Send me real-time posts from this site at my email

First Republic Bank (FRC) Q2 2021 Earnings Call Transcript

Image source: The Motley Fool.

First Republic Bank (NYSE: FRC)
Q2 2021 Earnings Call
Jul 13, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to First Republic Bank's second-quarter 2021 earnings conference call. Today's conference is being recorded. [Operator instructions] I would now like to turn the call over to Mike Ioanilli, vice president and director of investor relations. Please go ahead.

Mike Ioanilli -- Vice President and Director of Investor Relations

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.

10 stocks we like better than First Republic Bank
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and First Republic Bank wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of June 7, 2021

Jim Herbert -- Founder, Chairman, and Chief Executive Officer

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 a 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. Nonperforming assets at quarter end were only 8 basis points of total assets.

We remain, 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. As represented -- this growth represented a substantial portion of the quarter's total loan activities, including both purchase and refinance. For some perspective on the long-term stability of First Republic's service model, residential loans have remained steady at approximately 60% of our loan portfolio for the entire past two decades. This is a very safe asset class, particularly with our stringent underwriting standards and is a key to us attracting new households.

During the second quarter, we opened our first banking offices in Hudson Yards. Clients are responding well to our presence in the area and foot traffic has been actually quite good. Our other new markets, including Palm Beach and Jackson Wyoming, continue to perform very well. Overall, it's been a strong and successful first half of 2021.

Before turning the call to Gaye, I would like to take a moment to congratulate her on her appointment as co-CEO. Gaye has been an inviable contributor to our performance, and I'm really delighted to continue our successful partnership at this new level. Working together, we intend to ensure the consistency of First Republic's culture, which is particularly important as we emerge from the pandemic. Now let me turn the call over to Gaye Erkan, co-CEO and president.

Gaye Erkan -- Chief Executive Officer and President

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 and 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 toward minimizing transactional time to create more time to build further trust and deepen relationships with clients and to serve our communities.

Let me now provide some additional comments about the quarter. Loan origination volume was $16.8 billion, our best quarter ever. I would note that the weighted average loan-to-value ratio for all real estate loans originated during the second quarter remained conservative at 58%. Single-family residential volume was $8.7 billion, also a record.

Refinance accounted for 49% of single-family residential volume during the second quarter. A large percentage of refinance activity continues to come from clients with loans at other institutions, which provides us with great opportunities for new client acquisition. For perspective, throughout the past 10 years across varying interest rate environments, refinance activity has always accounted for at least 40% of single-family volume. Turning to business banking.

Business loans and line commitments, excluding PPP loans, were up 27% year over year. Capital call outstanding balances were down quarter over quarter, driven mainly by a reduction in the utilization rate from 40% to 36%. This is in line with our historic utilization range of mid-30s to low 40s. In terms of funding, it was an exceptional quarter.

Total deposits were up 37% from a year ago, supported by client activity, as well as a very meaningful impact from both fiscal and monetary policy. We continue to maintain a diversified deposit funding base. Checking deposits increased by $5.3 billion in the second quarter and represented 68% of total deposits. Business deposits represented 61% of total deposits, up modestly from the prior quarter.

The average rate paid on all deposits for the quarter was just 7 basis points, leading to a total funding cost of 20 basis points. Turning to wealth management, assets under management increased to $241 billion. This is an increase of $46 billion year to date, of which more than half was from net client inflows. Year to date, wealth management fees were up 39% from the same period a year ago.

During the quarter, we welcomed four new wealth management teams to First Republic. The strength of our integrated model continues to attract very high-quality teams. Our second-quarter results demonstrate the power of our service model and the dedication of our exceptional colleagues. Now I would like to turn the call over to Mike Roffler, chief financial officer.

Mike Roffler -- Chief Financial Officer

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. We continue to expect our net interest margin for the full-year 2021 to be in the range of 2.65% to 2.75%. Importantly, net interest income was up a very strong 27.5% year over year.

This is due to the robust growth in earning assets and a stable net interest margin. We are pleased with our efficiency ratio, which was 62% for the second quarter. Our expense growth remains proportionate to our revenue growth as we continue to invest in the franchise to deliver outstanding client service. I would note that our 2020 Net Promoter Score actually increased from the prior year.

We continue to expect our efficiency ratio for the full-year 2021 to be in the range of 62% to 64%. Let me talk for a moment about CECL, which has been in place for six quarters now. CECL's formulaic guidelines take into account our loan growth, loan mix and historic credit performance. In accordance with CECL, our provision for credit loss during the quarter was $16 million, reflecting our continued loan growth.

