First Republic Bank

Thank you, and welcome to First Republic Bank's Second Quarter 2018 Conference Call. Speaking today will be Jim Herbert, the bank's Chairman and Chief Executive Officer; Gaye Erkan, 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 that are subject to risks, uncertainties, and assumptions. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, see the bank's FDIC filings, including the Form 8-K filed today, all available on the bank's website.

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

Thank you, Shannon. We continue to deliver safe, strong, and organic growth.

It was another excellent quarter by virtually every measure. Let me share some highlights from the quarter.

The year-over-year total revenue grew 16%, net interest income grew 15%, and tangible book value per share increased 11.4%. Our results were driven by strong growth across the franchise.

Total loans were up 19.7%, total deposits grew 15%, and wealth management assets grew 27% all year-over-year. Our loan origination volume for the quarter totaled $9.4 billion.

Our strongest quarter ever. Both single-family residential and business lending were quite strong.

Importantly, credit quality remains excellent. Our non-performing assets were very low 5 basis points, while net charge-offs for the quarter were just 771,000 less than a single basis point, and our capital levels remain quite strong.

We are pleased to have successfully accessed the perpetual preferred markets during the second quarter and Mike will talk more about this in a moment. The quarter's results reflect continued consistent execution of our intensely client focused business model.

We continue to deliver safe growth by maintaining the highest possible credit standards, while delivering exceptional client service to our very strong urban coastal markets. As we noted in our last call, our client satisfaction remains particularly high.

This is reflected by our net promoter score, which is at an all-time high of 75, more than twice that of the banking industry on the average. Service delivery is our key to growing the relationships with our clients and to help us attract new households to the bank.

Gaye will speak about this household growth in a moment. The more satisfied our clients are the less likely they are to leave us and the more likely they are to refer their friends and colleagues.

It is actually a very simple model. Also, quite importantly the markets that we operate in continue to be very strong.

Our recently completed Capgemini market study, which we do every other year shows that our markets now contain fully 59% of all high net worth households in the United States, up from only 46% share in 2003. The number of such households that First Republic serves grew approximately 11% per annum between 2015 and 2017, obviously a very strong increase.

There is tremendous opportunities still in front of us as well. Overall, we're very pleased with the quarter and the first half of 2018.

Let me turn the call over to Gaye Erkan, President.

Thank you, Jim. As Jim indicated, our very high level of client satisfaction and repeat business continues to drive our safe strong organic growth.

Overall, economic conditions in our urban coastal markets continue to be strong and our clients remain quite active. During the quarter, loan origination volume was exceptionally strong at $9.4 billion.

As Jim noted, it was our best quarter ever. We're very pleased that single-family residential volume was $3.1 billion during the quarter, representing the largest portion of our overall loan originations.

Importantly, the weighted average loan to value ratio on new single-family originations remains very conservative at 59% in the second quarter. Single-family volume was 56% purchased, and 44% refinanced.

Business loan volume had an unusually strong origination quarter, up $1.4 billion from the second quarter a year ago. This was driven mainly by new and increased capital call line commitments to private equity and venture capital clients and will likely not repeat in the next quarter.

The utilization rate on business lines of credit has remained at approximately 35% consistent with the past few quarters. Multi-family and commercial real estate loans also had a strong quarter.

Importantly, our weighted average loan to value ratios on new multifamily and commercial real estate originations during the second quarter remained very conservative at 50% and 47%, respectively. We continue to maintain disciplined underwriting standards across the entire business.

We have not and will not lose on our credit criteria in spite of the current very considerable competitive pressures to do so. Turning to deposits, overall, it was a good quarter.

Deposits were up 15% from a year ago. While balance sheet normalization by the Federal Reserve and rising rates present challenges to all banks, we remain pleased with the diversified deposit growth across all of our channels and geographies.

Checking deposits represented over 60% of our total deposits at quarter-end. Business related deposits were 56% of total deposits consistent with last year.

CDs represent 14% of deposits and continues to be a very effective way to attract new households, as well as to lengthen liabilities during this period of rising rates. Turning to private wealth management, the business continues to perform very well.

Year-over-year wealth management assets were up 27% and now total over 121 billion. Private wealth management continues to grow by doing more with our satisfied clients and attracting referrals.

We’re also pleased to have hired four new teams this quarter, which has contributed to the growth in assets. Wealth management fee revenues were up 22%, compared to a year-ago.

