Republic has significant experience with natural disasters over the years, unfortunately.

And in the case of fire damage, the standard homeowners insurance coverage is usually quite specific and comprehensive.

For perspective, the Oakland hills fire in '91 burned more than 12,000 -- 1,200 acres and destroyed 3,200 dwellings.

We did not experience any direct loan losses.

In terms of the impact to the people and communities that have been affected, we remain very actively engaged and will stay so in the weeks and months, maybe even years ahead, in supporting the recovery and rebuilding efforts for everybody up there.

Now let me turn the call over to Mike Roffler, our Chief Financial Officer.

Thanks, Jim.

Let me cover several key metrics, including the efficiency ratio, net interest margin, net interest income and the provision for loan losses.

We're very pleased with our quarterly results.

Revenues have increased 20%, and earnings per share grew 14% year-over-year.

Our capital remains strong and credit quality excellent.

Turning to expenses.

The efficiency ratio for the quarter was 62.4%, in line with our recent guidance.

We expect the efficiency ratio for the full year to be about the same as this quarter.

Our efficiency ratio reflects our ongoing investments in digital and mobile enhancements, the continued delivery of exceptional service and our successful and ongoing efforts to attract the next generation of clients.

Gaye and Jason will speak more about this in a moment.

Let me offer some perspective on the interest rate environment, competitive landscape and how we think about net interest margin and net interest income as drivers of our results.

We have experienced a modest increase in our deposit rates despite several increases in the Fed funds rate.

Loan pricing in our markets, however, has remained very competitive causing some pressure on our net interest margin.

We value, above all, maintaining a stable margin through all market conditions, but we look much more closely at growth in net interest income as our key measure of success.

Year-over-year, growth in net interest income was a very strong 20%.

Growth in net interest income supports strong earnings results and reflects our true earnings power.

It also funds the investments that I just mentioned for ongoing franchise development and future growth opportunities.

Next, I would like to touch on our provision for loan losses.

The provision totaled $10 million this quarter and was entirely a function of net loan growth.

We expect to maintain a total reserve as a percentage of period-end total loans of approximately 55 to 60 basis points.

At September 30, the allowance to total loans was 58 basis points.

Finally, a brief comment on other noninterest income, which was up $5 million in the quarter.

This increase relates entirely to the sale of a private investment that was realized in the third quarter.

And now I'd like to turn the call over to Gaye Erkan, President.

Thank you, Mike.

I would like to discuss our deposit franchise and investment portfolio, along with our efforts in attracting the next generation of clients.

At September 30, total deposits increased to $65.4 billion.

Checking deposits were 60.5% of our total deposits.

Year-over-year, deposits have grown 19%.

We are very pleased that our deposit growth has fully funded our loan growth over the past year.

Our average deposit rate during the third quarter was 25 basis points, up 7 basis points from prior quarter.

Over the past 12 months, our average deposit rate has increased 10 basis points, while the Fed funds target rate has increased 75 basis points.

Turning to investments.

Our securities portfolio represented 21% of total assets at the end of the quarter.

High-quality liquid assets, including eligible cash, were 13% of average total assets.

Both are consistent with the last quarter and now at a stable proportion of assets going forward.

As Mike mentioned, we are making significant investments in attracting the next generation of clients through student loan refinance and professional loan programs, as well as Gradifi.

Let me start with the strong results already produced and then cover why we are even more excited about the opportunities ahead.

Three years ago, newer clients acquired through our student loan refinance and professional loan program accounted for less than 5% of total borrowing households.

As of September 30, they accounted for over 20% of such households, a fourfold increase.

Not only have these programs become a meaningful driver of newer and generally younger client relationships, but they've also given us a great opportunity to learn.

These clients are helping us further evolve our technology, marketing and the way we think about providing exceptional service.

Gradifi, which we acquired at the end of last year, is yet another initiative focused on the next-generation client.

We continue to see more and more employers recognize the value of offering a student loan repayment benefit as a strategy for talent retention and acquisition.

While our current focus is on building Gradifi's brand, over time, we look to leverage this as a driver of student loan refinance opportunities.

Last month, we launched a comprehensive marketing and advertising campaign for Gradifi, and we are very pleased with the initial results.

Thanks to all these initiatives, our opportunities ahead are significant.

The bank you see today was built on relationships that grew over time.

These relationships that are often begun by serving a single need in home mortgage.

And today, while the initial need may be slightly different as we look to meet clients earlier in their life cycle, our longer-term strategy to build the bank for the future remains exactly the same.

These new clients are creating new opportunities to learn and to grow with them over time as they purchase homes, grow deposits, build businesses and manage their wealth.

These long-term benefits are well worth the near-term investments.