Since CECL became effective at the start of 2020, we have added $160 million to our reserves, while only experiencing $4 million of losses. Turning to the tax rate. Our effective tax rate for the second quarter was 17.4%. The decline in the tax rate from the prior quarter was due to increased tax benefits resulting from stock awards vesting during the second quarter.

These tax benefits added $0.11 to earnings per share in the second quarter. This compares to $0.03 in the same quarter last year. Under current tax law, we continue to expect our tax rate for the full-year 2021 to be in the range of 20% to 21%. Overall, this was a great quarter in the first half of the year.

Thank you, and now I'll turn the call back over to Jim.

Jim Herbert -- Founder, Chairman, and Chief Executive Officer

Thank you, Gaye, and 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. And it continues to work quite well. Now we'd be delighted to take any questions.

Questions & Answers:


Operator

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

Steve Alexopoulos -- J.P. Morgan -- Analyst

Let's start on the loan side. And one of the highlights of the quarter was the almost $9 billion of single-family originations. The question is how did the 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 -- Chief Executive Officer and President

So Steve, let me take that question. We see our pipe -- so first of all, the answer is that where our rate locks 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 locks coming off the peak levels.

That reflects the limited inventory, the supply constraints in 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 -- J.P. Morgan -- Analyst

OK, that's helpful. And maybe for you, too, Gaye, on deposits, 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 -- Chief Executive Officer and President

Actually, so on the business side, two-thirds of that business deposit growth came from nonfinancial. 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 consumer is 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 -- J.P. Morgan -- Analyst

OK, 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 -- Founder, Chairman, and Chief Executive Officer

Thanks, Steve. Actually, initially, probably not very much. As you know well, actually, Gaye and I have 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 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 -- J.P. Morgan -- Analyst

OK, 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 -- Morgan Stanley -- Analyst

All right. Great. Thank you. 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'd say, growing probably far less. How much of the investment in the franchise is hiring people versus sort of nonpeople-related items?

Mike Roffler -- Chief Financial Officer

Thanks, Ken. I think the one thing I'd first focus on when we look at compensation is there's a large portion of 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 talked about earlier, all those lead to greater incentives. And the second part of your question, yes, 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 of the bank because of the volumes, we've had to make sure loan operations, deposit services, investment management operations are all staffed accordingly and making sure, again, you're giving great service all the way through the process.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. OK. Maybe a different question. Just in terms of wealth management, I'm just trying to understand sort of how to think about the fee income.

Because I generally know that your fees are based on sort of a one-quarter lag. So whatever happened in the first quarter affects second-quarter fees. But with fees up 15% this quarter sequentially, AUM last quarter, in first quarter, I guess, was up 12.5%, it was 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 these? Thanks.

Mike Roffler -- Chief Financial Officer

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 -- Morgan Stanley -- Analyst

Got it. OK, perfect. Thank you very much.

Operator

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

John Pancari -- Evercore ISI -- Analyst

Good morning. I 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 it remains around that historical level? Or do you think it could decline below that level for the time being? Just want to get your thoughts there.

Thanks.

Gaye Erkan -- Chief Executive Officer and President

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, 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 PVC 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 -- Evercore ISI -- Analyst

Got it. OK, 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 indicated 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 new production LTV level? And just if you could talk about what's out in your reserve expectation on that front? Thanks.

Gaye Erkan -- Chief Executive Officer and President

So in terms of the credit underwriting standards, we remain to -- we will remain conservative when it comes to multifamily and CRE both. And the commercial real estate picture is very much region and product specific. We don't do much office, but just as general market color, office remains soft in the city centers, and there'll be a clear outlook later in the year as we see how people are -- how companies are bringing people back to the offices. We have a very limited exposure to CRE retail and hospitality.

While we are 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 refinanced, with experienced owner managers that value our service and holistic banking relationship.

Mike Roffler -- Chief Financial Officer

And John, you mentioned reserves. One thing that you talked about, you highlighted in the slide deck, there's not a large expected loss other than 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, 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 more than appropriate.

John Pancari -- Evercore ISI -- Analyst

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 inning are you on the project? Thank you.

Gaye Erkan -- Chief Executive Officer and President

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 testings. And we're doing a lot of end-user trainings as well across the bank. So it's in line with our expected time line and we intend to finalize it before -- by end of the year, by end of the year.

John Pancari -- Evercore ISI -- Analyst

Great. All right. Thank you for taking all my questions.

Gaye Erkan -- Chief Executive Officer and President

Thank you.

Operator

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

Bill Carcache -- Wolfe Research -- Analyst

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 -- Founder, Chairman, and Chief Executive Officer

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 a personal line of credit lending, a larger share of millennial households have homes already.

That's almost doubled, in fact, from what we were doing before under the student loan refi. And so it's actually the quality of those households that's 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 first condo or whatever it may be. So I think the business is actually going very strongly.

