First Republic Bank (FRC) 2021 Q1 法說會逐字稿

Greetings, and welcome to First Republic Bank's First Quarter 2021 Earnings Conference Call. Today's conference is being recorded. (Operator Instructions)

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

Thank you, and welcome to First Republic Bank's First Quarter 2021 Conference Call. Speaking today will be Jim Herbert, the bank's Founder, Chairman and CEO; Gaye Erkan, President and Board Member; 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, which 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, please see the Bank's FDIC filings including the Form 8-K filed today. All are available on the Bank's website.

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

Thank you, Mike. Good morning, everyone. We're off to a very strong start in 2021, with terrific growth in loans, deposits and wealth management assets. First Republic's differentiated business model continues to perform very well. In addition to strong earnings, we're quite pleased today to announce a 10% increase in our quarterly dividend to $0.22 per common share per quarter. This is our tenth consecutive year of quarterly dividend increases.

Since 1985, First Republic's success and durability have been grounded in a culture of taking care of each client, one at a time, while continuing to operate in a very safe and sound manner. Our long-term, steady approach has led to consistent success through a wide variety of environments, including this unprecedented pandemic.

We are extraordinarily proud of our team's dedication, hard work and commitment to client service and to each other throughout this period. It's been absolutely amazing.

A key part of our success is to take great care of our people who in turn take great care of the clients. We're pleased to have recently increased our company-wide minimum wage to $30 per hour, up from $25, which we instituted in 2018.

The unwavering dedication of our clients is also the reason for our latest client satisfaction level as reflected in our very strong 2020 Net Promoter Score. This strong score once again validates our client service model. Our Net Promoter Score actually improved during the year and remains more than twice the U.S. banking industry average. Client satisfaction among those who identify us as their lead bank is nearly 2.5x the industry average. This satisfaction level leads to long-term, deep relationships and more referrals, which are the ultimate drivers of our growth.

Let me summarize briefly the first quarter results. Total loans outstanding were up 24% year-over-year. Total deposits grew 37% year-over-year. Wealth management assets are up 59% year-over-year, and they now exceed $200 billion.

This growth across the enterprise drove very strong financial performance. Total revenue, year-over-year, has grown 24%. Net interest income is up 25%. And importantly, tangible book value per share increased 14.5%, year-over-year. Our strength, safety and soundness continue to be reflected in strong capital, liquidity and credit quality.

During the first quarter, for instance, we raised an additional $914 million of Tier 1 capital. Our total equity increased 25% year-over-year, supporting our strong growth. We don't engage in share buybacks.

Strong credit has been, for almost 36 years, the core pillar of First Republic and is a key to our strong results and stability. Net charge-offs for this quarter were only $487,000, a fraction of one basis point. Nonperforming assets at quarter end were only 11 basis points of total assets.

During the first quarter, we did reduce our reserve for credit losses. This is the result of CECL guidelines, leading us to a much-improved economic outlook plus a substantial resumption of loan payments among our COVID modified loans. Mike will discuss this more in a moment.

Looking to the rest of the year, we are very optimistic. Our clients continue to be very liquid and quite active. Our markets are on a solid path to returning to normal, it would appear, and fiscal and monetary stimulus, as we all know, are very considerable. Overall, it's a great start to 2021, and we are extremely pleased.

Now let me turn the call over to Gaye Erkan, President.

Thank you, Jim. It was a terrific quarter that benefited from continued organic growth across the franchise, leading to strong net interest income and wealth management revenues. As Jim mentioned, this is the direct outcome of the exceptional service provided by our caring colleagues and the resulting satisfied and loyal clients.

Over the past year, while working mostly remotely, our high-touch service model has been further strengthened by our continued focus on technology and process improvements. For example, we implemented new digital features that further empower our clients, including the ability to connect with their personal banker directly and securely through our mobile app. This digital-to-human service delivery provides greater convenience by allowing our clients to bank in a way that is customized to their needs. Today, more than 3/4 of our clients are using our mobile app. Importantly, our clients know that there is always a trusted human at the heart of their relationship with us, even in the case of our digital experience.

We are a people-first organization and have always believed that our exceptional service starts with our colleagues. With that in mind, we continually do more to support and empower our colleagues so that they can do their best.

As Jim mentioned, we recently increased our company-wide minimum wage to $30 per hour. We also expanded our health and well-being benefits to support colleagues through this pandemic. And we enhanced our employee home loan program with more than 30% of our colleagues currently participating. By taking great care of our colleagues, we are empowering them to deliver unparalleled service to clients. This in turn leads to repeat business and more client referrals.

Let me now provide some additional comments about the quarter. Loan origination volume was $15.7 billion, our best first quarter ever. I would note that the average loan-to-value ratio for all real estate loans originated during the first quarter remained conservative at 55%. Single-family residential volume was $6.9 billion. Refinance accounted for 65% of single-family residential volume during the first quarter. The majority of the refinance activity continues to come from clients who formerly had loans at other institutions.

