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First Republic Bank (NYSE:FRC)
Q2 2020 Earnings Call
Jul 14, 2020, 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 2020 earnings call. Today's conference is being recorded. [Operator instructions] I'd now turn the call over to Shannon Houston, senior vice president and chief marketing and communications officer. Please go ahead.

Shannon Houston -- Senior Vice President and Chief Marketing and Communications Officer

Thank you, and welcome to First Republic Bank's second-quarter 2020 conference call. Speaking today will be Jim Herbert, the bank's founder, chairman, and CEO; 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, 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 -- Founder, Chairman, and Chief Executive Officer

Thank you, Shannon. It was another strong quarter for First Republic bank. Loan originations set a quarterly record. Deposits and wealth management assets also grew very nicely.

And credit, capital, and liquidity are all quite strong. This year's first-half performance under very difficult conditions, again, demonstrates the consistency and sustainability of our conservative client-centric business model. Before I turn to details for the quarter, let me take a moment to discuss this business model. We have founded First Republic bank 35 years ago this month.

Since then, First Republic has systematically and organically grown from a the single office and less than 10 colleagues with $8.8 million in initial capital, to over 80 offices, over 5,000 colleagues, $128 billion in bank assets, $156 billion in wealth management assets and a market capitalization of over $18 billion. During these years, we've maintained the highest possible credit standards, and we have been profitable each of the 35 years. Enterprise value has grown at over 24% per annum during this period. This strong 35-year performance has been sustained on during widen varying economic conditions and through numerous unforeseen events, including the current pandemic.

First Republic's steady, organic growth is the direct result of staying focused on our core belief that we can build an unusually successful business by consistently providing a superior client-service experience. This client-service experience and excellence continues to be our driver. The accelerated application of technology to our already high-touch service model is, in fact, further differentiating us. Gaye will discuss this a bit more in a moment. We've also always believed in operating in a very safe and sound manner.

And we've not strayed from our stringent loan underwriting standards nor our philosophy of maintaining ample capital and liquidity at all times. It's actually a very straightforward operating model, brought to life by our strong culture and by the extraordinary hard work and diligence of all of our colleagues. This culture of First Republic continues to be one of teamwork, entrepreneurship, innovation and accountability, all of which empower each of our colleagues to be their very best every day on behalf of each other and our clients. The result is client satisfaction level, measured by Net Promotor Score, that continues to be twice this banking industry's average.

This is the source of our sustainability and growth. Let me turn to the second quarter's strong results. Year over year, total loans outstanding were up over 19%, not including PPP loans of about $2 billion. Total deposits grew more than 18% year over year, and wealth management assets are up more than 13% year over year.

This across-the-board growth also drove our financial performance. Total revenues grew 12% over the year. Net interest income grew 17%. Earnings per share have grown 13% year over year and tangible book value per share increased by 12% year over year.

Credit remains quite strong. Net charge-offs for the quarter were $1.1 million and nonperforming assets at quarter end were only 13 basis points. Our Tier 1 leverage capital ratio at quarter end was 18.15%. The full first half of 2020 has once again demonstrated the consistency and the strength of First Republic's simple, conservative, very client-centric business model.

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

Gaye Erkan -- President

Thank you, Jim. We are delighted with our continued strong performance and ability to serve our clients through these unprecedented times. During the second quarter, we closed a record number of loans, grew households 14% quarter over quarter annualized, modified approximately 3,600 loans for our clients impacted by COVID and delivered over 11,500 PPP loans to some small business and nonprofit clients. Importantly, we did this all without compromising our very high standards of service and safety.

The resilience of our business model is derived from our unique service culture, as Jim described. And at the heart of that service culture are our people. Their care and dedication is now more valuable to our clients than ever. This time tested, people-first model is being reinforced and enhanced by our tech strategy.

We are investing in agile platforms that enable the very rapid deployment of new features for our clients and process improvements to empower our colleagues. In light of our strategic vision, over the past few years, we have upgraded our home loan origination system, consumer digital banking system and deposit client onboarding system, while also building strong in-house development capabilities. These investments are being utilized with great effect to help meet the unique challenges of today. For example, since the pandemic began, we have further digitized our deposit account opening process, rolled out some additional mobile banking features including the ability to connect our clients to their trusted advisors with one click and developed process automation tools to help our colleagues serve more PPP clients safely.

These advancements resulted in a nearly 50% increase in digital deposit account openings in the last quarter alone. We saw a 200% increase in the adoption of the mobile check deposit feature, shifting significant branch activity online. We were able to close nearly as many PPP loans in one day as we do mortgages in a typical month. Our tech platform is reinforcing and scaling what is most important to our clients and fundamental to our business, the ingenuity and care of our colleagues.

This, in turn, results in this consistent and sustainable performance even in challenging times such as these. With that in mind, let me turn to an update on lending. Loan origination volume in the second quarter, excluding PPP, was $11.4 billion, our best quarter ever. Single-family residential volume also set a new record at $5.9 billion for the quarter.