And now I would now to turn the call over to Mike Selfridge, Chief Banking Officer.

Thank you, Gaye.

Let me talk about credit, overall lending activity, loan sales, business banking and economic conditions in our markets.

It is important to note that we continue to apply the same disciplined underwriting standards across our portfolio as we have in the past.

As Jim mentioned, nonperforming assets were just 4 basis points at the end of the quarter.

Year-to-date, we have had less than $2 million in net charge-offs, while at the same time establishing a $43 million reserve.

Loan origination volume was $7.2 billion during the quarter.

This was our best third quarter ever.

Single-family residential lending volume was 47% purchased and 53% refinanced during the quarter.

Turning to the secondary market.

It was an active third quarter.

The bank has sold loans every quarter since our founding, and we look at the secondary market to manage our asset liability profile, including interest rate risk, while helping to provide a full range of product choices to our clients.

During the third quarter, we sold $822 million in loans.

At September 30, we had over $700 million of loans committed for delivery in the fourth quarter, more than double our most recent eight quarter held-for-sale average of $319 million.

I would note that we maintain servicing for all of our loans.

Turning to business banking.

We had a strong quarter as well.

Year-over-year, total business line commitments were up 26%.

In the third quarter, the utilization rate on business lines of credit was 34%, down a bit from the 37% we reported in the second quarter.

Overall, loan demand is strong across-the-board though pricing, as Mike said, remains competitive, but we have a robust pipeline going into the fourth quarter.

Turning to our geographic markets.

Economic conditions remain strong across our footprint, consistent with last quarter.

And our clients remain quite active.

In our markets, values for single-family homes under $3 million have remained stable over the past few quarters.

Our weighted average loan-to-value for single-family loans originated during the quarter was 58%, also consistent with prior quarters.

At the very high end, where we do relatively small amounts of lending, we have seen a softening of prices, which we view as a positive for the market.

We continue to benefit from the strength of the economic activity in our regions, which tends to be stronger than the rest of the United States as a whole.

Overall, we are very pleased with the quarter and the opportunities ahead.

And now I'd like to turn the call over to Bob Thornton, President of Private Wealth Management.

Thank you, Mike.

We are very pleased with this quarter's results in private wealth management.

As Jim noted, wealth management assets now exceed $100 billion, and now we rank among the largest private wealth managers in the U.S.

Let me discuss the quarter's results and then offer some additional perspective on our wealth management franchise.

Wealth management fee revenues for the quarter were up 23% compared to a year ago.

Wealth management assets were $101 billion at September 30, up 26% year-over-year.

The increase in this quarter was evenly balanced between net client inflows and market appreciation.

Where we were also pleased to have hired another significant wealth management team during the quarter.

As Jim mentioned, the growth of private wealth management has been an area of strategic focus since our divestiture from Bank of America Merrill Lynch in 2010.

Since year-end 2010, over 80% of our net inflows came from existing clients doing more with us and the acquisition of new clients, both from new and existing wealth advisers.

Over the same period, we have hired quite a few wealth management teams from many leading investment firms.

These new teams have supported our growth, while sharing their experiences from other institutions, which we have further integrated into our own best practices.

These additional insights have helped First Republic create a uniquely successful wealth management business.

What sets First Republic apart is our ability to provide a breadth of wealth management products and services, combined with high-touch banking.

This fully integrated wealth management and banking model contributes to First Republic's best-in-class overall Net Promoter Score of 72, which measures our industry level of -- industry-leading level of client loyalty.

So looking ahead, we continue to see growing opportunities to hire talented wealth managers, deepen client relationships and continue the expansion of our private wealth management business.

We are delighted with this quarter's results and to have reached this milestone through our dedication to providing extraordinary client service.

And now let me turn the call over to Jason Bender, Chief Operating Officer.

Thank you, Bob.

I'd like to provide an update on 2 key initiatives discussed last quarter: the rollout of our new online and mobile consumer digital banking experience, and the introduction of our new single-family loan origination system.

Additionally, I'll touch on efforts we're taking across the franchise to further empower our colleagues and continually streamline our processes.

This June, we began the rollout of our new consumer digital banking platform, which greatly enhances the online client experience, significantly improves our mobile offering and provides the ability to link outside accounts and more easily move funds.

To date, we have successfully converted approximately 1/3 of our online clients to the new system.

This carefully phased out -- phased rollout is on track to be completed in early 2018.

Importantly, the benefits of our new consumer banking platform extend beyond improvements to our current system.

We have also built the new platform in a way that gives us the ability to make ongoing iterative improvements as our clients needs evolve over time.

In May of this year, we began the rollout of our new single-family loan origination system.