Gaye Erkan -- Chief Executive Officer and President

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 along -- across the lending, deposits and wealth management, coupled with the human trusted advisor, resonates with our millennial clients.

Bill Carcache -- Wolfe Research -- Analyst

That's helpful. If I can switch gears to wealth management. Can you discuss your momentum in 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 onboard.

Gaye Erkan -- Chief Executive Officer and President

So we're very pleased that we're seeing great quality of teams joining us. We have welcomed four new PWM teams, private wealth management teams, hired in the second quarter, and year to date, seven new private wealth management teams. 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 -- Founder, Chairman, and Chief Executive Officer

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

Gaye Erkan -- Chief Executive Officer and President

Yeah, preferred deposits, for example, are up 67% year over year.

Bill Carcache -- Wolfe Research -- Analyst

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 -- Founder, Chairman, and Chief Executive Officer

It probably won't make much difference operationally as to how we run the business. We do run a very matched book, I think, as Gaye referred to earlier. And so if you look at our simulation models, why 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 other 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 the 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 price to market of 15% per year, maybe 18% or whatever the growth rate is. And that -- those two items, together, equal 30 -- between 30% and 40% of the balance sheet. So we reprice the balance sheet about 30%, 40% every year from repayments and growth to market.

That allows us to keep up with the change in rates rather nicely.

Bill Carcache -- Wolfe Research -- Analyst

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

Gaye Erkan -- Chief Executive Officer and President

Thank you.

Operator

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

Casey Haire -- Jefferies -- Analyst

Thanks. Good morning, all. Maybe just a couple of follow-ups on the NIM. Guidance, still intact.

But just some color on where new money loan yields are and also for securities, given a pretty volatile long end of the curve.

Gaye Erkan -- Chief Executive Officer and President

Absolutely. So on the single-family residential side, we are seeing in 2.75% to 3% type of range coming in mostly in the high twos, then when we look at the rate locks. Multifamily, about 3.25%, 3.5% for safe deals and CRE, mostly mid-threes, 3.5%. And on the investment side, so on the muni side, the tax equivalent yield is 2.75% to 3%.

And on the government and agency HQLA which, again, Jim referred earlier to ALM 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 bps and the traditional agency HQLA is around 1.5% to 2%. So all in all, we're seeing the additional marginal assets coming in, in the high twos, more around the real estate assets coming in, in the 2.95% 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%, 2.75% as we have printed this quarter.

Casey Haire -- Jefferies -- Analyst

OK, all right, great. So pretty stable. On that cash position, what is -- I mean, I know timing in terms of working that down is a wildcard, but what do you guys see as the ideal minimum cash position for this sized balance sheet?

Mike Roffler -- Chief Financial Officer

You know, if you thought 4% to 5% of the balance sheet would be sort of like $6.5 billion 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 billion. And so you bring that down by $3 billion, $4 billion, your margin is going to be toward the top end of that guided range.

Casey Haire -- Jefferies -- Analyst

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

Mike Roffler -- Chief Financial Officer

Yeah, we're definitely talking about the learnings we've had from the pandemic and what are things maybe we used to do that you don't have to do as much of, 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 sort of a 1%, a 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 really start to see it probably more in the fourth quarter. And also, as Gaye mentioned and talked about, we are deep into the core conversion process here for the next couple of quarters.

Casey Haire -- Jefferies -- Analyst

OK, great. Thanks. Thanks for taking the questions. And Gaye, congrats.

Gaye Erkan -- Chief Executive Officer and President

Thank you very much.

Operator

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

Chris McGratty -- KBW -- Analyst

Hi, good morning. I wanted to follow up on Casey's question about efficiency and maybe ask it a little bit different on just operating leverage. Maybe Mike, 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 next tightening round? Thanks.

Mike Roffler -- Chief Financial Officer

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 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 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 -- Founder, Chairman, and Chief Executive Officer

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 in operating systems and procedures 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.

Quality of delivery of service is a primary objective. And then, we grow, and we grow because the clients grow. As Gaye has 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 -- KBW -- Analyst

That's great color. I appreciate that. Maybe just one final one, Mike, on the model. I know your Boeing income typically bumps up in the third quarter.

It did so this quarter. I'm wondering, did you add more Boeing investments? And should we expect a ramp in Q3?

Mike Roffler -- Chief Financial Officer

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 as sort of the new run rate after the purchase is factored in.

Chris McGratty -- KBW -- Analyst

Great. Thanks a lot.

Operator

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

Andrew Liesch -- Piper Sandler -- Analyst

Good morning, everyone. Gaye, congratulations on the announcement. Great to see.

Gaye Erkan -- Chief Executive Officer and President

Thank you.