Refinance accounted for 80% of the single-family residential volume. The majority of refinance activity came from clients previously at other institutions. We are pleased that our home purchase finance activity have increased quarter over quarter, in particular, the gained momentum in June. Multifamily and commercial real estate origination volume was $1.3 billion, consistent with the first quarter.

Turning to business banking. Loans and line commitments, excluding PPP, were up 17% year over year. So during the quarter, business line utilization decreased from 42% to 35%. This is once again consistent with our historical utilization range of mid- to high 30s.

As we enter the second half of the year, our overall our loan pipeline remains very strong, up meaningfully from this time last year. We continue to expect mid-teens loan growth for the full-year 2020. In terms of credit, we continue to maintain our conservative underwriting standards. The average loan-to-value ratio for all real estate loans originated during the second quarter was just 55%.

At quarter end, loan modifications totaled 4.3% of the entire portfolio. New deferral requests have slowed quite substantially. In terms of funding, it was a very good quarter, and total deposits were up 18% from a year ago. We continue to maintain a diversified deposit funding base.

Checking deposits increased by $3.6 billion in the second quarter, and now represent more than 62% of total deposits. Business deposits represent 55% of total deposits, in line with the prior quarter. Turning to wealth management. Assets under management increased this quarter by 13% to $156 billion.

The growth was due to market appreciation, plus a net client inflow of $2.7 billion during the quarter. Also, since the last call, we welcome two new wealth management teams to First Republic. Overall, it was a very strong second quarter and first half of 2020. Now I would like to turn the call over to Mike Roffler, Chief Financial Officer.

Mike Roffler -- Chief Financial Officer

Thank you, Gaye. We are pleased with record net income of $257 million, up 15% year over year and record earnings per share of $1.40, up 13% year over year. Our provision for credit losses under CECL was $31 million in the second quarter. This included a provision for credit losses of $43.5 million related to our loan portfolio and held-to-maturity debt securities, which was offset by a reversal of the provision for unfunded loan commitments of $12.4 million.

During the first half of 2020, we have added $91 million to our loan loss reserves, while net charge-offs were only $1.3 million. As Jim mentioned, our capital position remains very strong. As of June 30, our Tier 1 leverage ratio was 8.15%. This reflects two capital raises in the past nine months.

In April, the bank increased its quarterly cash dividend, and we are pleased to maintain this dividend level. Our liquidity position also remained strong. HQLA was 13.4% of total average assets in the second quarter. In May, we completed a residential mortgage-backed securitization, our first in many years.

Loan sales have always been an important part of our business, and this securitization provides yet another source of funding and liquidity. We always retain the servicing of our loans sold. Very importantly, net interest income increased 16.8% year over year. This reflects the power of the consistent growth of earning assets.

Our net interest margin for the second quarter was relatively stable at 2.7% despite interest rate volatility. We are particularly pleased the margin was down only four basis points compared to last quarter. During the quarter, we reduced the overall rate paid on deposits to just 30 basis points. This decline helped bring our overall funding cost down 22 basis points from the first quarter, which largely offset the 24 basis point decline in earning asset yields.

We continue to really expect that our net interest margin to be in the range of $2.65 to $2.75 for the full-year 2020. Our efficiency ratio for the second quarter was 62%. The efficiency ratio has benefited from reduced expenses for marketing, travel and events as a result of the pandemic. Given the first-half performance, we have now expected our efficiency ratio for the full-year 2020 to be in the range of 62.5% to 64.5%.

Our effective tax rate for the second quarter was 19.4%. We continue to expect our tax rate for the full-year 2020 to be in the range of 20% to 21%. Overall, it was a very good quarter. So, thank you and now we'll turn the call back over to Jim.

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

Thank you, Gaye and Mike. We're very pleased with the second-quarter results. And I know I speak for Gaye, Mike and I, when we say that we're particularly proud of the tremendous effort and work of our colleagues throughout the first half of this year under very difficult conditions. Overall, this first half of the year has been very strong for 2020, and we believe we have good momentum going into the second half.

And now we'd be pleased to take your questions.

Questions & Answers:


Operator

Thank you, sir. [Operator instructions] We'll first go to the line of Steven Alexopoulos with JP Morgan.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hey. Good morning, everybody.

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

Good morning, Steven.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hi, Jim. I wanted to start on credit. So if we look at the loan modifications of around $4 billion, Jim, I know this is a tough question at this stage. But what's your assessment in terms of what portion of those could become problem credits?

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

It is a tough question, Steve. We don't, of course, really know. But we have, as you might imagine, scrubbed them considerably and probably more importantly is we know our clients very well. We know the situation very well.

Suffice it to say that the vast majority of those modifications have quite reasonable loan-to-value ratios into 50s. And so we don't expect to be very much at risk ultimately on losses. We will have some anecdotal situations, but it's our opinion, we don't have a systemic issue at this point.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. That's helpful. And then similar but change in direction a little bit. If we look at the $2.4 billion of the COVID impacted loans that you're calling out, and you -- I assume you scrubbed that, too.

Jim, when you look at the collateral there, how do you think about loss content in that bucket?

