Earnings Transcript for FRCB - Q3 Fiscal Year 2021

Operator: Greetings and welcome to First Republic Bank’s Third Quarter 2021 Earnings Conference Call. Today’s conference is being recorded. 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 third 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 and 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. Good morning, everyone. It was another strong quarter with robust growth in loans, deposits, and wealth management assets. First Republic’s unique, simple, client-centric business model continues to perform very well across all of our segments and our markets. Since 1985, First Republic’s success has been grounded in a culture of exceptional service taking care of each client one at a time, serving our existing clients exceptionally well. Nothing has changed. It is a story of straightforward execution of our model, which results in consistent compounding organic growth year after year. This quarter was not an exception. Let me review briefly the results for the third quarter. Total loans outstanding were up 18.8% year-to-date annualized. Total deposits have grown 39% year-over-year. Wealth management assets were up 50% year-over-year to a total of more than $250 billion. This across-the-board organic growth drove our very strong financial performance for the quarter. Year-over-year, total revenue has grown 30%. Net interest income was up 27%. And quite importantly, tangible book value per share increased almost 19%. The safety and soundness of the bank continues to reflect very strong credit quality. Net charge-offs for the quarter were only $292,000, that’s a fraction of a basis point. Non-performing assets at quarter end were only 7 basis points of total assets. As always, we are very focused on capital and liquidity. During the third quarter, we raised $1.2 billion of new Tier 1 capital to support our continued growth. This included common equity as well as our Series M perpetual preferred stock, which was issued at our lowest dividend rate ever actually, 4%. At quarter end, our Tier 1 leverage ratio was 8.55%. Our HQLA liquidity level at quarter end was 16.7% of total average assets. This included very strong cash levels. We continue to be focused on strengthening our communities as we have been for 36 years. For example, this month, we participated in a capital raise for the support of housing fund managed by SDS Capital Group. These funds will be used to address the homeless’ challenge in California by providing additional permanent housing. Our participation in this initiative is only a modest part of our long-term focus on investing and strengthening our communities. Overall, 2021 so far has been a strong and successful year. Now, let me turn the call over to Gaye Erkan, Co-CEO and President.

Gaye Erkan: Thank you, Jim. It has indeed been a strong year thus far. The simplicity of our business model allows us to deliver consistent performance quarter after quarter, while remaining acutely focused on the long-term success of the franchise. Our strong performance supports further investments in the delivery and scalability of our client service model. For example, we continue to invest in our colleagues, new talent, and operational infrastructure to support our growth. New preferred banking offices to deepen our presence in our existing markets and technology and digital enablement to further empower our colleagues and reinforce our trusted client relationships. Let me now provide some additional detail on this quarter’s performance. Loan origination volume was very strong at $15.5 billion, up meaningfully from a year ago. This is our best third quarter ever. Single-family origination volume was strong at $7 billion. Single family continues to be a key driver of our growth representing more than 75% of our year-to-date loan growth. I would note that the weighted average loan-to-value ratio of single-family originations year-to-date was just 59%. Refinance accounted for 53% of single-family residential volume during the quarter. A large proportion of refinance activity continues to come from clients with loans at other institutions, providing us with great opportunities for new client acquisitions. We continue to maintain our stringent underwriting standards. The weighted average loan-to-value ratio for all real estate loans originated during the third quarter remained conservative at 56%, slightly lower than the prior quarter. Turning to business banking, business loans and line commitments, excluding PPP loans, were up 31% year-over-year. Capital outstanding balances increased during the quarter, reflecting growth in commitments as well as an increased utilization rate of 37.3%. In terms of funding, it was an exceptional quarter. Total deposits were up 39% from a year ago. At quarter end, checking deposits represented 69% of total deposits. Business deposits represented 62% of total deposits, up slightly from the prior quarter. The average rate paid on all deposits for the quarter was just 6 basis points, leading to a total funding cost of 17 basis points. Turning to wealth management, assets under management increased to $252 billion. This is an increase of $57 billion year-to-date, over 60% of which was from net client inflows. Year-to-date, wealth management fees were up 47% from the same period a year ago. The strength of our integrated model continues to attract very high-quality wealth management teams to First Republic. In total, we have welcomed 9 new teams year-to-date. This includes one team in the third quarter and another team already this quarter. Our third quarter performance demonstrates the power of our service model and the ongoing dedication and care of our amazing colleagues. Now, I would like to turn the call over to Mike Roffler, Chief Financial Officer.

