First Republic Bank (FRC) Q3 2020 Earnings Call Transcript

First Republic Bank (FRCB)
Q3 2020 Earnings Call
Oct 13, 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 third-quarter 2020 earnings conference call. Today's conference is being recorded. [Operator instructions]. I would now like to 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 third-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. The third quarter was a very strong quarter. Loan origination volume was another quarterly record. Deposits also grew very strongly.

Wealth management assets have fully recovered and are growing very nicely as well. And credit, capital and liquidity remain overall quite strong. This year's performance so far continues to demonstrate the strength of our conservative, well-capitalized client service business model. This is our 35th year of consistent organic growth and consistent continuous profitability.

Let me turn to the third quarter strong results. Year over year, total loans outstanding were up 19%, excluding PPP loans. Total deposits grew 22% year over year. Wealth management assets were up 20% year over year despite the extraordinary market volatility during the period.

This across-the-board growth continues to drive our financial performance. Total revenues grew 20% year over year. Net interest income has grown 19.5% year over year. And tangible book value per share has increased 12.6% year over year.

Importantly, our credit remains quite strong. Net charge-offs for the quarter were only $1.7 million and have been only $3 million so far year-to-date. Nonperforming assets at quarter end were a very modest 12 basis points. Our Tier 1 capital leverage ratio at quarter end was a strong 8.38%.

We were very pleased in September to successfully raise $500 million of qualified Tier 1 fixed for life perpetual preferred. This was issued at a very attractive dividend rate of 4 1/8%. In fact, this is the lowest dividend rate ever achieved by a bank for a fixed for life perpetual preferred. In terms of our market share performance for a moment.

We recently released -- we recently received the results of our two-year -- our every two year Capgemini household study. This study looks at our growth and penetration within the high net worth household segment, which is one of many segments that we serve but is representative of the enterprise overall. The number of such households that we serve grew 16% per year between 2017 and 2019. This is a very strong growth, and it compares to 11% per year during the prior two-year study period.

Overall, that's a 40% acceleration in household acquisition growth rate. As a result, our overall market share in this segment has grown very nicely over the period to nearly 5%. This market share growth rate represents an 18% increase in share position in just two years. It's our largest two-year share gain since we began doing this study in 2003.

The strong household growth reflects the continued power of First Republic's very differentiated service model. In short, we take very good care of our existing clients, who, in turn, grow their account sizes with us continuously, utilize additional services all the time and provide very strong referrals. This proven sustainable model has a compounding effect that continues to drive our organic growth. Overall, it was a very strong quarter.

As we plan for the future, we're actually very excited about the continued growth opportunities immediately ahead. Now, let me turn the call over to Gaye Erkan, our president.

Gaye Erkan -- President

Thank you, Jim. It was indeed an excellent quarter with strong client activity across the franchise. We are delighted with this quarter's performance and our strong household growth. Over the past several years, we have successfully scaled our culture and service model to manage an increasing household growth rate without compromising our very high standards of service and safety.

Among other things, this has included growing our talented and diverse workforce, the lynchpin of our service model, by about 10% year-to-date, selectively opening new preferred banking offices to enhance our community presence, investing in technology to provide greater service options for our clients and to scale our service model, and investing in infrastructure and risk management to maintain our safety and soundness. For example, our digital banking platform works hand-in-hand with the personalized service delivered by our bankers, providing a technology enabled, yet customized experience, for our clients. Clients can access their trusted banking teams seamlessly with a one-touch digital-to-human connection through our mobile app. We have also enhanced client options to self-serve digitally if they prefer from account opening to select transactions and account controls.

We are also giving our colleagues more time to delight our clients and deepen existing relationships by streamlining and automating repetitive tasks. More customization, greater access to dedicated bankers and continued service excellence drive overall client satisfaction, which in turn fuels our continued strong organic growth. With that in mind, let me turn to an update on lending. Loan origination volume in the third quarter was $12.2 billion, our best quarter ever.

Single-family residential volume also set a new record at $6.8 billion for the quarter. We are pleased that home purchase finance accounted for 42% of single-family residential volume, up significantly from 20% last quarter. Refinance activity also continues to be very strong and provides an excellent opportunity to acquire new households. The majority of our refinance activity comes from clients previously at other institutions.

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 third quarter was just 56%. Turning to business banking. Loans and line commitments, excluding the Paycheck Protection Program, were up 14% year over year.