Turning to business banking. Business loans and line commitments were up 27% year-over-year, excluding PPP loans. The growth in outstanding balances was driven by a utilization rate of 38.5% as well as new commitments.

During the quarter, we participated in round 2 of the Paycheck Protection Program, helping our small business and nonprofit clients obtain an additional 4,500 PPP loans. Our efforts have provided a much needed lifeline for many during a difficult time. Since the program started, we have helped to support over 100,000 jobs.

In terms of funding, it was an exceptional quarter. Total deposits were up 37% from a year ago. We continue to maintain a diversified deposit funding base. Checking deposits increased by $9.5 billion in the first quarter and now represent over 67% of total deposits. Business deposits represented 59% of total deposits, up slightly from the prior quarter. The average rate paid on all deposits for the quarter was just 9 basis points, leading to a total funding cost of 24 basis points.

Turning to wealth management. Assets under management increased to $219 billion. Since January 1, 2020, assets under management are up 45%, of which fully 60% was net client inflow. During the quarter, we welcomed three new wealth management teams to First Republic. The strength of our integrated model continues to attract very high-quality teams.

Our first quarter results demonstrate the power of our service culture and the creativity, care and dedication of our colleagues.

Now I would like to turn the call over to Mike Roffler, Chief Financial Officer.

Thank you, Gaye. As Jim mentioned, we run the bank with strong credit, capital and liquidity at all times. In the first quarter, we're pleased to have raised $914 million of net new Tier 1 capital, including both preferred and common stock.

We issued the Series L preferred stock and redeemed the Series G during the first quarter. Following these 2 actions, we expect our quarterly dividend on preferred stock to be approximately $24 million going forward. We also raised $331 million of common equity during the quarter, and as a result, we expect our diluted share count to be approximately 179 million in the second quarter.

We are very pleased with the progress of our COVID loan modifications. At March 31, COVID modifications were down more than 75% from their peak and now represent less than 1% of the bank's total loan portfolio.

Let me touch on this quarter's provision for credit losses. Historically, the Bank increased its loan loss reserve by approximately $20 million to $30 million per quarter as a result of loan growth. This quarter, however, we reduced our reserves by $15 million as the loan growth-related provision was more than offset by 2 positive factors. First was the substantially improved economic outlook since year-end, which largely offset any necessary provision for loan growth. Second was the resumption of regular consistent loan payments following the end of the COVID modification period.

For some perspective, since we adopted CECL on January 1, 2020, we have recorded $142 million of net provisions over 5 quarters, while only recognizing $3 million of net charge-offs.

Net interest income was up a very strong 5% from the fourth quarter and 25% year-over-year. This reflects our robust growth in earning assets.

Our net interest margin for the first quarter was 2.67%. This is down from the fourth quarter due to the elevated cash position resulting from our exceptionally strong deposit growth. We continue to expect our net interest margin for the full year 2021 to be in the range of 2.65% to 2.75%.

Our efficiency ratio for the first quarter was 63.5%. We're very pleased with, given the extraordinary revenue growth in the quarter and over the past year, that our expenses have remained in line with said revenue growth. We continue to expect our efficiency ratio for the full year 2021 to be in the range of 62% to 64%.

Our effective tax rate for the first quarter was 21.9%. Under current tax law, we continue to expect our tax rate for the full year 2021 to be in the range of 20% to 21%. Overall, this was a great quarter and a very strong start to the year.

Thank you. Now I'll turn the call back over to Jim.

Thank you, Gaye and Mike. First Republic's time-tested straightforward business model remains very focused on delivering extraordinary client service while operating quite safely. The model continues to perform very well. We'd be delighted to take any questions. Thank you.

(Operator Instructions) And we'll take our first question from Steven Alexopoulos with JPMorgan.

My first question is for Mike Roffler on NIM. So just given where liquidity levels now sit as well as the shape of the yield curve, do you think the NIM has now bottomed? And Mike, how do you see the NIM trending through the year given the range you just reconfirmed?

So the first quarter, as we mentioned, was 2.67% and impacted by very strong cash levels given the exceptional deposit growth. And so it is depressed a little because of that. If you go back to the fourth quarter, for example, cash was about $7 billion and the margin was about 6 basis points higher. Go back to that level, and our margin for the first quarter is a little bit higher than 2.73%. And so cash is elevated now.

As you know, tax day has been deferred a month, so it's May 17 now. And so typically, what happens is we have a liquidity buildup. And then it goes out to pay the federal and state taxes. And so you see a little bit of an upward in the margin just from liquidity being reduced.

Okay. So it sounds like NIM from here should trend modestly higher, right, as that liquidity draws down a bit?

If liquidity draws down, I think that's right.

Yes. Okay. And then on the loan side, Jim, for years, you've pointed out that the company operates in many states that are supply constrained, right? With that said, all we're hearing now is that nationally real estate is supply constrained. This seems to be a much more pronounced issue. I'm curious, could this constraint impair your ability to grow mid-teens this year? Or is there just enough share where you don't think it will be a factor?