Mike Roffler: Thank you, Gaye. Our strong third quarter results reflect the consistency of our business model. Revenue growth for the quarter was exceptional, up 30% 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 third quarter was 2.65%. This reflects the impact of our elevated cash position from fiscal monetary policy, which has resulted in significant deposit growth. We continue to expect our net interest margin for the full year 2021 to be in our previously communicated range of 2.65% to 2.75%. Importantly, net interest income was up a very strong 27% year-over-year. This is due to the robust growth in earning assets. Let me now provide a brief update on our core banking system conversion. We are very pleased with the progress of our core conversion and are in the final phase of delivery. We now expect to complete the conversion in the first quarter of 2022. This extension of one quarter will give us time for additional in-person testing and training that has been delayed due to the COVID-19 delta variant. I would note that our efficiency ratio guidance for the full year 2021 remains unchanged at 62% to 64%. For the quarter, our provision for credit losses was $34 million, which is reflective of our strong loan growth. As Jim noted earlier, we are particularly pleased with our Series M preferred stock offering in the third quarter. In the fourth quarter of 2021, our preferred stock dividend will be approximately $33 million. Turning to the tax rate, our effective tax rate for the third quarter was 21.4%. 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 strong quarter. Now, I will turn the call back over to Jim.

Jim Herbert: Thank you, Gaye. Thank you, Mike. First Republic’s time and cycle tested quite straightforward business model remains very focused on delivering the highest possible level of client service, staying focused on doing only what we do best and operating safely and soundly. We would be delighted now to take your questions. Thank you.

Operator: Thank you. We will take our first question from Steven Alexopoulos with JPMorgan.

Steven Alexopoulos: Good morning, everyone. I wanted to start with a big picture question for Jim and Gaye, feel free to add on as well. Jim, when I look at your key growth metrics, we have business bank deposits up 50% year-over-year, wealth management assets up 50% year-over-year. Loans are up 23% and it’s your best quarter ever for the third quarter originations. When I look at the company, it’s growing faster now at $170 billion than when it was $70 billion in terms of assets. As you analyze the key business drivers, what in your mind explains much stronger than expected growth being delivered and across the entire company?

Jim Herbert: Thanks, Steve. Well, the growth is – we are embedded in the nature of the model. In that, we take extremely good care of our existing clients, and we don’t lose them, and they compound and grow, but also – and they refer their friends and the more you have of happy clients from where you are going to get referrals. And if they stay with you and you don’t lose them, you don’t lose their business. This adds to the compounding or network effect of the franchise. But I’d also add and it’s very important not to take credit for what you don’t – shouldn’t have credit for. We are in a very good market and we are – and things are going up very nicely in the stock market and in deposits and loans. And we are benefiting from all of the liquidity in the system and a rising equity market. So, it’s very important to take that into account too, and let me turn this over to Gaye for some more detail.

Gaye Erkan: Absolutely. When you look at our loan growth, over 70% of our loan growth year-over-year was driven by strong single-family residential lending, mostly with our existing clients. Single-family residential loans were up 30% year-over-year, and I would note that the loan-to-value ratio of all single-family residential loans originated in the last 12 months was under 60% as is our portfolio. And then, Steve, you mentioned the business deposits. As Jim mentioned, our model continues to benefit from the liquidity and the activity in the market. This is reflected in the higher account balances. Half of the increase in the business deposits we have seen driven by increased average account balances with our existing well-known clients. And we have also seen very strong client activity and continued referrals. So, for example, our business households were up over 20% year-over-year. And with regards to AUM, S&P 500 was up 28% year over year. So, our AUM does reflect the strong stock market as well as quite strong client inflows from both existing as well as new clients as you mentioned earlier. So, the model continues to perform nicely and benefit from what’s going on in the market.

Steven Alexopoulos: Okay. That’s helpful color. Maybe for Mike Roffler on the margin, given the recent move higher in the 10-year, how does this impact your appetite to invest some of the excess cash that’s building up? And if the tenure holds at least at the current level, do you think that NIM has bottomed here?