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

Again, reasonably low because the loss content, for instance, in the hospitality area, the loan-to-value ratios are the low 50% and we have guarantees on a significant portion of them. And so as a result, we think we're probably OK, but we may have some work throughs for sure, and we'll have some losses. But it will be mostly a work-through problem. And what we don't know, of course, is who will begin payments post the deferral period, but we're actually pretty optimistic.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. And then NPA is overall very low, but you did see a $40 million increase quarter over quarter. Could you give some color there?

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

It's spread all around, really. There is one credit that went up a bit, but we're not worried about the collateral.

Mike Roffler -- Chief Financial Officer

Yes. I'd say, Steve, it's mostly a few single-family HELOCs, nothing unusual.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. And then final one for me. So if we look at the $5.9 billion of single-family originations in the quarter, just doing my math given the color Gaye provided, looks like purchases were $1.2 billion this quarter. So I guess, down a little bit year over year.

Can you just give color on the purchase market and is the spring selling season delayed just given everything virtual? Or is it not going to be what we've seen in the past? Thanks.

Gaye Erkan -- President

Steve, correct. We're seeing that this spring buying season is delayed into the third quarter, if not beyond, but we are optimistic, first of all, on the refinance, if I can comment, over half of the refinance activity is with clients from other institutions. So it's a great opportunity, a great win for us. On the purchase side, especially on the West Coast, the purchase activity has picked up nicely and great momentum.

June especially, particularly was strong. And we are also seeing the suburb purchase activity in New York suburbs to be quite active as well. So we are comfortable with the mid-teens loan guidance -- loan growth guidance.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. Terrific. Thanks for all the color.

Gaye Erkan -- President

Thanks.

Operator

All right. Your next question comes from the line of Kevin Zerbe with Morgan Stanley.

Ken Zerbe -- Morgan Stanley -- Analyst

Hi, it's Ken. Good morning, everybody.

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

Good morning, Ken.

Ken Zerbe -- Morgan Stanley -- Analyst

Just starting off, in terms of the NIM, obviously, you did better this quarter, which is great. Is the guidance for the 2.65% to 2.75%, does that include all of the accelerated amortization on the PPP fees?

Mike Roffler -- Chief Financial Officer

Ken, thanks. It does. And I would just comment that the forgiveness of the loans under PPP is likely not until late fourth quarter, more next year event because of the changes made to extend to a 24-week cover period and then the borrowers actually have some time to apply. They don't have to run in and do it right away, so we think it's probably more next year than it is this year, frankly.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. OK. And so you haven't seen any PPP forgiveness, I know it's really early, but you haven't seen anyone starting under the eight-week program?

Mike Roffler -- Chief Financial Officer

No. In fact, we're not sure the SBA is accepting applications yet because they haven't opened a connectivity to their portal. So it's likely a bit later going to happen.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. Understood. OK. And then just my second question.

In terms of expenses, obviously, with travel marketing, your advertising expense is down. I saw your updated guidance, obviously, but does that move back to more of a more normalized level, say, once -- yes, where is a normalized level, I guess, once the pandemic is over? So, I'm assuming you're going to travel a little bit more and do more marketing, etc.?

Mike Roffler -- Chief Financial Officer

Yes. I mean when we look at the guidance and of the update for efficiency, it was really reflective of what's happened in the first half of the year. And what you just touched on that marketing and travel is probably light for the next couple of quarters but it's not necessarily a long-term thing because you're right. We will start to travel.

We will have client events in the future. So it's really this year is what I'd focus on. We had been in a very comfortable range up until now that we've actually improved upon as a result of not incurring some of these costs.

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

One issue I would point out, Kenneth, we don't know this yet. But Gaye went through a number of things that have been improved recently and from an efficiency point of view. And buried in that and unstated is that clients have also taken to a number of those approaches. And so there may come out of this of some efficiency gains, but we're not sure and we certainly don't want project them yet.

Ken Zerbe -- Morgan Stanley -- Analyst

All right. Great. Thank you very much.

Operator

All right. Next question comes from the line of Arren Cyganovich with Citi.

Arren Cyganovich -- Citi -- Analyst

Thanks. One of the larger mortgage originators recently indicated they were kind of making it more difficult to get the jumbo loans on their platform. Are you seeing other competitors pulling back? And what kind of opportunity does that provide for you in the second half this year?

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

I would say that overall -- we are aware of that. I would say, overall, it's still quite competitive.

Arren Cyganovich -- Citi -- Analyst

OK. And then more recently, there's been some surge in cases, obviously, across the country, but also in California. Are you seeing any impacts to your business from that in the recent weeks?

Gaye Erkan -- President

No. The COVID-impacted exposure on the loan side is limited to the 2.5%, the hotel, restaurant, and retail, 2.5% of the portfolio and the modifications are less than 0.7% within that exposure. And in terms of our colleagues and us working as much as we're looking forward to back in the office is when it's safe, we have been incredibly effective working remotely in this quarter and the past quarter proved that. So we don't need to rush back in.

Arren Cyganovich -- Citi -- Analyst

And it does -- so you're not seeing any kind of demand change from mortgage or business loans related to that recently?

