First Republic Bank (FRC) 2020 Q4 法說會逐字稿

Greetings, and welcome to First Republic Bank's Fourth Quarter and Full Year 2020 Earnings Conference Call. Today's event 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.

Thank you, and welcome to First Republic Bank's Fourth Quarter 2020 Conference Call. Speaking today will be Jim Herbert, the Bank's Founder, Chairman and CEO; Gaye Erkan, President and Board Member; and Michael Roffler, Chief Financial Officer.

Before I hand the call over to Jim, please note that we may make forward-looking statements during today's call that are subject to risks, uncertainties and assumptions. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, see the Bank's FDIC filings, including the Form 8-K filed today, all available on the Bank's website. And now, I'd like to turn the call over to Jim Herbert.

Thank you, Mike. 2020 was a very strong year for First Republic. We have been consistently profitable each year for the 35 years since our founding in 1985. 2020 loan origination volume was over $50 billion, a record. Importantly, we were able to fully fund our loan growth with deposit growth. Wealth management assets grew more than $43 billion during the year and are now just short of $200 billion. Importantly, the majority of the growth during the year was driven by net client inflows.

This year has proven, once again, the resilience of our high-touch, client-centric service model, both delivered in person and through digital channels. The trusted relationships between our bankers and our clients have proven to be more important than their social proximity. In fact, early results show that our 2020 Net Promoter Score, the measure of our client satisfaction, is at least as high as the prior year. This client satisfaction level is more than twice the banking industry's average, and is our growth driver.

Gaye will discuss in a moment how we are further using technology to enhance this client service experience. Our continuing, consistent performance under a wide range of economic conditions demonstrates the stability and long-term nature and power of our client service model.

Let me cover a few metrics for the year. Total loans outstanding were up 22%. Total deposits have grown 28%, and wealth management assets increased 29%. This strong growth, in turn, has led to strong financial performance.

Year-over-year, our revenues grew 17%. Net interest income grew 18%. And the real bottom line, tangible book value per share has increased more than 14% during the year. Most importantly, our credit quality continues to be exceptional. Maintaining consistently strong credit in all economic and market environments is a hallmark and a focus of First Republic.

Net charge-offs for the entire year were only $2.4 million, less than 1 single basis points of average loans. During the year, we did add $157 million to our reserves. In the fourth quarter, we actually had net recoveries of $600,000, and nonperforming assets have ended the year at only 13 basis points.

Our capital remains quite strong. At year-end, our Tier 1 leverage ratio was 8.14%. This includes the benefit of 3 successful capital raises during 2020. Mike will touch on these in a moment.

I would note that First Republic does not engage in common share buybacks.

As we head into 2021, our clients remain very active and our loan pipeline is quite strong. Our pipeline is up from the same time last year. The lower rate environment continues to represent a terrific opportunity for single-family residential purchases and refinance. Single-family residential lending continues to be the primary driver of our growth, representing two-thirds of our loan growth during the year.

I would note that loan originations have some seasonality, with the fourth quarter typically being quite strong and the first quarter typically being a little bit slower.

December was the 10th anniversary of our second IPO, which we did shortly after we bought First Republic Bank back from the BofA in 2010. During these 10 years, total loans have grown 20% compounded annually, total deposits have grown 20% compounded annually, and total bank assets have grown 20% compounded annually, and wealth management assets have grown 28% compounded annually.

Our shareholders have also done well. In 2010, we went public at a price of $25.50 per share. Shareholder value has compounded at 21% per year since that time, including dividends. This is more than 2x the S&P 500 during the same period and nearly 3.5x the KBW Bank Index for the same period.

These results reflect our steadfast focus on delivering extraordinary client service, which, in turn, drives consistent organic growth.

Overall, it was a very successful quarter and a very successful full year. Now let me turn the call over to Gaye Erkan, our President.

Thank you, Jim. 2020 was indeed a very successful year for First Republic. We delivered record results, while also supporting our colleagues, clients and communities during this challenging time.

For example, in 2020, we are pleased to have welcomed more than 600 net new colleagues to the organization, and rolled out a number of new benefits to support the well-being of our colleagues. We made more than 4,000 client-friendly loan modifications for our clients impacted by COVID. We delivered over 11,500 PPP loans to small business and nonprofit clients. We did this all while originating a record number of loans.

Let me now turn to an update on lending. Loan originations for the year, excluding PPP, were $51 billion. Single-family residential volume for the year was a record at $24 billion. Refinance activity, which was particularly robust, accounted for 66% of single-family volume during the year. As we have noted before, refinance continues to be a strong means of acquiring new clients. In terms of credit, we continue to maintain our conservative underwriting standards. The average loan-to-value ratio for all real estate loans originated during the year was just 55%.