Mike Roffler: So, one of the things that is impacting the margin and I think we called this out a little bit is the level of liquidity and cash on the balance sheet. It’s continued to go up and it was up another $2 billion on average during the quarter. And so, that’s – that caused the decline this quarter. With respect to your question about the tenure, I do think there is probably a little bit better buying opportunities in securities. Yields are a little bit higher, but we are always going to be prudent and methodical. Just because we have the cash here, we are going to deploy it in a rational and methodical manner and most importantly, respond to client demand from a lending standpoint.

Steven Alexopoulos: Okay. So, you think NIM has bottomed based on that, would that be the best guess at this point?

Mike Roffler: Honestly, a lot of it in the near-term is based on the cash levels. If the cash levels were to dissipate a little bit, then you would probably see the NIM up a little – a couple of basis points.

Steven Alexopoulos: Okay. And then a final question, if I could squeeze one more in. It’s been quite a few quarters that the loan growth just continues to run above the mid-teens guidance. Just staying with the tenure, if that continues to grind up, this pulls the refi market a bit. I’d imagine this pandemic buying wave will burn out at some point too. Do you think in that environment, you guys could still deliver mid-teens loan growth? Thanks.

Jim Herbert: Thanks, Steve. Well, the answer – the short answer is yes. We went back and looked at ‘93 to ‘95, ‘99 to 2000, 2004 to ‘06 and ‘15 to ‘19, all of which had a rising rate environment. And each one of them was up 19%, 21%, 22%, and 19% year-over-year loan growth. So, it doesn’t really – it shifts a little bit in single family, which is the backbone of our growth, as Gaye just indicated, over 70%, I think. It’s just from purchase to refi. But remember, rates going up good economy and so more activity.

Steven Alexopoulos: Okay, great. Thanks for taking my questions.

Jim Herbert: Thank you.

Operator: We will take our next question from Ebrahim Poonawala with Bank of America.

Ebrahim Poonawala: Good morning.

Jim Herbert: Good morning.

Ebrahim Poonawala: Just following up on the loan growth, Jim, if we think about activity is strong, I guess, your business client acquisition is strong. On the other side, you have higher rates and supply chain constraints in the housing market. Just talk to us, one, in terms of – what do you expect the refi mix to look like if rates stay where they are and we go forward? And how big of a deal is the lack of supply in the housing market as you think about growth over the next year?

Jim Herbert: In our markets, we can’t speak for the whole country, of course. But in our markets, the supply constraint is still pretty tight. It is getting a little better. Listings are up slightly. And prices appear to have maybe topped a little bit. I don’t want to say they are done rising by any means. But on the other hand, we do see an occasional deal of transacting below asking very little. But – and so it’s not quite as frothy as it was, which I consider to be good. I think we probably all do. And – but our refinance volume, if you go back many years, basically has always been about 40% or greater of our total single-family loan volume. And so we seem to have a base there. And to some extent, that’s driven by the very nature of just human activity, adding room, refinancing, moving, job, etcetera. So there seems to be a pretty good base under it.

Ebrahim Poonawala: Got it. And I guess just a separate question. Mike, you mentioned the systems conversion in 1Q ‘22. Remind us once the conversion is over what that means, if anything, in terms of efficiencies or in terms of even revenue synergies that might come through once you move to the new system?

Mike Roffler: Yes. I mean, I think we’re excited about the progress and the new system and the things that will help with our colleagues in serving clients. So I think that’s what we’re really excited about. But I would say that we’re always investing for client service and continuing to support and serve our clients. And so there is always something we’re going to do. This will make us, I think, operationally a bit more efficient and also some of the costs of implementation go away, but there are other things we like to do and make sure we’re serving clients well.

Ebrahim Poonawala: Got it. Thank you.

Operator: We will take our next question from John Pancari with Evercore.

John Pancari: Good morning.

Jim Herbert: Good morning.

John Pancari: On the same systems topic. The delay, was there any related expense impact from that? And then separately, also on expenses, just wondering if you could talk a little bit about wage inflation and if you are seeing that impact across your business, just given that you’re still active on the hiring front and that you’re investing pretty heavily still in technology, which is an area that has seen notable impacts from wage inflation? Thanks.