Gaye Erkan -- President

Yes, we are seeing that the single-family residential activities is remaining pretty strong. Our pipeline and loss pipeline are quite significantly up compared to this time last year actually, and multifamily holding up well. CRE is the portion that has slowed down, and we're being very cautious on credit and strong deposit growth. So client activity remains robust.

Arren Cyganovich -- Citi -- Analyst

OK. Thank you.

Operator

All right. Next, we'll go to Dave Rochester with Compass Point.

Dave Rochester -- Compass Point Research and Trading LLC -- Analyst

Hey. Good morning, guys. Nice quarter.

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

Hey, Dave. Thank you.

Dave Rochester -- Compass Point Research and Trading LLC -- Analyst

Hey, for your reserve calculations this quarter, what were some of the bigger economic assumptions that went into that? I know real estate prices bear sort of a heavier weight in your analysis but any color you have on that and the duration of the downturn that you're assuming? That would be great.

Mike Roffler -- Chief Financial Officer

Yes. So, Dave, you're right, there continues to be a residential real estate, especially, and it's really market by market. So -- and I'd say this, our projections from 90 days ago probably were conservative in that prices have actually held up really well. And in most markets, are actually continuing to increase slightly.

New York is the one place where we do assume a little bit of a downtick, especially in Manhattan itself while the suburbs, as Gaye mentioned, have been actually pretty strong and recovering quite well. So the downturn lasts for a bit of this year, early into next year and then it starts to slowly increase. We do have a more significant decline on the CRE and multifamily prices close to a double-digit price decline, and then a recovery next year.

Dave Rochester -- Compass Point Research and Trading LLC -- Analyst

And just maybe on that last point, is there any longer-term concern on the multifamily side or even office fundamentals in some of your markets?

Mike Roffler -- Chief Financial Officer

So on multifamily, we're largely in rent-regulated and rent-controlled markets. And as you've heard us talk about before, we don't underwrite to the hope of new rents when departments turn over, we underwrite to rents that are in place. And so you don't see that as much turnover and you don't see as much vacancy in a rent-regulated, rent-controlled building because likely you're below market. And so we think the multifamily actually has held up pretty well.

And CRE, that's why we underwrite to stress scenarios with low LTVs and strong cash flow coverages. Does it change demand for office? I do think some of that's going to be determined in the future.

Dave Rochester -- Compass Point Research and Trading LLC -- Analyst

Any sense of where cash collections are for unstabilized or market rent multifamily properties in New York these days?

Mike Roffler -- Chief Financial Officer

They've been pretty good. It hasn't been down a lot from where it's been in terms of overall collections.

Gaye Erkan -- President

Yes. In general, multifamily is holding up quite well, to add to Mike's comments. And in terms of CRE, again, overall, our exposure is very limited and loan-to-value ratio is very low, and debt service coverage has continued to be strong. Retail, in general market commentary, retail is the weakest and office needs another year or so depending on how the pandemic progresses, to gain more visibility.

But we feel comfortable with our underwriting standards in multifamily and CRE.

Dave Rochester -- Compass Point Research and Trading LLC -- Analyst

Sounds good. Maybe just one last one on the margin guide. Are you guys assuming the existing curve persists or are you looking for any steepening in the curve? And then how much are you thinking that you can move deposit costs lower as a part of that?

Mike Roffler -- Chief Financial Officer

I'd say the curve is pretty much at this level. We're not really assuming much steepness. That should only be a benefit if it were to happen. There probably is another downtick to our deposit rates.

We ended the quarter in sort of the mid-20s range on a spot basis, so there should be a little benefit there, which hopefully offsets some of the continued drift that you'll see in loan yields.

Dave Rochester -- Compass Point Research and Trading LLC -- Analyst

Sounds great. Thanks, guys. Appreciate it.

Operator

All right. Next, we'll go to Casey Haire with Jefferies.

Casey Haire -- Jefferies -- Analyst

Thanks. Good morning, guys. Maybe just a quick follow-up on that -- on the back of that NIM -- on the reinvestment yields, HQLA and muni, where are they trending today?

Gaye Erkan -- President

Yes. HQLA is around 1.5%, agency HQLA that is. And munis are 3% to 3.25% on a TEY basis on the purchase yields. And single-family residential coming in around high twos, low threes, and multifamily CRE 3% to 3.5%.

Casey Haire -- Jefferies -- Analyst

OK. Great. And on the capital call, obviously, that was down this quarter. I mean, very consistent with the line utilization rates with your long-term trends.

But given that sort of a unique product, what is the outlook for that in the coming quarters? What could be a challenging backdrop?

Gaye Erkan -- President

Our -- the growth -- the primary metric for growth, if we look at in capital call lines was a commitment growth. And our capital call commitments are up 24% year over year, and total business line commitments are up 20%. So the pipeline remains strong. And the fundraising activity was in private equity, in general, was lower in the second quarter compared to second quarter of last year.

But the private equity continues to be an attractive investment opportunity for limited partners given the low rate and rich equity environment in the public markets. And there is around $1.5 trillion amount of dry powder in the market. So we will expect steady eddy growth for the remainder of the year. And utilizations are the reason why the outstandings are lower.