Overall, it was a strong quarter. Now, I would like to turn the call over to Mike Roffler, Chief Financial Officer.

Thank you, Gaye. I’ll cover capital, net interest margin, our efficiency ratio, the tax rate and earnings per share.

Overall, our capital position remains strong. In June, we completed a perpetual noncumulative preferred stock offering of $300 million at a fixed rate of 5.5% for life.

This offering will increase our preferred stock dividends by approximately 9 million in total for the second half of 2018. Subject to regulatory approval, we currently intend to use $200 million of capital to retire our outstanding 7% perpetual preferred stock at the end of December 2018.

Our liquidity also remains strong. At June 30, HQLA as a percentage of average quarterly assets was 12.3%.

Turning to our net interest margin, we're pleased that the margin was 2.95% during the second quarter. Our earning asset yields were up 7 basis points, while our total funding costs were up 9 basis points during the quarter.

For perspective, the average cost of our total liabilities was 61 basis points, and the beta on the overall liabilities, compared to the change in the federal funds rate has been approximately 18% since the third quarter of 2015. We continue to expect net interest margin to be in the range of 2.85% to 2.95% for the rest of 2018.

Our efficiency ratio for the second quarter was 63.5%. We’re pleased to maintain a stable efficiency ratio, while delivering strong revenue growth and investing in the franchise for long-term opportunity.

We continue to expect the efficiency ratio to be in the range of 63% to 64% for the full-year 2018. Turning to our tax rate, our effective tax rate for the second quarter was 16.8%.

Our second quarter tax rate is typically a bit lower, due to incremental tax benefits resulting from the majority of our outstanding restricted stock awards vesting during the second quarter. We continue to expect the bank's effective tax rate to be approximately 19% for the full-year 2018.

Finally, earnings per share were $1.20, up 13% from a year ago, reflecting our safe strong organic growth. Thank you.

Now, I’ll turn the call back over to Jim.

Thank you both Mike and Gaye. We're quite pleased with the strong and consistent performance delivered during the second quarter and for the first half of 2018.

The client service model continues to work very well, quality of credit is strong, and our acquisition of new households is at a new all-time high. Thank you, and we would be happy to take questions.

Hi, good morning guys.

Good morning, Dave.

You guys had mentioned a strong capital call line growth, I was just curious where that portfolio sits now? In terms of total balance?

In terms of total balance, it has been about 40% of our business banking outstanding. The commitments are obviously a bit larger and as Gaye mentioned, we are roughly at 35% business utilization rate.

So, 40% of 9.5 billion is about just under 4 billion.

Okay. And Gaye, I think you mentioned competitive pressures on loans and you gave of, you gave all of the LTVs on your originations, are you guys seeing more banks compete on LTV this quarter or other structure?

It is more we are seeing other competitors stretching in the LTVs. As you know, we are very conservative when it comes to credit.

We will compete for strong credit, but we won’t stretch in credit terms, which other banks are seeing to do so.

Okay. Are you seeing any kind of increase in the incidence of that this quarter and are you seeing that primarily from the bigger banks?

Yes, indeed.

Okay. Great.

And then just switching to the NIM, I suppose the June hike, are you seeing any movement on deposit rates amongst competitors at this point?

We have – the competitive pressure on deposits remains so far just to take a step back, we are very pleased that 15% year-over-year growth rate with a 24% beta, compared to what has been disclosed in earnings so far the banks, the larger banks are around mid-30s of beta since inception. Just to take a step back we are looking just at total cost of total liabilities, which is a better measure in a rising rate environment to take all the diversification of funding into account and the beta on our total cost of liabilities has been less than 20% since the first said hike, since the end of third quarter of 2015.

Dave, it is Jim. Let me just weigh in on that point for a second because this is something that we actually hear about a lot and we’re a little surprised.

The total liability for instance for the bank in the last quarter went up 9 basis points. The other four banks that have reported so far today went up 15 basis points.

Our deposits went up 6 and those four banks went up 8. I am not sure where this is coming from to be honest with you, I think people should pay a little more careful attention to the actual facts.

Okay. Great.

And I guess on the funding side, I noticed you added some term funding this quarter, I was just curious as to what the rates were and the duration of that, I know you typically do that in 2Q, but was just curious if we can get an update on that front?