Turning to business banking. Growth of loans and line commitments was very strong, up 28% year-over-year, excluding the Paycheck Protection Program. During the fourth quarter, business line utilization increased to 38%. This is in line with our historical utilization range of mid- to high 30s.

In terms of funding, it was a record year. Total deposits were up $25 billion, or 28% from a year ago. We continue to maintain a diversified deposit funding base. Checking deposits represented 67% of total deposits at year-end. Business deposits represented 57% of total deposits at year-end. The average rate paid on all deposits for the quarter was just 11 basis points, leading to a total funding cost of 31 basis points.

In wealth management, assets grew 29% year-over-year and are now over $194 billion. Well over half of this growth came from net client inflow. Our integrated banking and wealth management model continues to attract very successful wealth managers. During 2020, we are pleased to have welcomed 8 new wealth management teams, including 2 teams in Bellevue, Washington, a key part of the greater Seattle market. We plan to open a preferred banking office in Bellevue later this year to further establish our presence in the market.

As we grow our business safely and organically, we continue to make investments to further reinforce and scale our differentiated service model through an agile tech strategy and continuous process improvements. Our strategy is focused on using technology to enhance human-to-human relationships between clients and our bankers, not to replace them. We are doing this by empowering our bankers with actionable insights and tools to reduce transactional time and maximize emotional time with their clients, and also by rapidly developing and rolling out additional digital capabilities, which allow for a customized and convenient experience for our clients.

2020 demonstrated the effectiveness of this strategy. During the year, and in the midst of the pandemic, approximately 70% of our mortgage applications were submitted digitally. We redesigned our corporate mobile app, leading to an increase in active users by more than 40%. We tripled the number of digital deposit account openings. We released one new digital banking feature per week on average. We doubled task automation and gave back 150,000 hours annually to our bankers to further delight their clients. These time savings are equivalent to a 1.5% workforce expansion.

These achievements were enabled by our unique tech strategy, continued operational investments and focus on omnichannel client experience with enhanced connectivity to their trusted bankers. As a result, over the past several years, the number of client households served per banker has increased significantly, while we have maintained our Net Promoter Score consistently double the industry average, as Jim mentioned earlier.

Overall, thanks to the hard work and dedication of everyone at First Republic, we have successfully navigated a challenging year. Now I would like to turn the call over to Mike Roffler, Chief Financial Officer.

Thank you, Gaye. Let me review the results for the year and quarter and also offer some guidance for 2021. Our capital position remains strong. During the fourth quarter, we successfully raised $225 million of common stock and completed the redemption of the Series F preferred stock. In total, during 2020, we added over $900 million of net new Tier 1 capital. Liquidity also remains strong, as high-quality liquid assets were 12.8% of average total assets in the fourth quarter.

Our credit quality remains excellent. Our provision for credit losses for the fourth quarter was $35 million. This provision was driven almost entirely by our strong loan growth. As Jim mentioned, for the entire year, net charge-offs were only $2.4 million, one-quarter of 1 basis point of average loans. Over this period, we added $157 million to our reserves.

We're pleased with the progress of our COVID loan modifications. At year-end, COVID modifications totaled only 1.1% of the total portfolio, down from 3.7% on September 30.

In 2020, loans were up a very strong 22%, excluding PPP. For 2021, loan growth is expected to be in the mid-teens range.

Our net interest margin has remained stable at 2.73% for the fourth quarter and 2.72% for the full year 2020, in line with our guidance. For 2021, our net interest margin is expected to be in the range of 2.65% to 2.75%, consistent with current levels. Within this range, our net interest margin may be influenced by higher cash levels as a result of current economic conditions and government stimulus.

Our efficiency ratio was 61.6% for the fourth quarter and 61.9% for the full year 2020. As a reminder, the efficiency ratio has benefited from reduced marketing, travel and events due to the pandemic. For 2021, the efficiency ratio is expected to be in the range of 62% to 64% as we continue to invest in our business and regulatory infrastructure.

Our effective tax rate was 20.2% for the full year 2020, in line with our guidance. For 2021, we expect our tax rate to be in the range of 20% to 21%, assuming no change to the corporate tax rate.

Overall, it was a very strong year that speaks to the sustainable power of our client service model. Now I'll turn the call back over to Jim.