They're currently for capital call, and they're currently at 36%. And as we've mentioned in the prior quarter, utilizations were elevated in the first quarter as the GPs were phasing out capital calls and they returned back to a historical range we have seen to mid- to high 30s. So we would expect that to remain in that type of range.

Casey Haire -- Jefferies -- Analyst

Great. Thanks for that color. And then, Jim, just last question. Big picture question for you.

We're all reading about everyone leaving New York City and San Francisco and departing for the suburbs, and you guys are obviously in a unique perspective given your urban market concentration. Just how do you -- what do you -- given your experience and based on what you're seeing from your client base, what do you -- how do you see this playing out? Is this more long term or is this somewhat temporary?

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

My guess would be -- and it's only a guess, of course, but my guess would be it's a little more on the long-term versus temporary category. But we need to -- we -- and our markets include this in the urban centers and the suburbs around them. So we do see both sides of this equation. We need to remember, it's -- to some extent, it's a reversal of a trend that has been going on for 10 or 15 years where the people have been coming out of the suburbs and going into the cities.

So we may have simply a pendulum coming back a bit to the center. But the number of units of housing in the suburbs versus in the cities is going to be the real driving factor. There's only so many homes in Southampton and Greenwich versus Manhattan. And so I think it's an adjustment.

I don't think it -- and so I think it's a directional change for sure. But I don't think it's going to -- it's not going to -- the implication, of course, is it leaves the city centers hollowed out. So, that's not going to happen. That's just my opinion.

Casey Haire -- Jefferies -- Analyst

Thank you.

Operator

All right. Your next question comes from the line of Erika Najarian with Bank of America.

Chris Nardone -- Bank of America Merrill Lynch -- Analyst

Hey. Good morning, guys. This is Chris Nardone on for Erika. I just wanted to ask about your Tier 1 leverage ratio.

It seemed to move to 8.15%, and I believe you typically prefer to operate above the 8% level. So can you just discuss how you're thinking about capital levels as we head into the back half of the year if the strong loan origination activity continues? Thanks.

Mike Roffler -- Chief Financial Officer

Yes, thanks. We feel really good where we're at 8.15%. We raised capital late last year, early this year, and those turned out to be very strong capital raises. We continue to remain opportunistic and look at the markets, but there's nothing in the offering that we feel we have to do right now because we've done those two raises sort of before the pandemic hit.

Operator

All right. We'll move on to Chris McGratty with KBW.

Chris McGratty -- KBW -- Analyst

Great. Thanks for the question. Mike, a lot has been talking about tax rates given the deficits that we're incurring as a nation. Last cycle when rates were dropped, there wasn't as much of a sensitivity to First Republic given the structure of your earnings.

Could you just walk through how you're thinking about potential tax sensitivity if some of the Biden proposals get enacted?

Mike Roffler -- Chief Financial Officer

Yes. So obviously, given some of the fiscal stimulus, there's a potential of higher tax rates in the future. The good news is because the bank has been -- we've been so consistent with our tax-advantaged investments, municipals, low income housing, bank-owned life insurance, all those become a little bit worth a bit more in a higher tax rate. So it won't be a one for one percentage increase.

Maybe it's half, maybe it's 60% of an increase to the rate because those benefits are all greater in a higher tax rate.

Chris McGratty -- KBW -- Analyst

Great. Thanks. And then second question, you called out in the release, it looked like an MSR impairment. I'm just wondering if you could quantify the amount that was realized.

Mike Roffler -- Chief Financial Officer

Yes. Just under $6 million in the second quarter. In the first quarter, it was about $650,000. The MSR balance itself is pretty low.

I think it's about $31 million asset on the balance sheet. So it's gotten to be a pretty low amount given how fast repayments are happening in servicing portfolio.

Chris McGratty -- KBW -- Analyst

OK. And maybe one more, if I could. Could you just remind us, high level, the AUM that's priced off at 630 assets and how we should be thinking about fees in the third quarter, given the rebound in markets?

Mike Roffler -- Chief Financial Officer

Yes. It's the AUM associated with First Republic investment management. And I think that increased from $60 billion to $68 billion. So think of it as sort of low to mid-90s for investment management fees.

Chris McGratty -- KBW -- Analyst

Great. Thank you.

Operator

All right. We'll take another question. This one from Terry McEvoy with Stephens.

Terry McEvoy -- Stephens Inc. -- Analyst

Hi. Thank you. Good morning. You had a little over $2 billion of PPP loans on the balance sheet at the end of the second quarter.

What amount of those funds were in total deposit balances also at the end of the quarter?

Gaye Erkan -- President

So net-net, it was actually more loans than deposits, given our clients are actually disbursing these funds. So it's changing dynamically over time. It's declining. So net-net, it's actually a negative on a -- on the loan line of deposits.

Terry McEvoy -- Stephens Inc. -- Analyst

OK. And then as a follow-up question, thanks for putting in the personal guarantees on those three industry segments. Restaurants being at 94%. I'm just curious, out of those 955 loans, how many of those borrowers have deposit relationships with First Republic or maybe your wealth management clients, just to give you some sense and insight maybe into their ability to support those loans?