Mike Roffler: First, on the conversion, really no change to our expense outlook or guidance, it was a planned fourth quarter. So those expenses are – were already projected, and they are still there. And in the first quarter, it’s very modest in terms of a little extra. And then the second, in terms of wage inflation, I mean the one thing I would highlight is, we did recently increase our minimum wage to $30 for colleagues – for all colleagues across the bank. And so we think that’s a great step for our colleagues. And I think we have been hiring, and it is very competitive from a hiring standpoint. And so I don’t think it’s necessarily meaningful, but we have seen a little bit more competition for new hires and some of that does come down to wages.

John Pancari: Got it. Alright. Thanks, Mike. And then separately, on the loan growth front. On your production figures on Page 13, I know multifamily, CRE, construction, all saw very strong production in the quarter. Can you just talk about what you’re seeing there in the CRE book that’s starting to result in some improving production there? Thanks.

Gaye Erkan: Yes, absolutely. As you have pointed out, both multifamily and commercial real estate, we have seen some increased activity. Multifamily, let me start with that, is performing strongly across all of our markets. You’re seeing new leasing activity being very robust, driving down vacancy rates. And multifamily lending has been driven mostly by the California, the West Coast and majority of it is refinanced activity with existing clients. On the commercial real estate front, as you know, as its smaller deals, we don’t do large loans. And that’s mostly focused on either multiuse or office type of buildings, but on the smaller scale and Class A buildings. And we don’t have much exposure as you know to retail and hospitality, that’s the one area macro wise. It’s still struggling a bit, but it’s great optimism and tailwinds there as well with our TON potential opening of international travel.

John Pancari: Got it. Alright. Thanks, Gaye. Appreciate for taking my questions.

Gaye Erkan: Thank you.

Operator: We will take our next question from Dave Rochester with Compass Point.

Dave Rochester: Hey, good morning guys. Nice quarter. Just wanted to start on the deposit side, growth was fantastic yet again this quarter. Can you just talk about any specific drivers impacting those trends? And I know you generally have stronger deposit growth in the back half of the year. So just kind of wanted to confirm you still expect that momentum to carry into 4Q?

Gaye Erkan: Yes, absolutely. So we have seen the deposit growth coming in both in terms of increased average account balances that we have seen across consumer as well as business and quite strong client activity and referral activity, especially on the business side. It has been well diversified across client types, regions and industries and a healthy mix of both new and existing clients. In terms of consumer, we have seen, again, a healthy mix from new and existing client referrals. And business side, technology, private equity and real estate has been performing greatly. About half of our growth is coming from these particularly strong sectors, but no vertical in our deposit franchise accounts more than 12% of our total deposits. So happy colleagues, happy clients and more referrals, we’re seeing that on the business side as well.

Dave Rochester: That’s great. I appreciate that detail. And then maybe just a quick one on the borrowings front, can you just remind us how much of that matures in 4Q and what the maturity schedule looks like for next year? And I guess, a bigger picture question, now that you’ve got cash balances materially exceeding the balance of those FHLBs. Is there any reason to hold on to those?

Gaye Erkan: Yes. We have about just over $1 billion in the fourth quarter and an additional $3 billion in the next year, so call it just over $4 billion coming due. And depending on the rate environment and deposit flows that we will make decisions as we go opportunistically on those, but it does provide some room for improvement on the yield side given the yields that they are carrying.

Dave Rochester: Alright, great. Thank you very much.

Gaye Erkan: Thanks.

Operator: We will take our next question from Bill Carcache with Wolfe Research.

Bill Carcache: Thanks. Good morning. Jim, your comments at the start of the call around the consistency of the model and make a lot of sense, but I wanted to ask if you could comment on how you’re thinking about the pace of deceleration in loan origination growth from here? Last quarter was your strongest ever, and this quarter was your strongest third quarter ever. So it would be natural to see some deceleration of these very high levels, especially as you go up against tougher comps. So just would be curious to hear your thoughts there on the pace. And then separately, if you could also discuss what kind of impact, if any, you think the Fed’s tapering could have on your mortgage business and Gaye, please would also love to hear your thoughts?