Good question, Steve. I think it won't be much of a factor. A couple of reasons. One, although we've done very well, we're still a small part of the markets that we operate in. And particularly, if you think about dollar share as opposed to unit share because a place like San Francisco is very constrained, but the prices are strong.

And the movement around the sale and transaction volume is down a little bit because of supply constraint, but the pop-up in rate and prices, I think, as we -- as soon as COVID fades into the background, will pick up volume. It's already beginning to do so. New York is a really good example of that. The volumes in New York have picked up considerably in the early part of the year. So I think we're going to be fine.

Okay. And then maybe one final one. Maybe for you, Jim. It looks like most of the COVID-impacted loans are moving back to paying full principal and interest. Are there any segments of the portfolio where you're not seeing loans on deferral resume full payment that you would call out for us?

Not really. The restaurants are slower and the hotels are slower, but they're coming around. And so I think it's pretty much across the board with those 2 exceptions, and they're not zero; they're just trending more slowly. They're small parts of our portfolio -- those are small parts of the portfolio, as you know, anyway.

And up next, we'll take a question from Dave Rochester with Compass Point.

Nice quarter.

Thank you.

You guys had some tremendous deposit growth this quarter, well above that H.8 data, which speaks to your ability to continue to take share there. I was just wondering if you had any sense for how much of that came from stimulus this quarter?

And I know 2Q deposit trends are normally a little soft with the tax payments that, Mike, you just mentioned. But I was just curious if you're still seeing some momentum in inflows there. And just given the economic backdrop, if you're still expecting to have these deposit growth this coming quarter despite some of that softness?

Let me take that. So yes, the deposit growth has been exceptional. And it was very well diversified, primarily driven by consumer and nonfinancial business clients and a healthy mix of growth between new clients as well as deepening existing relationships.

I'll also add that the average account balances are up in general, in the mid-teens for both consumer and business clients. Like all banks, we have been the beneficiary of the increased systemic deposit funding. But we're very well positioned because this environment has afforded us a unique opportunity to engage new clients and prospects, and we remain confident in our ability to grow and fully fund our loan growth going forward.

Okay. Fantastic. Maybe just a quick one on the borrowing side. I know you guys have mentioned last time expecting $5 billion in maturities this year. I was just wondering about the progression on that. And what kind of opportunity you might have to pay some of those down as you roll into '22 as well?

Yes, Dave. So at the end of March, we've got about just under $4 billion of FHLB that comes due this year. That rate is just under 1.80% and 3-year money right now is around 55 basis points. So if you refinance those down, there is some benefit to that to help protect the margin and keep it in that range that we just talked about.

And any sense for next year as well in terms of maturities?

Yes. Another just under $3 billion, at about 1.5%.

Okay, great. And then switching to refi loan growth. I know there's been some concern in the market on your ability to maintain strong loan growth trends, just given the expected slowdown in mortgage activity this year, but you guys clearly continued to execute on growing that book very nicely this quarter. Can you just talk about the trends you're seeing in that market today and what your outlook is as purchase activity continues to ramp up here in 2Q?

Yes. The economy rebounding has also led to continued strong demand across all of our markets. Our pipeline is up strongly year-over-year. Our 6-week rate locks are -- remain robust. They're higher than last year. And the composition of rate locks, purchase rate locks are up significantly. The refi rate locks are down slightly, but refi always constitutes a great opportunity for us to get new clients. So we remain confident in our mid-teens guidance because business overall is very strong.

Yes. Great. Sounds good. Maybe just one last one on margin. Where are you guys seeing new loan yields at this point and securities purchase rates, just given the uptick we've seen in the curve?

Sure. The -- so the -- on the marginal side, the asset side are coming in, in high 2s. So single-family, 2.75% to 3%, multifamily and CRE more 3% to 3.5% range. And on the security side, the munis are high 2s, around 3% and government agents HQLA is 1.5% to 2%. So the marginal side on the asset side coming in around 2.90%. And then the marginal cost of funding, as we have talked about the FHLB as well earlier, about 20 basis points or better.

So we remain confident on the 2.65%, 2.75% range for NIM for the year. And not to forget strong organic growth across the entire franchise, the NII is what pays the bills, the net interest income, and we have been very pleased with the strong growth in that, which offsets some fluctuations in NIM.

And up next, we'll take a question from Ken Zerbe with Morgan Stanley.

All right. Great. Maybe a first question for Mike. In terms of the reserves, if the outlook continues to get better for the economy, how much more room is in your reserves that could potentially come out? I guess I'm just trying to figure out like how much of the sort of the pandemic is still reflected in your ALL?

So it's a good question, Ken. So there's -- on the -- call it, the quantitative forecasting side where all banks are looking at an economic outlook, we're pretty much back to where we started on that aspect pre-COVID. So I don't think there's a lot of room on forward-looking economy because it's been such a strong recovery.