This system is a key component in our plan to safely scale our operations and service model.

It provides First Republic with important capabilities, such as workflow management, paperless functionality and document preparation, along with automated compliance checks and control features.

We are currently processing over 60% of our home loans on the new system, and we plan to be fully transitioned by year-end.

While technology investments are important and essential, service begins with colleagues who are able to focus their efforts on building client relationships and who are empowered to take care of their clients' needs.

Earlier in the year, we launched an internal program designed with a clear mission in mind: How can we better serve our clients in an even more productive way?

Through this program, we have identified and implemented numerous solutions to further empower our colleagues and to improve operational processes.

Our primary goal is to maintain the speed with which we make decisions and process requests in order to continue to provide the decisive and responsive level of service our clients want.

In short, through efforts such as increasing authority limits, eliminating or reducing unnecessary forms and reengineering key operational processes, we're able to continue to reduce the amount of time we spend on administrative matters and increase the amount of time we spend with our clients and prospects.

Continued investments in technology and process improvements, along with an empowered workforce, support our consistent execution of extraordinary client service today and looking ahead as we grow.

And now let me turn the call to Mollie Richardson, Chief Administrative Officer and Chief People Officer.

Thank you, Jason.

I'd like to touch on how we are developing our next generation of relationship managers and provide an update on our corporate social responsibility initiatives.

As Gaye noted, our efforts to build the next generation of the bank's clients have produced meaningful results already, with significant opportunities ahead.

To serve these clients, this year, we expanded our internal training program to develop our next generation of relationship managers.

This comprehensive program is a mix of formal training modules and traditional apprenticeship.

We also partner our participants with more senior relationship managers so they can learn from experience and direct mentorship.

The 24 participants in our first class have 4 years of experience at First Republic on average, before entering the program, already embodying our client-focused culture.

Upon program completion, they will join our full team of approximately 175 relationship managers with the same mission of delivering exceptional service to clients.

Let me now provide an update on our efforts to care for our communities and colleagues as a thoughtful and responsible corporate citizen.

First, we are pleased to have launched a new green discount for all residential, commercial and construction lending projects that are LEED certified.

Caring for the environment is important to us and our clients.

This is something we are delighted to encourage through discounted loan pricing.

Next, and turning to our responsibility as an employer, we continually look for ways to foster a meritocracy-based, inclusive and diverse workplace environment.

This has always been a competitive advantage and a key to First Republic's success today and throughout our 32-year history.

Inclusion and diversity start with leadership.

We are pleased to have been recognized as a leader in gender diversity at the board level.

Our diversity at First Republic is reflective of our clients and our vibrant urban coastal markets, and it is evident in our workforce at all levels.

Let me share a few statistics as of September 30.

48% of our total workforce and 50% of our senior management team are female.

48% of our total workforce and 21% of our senior management team are minorities.

Our very diverse colleagues, in fact, speak over 50 languages, representative of the many different cultures at First Republic.

The power of diversity results in more thoughtful collaboration and teamwork.

A diversity of perspectives also helps drive innovation and gives us greater ability to anticipate our clients' needs.

Last, let me take a moment to cover a few key corporate governance enhancements.

Over the past year, we initiated a formal governance outreach program for our shareholders to hear and incorporate feedback in advance of the proxy season.

In response, and as seen in our proxy statement, we added a Net Promoter Score objective to our named executive officer bonus compensation.

At the start of last year, and understanding the ever-increasing importance of cybersecurity, we formed a board-level Information Security and Technology Committee.

This committee brings direct and active board engagement to various aspects of information security, including systems, management, employee training and client education.

Caring for our communities and colleagues as a thoughtful and responsible corporate citizen is a top priority for First Republic.

And now I'll turn the call back to Jim.

Thank you, Mollie, and thank you, everyone.

We are very excited about our numerous opportunities, which are ahead of us.

As always, we play the long game.

Our focus and our key objective is providing exceptional service to our existing clients.

These satisfied, existing clients drive more than 75% of our growth by growing themselves, by doing more with us over time and by referring their friends and colleagues.

In short, the more satisfied clients we have, the more new clients we acquire.

Overall, we're very pleased with the quarter and our ability to deliver stable, consistent results through our continuing simple, straightforward business model.

Now I'd like to open the line for questions.

(Operator Instructions) Our first question comes from the line of Steven Alexopoulos with JP Morgan.

I wanted to start by diving a bit deeper into the efficiency ratio.

So if we look at it, there are really been 3 weights on it, right?

We have margin pressure, we have expense growth and wealth management, I guess, to a lesser degree.

If I start with the margin pressure, it looks like the pressure this quarter really came from the deposit side, despite what Mike Roffler talked about with loan competition.