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

Actually, virtually all of them would have maybe not wealth management, but personal banking with us. We make very few loans with people that don't bank with us.

Terry McEvoy -- Stephens Inc. -- Analyst

That's what I expected. That's it. Thank you.

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

Thank you.

Operator

All right. Your next question comes from Brock Vandervliet with UBS.

Brock Vandervliet -- UBS -- Analyst

Hi. Good morning, everyone. Thanks for the question. Mike, you could just talk about resi yields? They've been extremely resilient, down only 15 basis points.

This quarter, we've heard a lot about primary and secondary mortgage spreads, and it seemed to be pretty wide on the mortgage side. Should we -- on the primary side, should we expect that to gradually come in and pressure those yields in the second half?

Gaye Erkan -- President

So far, the single family [Audio gap] in the high twos, low threes. Actually, the six-week rate logs we're seeing coming in slightly better than the second-quarter originations, just a bit. So we feel comfortable with the 2.65%, 2.75% NIM guidance for the year. I would also note that the earning asset growth plays a key role in our NII growth as well.

Brock Vandervliet -- UBS -- Analyst

OK. And as a follow-up in the mortgage area, the $300 million securitization, that seemed like kind of a trial balloon size, your first one in a long time. Do you see the markets have healed enough to pursue that more broadly or not?

Mike Roffler -- Chief Financial Officer

Yes. I mean, we're really pleased to reenter the securitization market in our name. Obviously, our loans have been securitized by others for a long time but it was great to do. We had arranged it before the pandemic, and it speaks, I think, to the market's view of our credit quality that it continued through and closed in May.

We look at it as another tool that we've gotten to reopen from a liquidity and funding standpoint. And if the market -- it's trading pretty well and if the market warrants it, we would consider it again, yes. But nothing on the immediate horizon, so to speak, of a securitization.

Brock Vandervliet -- UBS -- Analyst

OK. Great. Thank you.

Operator

All right. Next we'll go to Jared Shaw with Wells Fargo.

Jared Shaw -- Wells Fargo -- Analyst

Hi, good morning.

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

Good morning, Jared.

Jared Shaw -- Wells Fargo -- Analyst

Just looking at the provision, should we assume that, that provision as a percentage of growth stays stable as we go through the end of the year or was there any component of second quarter that was more of a gross up for the economic backdrop?

Mike Roffler -- Chief Financial Officer

Yes, I wouldn't say that. I think we're a little bit different than other banks in that we've always had a provision because the portfolio is growing, right? So there's typically been some level of loan loss reserve building while having pretty low charge-offs, especially in the last five, 10 years, especially. So I think we'll always have some level. And then it will depend on how the economic outlook progresses as to whether that goes up or down, how the modifications come off of modification late in the year, and do you have any specific instances that you've sort of got to dig into more.

Jared Shaw -- Wells Fargo -- Analyst

So, I guess, with the color that we have right now, you feel that, that current level, obviously, is good for new loans coming on?

Mike Roffler -- Chief Financial Officer

Yes, yes.

Jared Shaw -- Wells Fargo -- Analyst

OK. And then, Gaye, you had mentioned on the capital call loans, the dry powder sitting on the sidelines. I guess, in your view, what's keeping that on the sidelines? And how fast do you think that some of that can be deployed in the industry? And then at what point do you guys see net new fundraising or net new funds starting to be formed to drive new commitment growth?

Gaye Erkan -- President

Sure. So in general, going into the pandemic, there was already sizable dry powder in the market -- in the PE market. And then the first quarter, given that the GPs were working out through the pipelines as well as spacing out, wanting to space out capital close to LP. So there was increased utilization on the line roles as well.

In terms of -- so that's why the utilizations came down, and so there is still a sizable amount of dry powder in the system that's being -- is that rates are low. Equity valuations in the public market rebound, equity valuations are rich. So there is -- especially from institutional LPs, there is additional interest in the PE market as an attractive investment opportunity. So actually, the LPs, especially institutional LPs are looking to deploy money.

That really just brings up the deal activity and due diligences that are 80% done virtually just anecdotal talking to our clients. So we would expect the activity to remain healthy in our pipeline, to some extent, reflects that as well. But the utilization probably in the mid- to high 30s, but it's to anticipate the deal timing.

Jared Shaw -- Wells Fargo -- Analyst

Great. Thank you.

Operator

[Operator instructions] We'll next go to Lana Chan with BMO Capital Markets.

Lana Chan -- BMO Capital Markets -- Analyst

Thanks. Good morning. Just a couple of follow-up questions. One on the expense side, the efficiency ratio guidance. I think previously you talked about low double-digit expense growth.

With the new efficiency ratio guidance, is there any update on the expense growth rate?

Mike Roffler -- Chief Financial Officer

So we're very pleased that it's probably high single, maybe low double, but because of some of the savings that we do think we'll have for the rest of the year, it's probably a little bit lower than it was at the start of the year.

Lana Chan -- BMO Capital Markets -- Analyst

OK. Thank you, Mike. And then any -- is there any risk within the muni securities book, given what we're potentially seeing with some of the municipalities with the economic situation?

Gaye Erkan -- President

Yes, we are -- credit is always first on the asset side, so we have been very cautious. AA-rated average is our rating, and we have been always keeping an eye on ratings as well as the credit quality of munis bond by bond, so we feel comfortable with the credit underwriting standards. And we have very limited exposure to at-risk sectors insignificant.

Lana Chan -- BMO Capital Markets -- Analyst

OK. Thanks, Gaye.

Operator

All right. We'll take another question. This one from Garrett Holland with Baird.

Garrett Holland -- Baird -- Analyst

Thank you. Good morning. Appreciate you taking the question. I just had a few clarifications.

First, on NIM. I guess based on the forward curve, can you help us understand the NIM progression as we move through the second half and where you'd expect the margin to stabilize ex PPP at the end of the year?

Mike Roffler -- Chief Financial Officer

So we were 2.70% million this quarter. And given the curve is sort of where it's at, and we don't expect any steepening, we should bounce right around this level, I think, without any sort of PPP acceleration, what's happening is you're continuing to just see a little bit of a drift lower in loan yields as the portfolio reprices a little. And our funding costs also have some room to move down as CDs mature, FHLB matures, it gets replaced at much improved rates right now. So we feel pretty stable.

There could be a little bit of, call it, we're in the tax season right now. So there could be a little bit of extra cash early this quarter that comes down that could cause the margin to bounce back around a little bit, but we feel pretty good right sort of where we are.

Garrett Holland -- Baird -- Analyst

That's very helpful. And then just a quick one on the efficiency ratio guide. I think the core efficiency ratio performance is very good this quarter, and in the first half, really, and I understand the compensation accruals and the business mix can bounce around with wealth management. So it looked like you'd be comfortable to be able to come in below that mid- 60s range.

Is there anything lumpier on the expense side in the back half of the year that we should be thinking about?

Mike Roffler -- Chief Financial Officer

We don't see anything lumpy in the back half of the year. We lowered the lower boundary of the range to 62.5%, given the first-half performance and then some of the things that we're just not incurring right now but it feels like that's a good range. And the other thing I'd say is this, if you ran the margin of 2.65% to 2.75%, that equates to about a 2% difference in your efficiency ratio. So they're actually pretty much in line, the two together now.

Garrett Holland -- Baird -- Analyst

Thanks, Mike. Appreciate that detail.

Operator

All right. Next question is from David Chiaverini with Wedbush Securities.

David Chiaverini -- Wedbush Securities -- Analyst

Hi. Thanks for taking the questions and thanks for the details on Page 15 of the release with the loan industry information. I was wondering how much of the PPP loans to hotels and restaurants went to your existing borrowers versus new relationships in the quarter?

Gaye Erkan -- President

Very few borrowers actually, mostly our deposit clients, and I would note that a good portion also that a third of our business line is a nonprofit. So a good portion where the deposit nonprofit clients, about a quarter of our PPP loans, that went to our nonprofit clients. So limited exposure to the hotels.

David Chiaverini -- Wedbush Securities -- Analyst

OK. And then my second question is on deposits. You've had success and mentioned about the success with the digital account openings. Could you talk about the stickiness of these online accounts versus the branch source deposits?

Gaye Erkan -- President

Sure. Actually, it speaks back -- it goes back to our motto of doing more with our existing clients. So what we have seen during the pandemic flight to service and safety, part of the -- majority part of the deposit growth is coming from clients doing more with us and aggregating their accounts with us. And we enable them and empower them to open their accounts online if they choose to do so.

And we also have senior hours in our box strategies and the PBOs in our branches if they choose to come in. But at the end, our doing -- not losing our clients, doing more with them and being responsive to them, and the referrals that are coming in from the clients, whether it's digital or PBO, they are just the same robust trusted relationships that are coming because of the service our colleagues provide. So we feel comfortable with the stickiness and the stability regardless of the channel, it's just more of an empowerment of our colleagues and clients.

David Chiaverini -- Wedbush Securities -- Analyst

Great. Thanks very much.

Gaye Erkan -- President

Thank you.

Operator

OK. Your next question comes from the line of John Pancari with Evercore ISI.

John Pancari -- Evercore ISI -- Analyst

Good morning.

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

Good morning.

John Pancari -- Evercore ISI -- Analyst

I know you've given us the LTVs in the -- in your slide deck in your release for your commercial real estate portfolio and you indicated that they remain very low. Do you have those LTVs that are updated for the current backdrop or are they at origination? I know you've disclosed the 46% for CRE and 53% for multifamily. Do you have updated?

Mike Roffler -- Chief Financial Officer

Those are at origination, John. And so they're not currently updated. Yes. And in many -- and much of the portfolio, given the age, they've gone up since origination before starting to come down at this point.

John Pancari -- Evercore ISI -- Analyst

OK. Got it. Thanks, Mike. And then related to that on the commercial real estate side. I know industry commercial real estate delinquencies have jumped sharply for CMBS facilities.

And when you look at some of that data, there's a pretty sharp spike that we're seeing. Are you seeing any signs of distress, or to that magnitude in your portfolio? And if so, is it being kind of staved off by the forbearance. So if you can just give us a little bit of that backdrop, what you may be seeing. Thanks.

Gaye Erkan -- President

As far as our -- our CRE portfolio is concerned, very low loan-to-value ratios. For example, if you look at the second-quarter originations as an example, it was at 43% LTV, and very strong debt service coverage. And so given the strength of the cash flows and the collateral, we feel comfortable with the credit quality of our CRE portfolio, and these are smaller loans. These are not large loans.

So average sizes are quite small as you can see in our investor presentation.

John Pancari -- Evercore ISI -- Analyst

OK. All right. And then my last question, and sorry if you've already talked about it, but the decline in the investment advisory fees in the quarter. How much of that was tied to the market, as you noted in the release versus asset flows?

Mike Roffler -- Chief Financial Officer

It would have been tied to the market, and it's based on March 31st values. So it was already sort of locked in at that point. Client flows have been positive sort of both first and second quarter.

John Pancari -- Evercore ISI -- Analyst

Got it. OK. Thanks, Mike.

Operator

All right. [Operator instructions] We'll take a follow-up question from Ken Zerbe with Morgan Stanley.

Ken Zerbe -- Morgan Stanley -- Analyst

Hey, thanks. Hey, Mike, just -- I actually had a follow-up question to Jared's question on provision expense. I think I heard you say that this quarter's provision expense was indicative of kind of where it should be going forward. First part of my question is, are you talking about the $30 million reported or the $40-plus million of sort of core ex the reversal?

Mike Roffler -- Chief Financial Officer

Yes, it's a fair question. I'd say $40 million is probably the upper bound. Again, it depends on the economy and how it progresses.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. OK. And then the second part of the question is, and I know First Republic is sort of very unique in the sense that you still don't have credit losses. But can you elaborate how much of the $40 million that you took either this quarter or last quarter, actually related to sort of CECL adjustments versus just you needing, say, $40 million of provision expense to account for the lifetime losses on the new loan originations.

If you break those pieces, that would be really helpful.

Mike Roffler -- Chief Financial Officer

So that's a very complicated thing to do to be fruitfully honest with you. So -- because there are probably five different elements that go into the reserve. Growth would not have been $40 million, I won't say that. Growth is typically a much lower amount, and then it's been adjusted higher given the change in economic outlook.

Ken Zerbe -- Morgan Stanley -- Analyst

OK. So presumably, if you assume $40 million continues, then you're assuming the economy gets worse every single quarter going forward? I guess that doesn't -- I just want to make sure I understand that in context of CECL.

Mike Roffler -- Chief Financial Officer

So go back to what I said, it was an upper bound, which means it could be lower also but we do have growth and that does play into that.

Ken Zerbe -- Morgan Stanley -- Analyst

Understood. OK. That helps. Thank you very much.

Operator

All right. And we did have one more question. We'll take that from Brock Vandervliet with UBS.

Brock Vandervliet -- UBS -- Analyst

Thanks. OK. I know in the past, you've kind of more aggressively scaled up and down your CD exposure, and you touched upon this, that there may be further scope to ramp back down. Could you talk a little bit more about that? Is it -- did you drop $2 billion or so in the quarter?

Gaye Erkan -- President

So CDs do remain an attractive funding strategy as part of our attractive funding strategy and more than half of the time, we end up deepening our relationships with our CD clients given the amazing service our colleagues provide. What we have seen during the pandemic is a flight to service and safety. So the strong checking growth, coupled with the strong money market savings and money market checking growth, so that's why we have been paying less attention in our CD promotions and let that to roll off as they mature. And the rate -- the remaining term has come down significantly as well, which is less than five months right now in the CD portfolio.

Brock Vandervliet -- UBS -- Analyst

Less than five months. OK. Got it. Thank you very much.

Gaye Erkan -- President

Thank you.

Operator

All right. And it looks like we have no further questions at this time. So I'd like to turn the call back over to Mr. Jim Herbert for any additional or closing remarks.

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

Yes, thank you all very much for your time today. We appreciate it. Have a good day.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

Shannon Houston -- Senior Vice President and Chief Marketing and Communications Officer

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

Gaye Erkan -- President

Mike Roffler -- Chief Financial Officer

Steven Alexopoulos -- J.P. Morgan -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Arren Cyganovich -- Citi -- Analyst

Dave Rochester -- Compass Point Research and Trading LLC -- Analyst

Casey Haire -- Jefferies -- Analyst

Chris Nardone -- Bank of America Merrill Lynch -- Analyst

Chris McGratty -- KBW -- Analyst

Terry McEvoy -- Stephens Inc. -- Analyst

Brock Vandervliet -- UBS -- Analyst

Jared Shaw -- Wells Fargo -- Analyst

Lana Chan -- BMO Capital Markets -- Analyst

Garrett Holland -- Baird -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

John Pancari -- Evercore ISI -- Analyst

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