Sure. Yes Dave, we have used the Federal Home Loan Bank as a good source of funding, it helps us lengthen our liabilities in the second quarter given some of the seasonality with deposits is a time when we use it more.

We typically go out two years, three years and right now those rates are to 2.75, 2.80.

Okay. And then just one more real quick one on CDs, just saw that you had a 2% are out there and one that was a little bit higher, there was a longer duration, are you seeing, are you actually getting new money on those products or are you just seeing more of a shift from some of your other products into those CDs?

Let me just comment for a second and then turn over to Gaye, you know just to state the obvious, I have been leading the organization for quite a while, CDs come and go, a lot of people are not very used to them because we have had lower rates for so long, but in fact historically at First Republic they’ve been very key product for us. We have a 72-office system and the size of the office is north of 350 million on the average.

And so, the CD tool is in fact one we understand very well. It comes in on the retail side as a driver of traffic and as an accommodation to mostly our somewhat more mature savings clients, but we also cross-sell checking very heavily of it and other products, and at any moment in time we will have a special, but that generally is sort of milk in the back of the store, and we will negotiate and cross-sell off of that lead product.

Just to add to Jim's comments, over 50% of our CD clients have other deposit relationships with us and most of our CD when you look at the snapshot of our CD balances, over 80% is consumer CDs and the average consumer checking balance of consumer CD clients for household is over $100,000, and the weighted average original term is over 18 months. So, it a great – in a rising rate environment, not only it is a great diversification of funding, but it is also helping us lengthen the duration of the liabilities.

So, it sounds like it is a combination of the two in terms of new money versus clients moving funds, is that a fair statement?

Yes, correct.

Okay, great. All right.

Thank you very much guys. Appreciate it.

Thank you.

Hi, good morning everybody.

Hi Steve.

I wanted to first start with a follow-up on Gaye’s comments that you don't expect that 2Q commercial volumes to repeating at the end of the third quarter, are you actually seeing a reduction in the pipeline for capital calls, are you just being conservative with the guidance?

There has been significant client activity given the health of markets in private equity and venture capital space, so those drove, it was a combination of existing client, as well as new activity coming in because of that one-of that we don't expect that to continue at that high level.

Okay. And Gaye given that these are typically short-term loans, very short term, how do you think about loan growth in the second half?

In general, we will stick to mid-teens loan growth, obviously we have seen the first half to be stronger, but we would expect and look at our pipeline it remains strong, so we would still stick to the mid-teens loan guidance Steve.

Okay. And then just to switch over to the margin, with the loan to deposit ratio moving up quite a bit in the quarter to 95%, can you talk about the funding strategy do you plan to increase promotions further to fund loan growth?

We have two Fed hikes modeled for the remainder of the year, and based on that, we expect that 2.85 to 2.95 NIM range, given those two Fed hikes, and we'll be opportunistic in terms of diversification of our funding strategy between the term funding that Mike mentioned earlier the CDs and the organic growth. And as you know, the second half tends to be a lot better in terms of the deposit surge and the increase in average account balances.

I would like to note that the tax outflows we have seen in the second quarter has been [45%] [ph] higher and mostly driven by consumer, compared to the last year and despite that the average balances grew nicely.

Okay. Overall margin pressure was fairly modest this quarter, but the curve continues to flatten and you are keeping the low end of the guidance on NIM, are you anticipating margin pressure to intensify in the second half?

Yes. So, I think from here Steve it does trend down a little bit.

The Fed did just move in June, obviously and as Gaye said, we have a couple more hikes planned. And you hit on one of the important points, the curve continues to be very flat and then competition for lending is challenging.

So, I think we’re migrating towards the middle of that range here in the next sort of couple of quarters.

Okay. And Mike, while I have you on the expenses, if we look at the first of expenses we are up about 20% versus the first half of 2017, do we still think mid-to-high teens guidance is reasonable this year or do you think it will be closer to 20%?

Thanks.

So, probably high teens is probably better number. I think that we were pleased that we were 19% in the second quarter year-over-year, and so that’s helpful.

I might think about – as we look at efficiency and sort of how we think about, we have really done a lot to invest in the franchise to be at this range of 63% to 64%. We talked about in the past investing in wealth management, next generation of clients, and a lot of the technology, I mean just a couple of the technology things that we talked about, you know successfully completed a full migration of digital mobile, new origination system for home loans, the way we on-board clients, and we really kept in this range of efficiency, while we actually increased net promoter, also which is twice the banking industry.

If we think about the future this is a good range for us to be in. We do have some activity that we are in the preliminary stage of, which is around replacing the core legacy banking system.

This is going to be a several-year project. We're very confident in our ability to execute because of the experiences we had, especially with next-generation, and we will be very methodical about it.

And so that investment will take over the next couple of years, but importantly a few people have touched on this. The FDIC assessments are right now elevated as they have been in the last couple of years.

They are going to come down starting in 2019 because the surcharge that the larger banks pay will go away. And so, we’re really pleased that this investment we need to make can fit sort of right into that savings that we have coming to keep this efficiency ratio of sort of 63 to 64 as we go out over a longer horizon.

Okay. So that, the 63, 64 that you are saying extends beyond 2018 and includes all of the cost to upgrade the core system, right?

That is correct.

Okay. Great.

Thanks for all the color.

Great, thanks, good morning. Just want to really make sure that we get the NIM commentary down right.

So, I guess Mike you mentioned that you are trending towards the midpoint of that range, but I guess that would imply a sort of the next two quarters that it would imply this on a full-year basis you end up as sort of the high-end of your 2.85 to 2.95 range, I just want to make sure that that is the right because otherwise we are sort of building in 2.85 for the next two quarters just to have the midpoint?

So, if I think of third quarter down several basis points maybe for a fourth quarter – around that range maybe a little lower, but we are – so if you are thinking 2.95 is not going to be down for the year, I would come down from there towards the middle, towards the middle or slightly above the middle.

And just to add it also depends on how the curve is going to play itself the flattening of the curve that outside we felt comfortable with the 2.85 to 2.95 range, we assume about two Fed hikes would assist the bips deepness, if it were to flatten more obviously it would impact it towards the lower end of the range.

Got it. Understood.

And I guess more of a detail question on the NII piece of the impact there. You mentioned deposit inflows, thanks, I heard that right was stronger second half, obviously you could have NIM compression just because you have more deposits, which is actually a positive for NII, but that versus having NIM compression due to the flattening of the yield curve, which is I mean say a negative to NII, is there, is the NIM compression weighted more towards the inflows or the flattening curve?

Probably more towards the curve Ken, which is one of the reasons you actually hit on a good thing. What matters a lot is net interest income growth because that is what allows us to make the investments and to grow the franchise and so you could have a slightly lower NIM from growth, but the curve is probably more of a driver today than that.

And just to add when it comes to – that is a great question actually, I’m glad that you’re raising that. The net interest income is what pays the bills.

So, the growth of the balance sheet, especially compared to the banking sector when you compare First Republic, the growth of the balance sheet to save an organic growth is a great lever and mitigant, risk mitigant when it comes to rising rate environment. So, the NII is the multiple occasion of the growth and the margin.

While the margin may see pressure, the growth is actually is a bigger driver of the NII growth.

Got you. Understood and then just last question.

When you think about the balance sheet or how you're supporting that loan growth like given higher short-term rates, given the deposit pressures, albeit small, are you thinking it in terms of changing or driving or supporting more of that loan growth from the securities portfolio or that way you can use of on paying up for deposits, new deposits or is it still very much deposit growth? Thanks.

Sure. Let me take a step back for a second so the – we are a service organization, so we are driven by our consumer, repeat business that exist in clients and the consumer household growth.

So, we have seen, we are very pleased that the consumer households have grown 20% year-over-year, compared to when you look at the prior five years, our consumer household growth has been at 9%. So, we're very pleased with that and obviously the net promoter score plays into that.

So that’s number one. And when we look at the lending relationship we don’t set goals, it is a client driven, and credit driven decision.

When it comes to securities portfolio, the yields that we have seen in the securities portfolio for the amount of duration that we have taken, when compared to lending, for the first time the securities did not look as attractive. They were on top of the lending yield with similar duration, and yet with lending we actually acquired relationship or we delight our relationship.

So that’s what it has been driving the securities purchases or the like thereof.

All right. Thank you.

Hi, good morning.

Good morning, Jared.

Maybe just on the deposit side, are you seeing any geographic pressure, differential maybe between your markets, your East Coast and your West Coast markets or is it fairly standard across the platform?

Yes, it is pretty standard across the platform.