It looks like the money market and savings deposits went from 18 to 36 bps.

Maybe for Gaye, was that a onetime adjustment?

Or is this pressure likely to continue?

Sure.

It was a onetime adjustment.

As you know, we have lagged for about couple of years now, and so we have made an adjustment to our money market savings rates, which at an absolute level was well below the peer median for $50 billion to $250 billion banks.

And I would also note that the larger banks that have reported before us, they all have seen just holistic loan-to-deposit increase, somewhere between 5 to 9 basis points increase, which is in line with what we have seen, about 7 basis points increase, which over the past 2 years, it corresponds to a 10% to 15% type of beta.

Okay.

So we think about maybe a modest rise in deposit cost from here.

Maybe for Mike Roffler, how do you think about the trajectory of the overall margin from here, given some of the commentary on loan competition?

Well, why -- yes, I think there's 2 things, as Gaye talked about.

Deposit pricing and competition has ticked up a bit.

And the real pressure is you're not getting a great relief on loan yields.

Lending is extremely competitive for the type of business that we're doing and in the markets we're in.

And as we've said before, if you want A quality client, A quality business, pricing is extremely competitive because the largest banks want the same client base.

And again, it's one of the reasons we focused on our discussion.

Net interest income growth is really what drives the bank and drives our ability to continue investing in the franchise, and it is under a little -- the margin might be under pressure, but net interest income is growing very well.

And maybe if I may add.

The deposit beta impacts NIM.

However, the growth, the healthy growth in the earning assets impacts net interest income, which pays the bills.

And the healthy growth in the NII, the net interest income, may overcome modest NIM pressures, as you have seen in this quarter.

So Mike, is that the outlook then, modest NIM pressure moving forward?

Is that what you're saying?

That's correct.

Steve, it's Jim.

I would -- if I could.

If you look back over the last time the rates went up, our NIM, I think, bottomed at about 3.06%, 3.05%, somewhere in that range, and stayed there for a while.

And that wouldn't surprise if it happens again.

We're close now.

And so our -- the model is a little different.

As Gaye pointed out, actually, the absolute increase in basis points of the cost to our deposits is in line with the other 4 larger banks that have reported in the last sort of 48 hours or so, as near as we can tell anyway, up sort of 7, 8, 9 basis points.

The real issue is the loan side, as Mike said.

And on the other hand, the loan demand is extraordinary.

We actually raised our rates to slow it down a bit.

Jim, I want to talk a minute on expenses.

If we look at expense growth, whereas historically, expense growth as a percentage tended to pace about in line with revenue growth.

It's starting to outpace revenue growth by a fairly meaningful margin.

Do you view that as temporary as you're investing in businesses, such as Gradifi and All-in-One?

Or is there a new reality that, as an $81 billion asset bank growing 20% a year, you need to invest more in this company to drive that growth?

It's probably a little of both, but it's more of the former.

Gradifi is -- we're investing heavily in Gradifi.

It's a losing -- the company is losing money at its current operating size, and we predicted that for at least a couple of years.

But importantly, we put forth an advertising campaign that's working very well.

But nonetheless, it's expensive at this point.

The other investment area, you heard a bit from Jason in terms of technology, is we've had 2 rather meaningful things going on: the loan operating system improvements and the new online consumer banking.

Both are -- will have been rolled out by this time next year and probably in late spring, in fact.

The LOS, loan operating system, will be done by the end of the year.

The other one is the growth in wealth management relative to the total bank is inflecting the efficiency ratio a bit and probably, that will not reverse.

And then I would say the last one is we're building the new generation of clients, as Gaye referred to, quite strongly.

And that's basically, it's not -- it's an upfront expense in the sense of acquisition cost of a rapidly growing cohort on top of a not-yet-large base.

We've added about 5,000 households in the last year on a base of about 6 or 7. As we go forward, that 5,000 add, if it stays in that range will be on a base of 10 or 12.

So -- and they will be in their second year, and that is where they hit profitability for us.

So there's expenditure there, and there's some marketing there, but more bonuses and discounts to bring them in.

We -- I could not be more delighted with the results, however.

It's not possible to have better results than we're having, I don't think.

So Jim, if we tie this all together with the expense in All-in-One, which is clearly a drag, we'll see some lessening of pressure over time, how should we think about expense growth and the efficiency ratio in 2018?

I think -- I'll turn the mic, but I think it's probably going to run about the same as this quarter.

It's probably going to be in the 62-ish range.

The bank is bigger, but we're improving it very dramatically.

Wealth management is growing very nicely, but of course, the efficiency ratio is different.

And the young cohort is going to continue to cost us a bit.

I'm not too worried about that given the Net Promoter Score results of the bank, the high-touch service that we're delivering, the growth rates we're delivering.

And I would note that most $50 billion to $250 billion banks operate kind of in the 65% to 67% efficiency range.

Our next question comes from the line of Chris McGratty with Keefe, Bruyette, & Woods.

Just had a question on the deposit strategy.

Obviously, we're seeing from many banks this quarter pressure on deposit costs recognized through interest expense.

I'm interested in any kind of noninterest expense-related strategy that might be implemented at the bank, whether close to the expense line, more so from the marketing line.

I know some banks have gotten creative in terms of deposit gathering, offering promotion.

I'm wondering if there's any color you could elaborate there?

Sure.

We're always focused on consumer deposits, because they're diversified and they're here, given our business model, the client satisfaction and loyalty plays and the service nature plays an important role.

So there is promotions that we have for consumers to just give us a trial.

But that's business as usual.

We have had those for several years.

The increase in the deposit rate is really twofold.

As Steve asked in the question, it's a onetime.

We made an adjustment to the money market savings rate, which has lagged for several -- a couple of years now.

And also the CDs, we are keeping them, increasing them to be competitive with relevant benchmarks.

Great.

Jim, maybe an update on capital.

Obviously, the second quarter was tremendous.

You guys came to market a couple times.

This quarter, it slowed a bit.

But just remind us where your capital -- comfort with capital is maybe entering the end of the year.

Well, we're actually quite comfortable with capital at this point.

We have -- we did anticipate pretty good growth in the second half of the year, and that's what took us back to the markets in the second quarter, I guess, it was.

And so we're in pretty comfortable shape right now, it seems.

But as you know, we always are focused on the capital markets, and we never want to be caught short.

The -- in a positive manner, the pressure on the company now is coming from more business than we can do.

There is so much demand.

There is so much flow of business that we've raised our rates a bit on loans in order to slow it down.

That is, in a way, of course, the nicest problem you can have.

But we felt that coming and have capitalized for it.

But we always try to stay ahead of ourselves, too.

We never want to be short on capital.

And so we're -- we look at the markets all the time, as we have forever, as you've been following us quite a while, and you know that.

So we're likely to be in the market sometime in the next 12 months for sure.

Great.

And then maybe last one for Mike.

Maybe on the tax rate.

Obviously, the first quarter bumps around a bit.

But is this about a good rate for the fourth quarter?

Yes.

So we were -- we've been running slightly below 17%.

This quarter, it was just above 17%.

It really is a function of the employees and what exercise activity they have on stock options.

So that is -- will vary it from the 17% to 20% that we previously provided.

So I could see it being slightly higher in the fourth quarter.

Our next question comes from the line of Ken Zerbe with Morgan Stanley.

Just want to make sure I kind of connect all the pieces here.

So you had really super-strong loan growth this quarter.

But you're also saying that the competition for loan yields is really, really strong, and that's kind of keeping a lid on your growth -- or sorry, on the yields that you're getting on the loans.

Is it -- I mean, is it possible that you guys are just simply too low on loan pricing this quarter, and that's why you felt that pressure on the asset yields, where you should've just been a little bit higher, which could've offset some of the NIM compression?

As you know, Ken, the answer I suppose technically one loan at a time could be, we could've gotten -- we could've pulled back from that loan.

But our focus has always been, loans are a means to an end.

It's the acquisition of a household.

It's the acquisition of the client that we focus on and, of course, the servicing of existing clients.

The pressure comes more from the incremental new client than it does from the existing client.

But we -- the demand for loans is strong, however, the larger banks have found this asset class to be quite attractive, at least for now.

And as a result, we have competition from them, not just on rate, but on terms and conditions.

We are not following terms and conditions.

Their loan-to-value ratios are climbing.

Ours are not.

That's why Mike put that number in our presentation.

But if you're doing 59%, I believe it was Mike -- 55% -- 59% loan-to-value ratio average lending, that's clearly an A loan, and it gets A pricing.

Okay.

And then just second question on deposits.

Maybe just the outlook for deposit pricing for the high-net-worth client base, specifically.

Because, I guess, part of the concern is, the high-net-worth market might be a little more savvy or demanding in terms of deposit cost.

And I think I -- if I heard right, this was sort of a onetime adjustment in the money market rates.

But is -- like how confident are we that that truly is a onetime versus this is the start of kind of a more -- much more aggressive deposit pricing competition among that high-net-worth base?

It is actually no different than any other bank.

I would note that despite the adjustment that we have made on money market savings and continual adjustment on CDs, our increase in overall deposit rate was in line with the larger banks who reported so far.

Our next question comes from the line of Dave Rochester with Deutsche Bank.