Andrew Liesch -- Piper Sandler -- Analyst

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. But now, with TCE, the tangible assets now below 7% for the last couple of 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 -- Chief Financial Officer

So Andrew, I think you bring up a good point that we talk about the sort of 11.5, the extra cash carrying impacting 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 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 -- Piper Sandler -- Analyst

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 -- Wedbush Securities -- Analyst

Hi. Thanks. I had a follow-up question on loan pricing on resi mortgage. You mentioned about how you're getting a yield of 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 -- Chief Executive Officer and President

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

David Chiaverini -- Wedbush Securities -- Analyst

Great. That's good to hear. And on the net interest margin, with the guidance 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 -- Chief Executive Officer and President

No, I would reinforce the 2.65%, 2.75% because the deposit is coming in strong as well, like elevated cash flows 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 to both.

David Chiaverini -- Wedbush Securities -- Analyst

Yeah, that makes sense. And then, one modeling question, shifting to expenses. Is the Hudson Yards expense 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 -- Chief Financial Officer

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 -- Wedbush Securities -- Analyst

Got it. Thanks very much.

Operator

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

Jared Shaw -- Wells Fargo Securities -- Analyst

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

Mike Roffler -- Chief Financial Officer

No, there was not.

Jared Shaw -- Wells Fargo Securities -- Analyst

OK. And then, you know, I guess, more generally, how sensitive do you think the purchase market is in your primary geographies to potentially higher rates?

Jim Herbert -- Founder, Chairman, and Chief Executive Officer

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 -- got us -- New York is the exception. There's plenty of supply in New York.

But everywhere else, there's virtually nothing.

Jared Shaw -- Wells Fargo Securities -- Analyst

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

Gaye Erkan -- Chief Executive Officer and President

Thank you, Jared.

Operator

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

Tim Coffey -- Janney Montgomery Scott -- Analyst

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 reduction in the quarter, it seems like it ticked up 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 borrowers having greater liquidity than we have before?

Gaye Erkan -- Chief Executive Officer and President

That would be a quarter-over-quarter fluctuation. We will -- our overall real estate lending, 80% of our lending, is real estate loans with a weighted average in the mid-50s. So slight pickup 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 -- Janney Montgomery Scott -- Analyst

OK, OK. And then, my other question was, do you see any benefit to First Republic from Wells Fargo canceling the personal lines of credit?

Jim Herbert -- Founder, Chairman, and Chief Executive Officer

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

Tim Coffey -- Janney Montgomery Scott -- Analyst

Yeah, I would think not. What percentage of your millennial clients, would you say, use a personal line of credit?

Jim Herbert -- Founder, Chairman, and Chief Executive Officer

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 -- Janney Montgomery Scott -- Analyst

OK. And is the typical line amount $100,000 or greater?

Jim Herbert -- Founder, Chairman, and Chief Executive Officer

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 $30,000 to $35,000. So that product is 125% self-funded with checking.

Tim Coffey -- Janney Montgomery Scott -- Analyst

Great. OK, all right. Those are my questions. Thank you very much.

Operator

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

Brock Vandervliet -- UBS -- Analyst

Thanks for taking 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 in the jumbo resi product?

Gaye Erkan -- Chief Executive Officer and President

So we are in the mid-50s, high 50s range, usually in the single-family residential mortgage. So the uptick 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 -- UBS -- Analyst

OK. And just we're seeing, especially among some of the independent residential originators, a very intense competition. At least one of them has introduced a jumbo product and the LTVs are, in some cases, significantly higher than that level. Are you seeing any evidence of competition from new corridors around jumbo?

Jim Herbert -- Founder, Chairman, and Chief Executive Officer

Let me -- 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 realize how good it was. But we did learn, through almost 40 years of jumbo production, how to do it. And one of the No.

1 things you do not want to do is to raise your LTV because they are larger and if there's a problem, we 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 -- UBS -- Analyst

OK, all right. Thanks very much.

Operator

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

Jim Herbert -- Founder, Chairman, and Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Mike Ioanilli -- Vice President and Director of Investor Relations

Jim Herbert -- Founder, Chairman, and Chief Executive Officer

Gaye Erkan -- Chief Executive Officer and President

Mike Roffler -- Chief Financial Officer

Steve Alexopoulos -- J.P. Morgan -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

John Pancari -- Evercore ISI -- Analyst

Bill Carcache -- Wolfe Research -- Analyst

Casey Haire -- Jefferies -- Analyst

Chris McGratty -- KBW -- Analyst

Andrew Liesch -- Piper Sandler -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

Tim Coffey -- Janney Montgomery Scott -- Analyst

Brock Vandervliet -- UBS -- Analyst

More FRC analysis

All earnings call transcripts

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


Source

Popular posts

Welcome! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue