Earnings Transcript for FRCB - Q2 Fiscal Year 2021

Operator: Greetings and welcome to First Republic Bank's Second Quarter 2021 Earnings Conference Call. Today's conference is being recorded. During today's call, the lines will be in a listen-only mode. Following the presentation, the conference will be opened for questions. I would now like to turn the call over to Mike Ioanilli, Vice President and Director of Investor Relations. Please go ahead.

Mike Ioanilli: Thank you and welcome to First Republic Bank's second quarter 2021 conference call. Speaking today will be Jim Herbert, the Bank's Founder, Chairman, and Co-CEO; Gaye Erkan, CO-CEO and President; and Mike Roffler, Chief Financial Officer. Before I hand the call over to Jim, please note that we may make forward-looking statements during today's call 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.

Jim Herbert: Thank you, Mike and good morning everyone. It was another very strong quarter with robust growth in loans, deposits, and wealth management assets. Our client centric business model is continuing to perform very well across all of our segments and all of our geographic markets. Since 1985, First Republic’s success has been grounded in colleague empowerment, and a service culture of taking care of each client one at a time while operating in a very safe and sound manner. This straightforward and personal approach has led to very consistent organic growth for 36 years. The growth is not predicated on mergers or acquisitions. Let me review for a moment the results of the second quarter. Total loans outstanding were up 18.9% year-to-date, annualized. Total deposits have grown 37% year-over-year. Wealth management assets were up 55% year-over-year to a total of more than $240 billion. This across the board very organic growth drove our strong financial performance. Total revenue year-over-year has grown 34% and net interest income was up 27% Quite importantly, tangible book value per share increased 15.5% year-over-year. The safety and soundness of the First Republic franchise continues to reflect our strong credit quality. Net charge offs for the quarter were only 1.2 million, just a fraction of a basis point. Non-performing assets at quarter-end were only 8 basis points of total assets. We remained as always focused on capital and liquidity. At quarter-end, our Tier 1 leverage ratio was 8.05% and our HQLA was 14.3% of total average assets during the second quarter. This included higher than normal cash levels. Our clients remain very active as the reopening of our urban coastal markets takes hold. This is particularly evident in the strong growth of single family home loans during the quarter and so far this year. This growth represented a substantial portion of the quarter’s total loan activities, including both purchase and refinance.

Gaye Erkan: Thank you very much Jim. I'm honored to be appointed Co-CEO and continue to serve this truly special organization alongside you and our leadership team. We will work hard to keep scaling our people first culture with an unwavering focus on safety and soundness, and doing more of what we do best, delivering exceptional service to our clients. I'm excited about opportunities ahead and look forward to continue to work with all of our extraordinary colleagues at First Republic. Turning to our earnings results, it was a terrific quarter that reflects our continued focus on safe, sound organic growth. Our top priority as an organization is taking care of our exceptional colleagues and empowering them to provide unparalleled client service. Our client satisfaction results in exceptionally low client attrition, which in turn fuels our growth through repeat business and client referrals. Happy people lead to happy clients, and the more happy clients we have the more repeat business we do and the more client referrals we get. Each year, more than 75% of our safe organic growth comes from these sources. Over the past several years, we have continued to make strategic investments in technology and risk infrastructure. These investments allow us to scale our service model, while keeping our bank safe and sound. Our digital and tech investments are geared towards minimizing transactional time to create more time to build further trust and deepen relationships with clients and to serve our communities.

Mike Roffler: Thank you, Gaye. Our strong second quarter results reflect the consistency of our business model. Revenue growth for the quarter was exceptional, up 34% year-over-year. This was driven by strong organic growth across the franchise, including loans, deposits, and wealth management assets. Our net interest margin for the second quarter was 2.68%. This includes the impact of our elevated cash position from fiscal and monetary policy, which has resulted in significant deposit growth.

Jim Herbert: Thank you, Gaye. Thank you, Mike. Our time tested quite straightforward business model remains very focused on delivering the highest possible level of client service, doing only what we do best and operating very safely and soundly. It continues to work quite well. Now, we'd be delighted to take any questions.

Operator: Thank you. And we start with our first question from Steve Alexopoulos. Please go ahead. Your line is open.