Definitely appreciate all the color on the deposit loan pricing dynamics.

Was just wondering bigger picture, given all the dynamics you're seeing at this point, are you guys thinking you're still modestly asset sensitive with additional rate hikes?

Or would you say you're more liability sensitive now?

So we still run and we run asset sensitive.

But I think it's worth talking about (inaudible) that you saw.

It is a net interest income simulation.

We actually went back to this 12 months ago.

If you looked at the Ramp +100 example, for example, we about had that the last 12 months, our net interest income actually was 2% higher than that simulation projected.

And so we don't -- as we mentioned earlier, we don't think about this in terms of the margin, what drives it.

It's what happens to net interest income in that environment, and that clearly has outperformed what the projections had been.

So we consider our still -- so the long way of saying it, yes, we consider to still be slightly asset sensitive, reflecting a net interest income growing base.

Got you.

So I guess with future rate hikes, I know you're talking about NII growing, but it sounds like maybe there would be potentially a little bit more NIM pressure incrementally, again, from future rate hikes.

But NII, you still expect to grow.

That is a very good way of saying it, yes.

Okay.

Great.

And on the efficiency ratio trend, do you expect from here -- appreciated the updated guidance for this year and next year.

I know historically, you talked about the ratio growing as wealth management grew faster than the bank.

Are you thinking those efficiency ratio -- or the initiatives that you're talking about will ultimately offset that upward pressure, given your outlook for that ratio to remain the same next year versus this year?

I don't think it'll offset the pressure from wealth management.

And of course, in a sort of funny way, we would hope it doesn't because that would mean wealth management grows even more.

But we do think that the investments that we're making will flatten out.

Gradifi is the obvious one that should as well as the cohort of younger clients as the base grows upon which the incremental growth is a smaller percentage.

Okay.

Great.

And just one last one, real quick.

Was just wondering what your thoughts were on the impact overall on the deposit market with the Fed balance sheet unwind.

Are you thinking that represents a headwind at all to deposit growth?

How concerned are you about that at this point?

Well, the recent reports indicate that more to come on the normalizing of Fed's balance sheet.

In the near term perhaps, the effect on the mid- to long end of the curves appears to be somewhat muted, given that there's a strong demand on a global level for [such] (corrected by company after the call) security.

So while no one really knows, I think the business model that we have, that is relationship focused and very long term and half of our deposits -- close to half of our deposits are consumer based, that plays a big important role why we have checking stable at 60.5%, 61% year-over-year at a very stable base.

So you don't sound too concerned about what that overall deposit market can look like over the next year?

No.

Our next question comes from the line of Jared Shaw with Wells Fargo.

Maybe a different take on the deposit side.

I understand what you're saying about pricing and sort of that catch up.

But as we look at the deposit composition and the mix shift, should we expect to see that continue over the next few quarters to migrate more towards the interest-bearing deposits?

And then if we -- where do you ultimately see that flowing through in terms of what component, noninterest-bearing checking and interest-bearing checking, could be ultimately?

The answer is, as of right now, we do not expect a mix shift.

There is seasonality in deposits, so I would recommend that we look year-over-year.

So for instance, checking as a percentage of total deposits a year ago was at 61%, and we're at 60.5% today.

Okay.

So you're not expecting a big or continued significant change of migration, other than the seasonality?

Given the stability and despite the very competitive pressures in deposits from banks paying, for a couple of years now, high rate and given increased rate, we have been very stable, so we do not expect.

Okay.

And then shifting a little bit on the expense side.

With the growth on the salaries and benefits line this quarter, was -- how much of that was due to either a change in incentive comp versus new team hires?

So a big part of it is going to be increased incentive compensation from all the activities across the franchise.

There is probably 25%, 30% of it that's just new hires to the bank in general, as the franchise grows.

And then incentives are probably most of the balance of it.

The other thing I'd add is -- we talked about this last quarter, because it impacts the tax rate.

Most of our stock granting occurs in June -- May, June time frame.

So the full impact of that expense occurs in the third quarter.

Our next question comes from the line of Emlen Harmon with JMP Securities.

Just wanted to hit on the, I guess, loan growth outlook into the end of the year.

You guys historically have talked about kind of mid-teens for the year.

You're in the -- you're at 14% now, which I would say, you've kind of hit that.

Just given your commentary on strong loan demand, can we be thinking about something in the kind of high teens for a full year basis?

Or do you see any potential headwinds there?

It's Mike Selfridge.

I would say, going into the fourth quarter, our pipeline is strong, but we're sticking to mid-teens.

Got it.

Okay.

And then I think, Jim, you mentioned recently at a conference that the board was going to be reviewing its 5-year plan shortly.