Jim Herbert: The – I think the loan volume, the loan volume is never forced. Let me – the reason I’m hesitating just how to say this. We never force our loan volume. We do as many good deals as we are exposed to opportunistically. But I would take you back to our investor deck, where about 80% or 85% of our business and over 60% is done with existing clients and 85% roughly is done with existing clients and their direct referrals. That activity does not really reflect a lot of volatility. The refinance component of it has some volatility in it. But those clients are there, they are doing, they are active. The economy is quite active, and they will bring their business to us at the pace at which they bring it to us. And we will compete for it. And in most cases, we will win it. When you have a Net Promoter Score of over 70, you tend to win the business with your existing clients or their referrals. And that’s the backbone of the model. And so it’s not as nearly as much a market condition-driven model as it is a client need and demand model. And right this moment, our clients are very active. In terms of rising rate or tapering, if you want to, let me just comment on this and then turn it to Gaye for maybe additional comments. But because we grow, we have – between the growth volume which remind you – maybe it’s intrinsic in this, but to state the obvious, new volume was always priced at current market. And so if you have new volume and you put it together with variable rate loans, repayments, you’ve got about 52% of our assets or our loan book is repriced in the year, over half. So if you look back at the company in rising rate environments, we’ve done just fine.

Gaye Erkan: Yes, I would just add that – and the various cycles that we have seen in a rising right environment, refinance active. Single-family residential has been the majority of the driver, and it’s diversified with a lot with the known clients and refinance activity has remained largely above 40% of our single-family originations given that majority of that comes from clients with loans at other institutions and a great acquisition tool. So that stays pretty much steady across different rate cycles. And with tapering potentially curve steepness if that were to be the case, would also be helpful. And in a rising rate environment, the balance sheet growth safe, mostly with known existing clients, known credit, that’s in mid-teens plus the repayment that we are seeing, even though it slows a bit, it still continues, plus the floating rate assets. So over 50% of our loaning portfolio reprices over time, which is great.

Bill Carcache: That’s really helpful. Thank you. On the wealth management side, you highlighted the success that you continue to have adding teams, and that’s been a nice contributor to your client inflows. Have you had any notable outflows recently? If you could speak broadly to whether you have any concerns around attrition at all and also discuss how the pipeline looks? Any color you can give on the expectations on the ongoing addition of new teams?

Jim Herbert: We’ve not had any notable attrition, either in teams, people or assets. The pipeline is an ongoing process. It’s a little – it’s unpredictable because is an ongoing it’s the hiring of individual teams. Those are highly specialized folks, and we have conversations going on at all times. I would – I think this year’s effect as this year rate is probably reflective of what we could expect going forward, but it’s very hard to predict and it’s certainly hard to predict quarter-to-quarter. We just have – what is happening, however, is that we have within the team that we hire a bit of a network effect, just like we have client network effect. We basically have people talking to cohorts – to their friends back at where they came from, saying, come on over the water is fine.

Bill Carcache: Very helpful. If I could squeeze in one last one. Mike, you addressed the labor market shortages and the impact on the competitive labor markets having on you guys. But I was wondering, within business banking, is your client base – can you give a little bit of color on any of the challenges that they are bringing up with you guys around labor market shortages and the supply chain constraints that they are facing or would you say, your business banking customers are sort of in verticals that are relatively more insulated from some of those issues perhaps than what we’re hearing from others.

Mike Roffler: Yes. I don’t think – I think the challenges that we talk about in terms of hiring that sort of consistent, I don’t think I’d point out anything that’s unusual relative to us or what you’re hearing.

Bill Carcache: Okay. Thank you for taking my questions.

Operator: And we will take our next question from Casey Haire with Jefferies.

Casey Haire: Great. Thanks. Good morning guys. Follow-up on the NIM, where are new money loan yields today as well as securities reinvestment rates?