And the second thing, and this is maybe harder to see is every prediction we made before didn't end up as bad as we thought it might. So the portfolio is just that much stronger. There are a few COVID modifications that have some specific allocated reserves to them, but those are relatively modest in nature from this point going forward. And so we would anticipate if we kept growing the portfolio that there likely is some positive amount of reserve that gets recorded in future periods.

Got it. Understood. That helps. And then in terms of the expenses, obviously, ticked up and your revenue is higher certainly as well. Can you just talk about some of the new investments that you guys are making in the franchise, like something over the last, say, quarter or so that are sort of the new initiatives, specifically on the technology side?

Yes. I mean one of the things we're doing is we're obviously progressing through the core conversion in those costs, you see a little bit of an increase in professional fees. And some of our compensation costs are tied to that. That's a big one for 2021 from a project standpoint.

There's a very starting of the Hudson Yards expense in the first quarter, just in March, that will start to pick up here in the second half of the year. And then the third one that's maybe not as self-evident is given the revenue growth that you've mentioned, there is a variable nature to a bit of our compensation that's tied to the revenue growth, be it in wealth management fees, the very strong checking growth that we've talked about and loan volume, which year-over-year, I think, is up about 50%. So all those things sort of drive the expense growth that you see, which has matched revenue growth nicely.

Got it. Understood. And then just one last question. In terms of the deposit growth, obviously, it's incredible. I don't think there's any question about that. And you guys normally have sort of a very upward sloping trend when it comes to growing deposits. But when we think about the magnitude of deposits that have come on to your balance sheet, like, I guess, in second quarter, there could be some volatility given tax payments, totally fine. But when we think about the next several quarters, can you just talk about some of the factors that might drive that up or down from here? I mean, outside of your normal growth, I'm just wondering to what extent, like how much if there's any excess in there, just given -- I don't know, I mean, just given what's happening with the economy, where some of that growth could potentially be transitory.

So on the deposit side, you're right. So the tax outflows are shifted to May now, so May 15. So we're going to see some tax outflows coming in. And some of the average and median account balances being higher, and it's about mid-teens higher, both consumer and business sides year-over-year, that is benefiting from the stimulus in the market as well. But we are very well positioned to help manage client needs across different macro environments with both on and off-balance sheet liquidity solutions and optimizing our funding mix overall, whether it's the deposit side of it, which is about 90% of our liabilities and beyond.

I'll just add to that for a second or emphasize something Gaye has said. There's an unusually high savings level in society in general. It shows up in more consumer deposits, but it's there in business as well. The liquidity, the general liquidity in the system from all the stimulus is ending up in the banking system.

And we've gotten, I think, a bit more than our share of that because of the way that we operate and the trust that clients have in us. But nonetheless, as Gaye has said earlier, the average account size of the Bank is up. And what we don't know is how much of that is temporary or permanent. We are guessing that a fair amount of it will be spent and thus become economic stimulus, and that's, of course, how the system works.

So the last time we've seen anything close to this was a while ago. And in fact, we've never experienced this level of stimulus before. But it will flow out into the economy in due course. So our deposit growth in the future will not be this high.

And up next, we will take a question from Bill Carcache with Wolfe Research.

Could you discuss what overlaying a strengthening economy in the second half of '21 would mean for the trajectory of your growth? Could that be incremental to the trends that you're seeing now? Just curious how you're thinking about that.

It's a good question, Bill. It's going to be supportive of growth, of course. I think that the growth rate we've experienced this quarter as a relative number is high, actually, mostly in part because of the base we're operating with on a comparison, but also the housing market, which is -- the Bank is still strongly driven by single-family loan level volume, which we like very much. It's a very safe asset class that we've managed to work very successfully in.

I think that's going to continue. The supply constraint will be the primary limiting factor there, but we're taking share rather regularly, too. I think a strong economy means stronger loan volume, generally speaking. Is it directly parallel? Hard to say. But directionally, it is stronger.

That's helpful. I want to go -- separately, shifting to expenses. I want to ask a follow-up question. You guys have expressed confidence in the 62% to 64% efficiency ratio target for 2021. But could you more broadly speak to the longer-term sustainability of that range? We've seen over the years a bit of upward creep in your efficiency ratio for different reasons since you guys went public. But it would be helpful to know whether you think that 62% to 64% level can hold because that would suggest that more of your top line growth can drop to the bottom line without pressure that we've seen in the past from expense growth outpacing revenue growth. Would be helpful to hear your thoughts on that.

I think the last couple of years, we feel like we've been in a pretty good and consistent range, 62%, 63%, 64%. You're right, if you go back to our early public days, it was a little bit lower. As a smaller institution, you didn't have as many infrastructure and regulatory expectations when you're below $50 billion.

So we feel like we're in the right range because it allows us to continue to invest for the opportunities we see ahead of us in our markets for growth. And the great client service, we continue to deliver. All those things lead us to this pretty consistent range we've had the last couple of years and feel good about, given the opportunities that exist in our markets.