Okay. And then shifting I guess, following up on the capital call lines as we have seen the higher rate environments have come through, have you been able to maintain the spreads on that or is the competitive environment maybe actually seeing spread contraction on incremental capital call lines?

No, they have been pretty stable, I mean it is competitive so you have always got to have a quality pricing for the business, but it seems like they are consistent with where they have been spread wise.

Okay. And I guess just finally for me just following up a little bit on the margin question, should we expect to see some of that cash position be deployed as we move through this higher rate environment or do you feel comfortable keeping cash fairly stable there?

We always want to maintain a strong liquidity position and one of the things that happens Gaye mentioned that the early part of the second quarter has some tax outflows from our deposit base and so our average cash is actually a bit lower during the quarter and as deposits start to pick up following tax flows you start to see a build of liquidity position, we will put that to work methodically as we always do.

Great. Thank you.

Hi, thanks. I wonder if you could just touch on the competitive environment for mortgage, it looks like you had a pretty strong production for the quarter, just thinking about how you are viewing it geographically for the rest of the year?

The competition is pretty tough as was mentioned earlier and in two respects. One, pricing is still very tight and that is probably the place we are getting the greatest price from the curve so to speak.

The other one is, standards are going down. I don't think they are bad necessarily yet, but they are not where we like them.

And so, we are backing away from an increasing number of transactions. The biggest constraint on loan volume is actually supply of homes for sale in our urban coastal markets, almost without exception there is a supply shortage.

New York would be the exception, but mostly it is the high-end. And so, volume is really pretty strong across the markets, but the competition is more aggressive than it would have been even a year ago.

Okay. And then you mentioned multifamily is fairly strong, is that kind of playing into that supply shortage as we're getting some more supply of multifamily in the different markets?

Yes. Well the supplies are going up very much in the close to urban markets, it is pretty hard to build new multifamily housing.

You see a little bit of it in New York again, but not too much anywhere else. The cash flows on our multifamily properties are probably on an all-time high, cash flow coverage on debt.

Okay. And then just lastly, on the student loan refi’s and maybe you could talk a little bit about how that is progressing, how many households you have been adding kind of at a more annualized rate and just your thoughts for continued growth there?

Sure. We’re actually very pleased with the results of that.

We’re running – the last 12 months was probably about 8000 household rates. We had about 1004 fresh and loan program.

So, we are running between 8500 and 9,000 annual rate on that younger household acquisition rate.

Great. Thanks a lot.

Thanks. Good morning guys.

I wanted to touch on the loan yields. You guys had a very nice uptick, one of the largest you’ve had since the Fed began to tighten, just some color there, was that positive mix shift from capital call line or are you starting to see relief just given the move in the long end of the curve?

Yes, Casey. I think one obviously we do benefit a little bit from the rate hike in March and just a fair amount from June.

So that’s part of it. Second is, the volume and the rates that new business is coming on has improved, you know we hit sort of a bottom in what I will call the third and fourth quarter of last year and it has steadily crept up, and so the new yields are coming in a bit better, which is also contributing incrementally to the overall loan yield.

Okay. Any color on what the new money yield is today versus the 351 [ph] in the second quarter?

Yes, just to add on that, so for single-family residential to give you some idea, the second quarter originations were 3.7%. For multi-family the second quarter originations were at 3.9 and CRE at 4.35%.

And for single-family they are trending slightly higher and for the rest around that level.

Okay, great. And then my just switching to capital management, I know you guys have been, you guys are above your targets, but obviously a very strong growth quarter and pipelines are strong, can you just give us some updated thoughts on capital management, not just the Tier 1 common, but also the Tier 1 leverage ratio as well?

It is Jim. We have always tried to stay pretty well capitalized as you know.

As we see growth coming, we tend to go to the capital markets. We did that with the preferred.

As Mike noted, we raised 300 million. We're going to use 200 if you track the money, which we don't necessarily, but the point is we would – subject to regulatory approval we would redeem 200 million.

We will need to keep our capital topped up here and I would expect that we will be back to market at some time in the next few quarters.

Okay, great. Thank you.

Hi, good morning. I just wanted to follow-up on guys comments earlier on the securities yields now versus the, I guess the loan portfolio, should we take that to mean that you're not going to really build the securities growth going forward?

We will make sure to maintain our HQLA ratio at or about 12%, and anything beyond that on the yield and has some portfolio will be opportunistic.

Okay. And any color in terms of, I guess the recent regulation around and muni inclusion potential inclusion on the HQLA?