Gaye Erkan: So, we are seeing the real estate new money yields blended is about $2.90. Single-family is a little over, around $2.75, $2.80ish, multifamily at $3.25 and CRE, we are seeing at $3.5. And when it comes to securities portfolio, the investments, the traditional pass-through type of investments are coming in around 1.5% to 2%. And the short-term, we have done some short-term HQLA purchases, but it was a blend of floaters and short-duration CMOs and project loans. That’s coming in about 75 basis points blended. And then on the muni side, we did do some purchase on munis and that at high 2s, low 3s on TEY. So, the new money yields to summarize coming around $2.90, with a marginal funding cost at about 15, 20 basis points and then you add on the elevated cash levels that brings you to the lower end of our guidance to $2.65 to $2.75 guidance.

Casey Haire: Excellent. Thanks for the color. And then on the $7 billion of single-family resi originations, can you just give a breakdown of how that’s coming across geographically through your markets and how that’s – how that compares versus historical? Is it pretty consistent, or is there a market that’s pushing a little harder than others?

Gaye Erkan: Actually, we are seeing the activity quite robust across all of our markets and Manhattan has been catching up quite a bit as well. Both – now, what we are seeing is suburbs have been active and city centers are also getting very active, including Manhattan. So, when you look at the months of supply across all of our markets with the exception of Manhattan is within 1 month to 2 months, whether it’s floor to Los Angeles or Boston or San Francisco. And in Manhattan, we are seeing that to be more of a five months of supply. But the activity is robust, especially on the purchase side across all of our markets.

Jim Herbert: It’s just not enough. I would just add to this thought. Interestingly enough, the demise of the Center City has been very prematurely announced. The activity in the Center City, San Francisco, New York, Boston, would say that the core of the cities is in fact quite strong.

Casey Haire: Understood. Just last one big picture question on efficiency, you guys year-to-date running at 62%, the low end of your guide. And that’s in spite of a lot of things happening that are a drag on the efficiency ratio, wealth management NIM compression, you got the conversion going on and your Hudson Yards build out. It just feels like you guys have figured out a way to run more efficient. I am just curious – are you guys – is this – how do you guys feel about improving that efficiency ratio or at a minimum, running towards the lower end of that 62% to 64% next year and beyond?

Mike Roffler: Yes. I mean we are obviously pleased that at nine months in that we have been running at the low end of the range, and this quarter was a little bit even lower. I would note that our revenue and expense growth have been pretty well matched throughout the last few quarters. And part of that, I know there was a question about wage inflation, but what’s really driving the increase in salaries is the growth from production. And so you are seeing increases in assets under management, increase in deposits. There is an expense associated with that from an incentive standpoint that’s matching pretty well with the growth in revenues, which is really over a long horizon is probably more of our focus than squeezing the last dollar out, right. We are investing for client service in the future. And so it’s important, those things align over time. And that’s what I think we are most pleased about with the last several quarters.

Jim Herbert: If I could comment on this for just one second, it goes to the core of the model, the comment that Mike just made about the bonus component of our compensation. Remember that we do have an incentive approach to both deposits, AUM and loans with callback on the loan side. But our attrition of clients is somewhere in the 2% range. So, our approach to this is the cost of bringing the client in, getting them happy, satisfying them, getting them up in Net Promoter Score into the 70s and 80s is a lifetime approach to the value of the client. That’s all we think about. And the question is, if you are going to have a client for 20 years, 30 years, 40 years, the upfront compensation to bring them in and land them happily inside the bank and keep them is modest or less.

Casey Haire: Thank you.

Operator: We will take our next question from Ken Zerbe with Morgan Stanley.

Ken Zerbe: Great. Thanks. Good morning guys.

Jim Herbert: Good morning Ken.

Ken Zerbe: Actually, maybe a question for Mike to start with, just – I don’t want to ask another big picture question, so I won’t. But specifically in terms of fourth quarter efficiency ratio, like obviously, you are averaging so far this year, call very low 62%. I guess my question is like what are you expecting in fourth quarter? Because I am just trying to figure out why you wouldn’t change your guidance to be a little more closer to the very low end of that 62% to 64% unless you expect something more material or materially higher expenses in the fourth quarter? Thanks.

Mike Roffler: There is – I wouldn’t say there is anything we are staring at that’s unusual in the fourth quarter with 9 months in Ken, I think your observation is right that we will probably be towards the lower end on an annual basis, which puts us sort of in the right around 62% probably in the fourth quarter. As Jim just mentioned, we talked about the production does lead to incentives. And so some of those obviously get looked at, at the end of the year based on where final balances end up. And sometimes you see a little bit of extra there. But there is nothing unusual staring at us that doesn’t tell us we are sort of in the lower end of our range.