Could you maybe just give us a little bit of color, kind of what the board's focus is when looking out that far?

And just kind of any changes in terms of the business direction relative to what you've been -- that you've been talking to us about?

The -- actually, we do a 5-year plan review every year and have for almost 30 years, we -- or at least 25, and we run it forward.

What it does is drive our thinking as to capital primarily, obviously, systems, et cetera.

But we don't see any major changes in the business makeup, other than mostly the focus on 2 things.

At the wealth management side, we would expect that the opportunities there are considerable.

And on the younger cohort of clients, that is picking up a lot of steam and will have considerable impact.

Already is, but will have a compoundingly greater impact over the next few years, particularly as they convert over to first-time homebuyers and fuller serviced clients, although we're starting with more than 4 products per client.

So I don't think that there's a lot of change.

I did mention Jackson Hole, where we'll open either in late '18 or '19.

But I think it stays the same steady state, but with technological improvements along the way as needed.

And in fact, many of them are in the works right now.

Our next question comes from the line of Aaron Deer with Sandler O'Neill + Partners.

Gaye, I just wanted to follow up on your comments with respect to the deposit flows.

The -- was there anything outsized in terms of customer activity that drove the decline in the noninterest-bearing accounts?

Or was that really just entirely a shift in repositioning into rate-paying accounts?

And I guess, partly, too, if you could elaborate on your comments regarding the seasonality of deposits?

Because if I recall correctly, last year, the third quarter had very strong inflows in noninterest bearing?

Sure.

So the first question, there's no particular segment.

It still continues to be, especially on the business side, continues to be very well diversified.

No one industry represents any more than 10% of our total deposits.

Again, having lagged for a couple of years now, and absolute level was lower than the peer median for $50 billion to $250 billion banks, it was time for us to do a onetime adjustment to the money market savings rate.

And again, CDs also represent a good portion of our deposits, too, which are repricing with the market.

So no one singular aspect to it.

And your second question was on the seasonality.

Again, it was more on the back of the mix.

It was pretty much stable, 60.5% now versus 61% a year ago in terms of the mix.

And the way I look at the deposit growth, what really makes us pleased about, is the deposit growth fully funding the loan growth.

Okay.

And then Mike Selfridge, the -- I was wondering if you could just give us a sense on the line utilization.

I think you said came down to 34%.

It typically runs, I think, between 30% to 35-ish percent, somewhere in there.

Where -- can you give a sense of where that is today?

And what's driving that?

Is it private equity that's a big component to that, that -- because I know last quarter, it was particularly outsized in terms of the usage.

And maybe just directionally, where you think that's going from here?

Yes, Ken, I think, on average, if you look historically, the range is sort of in the 27% to 42% range.

So that's always hard to predict.

I think 35% is a good average over the long term.

I would focus more on the business -- so your first question, yes, it's driven largely by capital call on lines of credits to venture capital and private equity.

Two, looking at the business line of credit commitments, which were up 26% year-over-year.

That's the more -- that's a better indicator of the growth in business banking.

And then the utilization will bounce around quarter-to-quarter.

Our next question comes from the line of Matthew Clark with Piper Jaffray.

Curious on the professional expense line uptick this quarter.

Wondered if there was anything unusual in that line item.

No, it's just continued investments that we talked about in the franchise is really driving it and slightly higher legal fees, but nothing unusual.

Okay.

And then can you give us your contractual loan yield in the quarter, just relative to last?

So as we talked about earlier, on new business, it's down about 4 to 5 basis points.

It was close to 3.30% in the second quarter on new business.

It's 3.25% on new business this quarter.

And so the portfolio yields are pretty much flat to where they were.

Okay.

And then you guys witnessed some pressure in securities yields, down about 10 basis points.

I'm curious what the drivers there, whether or not that was muni related.

Maybe you can give us a sense for what you're buying in the muni portfolio today and the rest of the portfolio.

I'll take the first part, and then turn it to Gaye.

But we talked about this, I think, briefly on our last Q&A.

The second quarter yield was -- benefited from a discount security that had some accelerated accretion in it.

Without that, it was about the same as this quarter.

So really this quarter, I would call a normal activity.

But I'll let Gaye talk about the new purchases.

Sure.

And to add to Mike's comment, the average market rate, second quarter average, third quarter average was also flat, in line with what we have seen in the investment portfolio yield, absent the accretion, the onetime accretion in the second quarter taken out of -- from the impact.

In terms of the muni bond portfolio, same as usual.

We have been always focused on AA+ credit.

Again, no changes, business as usual.

Our next question comes from the line of David Chiaverini with Wedbush Securities.