Thank you, Mike and Gaye. It was a strong quarter and a strong year. First Republic's simple, straightforward, very client-centric business model has proven to be consistent in a wide variety of environments. Delivering exceptional client satisfaction - one client at a time, year in and year out - is the driver of our growth and success.

Our high-touch model is being further enhanced, as you heard from Gaye, in our growing digital capabilities. Looking ahead to 2021, we expect to continue to deliver safe, organic growth coupled with very conservative underwriting standards and strong capital at all times.

Now we'd be happy to take your questions.

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

So Jim, one of the hallmarks clearly of the franchise is consistency. And when I look at the macro backdrop for 2021, the one variable that may not stay consistent are longer-term interest rates. And if we look at 2020, right, over two-thirds of the loan growth was from single family. So can you walk us through -- I know Mike said mid-teens loan growth, again, is the guidance for 2021. But how do you see that playing out if we see a material increase in mortgage rates?

If you see a material increase in mortgage rates that the competitors pass-through, remember how liquid the system is. Why, you will have a rise in rates at the -- you'll have a rise -- a slowdown in refinance. Purchase finance may not slow down all that much because demand is very high. The problem on the purchase side is supply, actually, not demand. I would think that the -- 66% of our loan business in single-family this year was refinance. That would probably slow down, and, in fact, we think it may anyway because the rates are already up a little bit.

We don't worry about a move that will be destructive to the market. Rates -- mortgage rates are going out at the high 2s, low 3s, but mostly high 2s. I don't think the low 3s to the mid-3s slows down purchase finance very much. It does slow down refinance, I think.

Okay. That's helpful. And maybe for Mike Roffler, if we stay with the theme of potentially rising rates, assuming that happens, we'll see. But given that gain on loan sales have been so elevated, how much of a rise in the 10-year do you think we would need to see before you would start to see that translate into NIM expansion? And I recognize this is as much art as science, but any color would be appreciated.

Well, I think one of the things Jim said that I think is important to think about is the competitors and how do they feel about pricing in the market. So even though the 10-year has risen in the past couple of weeks, I don't think you've seen much change in mortgage rates to the consumer or clients at all. So I think it will be very dependent upon what happens with competitors and do they pass that through or not.

Okay. Got you. Okay. And then finally, for Jim, and I think I've asked you this every quarter since COVID really broke. But if we think about credit, how do you see the rest of the cycle playing out from here, particularly when we think about commercial real estate, whether it be New York or San Francisco?

And if we get -- I think Biden administration may announce $2 trillion of additional stimulus tonight. Does that eliminate a cycle? Do we still have losses coming? You've been through so many cycles, how do you see this playing out from here?

It's hard to call, of course, it's just an estimate. But it does seem to us that certain asset classes that were particularly disadvantaged are beginning to find price points. Hotels, very limited quantity, but they're trading down, obviously. The biggest one -- the biggest unknown is clearly retail. We don't have an opinion on that, to be honest with you. It's got to just find its level that's going to work, and I don't know what that is.

Office space is clearly available in the cities we operate in. We can't speak about others, but the cities we operate in, there's, all of a sudden, a bit of an excess of office space. New York is particularly, I think, hit hard. But it's also -- but rental, particularly in new A buildings are finding a rental level that is being signed up, probably down 15% from what it was before.

The question is, how far down it will ripple in the quality stream from A to B to C properties. And that's not yet clear. Single-family is another matter. It's picking up pretty good, even in New York. But I think that the cycle is probably within a quarter or 2 maximum of bottom would be our opinion.

We will now take our next question from Christopher McGratty from KBW.

Mike, maybe a question on the efficiency. I think your initial 2020 guide was 63.5% to 64.5%, and you outperformed that by 150, 250 basis points. I guess, number one -- the first question is, how much of that would you attribute to just the COVID-impacted relief on certain expense items? But then secondarily, positive operating leverage is pretty notable for the year, which has -- in the past, not been as significant. How do we think about positive operating leverage potential in '21?

So thanks for the question. I think that you're right, being just under 62% for the year definitely did benefit from a lack of travel, a lack of in-person client events. My guess is, we're at least 1% higher if you have those items at a normal rate.

In terms of positive operating leverage, obviously, we're pleased with the year. I do think those costs will start to come back in 2021. And that's probably later in the year, they'll start to come back because of vaccines and people wanting to get out. So I think that's why the range sort of went to 62% to 64%.

We also are continuing to invest in the franchise. We've talked about on several calls, Hudson Yards coming online this year, the core conversion being worked on. And so we're continuing to support the franchise and the way we think that the range is appropriate for next year. And the other side that's important is the margin being relatively stable.

Okay. If I could just ask a follow-up on the margin? The momentum on the deposits has enabled you to reduce higher-cost borrowings. Any comments about the ability to further remix the liabilities towards your 11 basis points cost to deposits versus north of 1 on the borrowings?

Yes. I think we're really pleased with the deposit growth, which has allowed us to reduce our FHLB advances, which are a little bit higher cost. I think next year, we have about $5 billion that comes due. So you'll either renew at lower rates or we'll remix those. And as we look at optimizing our funding, if deposit growth remains strong, you can reduce those even further to keep your funding costs at a pretty low level.

And where would those refinance costs be today if you were to swap them out?

Term FHLB is, if you are sort of in a 4-year range, is probably around 50, 60 basis points.

The way you may want to think about it is the spot deposit rate is at 10 basis points, average was 11. And where we are seeing incremental asset yield coming in at about 3%, call it, and incremental funding costs at about 30 basis points. The 2.70% is right smack in the middle of the 2.65%, 2.75% range. But that's one driver of the equation. The other driver is the safe and sound earning asset growth that's driving the NII. And we'll continue to invest into our biggest strength, our people and our service model. So we'll continue to make investments, whether it's core Hudson Yards and whatnot because we're more long-term-driven than short-term investments.

We'll now take our next question from Bill Carcache from Wolfe Research.

I wanted to ask about growth, in particular, next-gen, which represents 34% of consumer borrowing households. How high does that mix go from here? Any color you can give on the trajectory that you expect would be helpful. And sort of along these lines, I don't think next-gen household growth was a focus of yours in the last cycle. So any thoughts around how you think the low rate environment is impacting next-gen growth? And what kind of impact, if any, you would expect from a higher rate environment?

Absolutely. So we're very pleased with the success of our millennial strategy. Over 35%, close to 40% of our borrowing households are millennials, which is a significant increase compared to 2015 type of levels. And our millennial strategy goes way beyond the interest rate environment. So we have seen some trend in terms of the suburbs, some clients are buying secondary homes, but the millennial population with kids, for instance, are accelerating their first time homebuyers, especially in the suburbs, which we have been able to help those clients. And in order to serve these clients, we have also been continually expanding our toolkit. So for example, we have included personal line of credit in addition to professional loan program, robo-advisor and financial planning products. And we see that we are getting the same great next-gen clients who are actually slightly further along in their lives, and closer to buying a home or already refinancing with us. So -- and the digital investments in the next-gen population, while they all value the human-to-human relationship, at least the clients who choose First Republic, digital and mobile-first is important. So all the investments we have been making all along have been paying off handsomely in serving our clients in the next-gen population.

Got it. And presumably not all of your next-gen households are high net worth. Can you give a sense of the extent to which you're seeing some of those next-gen households eventually becoming high net worth?

So -- absolutely. So our clients are urban coastal professionals, highly employable, highly educated, conservative prudent financial decision makers. So whether they're millennials or baby boomers, actually, the earlier we catch them in their life, we grow with them, and they grow with us, trusting us as their trusted adviser. So that's the most important key. So as we have seen in our Eagle Lending, the way that we have successfully navigated the COVID environment, our clients have been very prudent financial decision makers. So we will continue to grow with them and create routes for them.

And lastly, if I may. I think you gave a little bit on this kind of new money rates that you're seeing on lending and securities. But I was wondering if -- on the securities portfolio specifically, if you could discuss how you're thinking about reinvestment risk given the dynamics around anticipated maturity schedules and call provisions.

Sure. Absolutely. So we're seeing -- and we're looking at it across the asset side. So we're seeing HQLA at about 1.25% to 1.5% government agency HPLA munis that we're seeing a majority of purchases being HPLA munis in the 2.75% TEY type of range, although with the 10 years selling off a bit. So that's helping the yields compared to single-family at 2.75% to 3% range and multifamily and CRE at 3% to 3.5%, but majority of the originations have been single-family residential originations and some multifamily refi.

So earning asset yields are coming in around 3%, with incremental funding costs at about 30 and slightly better. So thus the range at 2.65%, 2.75% on the NIM, with strong earning asset growth.

And then the dynamics around some of the reinvestment risk given the maturity schedules and call provisions? Any color on that?

So I would just comment. I mean, obviously, we do have repayments of government agencies and things like that. You haven't seen our investment portfolio grow as much the last couple of quarters, if at all, because frankly, we found a better way to put that money to use from a liquidity standpoint and to client activity and client demand. We do have municipal portfolio that we've averaged in over, frankly, a 10-year basis. So there's always periodic calls and redemptions that occur, but nothing that's coming out in a big jump -- or a big amount.

We will now take our next question from Ken Zerbe from Morgan Stanley.

First question is for Mike. Mike, I certainly heard your guidance for mid-teens loan growth next year. And I guess I'm looking at one of your slides, it looks like Slide 2 where you've been very clear, you've grown loans 20% CAGR for the last 10 years. If I just take the average 5 years of loan growth, you're also up 20% a year. Like what response would you have to someone who says that maybe your 15% is probably just a little bit too low? And maybe 20% is kind of the right number for loan growth on a go-forward basis, maybe not so much next year, but just over sort of the next several years?

Yes. No, look, it's a totally fair comment. And you're -- I think you're referring to the investor deck that's got sort of a 10-year historic look. I think the most important thing to remember is, we don't set any loan targets, right? Our client-facing people, their role is to serve the client need and client demand for whatever it might exist, be it deposit activity, wealth activity or home loan buying or businesses. So when we sort of start the year, we feel that, that's an appropriate measure based on sort of client demand, maybe the economic environment, how we're feeling about our different geographies. And we've, obviously, outperformed that over a sustained period of time, but we're not going to chase either.

The first question, I think, we're talking about higher rates. And does that impact volume? That does impact some refinance activity and a lot of our refinance activity comes from other banks. And so that also has an impact. So I think we think it's a prudent way to plan and to estimate, but also do what the good business is right in front of us and not try to stretch for it.

All right. Understood. No, you've definitely done well in the past. Maybe the second question I have, I know you provide this in the 10-Q, but how much of the growth in wealth assets came from market appreciation versus net new client inflows?

Majority came from net client inflows, about $25 billion was client inflows and $18 billion was market increase.

Do you have that for the quarter, though?

Yes. For the quarter, we have about 20 -- $12 billion came in from net client inflows, $12, $13 billion.

We will now take our next question from Erika Najarian from Bank of America.

My first question is on the dynamics of growth in the quarter. I guess it's a 2-part question. The first question is, if you could just talk a little bit about the investment cycle dynamics that propelled such robust capital call line growth. I think everybody was surprised to the upside. And second, given the compounding nature of the clients that you actually have in-house, I'll be curious to understand in terms of all your single-family originations in 2020, how many were to new clients to the bank?

So I'll start, Erika. So on the capital call line, private equity has been quite strong with active deal flow, stronger realized gains and a new fund formation, particularly towards the end of the year. The strong momentum we expect to continue into 2021 as well, given the low yields and all-time high equities attracting more investors into private equity. And the utilization rates do vary. So we look at the commitments growth, as you have seen that the commitments growth has been quite strong, especially in the capital call line, about 35% safe growth in commitments. And we remain conservative in terms of repayments generally within 180 days. So -- and then on the single-family residential side, 66% of the originations were refi. Out of those refis, over 60% were acquiring new clients, clients with loans at other banks. So continues to be a very strong means of client acquisition.

Got it. And my second question is for Mike. I think that we're entering the year with the market enthusiastic about potential curve steepening. So as we think about the net interest margin range, which has stayed steady, how should we think about -- at what level of front book rates, would you be more compelled to redeploy the cash that you have?

And given your starting point from 2.73%, I guess, could you be outside of the range on the upside if we do have a steepening of the curve that would encourage you to be more aggressive at deploying that excess cash?

Yes. So I think we always want to remain very prudent. And Gaye mentioned some of the agency paper at 1.25% is not really attractive right now. And given our loan demand, we'd rather carry a bit of cash balance and put it into client activity versus securities. I mean, I think the last couple of quarters, our margin has been very stable 2.72%, 2.73%. And we've sort of found a pretty good place with the example Gaye gave about current loan yields or earning asset yields around 3% and funding cost 30 or slightly less.

The variability largely, I think, will come from the amount of cash we hold, right? So I think you saw the cash balances up on average a little bit in the fourth quarter. And yet, we still were around -- the margin was actually expanded slightly. So we're in a pretty good place, but I don't think that -- unless competition moves up mortgage rates, I don't think there's a big chance of sort of outside of the range at this point.

Let me just add, Erika, to that, it's Jim. We don't -- as Mike said earlier, we only respond to the volume of good deals we see coming in. We don't chase deals because we have extra cash. You're very aware of that. But I think in the environment that's going on now, back to Steve's earlier question, one of the risk factors in the environment right now with this much liquidity out there is credit standards decline, we're very -- we will not do that. And that's probably going to be the biggest constraint on our cash utilization and lending.