Steve Alexopoulos: Just start on the loan side. And one of the highlights of the quarter was the almost 9 billion of single family originations, my question is, how did a lack of housing supply impact the spring selling season? And with rates coming down a bit further here, should we expect another record quarter for originations in 3Q?

Gaye Erkan: So Steve, let me take that question. We see our pipe – so first of all, the answer is that our rate logs are coming off of the peak levels that we have seen in the second quarter. It has been an exceptionally strong quarter in the second quarter for sure. While our pipeline remains strong above the last year levels we're seeing the rate like coming off the peak levels that reflects the limited inventory, the supply constraints and the purchase market, as well as the refi slowing down into the second half of the year. But we do remain confident for the year with our mid-teens loan growth guidance.

Steve Alexopoulos: Okay, that's helpful. And maybe for you too, Gaye, on deposit, it looks like private bank deposits came down a bit as expected, but you saw a surge in business bank deposits, checking accounts are almost 70%, can you give some color, what drove, I think it was almost 8 billion this quarter, the sharp increase in business deposits and is that strength continuing?

Gaye Erkan: Actually, so on the business side, two-thirds of that business deposit growth came from non-financial, and it has been very diversified, no individual sector is over 10% to 12% type of mix. We are also seeing that the consumer spending is also up on the consumer balances. So, when I look at the average business account balances, versus the average consumer, the average business checking accounts are higher compared to the pre-pandemic levels and consumers kind of plateauing a bit on the average account balances. So that's also reflecting into that with the Fed – and the Fed stimulus is also playing a role, obviously, along with the yields in the market, that's also a lot of the business are keeping more cash on the sidelines. But I would reiterate that as part of the model, we follow our private banking clients to their businesses. So, all-in-all, it's one client relationship that we continue to deepen.

Steve Alexopoulos: Okay, that's helpful. And final question, just on the management update that was announced first, congratulations, Gaye, not a surprise, congratulations on the Co-CEO. But maybe for Jim, could you walk us through what will now change in terms of responsibilities under this Co-CEO structure? Thanks.

Jim Herbert: Thanks, Steve. Actually, initially, probably not very much. As you know well, actually Gaye and I've been running this together along with the rest of the team for quite a while. And the direct reports are pretty well aligned already. The substantial change really is the calmness of the transition. And, you know, we're not out of the pandemic really yet. We're not back to the office yet. We have a core conversion going on. There's a lot happening. So, it seems to us and it seems to the Board, a very First Republic steady-eddie approach to transition.

Steve Alexopoulos: Okay, terrific. Thanks for taking my questions.

Operator: Our next question is from Ken Zerbe, Morgan Stanley. Your line is open. Please go ahead.

Ken Zerbe: Alright, great. Thank you. Good morning. I guess the first question I had, just in terms of expenses, you've talked about investing in the franchise a fair bit. If I look at where the expenses are coming from, it looks like a lot of that is compensation related expenses, whereas, sort of everything else is, I mean, I say growing probably far less. How much of the investment in the franchise is hiring people versus, sort of non-people related items?

Mike Roffler: Thanks, Ken. I think the one thing I'd first focus on when we look at compensation is, there is a large portion that is variable base that's tied to our revenues. And so as checking balances grow, as investment management fees and wealth fees grow, the strong production volumes that Gaye had talked about earlier, all those lead to greater incentives. In the second part of your question, there is some people addition going on, especially to support those teams, and the production levels that they're doing. And so, we've always had a team based approach and so as you grow a book of business, we’ll add additional support people and additional team members to help you deliver extraordinary client service and then also investing in the operational capacity as a bank because of the volumes, we've had to make sure loan operations, deposit services, investment manager operations are all staffed accordingly and making sure again, you're giving great service all the way through the process.

Ken Zerbe: Got it. Okay. Maybe a different question, just in terms of wealth management, just trying to understand, sort of how to think about the fee income because I generally know that your fees are based off of, sort of a one quarter lag. So whatever happened in first quarter effect your second quarter fees, but with fees up 15% this quarter sequentially, AUM last quarter in first quarter, I guess was up 12.5% is up 10% this quarter. It feels like maybe fees were, sort of higher than they should be just based on the AUM piece. Can you just help us understand what the variables are that affect fees? Thanks.