Ken Zerbe: That’s good to hear. And then just a different question, in terms of foreign exchange fees, I know there – like last quarter, they were fairly high. And I think you guys mentioned they were sort of represented a healthy level of client activity. This quarter, they are even stronger. Can you just talk about the outlook for foreign exchange fees? I mean are we at sort of a sustainably higher level, or is this a particularly unusually high quarter? Thanks.

Jim Herbert: It’s – quite frankly, it’s hard to answer. The foreign exchange activity is very strong, and the folks that are running that have done an extraordinary job of building the business is tremendous. And the adoption of foreign exchange – of us for their foreign exchange activities by our clients is ramp – continues to ramp up, and we have added people in the area to service our clients. Having said all that, it’s quarter-to-quarter a little bit. It’s driven mostly by the velocity of business activity and business activity generally is strong and picking up. And so the foreign exchange activity will parallel pretty much that plus the growth we have by – having new clients adopt us for their provider and adding some people in terms of delivery of service and sales.

Ken Zerbe: Got it. Understood. Perfect. Thank you very much.

Operator: We will take our next question from Chris McGratty with KBW.

Chris McGratty: Hi. Good morning. I think in the prepared remarks, you guys mentioned that capital call utilization was up around 100 basis points. I want to, number one, confirm that and also provide any – see if you could provide any color on the driving factors? Thanks.

Mike Roffler: Yes. Just to confirm, our capital call utilization was just over 37% at quarter end. And it was just under 36% at the end of last quarter. So, it is up just about 1.5%.

Gaye Erkan: Yes. And it is in our historical range that we have seen mid-30s to low-40s. So, the slight increase in the utilization is driven by increased deal activity. So, we are seeing the PVC fundraising, deal activity and exits to remain quite strong and expected to continue the deal activities double the pre-pandemic levels, more dry powder above the pre-pandemic levels. And the PVC lifecycle is a bit shortening from fundraising investments to exits coming a little bit ahead of schedule. So, it’s reflected in that. But it’s hard to anticipate. So, it has been in the mid-30s to low-40s.

Chris McGratty: Okay. Thank you.

Operator: And we will go to our next question from Andrew Liesch with Piper Sandler.

Andrew Liesch: Hi, good morning everyone. Thanks for taking my questions. Mike, just curious, were there any one-time performance fees in the investment management fee income line this quarter?

Mike Roffler: No, there were not. That was just – the investment management is just based on where AUM ended last quarter.

Andrew Liesch: Got it. Okay. Thanks. And then Jim and Gaye, everything seems to be firing on all cylinders of balance sheet growth and wealth for new client acquisition. And this has been going on quite rapidly since the onset of the pandemic. So, I guess my question is, what can disrupt this momentum in these trends? What’s worrying you right now?

Jim Herbert: No, I think the thing that worries us pretty much all the time is two things. One, an anecdotal whoops somewhere in the portfolio. We don’t see them now, but they are by nature anecdotal. And then number two, a rising rate environment initially reflects a strong economy, but in due course, can go too far. We don’t see that happening in the near future. And then, I guess, the third thing always that everybody worries about is some black swan event around the world.

Andrew Liesch: Got it. Thank you. Thanks for taking my question.

Operator: We will take our next question from Terry McEvoy with Stephens.

Terry McEvoy: Hi, good morning. Just one last question on my list, within the wealth management assets, most of the growth occurred in brokerage and money market mutual funds, pretty limited growth within the investment management area. And I guess my question is, from a profitability and revenue standpoint, where would you like to see that growth? And how much of an impact is growth in the mutual fund kind of impact quarterly performance and any commentary on why the investment management was flattish in Q3?