Got it. And maybe if I could just squeeze in a third question? So I think there's no other word for it. You guys, fundamentally, clearly killed it this quarter, margin expansion, robust loan growth. I don't think I'll see that in any of my releases for the rest of the season. And yet the stock is underperforming today. And the market is the market. But maybe, Jim, this is for you. Could you remind us as you've been through many cycles, what does the fundamental trajectory typically look like for your bank in year 1 of an economic recovery?

We generally do very well during a difficult time in part because we're well capitalized and clean and able to continue to expand our business base and take in new clients during that period. 2020 is definitely a year of that nature. That usually gives us a larger balance sheet going into the recovery moment, which you're looking at, at this very second. The balance sheet growth this year was unusually strong even for us. And that's a result of a slowdown in competition during the sort of first half of the year, at least, and actually still continuing. And it's not just competition pulling back, it's delivery quality and things of that nature. Our pickup of new households this year is probably a record number, both in absolute and percentage wise. And I think that we -- I would say we will do very well usually in the first year of recovery if you look back over 4 or 5 cycles.

We'll now take our next question from John Pancari from Evercore.

I heard you on your mortgage comments, and that's helpful in terms of the impact of potentially higher rates and what it means for refinancing activity. So I just want to basically see if you can help us. In terms of the actual growth that you would expect on the mortgage front, in terms of on-balance sheet, loan growth, is it fair to assume that you do expect slower mortgage growth given how much of your volume has been refinancing activity and the fact that you acknowledge that, that could slow?

I would not automatically extrapolate our comments to that. We're just saying that the refinance will, at some point, slow down. It's not slowing down very much yet. But if the 10-year continues to move up, in due course the refinance part of the demand will slow down. So -- but I wouldn't -- we're not saying that it's happening now. We're just saying it could easily happen.

Got it. Related to that, if we -- if that was to happen and we saw some moderation in on balance sheet mortgage growth, do you see offsets in other parts of your portfolio given the relationships that you've added that would mitigate that and keep you in that loan growth range that you expect?

Sure. The CPR, the repayment rates slow down simultaneously. And a slowdown in refinance does not necessarily -- rising rates means a stronger economy, stronger economy means more home purchase and more multifamily purchase, et cetera. So they actually offset pretty well. The refinance slowdown or speed up is always slightly faster. But if you look back at the consistency of our growth over those 10 years, that's one of the reasons we put that out there. Those are -- that growth is consistent through up and down rate cycles.

Got it. That's helpful. One last question on the margin front. On the -- I know you talked about new money yields. Can you just give us where the new money yield is for the capital call lines that you're putting on the portfolio currently?

Coming in around prime minus 50.

We'll now take our next question from Dave Rochester from Compass Point.

I wonder if you could talk about some of the assumptions behind that margin range if it assumes the current curve persists going forward and what you're baking in for deposit growth being able to fund all the loan growth and maybe some cash going to pay down some of the borrowings? Just any additional color there would be great.

Yes. I think -- well, clearly, the Fed has been very public about being on hold. So we're not assuming any type of Fed funds move. I think the current yield curve is -- forward curve is about as good to look at from an expectation standpoint. And then I do think that, like this year, we were able to fully fund our loan growth with deposit growth, which we would like to continue into the future. And so that may allow for some remixing of FHLB.

You're going to get some of that benefit anyways as you refinance maturities, as I mentioned earlier. But as Gaye mentioned, and I think we've reiterated, our loan assets are coming in right around 3% and funding, depending on the mix of liabilities, is sort of 30 basis points or a little less. And so we're right in this 2.70%-ish range. And then the variable largely would be how much extra liquidity are we carrying at any point in time.

Yes. Got it. That makes sense. Then just switching to capital. How are you guys thinking about levels here? It sounds like you're still very comfortable with where you are. But looking at the Tier 1 leverage ratio, just over 8%, I was just curious how you're thinking about that. And would you let that slip to below 8%?

Dave, I mean, I think we've been pretty consistent that we always remain opportunistic and think about the markets. But that being said, the balance sheet is very safe right now. And some of that leverage ratio is driven by the previous conversation we had with cash. And so could it slip a little bit? Sure. But at the same time, we're always reviewing what the markets look like and opportunistic for small raises depending on those markets.

Okay. And maybe just one last one on expenses. Just given your base case for growth and revenue levels this year, how does that efficiency ratio range translate into an expense growth rate range for the year, roughly?

Yes. So I think if you take some of the comments we've made about mid-teens loan growth with a margin that, absent cash, is pretty stable that translates to probably about a mid-teens revenue growth rate. And then you've got an expense -- or an efficiency that's a little bit higher than this year, you're probably in that mid-teens range from an expense standpoint. As we continue to invest in the franchise, as we've talked about, be it the core conversion, opening up of Hudson Yards, continuing to invest in our regulatory infrastructure, it feels like that's about the right percentage-wise increase.

We will now take our next question from Casey Haire from Jefferies.

Just want to follow up on the efficiency. Mike, I think you said it's 100 basis points impact from no T&E around COVID. So I'm just curious, it's obviously been a very strong origination year. You guys are -- the Net Promoter Score, which I know is very important to you, was flat to maybe even up a little. So I'm just trying to understand why are you guys so eager to turn on that spend when you've demonstrated that you can deliver while running more efficient?

I think it's a very good point. And I do think it will probably come later in the year, and it may not come back at the same levels, right? Because you're absolutely right. We have learned and done this remotely. And so there will probably be some review of things like that. And whether we do as much in the future is up for discussion. But I -- there will be some modest increase, of course, but I think it won't be probably back to normal during 2021.

And let me just add, there's also a lot of growth opportunities in front of us in the markets that we are in as well as the Bellevue teams, for instance, that we have mentioned and the core coming in. So from that perspective, you're investing -- we are investing into the long-term and also taking advantage of the opportunities ahead of us.

Great. And then another follow-up on the millennial strategy, the student loan refi in particular.

So that product is now 7 years old, 29,000 households. Can you give us some metrics in terms of how many -- what percentage of those households have come to that home purchase event? And what percentage of that has First Republic gotten the single-family business?

So we're doing multiple things, not just single-family, but about 10% of that cohort are either doing -- either buying homes with us or refinancing the homes. As I've mentioned, the personal line of credit clients are coming in. They're closer to the home purchase or already have a home that they're refinancing with us. So that's a great directional trend. And also, we are doing a lot on Eagle Invest side and financial planning with our millennial clients, deepening the relationship on that front as well. So we're very pleased with the progress.

Great. And just last one for me. The Democrats have talked about rolling back the SALT cap. Obviously, that'd be a very positive catalyst for real estate values in your market. How do you guys see -- do you see that as a meaningful impact? And then how would it change your outlook?

It would be a favorable impact for the company net-net because most of our markets have been adversely impacted by the change previously. I don't know if it's going to come back or not, none of us do at this point. If it did, it would stimulate additional real estate activity in our markets for sure.

We will now take our next question from Andrew Liesch from Piper Sandler.

Just want to circle back with the efficiency ratio and expense outlook here. I mean, how do you see that playing out as the year goes on? I think maybe towards the higher end this quarter with some seasonal expenses and trailing up?

I think I would say the first quarter, if you look, historically, always is a little elevated and then improves throughout the year. That's a seasonality thing because of the starting of payroll taxes and 401(k) contributions again. But I think we're going to be relatively stable during the year, consistent with the growing balance sheet versus some uptick later because we will grow -- we anticipate growing during the year to keep the efficiency relatively stable over the period.

Got it. Okay. That's helpful. I guess the other leg of the stool on the revenue front, though, is the fee income line here. And I think there might be some seasonal aspects to the investment management fees here in the fourth quarter. But how do you see fee income trending now throughout 2021 just continued growth? I mean, the growth in AUM has been pretty fantastic.

Yes. I think the bigger base of assets under management with the market strength and the strength of net client inflow in the fourth quarter leads to a growing revenue or growing fee income. I will say the fourth quarter did have a performance fee in it. So you may not see growth in the first quarter in fees, but you will see it as the assets grow during the year.

We will now take our next question from Brock Vandervliet from UBS.

Just a couple of market competition questions. Seeing a lot of activity focused on nonbank origination platforms. Most of that is obviously directed at the agency space as jumbo is such a small part of the overall market. Are you seeing any competitive threats from nontraditional platforms really directed at jumbo?

So that's a great question. So we're seeing less of a penetration into jumbo market more into the conforming and the 30-year fixed base. What I would say just from a -- to take a step back, from a model perspective is fintechs are disrupting the banking sector. The scarce commodity increasingly is going to be the trusted team and relationships and the customization elements that are going to be harder to find. And that's exactly our First Republic shines. So we see fintechs more as partnerships and collaborations that actually decreases transactional time and increases emotional time to allow for further customization.