Mike Roffler: Yeah. So Ken, what you're describing is the largest component, which is investment management fees and directionally the way you described it is right. The assets under management number at June 30 will drive the third quarter revenues. At the end of the first quarter, you also have the benefits of teams that maybe joined us late last year, early this year, where their assets came over during the first quarter. So, not only do you get the quarterly revenue, but you get a little bit from the, call it the stub period. If someone joined us February 1, there'll be five months of revenue in this quarter versus three, because we don't bill until you get through the quarter process. And so, a little bit of that will happen. And so it's probably a little stronger than normal, but your general rule of thumb of the increase in AUM is a good one to use.

Ken Zerbe: Got it. Okay, perfect. Thank you very much.

Operator: Our next question is from John Pancari, Evercore Partners. Your line is open. Please go ahead.

John Pancari: Good morning. Just have a question on the capital call line lending business. I know you had indicated that the utilization rate was down to about 36%, which is in-line with your historical, what are your expectations there going forward? Do you think you know it remains around that historical level or do you think it could decline below that level for the time being? I just want to get your thoughts there? Thanks.

Gaye Erkan: John, that's a great question. And it's one that is very hard to estimate because it is very much deal specific and deal dependent. It's the one variable that we really tried to estimate it, but it's very much idiosyncratic, but what we have seen is that the mid-30s and the low-40s has been pretty much the historical range. Right now, you know, we have come from the 40s to down to the 36%. The one variable that we always look at it is or metric is the commitment growth and the (ph) activity continues to be strong. So, you would expect the momentum in terms of the commitment growth to continue through the second half of the year. And the markets remain very active, very attractive for exits, while the fundraising is going all above the pre-pandemic levels as well. So for that reason, I would look at the commitment growth and then still try to expect it to be somewhere between mid-30s to high-30s probably.

John Pancari: Got it. Okay thank you Gaye. And then on the – separately on the commercial real estate side, I wanted to see if you can talk a little bit about the trends in the CRE portfolio? Are you seeing any signs of stress there, I know your LTV at origination, you indicate on Slide 19 is 45% and also the current appears to be on Slide 21, right at 45% as well, do you expect migration higher in that origination, LTV or a new production LTV level? And just that you could talk about what's out into your reserve expectation on that front? Thanks.

Gaye Erkan: So, in terms of the credit underwriting standards we remain to – we will remain conservative when it comes to multi-family and theory both, and the commercial real estate picture is very much region and product specific. We don't do much office, but just as general markets call their office remain soft in the city centers. And there’ll be clear outlook later in the year as we see how people are – how companies are bringing people back to the offices. We have very limited exposure to CRE retail and hospitality. While we're seeing positive trends as hotel occupancy rates are rising it's still uncertain, it depends on the global tourism and business travel. But we will continue to do safe deals, which tend to be mostly refinance with experienced owner managers that value our service and holistic banking relationship.

Mike Roffler: And John, you mentioned reserves, you know, one thing that you talked about, and you highlight in the slide deck, there's not a large, you know, expected loss other than, you know, you might look at one-offs here and there, because of our LTV and our coverage ratios. And maybe just if I step back on the reserve for a moment, you know, about 65% - 60% of our reserve is tied to home loans, which again with – sorry 60% of our portfolio, loan portfolio is tied to home loans, which have a pretty low reserve allocation. If you look at the rest of the loan portfolio, it's about a 1% reserve rate on it. And given the strength of our underwriting, we feel that's you know, more than appropriate.

John Pancari: Got it. That's helpful. Thanks. If I could ask just one more, can you just give us a status update on the core systems replacement project where you stand on that? And what – are you on the project? Thank you.

Gaye Erkan: Sure. We're very pleased with the ongoing conversion of our core banking system. So the development work is nearly complete. And we're going to have also the third data migration is also complete along with the most of the data validation too. So, the next milestone for us is, we're going to have multiple mock conversions planned throughout the summer and into the fall to do end-to-end testing. And we're doing a lot of end user trainings as well across the bank. So, it's in-line with our expected timeline and we intend to finalize it before – by end of the year.

John Pancari: Great. All right. Thank you for taking all my questions.

Gaye Erkan: Thank you.