During the quarter, business line utilization remained consistent at 34%. This is in line with our historical utilization range of mid to high-30s. As we begin the fourth quarter, our overall loan pipeline remains very strong, up meaningfully from last quarter. Let me provide a brief update on our COVID-related loan modifications.

At quarter end, the dollar amount of loan modifications totaled 3.7% of the total portfolio. As a reminder, most of our modifications were made in April and May with an initial duration of six months. Therefore, the deferrals are scheduled to expire during the fourth quarter. We expect the vast majority of our clients to return to normal payment at that time and early indications are quite positive.

In terms of funding, it was an excellent quarter. In this time of uncertainty and low rates, our safety, soundness and differentiated service are more highly valued by our clients than ever before. Total deposits were up 22% from a year ago. Checking deposits increased by over $6 billion in the third quarter and now represents 65% of total deposits.

Business deposits represent 58% of total deposits, up slightly from the prior quarter. Importantly, over 85% of total funding at quarter end came from deposits. Turning to wealth management. Assets under management increased this quarter by 8% to $168 billion.

This growth was due to strong market appreciation, plus a net client inflow of $4.6 billion during the quarter. Also, since our last call, we welcomed three new wealth management teams to First Republic. Overall, it was a very strong third quarter. 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 the record quarterly revenues of $1 billion, up 20% year over year. Earnings per share were also a quarterly record of $1.61. Earnings per share did benefit by approximately $0.09 from onetime items, including discounts on loans sold, insurance proceeds and an amended tax return refund.

Our balance sheet remains quite strong in terms of credit, capital and liquidity. Our provision for credit losses was $28.5 million, slightly less than the second quarter. In contrast, net charge-offs during the quarter were only $1.7 million. So far in 2020, we have added over $122 million to our reserves, while net charge-offs for the same period have been only $3 million.

Let me discuss our continued capital strength. In September, we were pleased to successfully raise $500 million of fixed for life perpetual preferred stock at the historically attractive rate of 4 1/8%. This was our largest equity raise ever. With a portion of the proceeds in October, we retired the $100 million 5.7% Series F perpetual preferred stock.

As a result of these capital actions, we expect quarterly preferred stock dividends to be $18.5 million beginning in the first quarter of 2021. We are pleased to declare this quarter's dividend of $0.20 per share on our common stock. 2020 marks First Republic's ninth consecutive year of dividend increases. Also, as a reminder, First Republic does not engage in share buybacks.

Our liquidity position remains strong. HQLA was 12.9% of total average assets in the third quarter, including $3.1 billion of eligible cash. Given our strong deposit growth and liquidity position, we prepaid approximately $1.4 billion of FHLB advances, which were coming due over the next two quarters. Net interest income increased 19.5% year over year.

Our ability to grow NII at such a strong pace reflects the power of our consistent growth of earning assets and a stable net interest margin. We are particularly pleased with a net interest margin of 2.71% for the third quarter, up one basis point from the prior quarter. This, of course, reflects our ability to deploy our strong deposit growth into well-secured real estate lending instead of leaving those deposit dollars in cash and short-term investments. Driven by strong checking deposit growth, the cost of funding declined by 11 basis points, which more than offset the 10 basis point decline in earning asset yields.

We continue to expect 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 third quarter was 60.7%. Our efficiency ratio did benefit by about 100 basis points from the previously mentioned onetime discounts on loans sold and insurance proceeds. We expect our efficiency ratio for the full-year 2020 to be near the lower end of the range of 62.5 to 64.5%.

Our effective tax rate for the third quarter was 19.6%. Given the positive tax refund mentioned above, we expect our tax rate for the full-year 2020 to be near the lower end of our range of 20% to 21%. Overall, it was a very good quarter. Now, I'll turn the call back over to Jim.

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

Thank you, Gaye and Mike. It was an overall very strong quarter with high-quality growth across the franchise. As we continue to grow, we are very focused on continuing to scale our model by investing in people, infrastructure and technology. This combination further supports our service model and sustainable growth.

Now we'd be pleased to take any questions. Thank you.

Questions & Answers:

Operator

[Operator instructions] We'll take our first question from Steven Alexopoulos with JP Morgan.

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

Good morning, everybody. Maybe to start on NIM and follow up on the guidance that Mike just provided. I get the range is consistent, but do you think the NIM can hold, Mike, relatively steady in this 2.70% range heading into 4Q?