Yes, great question, as you know we do hold a sizable amount of municipal bonds in our portfolio and it’s likely that there will be some positive impact to our HQLA. As a result, HQLA ratio is a result of this bill.

Yet, we will work with our regulators in the coming months to determine the appropriate treatment of these muni bonds in our portfolio in a go forward basis.

Okay, thanks. And just last question.

I don't know if I had missed it, but did you give the spot rate for deposits at the end of the quarter at this time around?

We did not yet, but we would expect it to be again taking into account, we just had of Fed hike in June and another one is expected in September, it would be around mid-40.

40’s [ph]?

Mid-40s.

Mid-40s. Okay.

Thank you.

Thank you.

Hi, good morning everyone. Just curious, I guess this kind of ties into some of the margin discussion, but the loan deposit ratio came up some and I'm just curious with respect to how you – to the extent that you are managing toward any specific ratio there, if you're not seeing the kind of normal seasonal deposit inflows that you typically would expect here in the back half, would you go out and pay up more on the CD side to keep that loan to deposit ratio where it is or even push it down somewhere, any thoughts on that front about kind of what the appropriate level is there?

No not necessarily. It is a ratio world, but it is not a driver for how we run the business.

It fluctuates over the years, low 80s to the high 90s. I mean, but we are, that is one of the reasons we are focusing entirely now on total liability cost as well.

Having said that, I think the second half of your loan deposit should be pretty good. It will be – we will use the CD tools, I said earlier, but we would use that over decades very effectively.

The, but our flow of deposits is actually pretty strong. The biggest thing that happened was on the negative side.

The – as Gaye indicated the outflow of tax payments was unusually high this year, which was not as much of a surprise as all that given the tax planning that people did in the face of the tax bill that happened, particularly our client base if you think about it, but the driver is always net interest income on the enterprise because of the growth nature.

Sure. Okay, and then Jim, you mentioned, possibly coming back to the capital markets kind of given where the capital stack is now, any sort of preference in terms of what type of capital you'd be looking at on the next round?

No, we look – no, not really, we look at – there is only two, well we have some terms of that as you know, but the driver is really our preferred and common and we tend to all go back and forth a little bit. I think it is important, but you should remember we do very small transactions.

We are very, we try to be very systematic about it.

Okay. And then just one last one for Mike, you mentioned kind of on a longer-term basis to hoping to stick with that 63% to 64% efficiency ratio guidance, is that inclusive of kind of an expected and ongoing shift towards wealth management being kind of a bigger part of the franchise or what are your thoughts there?

Yes, that’s right. In addition to the things that I talked about earlier, it is a part of that as well revenues continue to grow as part of our total revenue base, which they are now over 14%.

That does have an impact, a little bit up on your efficiency ratio going forward.

Okay. Thanks for taking my questions.

Good morning. Thank you for taking the question.

Do you think there is a point with rising rates where you start to see more of a shift out of and checking and into either savings or CDs, customers just run with lower checking balances because the opportunity cost is getting higher?

What you just actually that’s how we model the NII simulation in our 10-Q’s. We do assume some shift from checking to be conservative.

Having said that, our internal liquidity stress tests, we always look at what deposits are of operational nature and thus are therefore – they are there for the service not for the yield necessarily and that percentage seems to overlap with the checking percentage and on average basis our checking percentage remained at 63% just to note.

Great. Thank you.

Thanks.

Hi, good morning. Thanks for the questions.

Jim or Mike just one more on deposits, I apologize, based on your business mix between consumer commercial and wealth, interested in kind of how the conversation is going within each and where the pressure points are within the portfolios, and I think last year mid-year you had a reset in the wealth deposit rates and kind of interested in conversations that are happening now that we’ve had more successive rates? Thanks.

So, we did – our checking as you know has remained over 60% in terms of ending balance and the rate on that has not really moved, it is at 5 basis points. CDs we tried to keep it competitive.

Having said that over 50% of these clients do have other deposit relationship including a sizable average checking balance on the consumer side, which brings down the total cost of those and the diversification also comes in by the consumer household growth, which I mentioned that we have increased our number of consumer households by 20% year-over-year which has been mainly on the deposit side. So, while we are seeing competitive pressures, obviously on the money market checking, money market savings, and CDs, which is what is repricing it up quarter-over-quarter.