Operator: Our next question comes from Bill Carcache, Wolfe Research. Your line is open.

Bill Carcache: Thank you. Good morning. Can you discuss what kind of household formation trends you're seeing among your next generation customers? What's the trajectory of that growth outlook from here and more broadly, if you could break down where the single family loan origination growth that you're seeing is coming from within your customer base?

Jim Herbert: Well, the household formation question, thanks, is hard to answer. We’re subject, we only have the same macro information I think everybody does. It is picking up it seems to us undoubtedly. The other thing that’s happening is that in our millennial client base, since we shifted over to the PLOC, which is personal line of credit lending, a larger share of the millennial households have homes already. That's almost doubled, in fact, from what we were doing before under the refi. And so, it's actually the quality of those households is higher than the prior business and it was good even then. I think in terms of the growth rates, the activity levels, among the younger households, they're very high actually. The hardest thing, quite frankly, is of course, finding the first home to buy, the or whatever it may be. So, I think the business is actually going very strongly.

Gaye Erkan: And I would add, we're very pleased over 20% of our millennial clients are now mortgage clients, which is fantastic and the household acquisition for millennial households continues to be strong around 13% year-over-year and the new offerings across the lending deposits and wealth management, coupled with the human trusted advisor resonates with our millennial clients.

Bill Carcache: That’s helpful. Thank you. If I can switch gears to wealth management, can you discuss your momentum and attracting new teams how the pipeline is looking and also maybe discuss some of the variables behind your success in retaining the teams that you've brought on board?

Gaye Erkan: So, we are very pleased that we are seeing great quality of teams joining us. We have welcomed four new PWM teams, Private Wealth Management hired in the second quarter, and year-to-date seven new . And we continue to have a strong pipeline of prospective wealth management team hires as long as they fit the culture and the holistic banking model. So that continues to be really well. Also I would note that year-to-date we have seen strong net client inflows that is both from existing clients deepening their relationships, as well as new client inflows coming in with the new teams.

Jim Herbert: One additional thing I'd add is, the success of cross-selling to the new clients coming in with a wealth teams to our banking platform is accelerating very nicely. We've got that one down better now than we had before.

Gaye Erkan: Yeah, referred deposit, for example, are up year-over-year.

Bill Carcache: Very helpful. Thank you. If I can squeeze in one final macro question, how do you think about the performance outlook for the business in an environment where eventually perhaps we start to see short rates rise a little bit faster than the long-end of the curve? If you could just frame how you think about that, and whether it makes any kind of a difference operationally to how you run the business?

Jim Herbert: It probably won't make much difference operationally as to how we run the business. We do run a very match book I think this Gaye referred to earlier. And so, if you look at our simulation models, rising rate environment is not a particularly threatening thing. The inversion, which you implied, in your question, I think, is always a little problematic, but the real problem buried in an inversion is what it does to the economy generally, not so much what it does to us in the short run. Inversions don't last very long. So, they generally don't mess with our balance sheet very much. The only thing that Gaye referred to which is very important and somewhat unique to us, you have – almost all banks have repayment rates on their portfolio CPR. And ours is a little higher than most for various reasons, the nature of our mortgages primarily, but what they don't have is the growth rate of 15% or so in the portfolio, which adds an additional priced to market of 15% per year, maybe 18%, whatever the growth rate is, and that – those two items together equal 30, between 30% and 40% of the balance sheet. So, we repriced the balance sheet about 30%, 40% every year from repayments and growth to market. That allows us to keep up with the changing rates rather nicely.

Bill Carcache: Thank you, Jim. And let me add my congratulations Gaye. Thanks for taking my questions.

Gaye Erkan: Thank you.

Operator: Our next question is coming from Casey Haire. Please go ahead. Your line is open.

Unidentified Analyst: Thanks. Good morning all. Maybe just a couple follow-ups on the NIM guidance, still intact, but to some color on where new money loan yields are and also for securities given a pretty volatile long-end of the curve?