So we are using a lot of such collaborations to do that as well as internal direct investments into technology to further empower the client and our bankers who are actually making the magic happen. So if you put all that together, the models actually balance itself, and in the markets that we are in, we are -- after so may -- 35-plus years, we still have just about 5% market share. Great opportunity in the Seattle market, for example, in Florida and Wyoming, and a very successful next-gen millennial strategy. So bringing back to some of the expense questions, there are so many great, safe and sound organic growth opportunities ahead of First Republic. So we're bound to take advantage of those even in the face of the disruption, which actually allows us to increase the customization.

Okay. And separately, I think, I've always heard wealth management hiring being described as extremely competitive. You're seeing new entrants now in the form of Silicon Valley. How is that competitiveness versus a year or 2 ago?

So we continue to have a strong pipeline of wealth managers who would like to join the First Republic model. That's mainly driven by the holistic non-siloed approach, 1 client, 1 trusted adviser, 1 relationship at a time. Actually, we have been deepening our relationship with our wealth management clients. The number of households who have given us trial on the banking side from wealth management has increased. Referred deposits have increased.

So we stay quite competitive and very pleased with the results. And couple that with backlogs in the pipeline and rate logs still strong despite refi may moderate with rates increasing, purchase remains strong. And year-over-year, we are very high on the mortgage pipeline side as well as especially on the single-family residential. So on both sides, we are doing a great job so far in creating a holistic banking delivery to all our clients, including the wealth management clients coming in.

We'll now take our next question from David Chiaverini from Wedbush Securities.

I wanted to ask about the PPP loans on the balance sheet. It looks like about $250 million were forgiven in the quarter and about $100 million on an average basis. It looks like that added about 1 basis point to the NIM. As we look out to the first quarter, or the first couple of quarters of 2021, how much in forgiveness are you expecting in each of those quarters and the potential impact on NIM?

So yes, I think we did start to see forgiveness pick up in the fourth quarter. Also, obviously, with the recent law that was signed in, there may be some acceleration on smaller dollars because of a simplified forgiveness process. I think by the -- probably the end of the second quarter, maybe the third, most of the first round should be through the process, either forgiven or you'll have a remaining loan for the amounts that are not.

Your estimate -- I think we had about $4 million of what I'll call extra accretion of the fees in the fourth quarter. There's only $24 million left and that's going to come in over the next couple of quarters. So it supports the margin ever so slightly probably in the first half of the year.

Great. And another housekeeping question. You alluded to a bump in performance fees in the fourth quarter. Can you disclose how much performance fees you had in the fourth quarter?

Yes, sure. So it's about $18 million. And I would give you the other side of that, too, is that about $13 million of it goes out in the form of compensation and a sub adviser cost. So there's not a lot that drops to the bottom line.

Will now take our next question from Jared Shaw from Wells Fargo.

Mike, circling back on the expenses. You mentioned investments in regulatory -- or making regulatory investments. Is that more processes and systems related to the core? Or is that actually hiring more personnel maybe in the regulatory oversight side?

I think it's just -- as a growing institution and being prudent and safe and sound, we're investing in people and resources to do that. I mean, I think the question about expenses, we're supporting a larger bank, and we also have tremendous opportunities to serve clients in front of us. And to be able to do that, you have to continuously invest in the franchise to do it better because that's what differentiates us, frankly, from a service model standpoint. And so that might be from a regulatory standpoint, it might be from a technology, but it's really about investing for that future growth because there are tremendous opportunities in front of us.

Okay. Okay. Great. And then just looking at the single-family originations this quarter. Did you notice any trends in geographic movement, whether it was bringing new customers in or following your customers sort of away from those urban coastal markets of San Fran, New York, L.A.? Or is it really not that noticeable?

So to your point, San Francisco, New York, and L.A. and Boston, refi has been strong in all of our key markets. In addition, a rebound in the purchase activity in Manhattan City Center and suburbs. While they have been suburbs and vacation homes and second homes, they're doing exceptionally well. And we are seeing the Manhattan City Center to come back as well. And in addition to that, I would add, Florida and Wyoming, and there's a lot of great opportunities in Portland, Seattle market as well that we have been seeing serving our clients there. So it's all full steam ahead, and the pipeline continues to be very strong, well over last year's levels at this time in addition to rate logs also quite robust.

And with that, that does conclude our question-and-answer session.

I would now like to turn the call over to Jim Herbert for any closing remarks.

Thank you all very much for being with us today. It was a very, very strong year, and we're entering the new year with a record backlog and a record sized balance sheet. And our clients appear to be quite satisfied. So we're -- we anticipate a strong year in 2021 as well. Thank you very much for spending the time today.

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.