So far, we have been pleased with the lag in terms of beta.

Thank you.

Hi, good morning everyone. I can't possibly think of more spread income questions.

So, Mike I guess if you could just take a deeper dive on some of the expense trends, particularly at professional fees advertising and marketing those two areas were a little off from our model and just trying to get a sense of whether those levels we saw this quarter are some levels we should see going forward?

Sure. So, advertising to marketing we are continuing to, as Jim mentioned acquire households in our next generation strategy that does lead to some marketing spending.

The other thing is, we did run some TV time for gratify again in the second quarter and so that pushed us up a little bit along with a few more client events. On professional fees, it is sort of a mix of combination of legal fees a little bit higher and then some professional fees around different projects we have going on.

You know, 15, 16 million on our professional fees is not a bad run rate and advertising is probably not a bad run rate that either.

Okay, great. And just in terms of an operation update on gratify clearly the client acquisition funnel is working well, any updates on when you believe they may be become profitable or range around that that we should be thinking about?

So, probably it would be in the year 2020 because we have been expanding the platforms. Some exciting updates on that.

So, we have added the 5.29 [ph] College SaveUp product expanding the platform in April 2018, and we have quite a few number of employers who already have signed to launch this product for their employees, and we will also be adding tuition reimbursement component in 2019 as well. So, we would expect that to be in 2020.

Just a last bit, as you know gratify refi is also another solution on the platform on the HR benefit platform that comes that gratify. The pickup in employers on gratify refi has been very exciting, compared to the paydown.

We have significant number of employers on that platform as well. So, right now, we have paydown College SaveUp and the Gradifi Refi already ready on the platform, tuition reimbursement to come in 2019.

Great. Thanks for taking my questions.

Thank you.

Hi, thanks. It was mentioned that the supply shortage is one of the biggest headwinds in mortgage, but I was wondering is cap on the state and local tax deduction impacting your clients and mortgage demand?

You know what’s interesting, we keep looking for that, but so far it hasn't been a noticeable impact. Just a personal opinion that we won't have any even evidence of this, but I don't think that is going to happen until people actually pay the difference in taxes next year.

This year it is currently theoretical. The only people feeling it right now are the people who have to make a withholding quarterly, but that may be coming, but as of now no, I would say it isn't impacting.

That’s it from me. Thanks, very much.

Yes, thank you. Just had a question with the updated Capgemini study out, if you could maybe talk about any differences you saw among your markets in terms of the bank's market penetration rate of high network households, are those details available yet or should we expect those later in the year?

Thanks.

Sure, thanks. Well, in the new deck that is out this morning, we did update the page on the Capgemini, sorry market penetration numbers that come from Capgemini and the – so that is updated, and that is page number 5, I think right, in our deck.

I guess maybe my understanding was in San Francisco, you used to have a penetration rate in the low teens, right, but then in markets like in Europe and Boston it was significantly lower. So, I guess maybe my question is more around that you see any variation I guess in the trend as well.

Well, certainly the market penetration rate has kicked up a bit versus 2015, have any markets performed better or worse within the footprint?

There is variation among all the markets, but they are all performing well. Our number of households is up in every market.

Our share growth rate is different from market-to-market. Generally speaking, it aligns somewhat with the markets in which we are already the strongest, which is one of the interesting anomalies of the model.

If you think about why that happens, it is the net promoter score. If you have a high net promoter score the more people that are in a market that are net promoters, the more likely you have compounding.

That’s the reason we stick to the markets we’re in. It is a very simple but overlooked concept.

The other thing about this study, which is fascinating is that in fact on Page 5 you will see in our new deck that our share of market has not actually gone up very much. It’s gone up from 4.02 to 4.21 in 2015, and it went up from 02 [ph] to 21 from 15 to 17.

Our growth rate of households however is 11.6% compounded annually. If you think about that, what it means is, the market is growing at a very rapid rate.

Got you. Maybe just a last question on those lines, we read earlier this year that the bank has doubled its office space in New York or about doubled its office space in sort of the Rockefeller Center location, I guess is that related to any near-term growth initiatives in the New York City market and maybe you can provide some color around that move?

Thanks.

Yes, it was slightly misleading in a sense that well it’s accurate, but it’s over time. Our commitment is a forward commitment.

So, over about a five-year period we're going to double.

Got you. Thank you.

Thank you all very much for being on the call today. Have a good day.