Gaye Erkan: Absolutely. So, on the single family residential side we're seeing in 2.75% to 3% type of range coming in mostly in the high-2s when we look at the rate logs. Multi-family, about 3.25%, 3.5% for safe deals, and CRE mostly mid-3’s, 3.5%, and on the investment side, so on the , the tax equivalent yield is 2.75% to 3%. And on the government and agency HQLA, which again as Jim referred matching from a duration management perspective, we have been doing some short-term barbell strategies there as well. The short-term agency HQLA is coming in around 75 bips and the traditional agency HQLA is around 1.5% to 2%. So, all in all, we’re seeing the additional marginal assets coming in into high-2s more around the real estate assets coming into type of range with a marginal funding cost about 20 basis points, and you put in the elevated cash levels. So that brings us to the lower half of the 2.65 to 2.75, as we have printed this quarter.

Unidentified Analyst: Okay, alright, great. So, pretty stable. On that cash position, what is, I mean, I know timing in terms of working that down is a wild card, but what do you guys see is the ideal minimum cash position for this size balance sheet?

Mike Roffler: You know, if you thought 4% to 5% of the balance sheet would be sort of like to call it 8 billion that feels like a pretty good place for us to run, given the size of our overall balance sheet and sort of the deposit activity we see. And I think our average in the second quarter was just over 11. You know, and so you bring that down by, you know, 3 billion, 4 billion, your margin is going to be, you know, towards the top end of that guided range.

Unidentified Analyst: Yeah, understood. And then, Mike, just on the efficiency ratio, I think you guys in the past have talked about, like, you know, in a remote work and not much entertainment, plant entertainment that the COVID benefit to the efficiency ratio is about 100 bips, I mean, can you just provide an update as to what that is today. And, you know, is there a possibility that you could, you know, you could run a little lighter than where you were pre-pandemic based on what you've learned thus far?

Mike Roffler: Yeah, we're definitely talking about the learnings we've had from the pandemic and, you know, what are things maybe we used to do that you don't have to do as much, right? I think your estimate of the things that are running lower than they had or continuing to run lower around client events, travel, internal events, they're still running a bit lower. And it's been a, you know, sort of a 1%, little more benefit to our efficiency, we do anticipate those things starting to ramp up. They may not get to that full effect, but we do think we will have events later in the year. People are starting to travel and entertain clients a little bit more. And I think you're really starting to see a probably more in the fourth quarter. And also as Gaye mentioned and talked about, we are, you know, deep into the core conversion process here for the next couple of quarters.

Unidentified Analyst: Okay, great. Thanks. Thanks for taking the questions. And Gaye congrats.

Gaye Erkan: Thank you very much.

Operator: Our next question is coming from Chris McGratty, KBW. Please go ahead. Your line is open.

Chris McGratty: Hi, good morning. I wanted to follow up on question about efficiency, and maybe ask a little bit different on just operating leverage. You know, maybe Mike, you know, last year was a year of positive operating leverage in an industry that didn't have that. How are we thinking about the ability to generate revenue growth in excess of expense growth? I totally hear you on the COVID normalization, but even so with rates where they are, you're still at kind of where the efficiency ratio was when rates were up. So, that would to me suggest that maybe you do a little bit better the . Thanks.

Mike Roffler: So, I think one of the things that we are always focused on from a business model standpoint is client service, and how that's delivered and the effectiveness of it. And that, you know, other institutions don't have that revenue growth or revenue production. And so, we're always supporting, how do you deliver client service while continuing to grow? And that has led to what we think is a very stable efficiency ratio in a pretty tight range, while improving our net promoter score, expanding offices like Hudson Yards was mentioned earlier, to deliver client service. And so I think we think more about it, that revenue growth and expense growth are relatively matched in terms of how they're growing. And so it may not be your positive operating leverage that you mentioned, but it leads to a consistency and stability over a long period of time. And I think we view that as very important.

Jim Herbert: Let me just respond also in a slightly more philosophical way. This is a growth enterprise. And we're basically focused on the quality of delivery of service at the same time. So, operating leverage can be achieved by cost cutting, which others do. We're not in that game. We're in this for the long haul. It's a very long game. And so, our approach has always been to maintain as Mike just said, so clearly, a balance of operating costs, and invest continually on operating systems and procedures so that we – so that we have good backup and safety embedded. But so operating leverage is not – it's on the table, but it's not our primary objective. The quality of delivery of service is a primary objective, and then we grow and we grow because the clients grow. As Gaye said, 75% of our growth is driven by our clients or their direct referrals. That's actually not something we're reaching for. That's just coming in. And so we have to respond to it with the level of service that they're used to or expect from us, or we'll have a diminishing franchise, and that we never intend to have. So, what we value above all else is stability, the predictability and stability of the model. And that's a balance. That's a continual balance. So, I wouldn’t actually look for the company to have a lot of operating leverage.

Chris McGratty: That's great color. I appreciate that. Maybe just one final one, Mike on the model. I know your income typically bumped up in the third quarter. It did so this quarter, I'm wondering, did you add more investments and should we expect a ramp in Q3?

Mike Roffler: So we did add one additional purchase mid-quarter. We also from time-to-time have a claim, and there was a modest impact in the second quarter from that. And so I think from a range I would think about 18 million to 20 million a quarter is, sort of the new run rate after the purchase is factored in.

Chris McGratty: Great thanks a lot.

Operator: Our next question is coming from Andrew Liesch, Piper Sandler. Please go ahead. Your line is open.

Andrew Liesch: Good morning, everyone. Gaye, congratulations on the announcement, great to see.

Gaye Erkan: Thank you.

Andrew Liesch: Got a question on just your capital position right now. I mean, certainly regulatory ratios are solid and some of them are up year-over-year, tangible assets now below 7% for the last couple quarters. Is there any – do you expect that to rise as liquidity leaves the balance sheet as you see deposit levels normalize? And I guess, in general, like how are you viewing where your capital stands today?

Mike Roffler: So, Andrew, I think you bring up a good point that we talk about the, sort of 11.5, the extra cash carrying impact in the margin. It also does have a little bit of an impact to our leverage ratio or our TCE, as you mentioned, and I think our philosophy remains similar as it has. We were pleased the first quarter to raise some capital at attractive pricing. We keep an eye on the market. We think about what our future opportunity is to serve clients and grow is. And then we remain opportunistic when appropriate. And I think that philosophy has been here 36 years, I think, and will continue into the future. And it's as much a view of our outlook of future growth as anything, because we always want to fund that, sort of in advance as we think about the future.

Andrew Liesch: Got it. You've covered all my other questions. I will step back. Thank you.

Operator: Our next question is coming from David Chiaverini, Wedbush Securities. Your line is open. Please go ahead.

David Chiaverini: Hi, thanks. I had a follow up question on loan pricing on resi mortgage, you mentioned about how you're getting a yield of, you know, 2.75% to 3% is the range. And when I look at the average balance sheet, it looks like the rate came down 6 basis points sequentially in the second quarter, I was curious, is the downward pricing pressure subsiding here?

Gaye Erkan: Actually it has been stabilizing. Just recently we have seen our rate logs to be just slightly higher price than what's on the portfolio. So, which is good news. So that would plateau itself. So, I would say on the single family, multi-family or real estate loans, the six week rate logs are coming in at 2.95% and above.

David Chiaverini: Great. That's good to hear. And on the net interest margin with the guidance, you know, staying the same 2.65% to 2.75% with – it sounds like stable in the near-term, but given that comment you just made where the rate locks are coming in slightly better, is there a directional bias, kind of one way or the other from where we were in the second quarter?

Gaye Erkan: No, I would reinforce the 2.65%, 2.75% because the deposit is coming in strong as well. The elevated cash levels have impact on the NIM too. So, I would be sticking to our guidance, mid-to-lower half of the range. But the net interest income for us given the strong earnings asset growth is really net interest income is the metric that pays the bill.

David Chiaverini: Yeah, that makes sense. And then one modeling question, shifting to expenses. Is the Hudson Yards expense, you know, sort of fully baked into the run rate now in the second quarter or should we expect another step-up to come through either in the third quarter or fourth quarter?

Mike Roffler: Yeah, it's pretty much fully and the rent is fully in and most of, sort of the tenant improvement depreciation is in, any step up would be pretty modest at this point.

David Chiaverini: Got it. Thanks very much.

Operator: Our next question is from Jared Shaw, Wells Fargo. Please go ahead. Your line is open.

Jared Shaw: Hi, good morning. Thanks for the question. I guess, Mike, just, first, was there any performance fee component to the wealth management revenue this quarter?

Mike Roffler: No, there was not.

Jared Shaw: Okay. And then, you know, I guess more generally, how sensitive do you think the purchase market is in Europe, primary geographies to potentially higher rates?

Jim Herbert: I would say it's not all that sensitive. The biggest problem is supply. That is improving a little bit. Listings are going up a little bit. The increase in prices has pulled sellers off the sidelines. And it's getting slightly better. But it's mostly a supply issue. New York is the exception. There's plenty of supply in New York, but everywhere else there’s virtually nothing.

Jared Shaw: Great. Thanks for the color. I just want to give my congratulations to Gaye as well. Congratulations.

Gaye Erkan: Thank you, Jared.

Operator: Our next question is from Tim Coffey from Janney. Please go ahead. Your line is open.

Tim Coffey: Great. Thank you. Good morning and thank you for the time. So, my first question is, if you look at the weighted average LTV on the residential mortgage production in the quarter, it seems like it ticked off a bit higher than we've seen in recent quarters. And I'm wondering, is that a function of just competition or is there other circumstances such as, you know, borrowers having greater liquidity than they have before?

Gaye Erkan: That would be a quarter-over-quarter fluctuation. We will come to – our overall real estate lending – 80% of our lending is real estate loans with a weighted average in the mid-50s, so slight pick-up is just a one-off. We will remain conservative in our underwriting standards. We won't compromise on credit at all. We will be fierce when it comes to relationship pricing, but we will not compromise on credit.

Tim Coffey: Okay. And then my other question was, do you see any benefit to First Republic from Wells Fargo canceling their personal lines of credit?

Jim Herbert: We think there may be actually significant opportunity. We focus mostly in the millennial with that product, but suddenly it might go more up – it might go up age, depending on what they do. We're not upset that they've done that.

Tim Coffey: I would think not. What percentage of your millennial clients would you say use a personal line of credit?

Jim Herbert: Actually a significant amount of the new millennial clients. Our personal line of credit product is only about a year old. So, it probably has 5,000 to 6,000 out of our 30,000 so far.

Tim Coffey: Okay, is a typical line amount 100,000 or greater?

Jim Herbert: The typical commitment. This is quite important, actually, the typical commitment is probably around 100,000 to 110,000, something like that. The typical usage is about 30 to 35. So that product is 125% self funded with checking.

Tim Coffey: Great. Okay. Alright. Those are my questions. Thank you very much.

Jim Herbert: Thank you.

Operator: Our next question is coming from Brock Vandervliet, UBS. Your line is open. Please go ahead.

Brock Vandervliet: the question. Most of it is already covered at this point, but just in terms of the jumbo LTV coming back to the earlier question, what's the average LTV just on the jumbo resi product?

Gaye Erkan: So we are in the mid-50s, high-50s range, usually in the single family residential mortgage. So, the up-tick was just a couple of percentage points when you look at the recent originations. So, the mid-50s to high-50s is really the range that we have been operating at. And we will remain conservative in that regard.

Brock Vandervliet: Okay, and just – we're seeing especially among some of the independent residential originators, very intense competition, at least one of them has introduced a jumbo product and the LTVs are, you know in some cases significantly higher than that level, are you seeing any evidence of competition from new quarters around jumbo?

Jim Herbert: We've been doing jumbo mortgages since 1985. And in fact, a bank that I started in 1980 before this is where we sort of stumbled into that product, and realized how good it was. But we did learn through almost 40 years of jumbo production, how to do it. And one of the number one things you do not want to do is to raise your LTV because they are larger. And if there's a problem you need margin for error. And also, it is almost axiomatic that the more someone puts down, the more liquid they are after the deal, which is quite interesting. And so, we've maintained our sub-60, right around 60% or slightly sub-60 slightly over 60% LTV range for three decades at least. And that won't vary.

Brock Vandervliet: Okay. Alright. Thanks very much.

Operator: It appears there are no further questions. At this time, I'd like to turn your call back to Jim Herbert for any further remarks.

Jim Herbert: Thank you very much everyone for your time this morning. We appreciate it. Have a good day.

Operator: And this concludes today's call. Thank you for your participation. You may now disconnect.