Understood. So all else equal, if the rate of expense growth just relative to revenues can hold in that level, then we should see more of the top line growth drop to the bottom line versus history when expenses maybe grew a little bit faster. Is that sort of a reasonable thought process?

I think so, but I think that it's also -- we think about stability and consistency over long periods of time, right? And so the margin has been pretty stable over the last couple of years. Our efficiency also. So we're investing at the pace at which our revenues are growing to support client service and to continue to grow the Bank, and that's how we think about it.

I'll just add for a second to that. If you think about it, managing growth of expenses and revenues aligned in a 15% to 20% growth company is very different than cutting expenses in a 5% growth bank in order to improve results.

That makes sense. Very helpful. If I could squeeze in one last one. Just out of curiosity, have any of your wealth clients expressed interest in gaining exposure to crypto assets? Any thoughts on how you guys are thinking about the potential emergence of crypto as a potential asset class in light of the CoinBase IPO today? That would be helpful to hear. Just high level how you guys are thinking about it.

Sure. I'll take that one. We're approaching the crypto or digital asset ecosystem with utmost care and focus on safety, soundness and compliance like everything else. So we do not lend to crypto companies. Clients, however, they can invest in crypto-related funds through their brokerage accounts, but we do not give fiduciary advice of such digital assets. And we're also assessing potential custody partners to help our clients with the regular purchase as well as do more comprehensive aggregated reporting for those.

But again, as I started, given our foundation of safety, soundness and rapid pace of the industry evolution, we're approaching it very methodically and conservatively while accommodating our clients.

And up next, we'll hear from John Pancari with Evercore Partners.

This is Tom Stephens on behalf of John Pancari. Just want to ask a quick question. Regarding loan originations, there was a slight drop-off in the multifamily in the quarter. I just wanted to get your guys' thoughts on loan originations going throughout 2021, specifically regarding the multifamily portfolio.

So we have been mostly active doing safe deals, mostly refinance with experienced owner-managers that value our service and our relationship model. So multifamily has been a resilient asset class on both coasts and our rate locks -- or actually, the 6-week rate locks are up year-over-year. So there is strong momentum. And the vacancies are coming off of the elevated levels. So there are signs of improvement that we are seeing, and it's a resilient asset class. So we'll continue to be active in that with a safe loan-to-value ratio. So we're very conservative, as you know, in credit underwriting.

And next question comes from Chris McGratty with KBW.

Mike, last quarter, you talked about the efficiency benefit by about 1 point from COVID and that making its way back into the run rate over the course of the year. I guess, do you have an update for that in terms of the pace of these deferred expenses that didn't occur last year and maybe contextualizing this quarter's efficiency ratio in the guide?

Yes. I mean, I think on this quarter's efficiency, one thing to remember too is, the first quarter is our highest period for payroll tax and 401(k), right? So there's elevation from that, that in the past and in this quarter has typically added about 1%. And that, that obviously smooths out over the year.

Relative to pandemic benefits, they're dissipating a little bit. Travel is still down, but it's $3 million or $4 million a quarter down. So it's not a big number. Marketing and advertising has been lower because we have less events. That will start to probably pick up the latter half of the year as things start to open up more.

So it's probably a little bit less than it was a year ago. One, because expenses started reducing in March last year. So your comps are starting to be more normal. And second is, obviously, the revenue base is much higher, so the impact is just less.

Okay. That's great color. And on the -- just kind of switching gears, capital call loans were up nicely again in the quarter. Can you just speak to kind of your outlook for that business, given all the liquidity that has been injecting into the economy?

Sure. The environment for PE and VC, both fundraising, deal activity and exit continues to be very strong. The fundraising is robust, even when done virtually as cash-rich investors are looking for returns. And it provides ample capital for investments with over $2 trillion of private capital dry powder today on the sidelines. And it fuels deal-making at a pace that actually exceeds pre-pandemic levels despite the high valuations, and funds are also realizing gains via multiple channels, whether it's equity markets, sales to buyers and SPACs.

So as a result -- and as you guys know us, we are underwriting with 90- to 180-day repayment terms with very strong GPs and LPs and with known relationships on the personal banking side. So we feel very pleased with the growth, continued growth and commitments as well as comfortable with our underwriting standards.

Okay, great. And maybe one just housekeeping item. The BOLI income last couple of quarters, is this -- just about the run rate we should be using $16.5 million, $17 million a quarter?

Yes. We have done some purchases over the last couple of quarters. And so $16 million, $17 million is a pretty good run rate.

And up next, we will take a question from Arren Cyganovich with Citi.

I was hoping you could touch a little bit about the de-urbanization trends and how that's impacting. Clearly, it's not impacting your growth. Are you retaining those clients that, say, move to -- on the West Coast to Idaho or East Coast to Tennessee? Maybe you can just comment a little bit about what you're seeing within multi -- sorry, within single-family there?

Sure. It's a complicated issue, as we all know. What we're experiencing almost daily is a regeneration of the cities. New York, San Francisco, L.A., Boston are all recovering incrementally and measurably almost every day. Companies are beginning to announce return to office programs that are actually a little more robust, I would say, than we expected.

The housing demand in the cities is now back. The prices are lower, which is, of course, stimulating demand, which is good. And rentals are down, and that's pulling people back in as well. There is some movement to Texas, Florida, Wyoming, et cetera, driven probably by tax policy, but also by opportunity. And that I think is going to continue. But it's not going to be the incremental element that changes a San Francisco or New York, in our opinion and observation.

And for folks that are moving out of your market, clearly, it doesn't sound like there's a huge amount that you're losing in the growth there. Are you actually retaining those customers within those markets...

Sorry, I should -- yes, we do retain them. We do retain them. Very seldom do we lose them. With digital banking, free ATM service, everything else, and a banker that they trust, we keep them. The distance is no longer a distance.

Yes. Just to add to Jim's comments on that side. Actually, we are doing the mobility study of our clients every year. And the majority of the movement we are seeing is within our markets to reinforce Jim's point. So whether it's moving from San Francisco, New York to places like Florida has seen a lot of moving in and Wyoming. And some are moving from city centers to suburbs. So we are in Manhattan as much as we are in Greenwich as well or Fairfield County. So we're able to serve these clients.

And again, to reinforce Jim's points on digital investments and technology for those who moved outside of our markets, which is the immaterial portion of that mobility, our continued investments in digital and technology allows us to serve them with the same exceptional service, given the human trusted adviser at the heart of the relationship with many years of trust.

And up next, our next question will come from Casey Haire with Jefferies.

I had a question for Mike on the securities book. It looks like you guys, just based on the average balances and the period end, that you took advantage of higher rates in March. Just wondering, given the improved liquidity position, is that something that you're going to look to aggressively continue in the second quarter here? Or is that just a onetime deal, just size of the securities book?

Yes. So as you know us, we are very steady when it comes to investments. So we have 2 ways; a, we look for opportunities, b, we also take into account, first, the lending opportunities to clients, and we want to keep a pretty ALM-matched book. So we're slightly asset-sensitive. So that drives the investment philosophy on the securities portfolio.

To your point, rising longer-term rates in the quarter allowed us to opportunistically purchase municipal bonds. In our investment portfolio, we made about $3 billion purchases, close to 3% TEY, just short of it. And it strengthened the NII growth. And given the marginal funding cost, it was right in the -- within the NIM guidance.

Our liquidity position remains very strong. It's driven to a great extent by the HQLA purchases that we're doing as well as the elevated cash levels. That's why you're seeing 15.3% HQLA ratio today, which, to some extent, reflects both the purchase and the elevated cash levels. So we feel comfortable with 12%, 12.25% and above that, that we're going to be disciplined to keep it above that level.

Great. And on the next-gen strategy, those 35,000 households, I think you guys have said historically that 10% of that has made their first home purchase. Is there an expectation that, that accelerates given the move to -- for home purchases? And I would think that would be -- there would be a nice tailwind for that client base to pull forward that life moment?

Yes, great question. We're actually very pleased with the success of our millennial strategy. Let me start with your question first on the deepening existing relationships with our expanded toolkit. Actually, I'm pleased to say that now over 20% of our millennial clients are now mortgage clients of the Bank, which is fantastic. So it's up from the 10% that you have quoted.

And at the same time, the millennial household acquisition continues to be strong as well, up 13% year-over-year, in a year where we launched the personal line of credit product at the same time. So the team did a great job bringing that to market. So with the expanded toolkit, with experienced, trusted advisers, where the millennials value the advice and the digital to human connection and mobile-first strategies that we deliver, we are confident that we are getting the same great clients younger in their life, which is key for private banking.

Okay. Great. So your 20% of that household base has converted or is converting towards a First Republic single-family product. Is there any attrition to where you're losing that to a competitor? Like I know you guys have a 2% annual attrition rate.

It's in line -- yes. So to confirm, over 20% of our millennial clients are now mortgage clients, whether they did with us or we refi-ed their loan. And in terms of attrition, it's in line with our overall clientele in terms of household attrition as well as the lead bank percentage and the lead bank NPS for millennial households are very much in line with our overall households, which is more than double the banking sector.

Up next, we'll take a question from Andrew Liesch with Piper Sandler.

You covered most of what I wanted to go over already, but on the wealth management front, there's been a, from what it appears to be, an increase in press releases of recent hires. I'm just curious, like what's been the trend of conversations with wealth managers coming on and joining First Republic. Has that accelerated compared to the prior quarters? An update there would be appreciated.

It's a continued momentum on the wealth management hiring. So we hired 3 new PWM teams in the first quarter. And our reputation continues to be very strong, and we expect to continue to add high-quality teams, but the pace of it is really -- you're seeing great reverse inquiry coming in and referrals from our existing wealth managers as well, but the pace is really driven by the cultural fit.

It's really important that we are the right fit for them, and they are the right fit for the First Republic culture. So that's going to be the key for the pace of the hiring. But we're seeing great high-quality teams and carrying conversations.

And our next question will come from David Chiaverini with Wedbush Securities.

A couple of questions for you. Starting with a follow-up on the capital call line business. So it was up in the first quarter, about $500 million, but growth slowed from the fourth quarter in which growth was about $2 billion.

So I was curious, you gave some commentary about the health of the overall private equity, venture capital, fundraising, all of those are strong. But just curious as to what was really the driver of the slowdown in the first quarter versus the fourth quarter, particularly if this is reflective of an industry slowdown or anything else?

So actually, both our outstanding and commitments went up, and -- both commitments went up and the utilization went up, so the outstanding is up because of those 2 factors. So we are seeing continued growth. The deal activity and the valuations from quarter-to-quarter, it also changes. But again, as I said earlier, we are seeing tremendous growth and the environment is quite strong on all fronts, whether it's fundraising, deal activity or exits. And we're seeing a healthy mix of existing clients deepening more relationships. But the fund formation and the deal activity in general, it does fluctuate from quarter-to-quarter, but it's continued growth year-over-year as well as quarter-over-quarter.

I think also one thing I highlighted earlier is the 90- to 180-day term. So if -- I think, David, you referenced a big quarter from September to December, well, some of these loans are getting paid back in the first quarter, right? Because of the short duration of the draw, they come back. And so I think when you consider that even growing as we did, continues to show the strength and depth of the market.

Yes. That's helpful. And then shifting gears. You mentioned about how the -- it sounded as if the pricing on loans is consistent in the first quarter versus the fourth quarter. And that's despite the 10-year treasury yield increasing nicely. I was curious if you can comment on how much of a timing lag there could be before we see an improvement in loan pricing, particularly on the mortgage product?

Yes. To your point, it does lag, the lending rates to mortgage rates to treasury yields selloff. So year-to-date, we have seen mortgage competition continue to be strong, which kept the pricing stable. So rates have been very much in line with the beginning of the year. That said, we'll see a benefit eventually as the yield curve steepens and especially as the multifamily activity continues to gain more traction and more momentum.

But again, we do A-plus credit with A-plus pricing, a lot of relationship pricing there. So we are pleased that the marginal yields, the high 2s, coupled that with about 20 basis points on the funding side on the marginal funding side, so that falls right in the NIM guidance, the 2.65% to 2.75%. That coupled with strong, safe organic earnings asset growth, the net interest income follows.

And our next question will come from Jared Shaw with Wells Fargo Securities.

I guess most of the stuff we've hit. I guess, Mike, just circling back on the provision going forward. You referenced the $20 million to $30 million sort of standard provision for growth. As we look at origination activity so being stronger and maybe a shift where non-single-family residential makes up incrementally bigger parts of that origination. Is that still the right range to use? Or should we be looking at like maybe more of a 54 basis point range to impact or to account for the growth?

Yes. So I think the $20 million to $30 million does sort of give you that latitude if the mix were any different. I think we've been -- I think this quarter, 70% of our growth was single-family, and that obviously has a pretty low reserve estimation on it. And you actually did mention something else. We're -- on January 1, 2020, we were 54 basis points of reserve to loans, and we're right back there at this time. This feels like the right range. And then depending upon mix, it could go down or up ever so slightly, most likely.

Okay. Great. And I guess maybe just looking at the pipeline today, you mentioned 65% of single-family origination was refi. Is that -- are we already seeing that sort of bleed out in the pipeline here? Did most of that happen at the beginning of the quarter? Or is there still a little bit of rate promo in the pipeline?

Yes. We see that as well that refi usually picks up a bit as rates are going higher as well. But overall, when you look at from last year, so our refi rate locks have declined slightly from last year. But at the same time, purchase rate locks have shown tremendous growth, which is almost double what they were from a year ago.

So -- and there's a strong spring buying season coming in. We talked about the economy rebounding. Refinance does slow down over time as rates are going up, but it has a natural floor because we do, do a lot of refinance of clients, new clients to the Bank from other institutions. So overall, given all these dynamics, we remain confident in our mid-teens loan guidance for the year.

And next, we will hear from Brock Vandervliet with UBS.

On the wealth management side, a couple of people have touched on this, just -- very strong growth. I just want to make sure our model doesn't get offsides with your own expectations. Is there anything else you would call out as special this quarter in terms of the balance growth that we should note going forward?

So let me start with the AUM growth, and then I'll turn to Mike for the fee side. So -- it's very much in line. So we have seen a majority of the growth coming from net client inflow, deepening existing relationships as well as the net client inflow coming in from the new hires. And about 1/3 of our AUM growth came in from the market change when I look at quarter-over-quarter. And on the fee side, we have seen tremendous growth across all different pillars.