So with the increased pace of hiring related to the onboarding of fast-track relationship managers to service the younger cohort, how long do you expect it to take for these new RMs to break even?

The -- first of all, just to clarify, the fast-track RMs are, on the average, been here about 4 years.

So we didn't onboard them specifically.

As we move them into that track, we will have to replace them in the positions they were holding previously.

But that'll take time.

That'll take place over about a 6- or 12-month period.

So I don't think that is -- represents an acceleration of hiring.

I would point out that, that new cohort represents about a 15% increase in the number of relationship managers we have in the bank.

We don't expect them to be the last of that -- of such a group, by the way.

What we're doing is transferring over to them or assigning to them the new -- the younger millennial clients that we're acquiring through the student loan refinance as well as the preferred -- the professional loan program.

That is going initially quite well, but it's still sort of a work in progress.

So we're excited about it.

I think our other hiring has been kind of pretty much in line with the growth of the enterprise.

Nothing unusual here, actually.

And you mentioned earlier about how there's 24 in that class.

Do you been expect similar sized classes each year going forward?

Or will that increase or decrease?

No.

Just quite frankly, we don't know yet.

We like the size of this group.

We'll see how it works out.

It's going very well.

The training's working very well, and we will see what -- how they respond when they're in the marketplace full time, and then we'll judge from that.

Our next question comes from the line of Casey Haire with Jefferies.

Wanted to follow up on the All-in-One.

The growth to 9,100 households within 3 years, very strong obviously.

What is -- what do you guys see as the addressable market?

I know there's 44 million borrowers -- student borrowers out there.

But how much of that is -- fits your sort of First Republic niche?

And what is capacity per annum in terms of how much you could take on per year?

Let me answer the latter first maybe.

We think we can do a good job of onboarding, and most importantly, handling through the new cohort of RMs.

Somewhere in the 5,000 to 6,000 range right at the present time, and that's why we're building out the younger RM cohort.

The average age in that group, by the way, our group, is about 33.

It matches up, of course, very well with the clients.

The addressable market is substantial, probably in the order of at least -- think in terms of -- in our market of a loan size above [40], which is currently our minimum loan size; and a very high, very high credit standing and also in the job for 2 years at least.

Those are the standards.

We're getting about 760, 770 FICO.

That addressable market is at least a couple hundred thousand clients.

Okay.

Great.

And just, Gaye, question for you.

The HQLA looks to be a little overweighted at 13% of assets.

I think you had said 12% is the standard.

Is -- are you just getting ahead of it?

Or is 13% a new sort of go-forward rate?

We strive to keep our HQLA at or above 12%.

The volatility that you see in HQLA is primarily due to the changes in cash levels.

So if you were to strip out the cash volatility, we're pretty much stable in terms of securities contributing to the HQLA.

Our next question comes from the line of Tim Coffey with FIG Partners.

I had a - I want to talk about the growth in the multifamily and commercial real estate portfolios.

You've had very solid growth the last several quarters, and I'm wondering if that -- what that is a result of it is, specific geography or a shift in approach to booking some of those bigger loans?

No.

It's Mike.

There's no shift in approach, those numbers on multifamily and commercial can move around quarter-to-quarter.

So I'd turn you back to our 8-K filing and look at the profile of commercial, multifamily median amounts less than $2 million, low loan-to-value, strong debt service coverage.

And then just our clients, who are active in the market but waiting for opportunities.

Okay.

You're right they can move around but they've been rather robust about, let's say, the last 7 quarters.

So is there a specific geography that you're finding the most opportunity in?

I can't point to one geography.

I'd say it's pretty well diversified across our markets.

And again, that can move around quarter-to-quarter.

Longer term, it's good opportunities.

Of course, our markets are characterized by limited supply, so it's just a matter of our clients finding the right opportunities.

Right.

Absolutely.

And then Jim talked earlier about raising prices on certain loans.

I'm wondering what those loans were?

We slowed down mostly single family a little bit.

And we don't want to do that, but it's a matter of not -- of being able to handle well only so many.

Okay.

And then some more for Jim.

The question about the wildfires.

Did the winery clients that you have up there, do those loans require fire insurance?

On the buildings, yes.

And we have coverage on -- we have coverage in place on all of our properties.

And just as a matter of lending practice, we have the ability to force-place insurance if, for any reason, it were to lapse.

So we keep very close track of this.

What about business continuity policies?

Generally, no, generally, no.

But of course, you have a great deal of -- in winery cases, you have a great deal of land usually as additional value.

Mr. Herbert, there are no further questions.

At this time, I'll turn the floor back to you for any final comments.

Great.

Thank you very much.

Thanks, everyone, for taking part in the call today.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.