Gaye Erkan: So, the investment management also depends on the client activity. So, we have seen strong client inflows when you look at year-over-year as opposed to quarter-over-quarter. So – and majority of what we do with our clients is investment management. And brokerage had some transactions and higher transaction volume this quarter. So, we are seeing that reflected. But we are very pleased that insurance, trust, foreign exchange in addition to investment management continues to drive the growth. We used to have our PWM fees to revenues at about 5% or so about in the last decade, and now we are at over 15% share. So, we are very pleased with the continued growth. And that speaks to the holistic approach of banking and the wealth management of the client and the teamwork that drives that internally. So, that’s where we differentiate us the most. It’s not some separate silo transactions. It is mostly driven by holistically serving the client with an amazing teamwork across banking professionals and wealth management professionals. And the cash that was elevated, we did move some of it to off-balance sheet tools in the toolkit. That’s what you are seeing in the money market mutual funds growing, but that profitability and revenue off of that is small.

Terry McEvoy: Great. Thanks for the incremental color. Appreciate it.

Gaye Erkan: Thanks.

Operator: And we will go to our next question from David Chiaverini with Wedbush.

David Chiaverini: Hi. Thanks. A couple of follow-up questions. The first on capital call lines, when you went through the loan pricing metrics and maybe I missed it, but did you provide the pricing on capital call lines?

Gaye Erkan: I did not. Thank you for bringing that up. So, it’s usually around prime minus 50, prime minus 75, around that level that we are seeing that coming in.

David Chiaverini: Thank you for that. And then a follow-up on the performance fees, usually, you guys had some come through in the fourth quarter. Do you have a sense of the magnitude those could be, or is it too early to tell?

Mike Roffler: So, you are right, the last two quarter – the last 2 years, we have had a fourth quarter fee. It’s probably too early to tell, but sort of the preliminary is we don’t expect it to be a meaningful amount like it has been in the last couple of years. And so I don’t expect to see a bump from that in the fourth quarter.

David Chiaverini: Great. Thanks very much.

Operator: We will take our next question from Tim Coffey with Janney.

Tim Coffey: Thank you. Good morning everybody.

Jim Herbert: Good morning.

Tim Coffey: We have seen some movement in real estate values over the summer. And I am wondering, as it relates to your commercial real estate and multifamily investor clients, do you think that move encouraged them to get off the bench and put some of their dry powder to work?

Jim Herbert: Yes, a little bit. Commercial real estate and of course buried in that is retail and all kinds of things office is still slow. Multifamily on the other hand has picked up. And multifamily values are stabilized at good levels, high levels and rents and vacancy is stabilizing. And there is a lot more forward vision in the issue of rent subsidies. And so that is stimulating multifamily activity. The good news is there is also a fair amount of new multifamily activity going on, which I think the country definitely needs. So, we are seeing a pickup, as Gaye indicated earlier.

Tim Coffey: Okay. And then Jim, if I can stick with you, have you seen a migration – meaningful migration of your clients from the coast to more inland areas where you are not currently – you don’t currently have footings? I mean we have heard news about Texas. Bozeman, Montana certainly has seen a lot of inflow. I am wondering if you have seen any migration like that?

Gaye Erkan: So, actually majority of clients that do move have stayed within our market. So, the migration activity has been very muted in terms of going out of first public footprint. And in the cases where we have some clients, the digital and operational enhancements that we have made allows us to continue to serve these clients, especially on the deposit and wealth management side. And we have seen a lot – so for example, if the client moves from an has into the suburbs or a second home in the suburbs, we have seen that to happen. Some primary residence changes, although limited, whether it’s the Florida or Wyoming, we welcome those clients over there as well. So, majority of that migration has been within First Republic footprint.

Tim Coffey: Okay. Great. Thanks Gaye. And then just one last question. Last quarter, you kind of expressed some interest in perhaps expanding the personal line of credit product. And I am wondering, did you do anything on that in the quarter?

Jim Herbert: Not – that product is going very, very well. We are running at a rate of around 6,000 new households per year. And we are very, very comfortable with that rate if it could go up without credit change, we would be delighted, and we are working on that. But remember, it’s only about a year old now, a year in a little bit. And the results have been actually stunning. As a cohort, we have greater deposits than we have money out.

Tim Coffey: Thank you. Those are my questions.

Operator: And that concludes today’s question-and-answer session. At this time, I will turn the conference back to Jim Herbert for closing remarks.

Jim Herbert: Thank you all very much for joining us today. Have a good day.

Operator: This concludes today’s call. Thank you for your participation. You may now disconnect.