Yes. Maybe just one sort of cleanup thing since you sort of referenced it that way, Brock. The first quarter -- if you recall, last quarter, we had a year-end performance fee for one of our funds that we operate. This quarter, there's a modest adjustment to that because we sort of finalize year-end numbers and review it. That added just under $4 million to our investment management fee this quarter that won't recur. So your starting base is probably closer to $115 million instead of $119 million as you go forward, and then factor in AUM growth on top of that. And just as a reminder, most of that $4 million -- most of that $4 million does flow through our expenses also.

Okay. Great. I appreciate that color. And sort of a similar question on occupancy, which has been very well controlled. You mentioned the Hudson Yards office a couple of times in the prepared remarks. Can you mention that expense?

Yes. So our occupancy, right, has been pretty consistent the last few quarters, $56 million, $58 million. There is a modest amount in March in the way we recognize rent cost for Hudson Yards. It will ramp in the second quarter more fully. So you'll probably see occupancy jump, let's call it, $8 million roughly from today's first quarter level.

And up next, we'll hear from Jon Arfstrom with RBC Capital Markets.

Gaye, a question for you, just a clarification on some comments you made earlier. You -- with the shape of the curve, the steepness of the curve the way it is today, would you expect earning asset yields to slowly grind higher over time?

Yes. With the yield curve steepening, that is what we are looking forward to. But as I said, competition has been quite strong. So that kept pricing pretty stable at the beginning of the year. So that's why the high 2s, the 2.9% to sort of 3% range has been kind of where the asset side yields have been coming in on the real estate side. But I mean, the 160 bps steepness when you take 10-year Fed funds today compared to 80 bps a year ago compared to no steepness in '19, that really shows how strong competition has been.

And we're doing A-plus credit and relationship pricing. We're seeing more of the relationship coming through to us, given the service -- extraordinary service our colleagues have provided during the pandemic. But again, small fluctuations in that NIM is largely offset by the strong, safe organic growth across the franchise, which we have tremendous growth opportunities across all of our markets.

If I could add to that just for a second. If you look at our investor deck on Page 34, we have a long historical NIM chart in there, and that's really worth noting. At this point, we're at a low point in that history at 2.67%. But at high point, it's also about 3.15%, 3.13%. So we operate in a pretty narrow and stable range. That's one of the keys to the franchise is its long-term stability and predictability.

Great. Good. And it gets to my next question, it's maybe a bit of an odd question, but what do you think would have to happen for deposit costs and funding costs to start to go back up? It just seems like there's so much liquidity that maybe even rise in short rates wouldn't send your funding costs back up. What would have to happen for that to move back up?

The -- well, let me answer this. So the stimulus, obviously, we talked about the average balance and the median balances being up compared to a year ago, kind of translated through the savings rate in the accounts. So that could basically, to some extent, reverse itself. More competition for funding as rates are going up. But again, as we listen to the Fed Chairman, it's going to be a while before the short end of the curve coming up. But hypothetically speaking, alternatives whether it's money market mutual funds or other alternative competition in there, that could also yield to higher costs.

But putting costs aside for a second and the percent checking is much higher than we used to have at over 67%, so that's kind of driven by the stimulus as well to some extent. So we're not going to have 37% year-over-year growth, which is kind of driven by stimulus. But at the same time, we have expanded our toolkit so much on the funding side, deposits and beyond, we remain in the A-plus credit on the asset side and the safety and soundness of the bank. The funding has not been an issue, it's just a matter of the pricing, as you point out.

The matching and -- the core matching in the enterprise, asset liability matching, would indicate that a rising rate environment benefits us slightly on net interest income and margin. And the primary reason is the thing Gaye mentioned, which is the high percentage of checking.

Yes, it looks positive in the near term. That's certainly true. And then just one bigger picture, maybe for you, Jim, but the industry, in general, has a bit of a near-term loan growth problem, and it's not been a problem for you, clearly. But there's this view that there's a lot of pent-up demand in commercial and seeing pipelines building and that we're going to see a lot of this loan growth pick up once the reopening really gains traction. Are you seeing elements of that in your business? I understand your mid-teens growth and it's a mosaic of growth. But are you seeing elements of that in areas like commercial, for example?

A little bit, but not too much yet. But we're -- a lot of the commercial loan business is really done in the CMBS market and outside the banking system, too and the insurance market. So you have to -- so the banking system does not see at all the same share of commercial lending -- real estate lending, that is -- that I used to see. I think our growth comes from client service.

If you -- again, in our investor deck, but about 80% or more of our lending is either to existing clients every year that are doing more business with us. That's about 50% to 55%. And another 20% to 25% is their direct referrals. So to some extent, we march inside of our business and their referrals and not so much in the general market. And that's why our growth rate can be fundamentally different.

This concludes the Q&A portion of the event. I will now turn the call over to Jim Herbert.

Well, thank you all very much for taking the time today. We appreciate it. Have a good day. Buh-bye.

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