Mike Roffler -- Chief Financial Officer

Yeah. Steve, it's been remarkably resilient, right around 2.70, 2.72 for the year. And it feels like we're in a pretty good place in this range, given the new business that we're doing and some of the reduced funding costs. And importantly, we're able to deploy our deposit growth into strong credits that are earning a decent yield.

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

OK. That's helpful. And then on credit, maybe for Jim. So one of the major concerns that investors have for all banks is cycles on commercial real estate, and we hear New York, San Francisco are the No.

1, No. 2 concerns. Now that the cycle is somewhat better understood here, which asset classes within commercial real estate do you see most at risk? And do you think banks will end up losing money on commercial real estate deals in either New York or San Francisco?

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

Well, I think the choice of your focus on commercial real estate, let's leave out multifamily for a minute. Let's just focus on office and retail and other sort of versions of true commercial real estate. Those are probably the areas most at risk. I really can't comment very knowledgeably on other banks.

And our lending in San Francisco and New York on commercial real estate non-multifamily, the loan-to-value ratios are all south of 50% in the portfolios. And the size of the deals are actually pretty small. They average about $5 million. So I don't think there's going to be actual losses taken.

Those properties are under a lot of pressure, ranging from not very much well run off as buildings with a number of tenants in them -- or credit tenants to retail, which, as we all know, has got a lot of problems.

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

And Jim, how would you compare New York to San Francisco? It seems like New York is under a lot more pressure. What's your view?

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

Well, I think it's certainly getting a lot more press. It's bigger, obviously. It's hard to tell. And as we know, in the office market in New York, there are several markets actually, Midtown, Hudson Yards, Downtown.

And those markets are functioning slightly differently. The Hudson Yards is getting a fair amount of press, but of course, it's just coming online, and it's the newest space in town where we have a heavy commitment there. And I will say that it seems to be leasing up very well, and those are mostly larger credit tenants because of the type of space it is. I think San Francisco, the rents are down.

The commercial rents are down meaningfully in San Francisco, but San Francisco goes through this kind of up and down every once in a while. And it's not a problem. I would say the incremental rates in San Francisco were down probably 15 to 20%. Vacancy is not that high, but the rates, the incremental rates, are down a lot.

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

OK. That's helpful. And then for a final question. So on a year-over-year basis, period end assets grew 20%, which is fairly consistent.

But when I think of your balance sheet, at least historically, loans have been the primary driver of the balance sheet and then you would backfill with deposits. If I look at the recent trends, it looks like deposits are starting to pull the balance sheet, and it's really the business bank doing that. Is this a temporary phenomenon tied to clients building more liquidity? Or do you see something changing on a more sustainable basis, which would obviously be favorable for NIM?

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

Actually, let me start that answer, and then pass it to Gaye. But for 35 years, the driver of the bank has been its lending proudness. And our ability to stay with, I remember, 55, 60% of all of our loans every year are made to existing clients, and that's our biggest growth element. And then their direct referrals are 25% -- another 25%.

And so that's our driver and it always has been. Only recently, we've been able to fund it entirely without diving into wholesale markets of any kind, and we didn't do that too much over the years anyway. Recently, obviously, with the Fed increasing its balance sheet, there's a lot of liquidity around. But let me turn to Gaye for the deposit side.

Gaye Erkan -- President

Yeah. Steve, we're very pleased with the strong checking growth especially, over $6 billion and 40% quarter over quarter, annualized. The deposit growth has been as a result of new households. On the back of the Paycheck Protection Program, business is giving us even more referrals, even those who haven't necessarily done those loans with us.

And the consumer account balance sizes are also higher compared to a year ago, and we are seeing the growth coming in from very diversified sources that includes, in addition to PE being active professional services, real estate and our nonprofits as well increasing in their deposit balances. So we're really pleased with the flight to service and the safety.

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

Great. Thanks for taking on my questions.

Operator

We'll take our next question from Bill Carcache with Wolfe Research.

Bill Carcache -- Wolfe Research -- Analyst

Thank you. Good morning. I wanted to start off with a question on your revenue growth. Against the backdrop of low rates and weak loan growth pressuring the rest of the banking industry, the idiosyncratic tailwinds in your business model are continuing to stand out.

Can you give a little bit more color on your confidence level and the durability, repeatability and sustainability of those idiosyncratic drivers of growth, even if the low rate environment and margin pressures persist? And do you see any indication of that growth, even if not now, is there any risk that you see of that growth being competed away over time?

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

Well, the growth, as I just kind of said in the last answer, is driven by our Net Promoter Score, which is in the 70s, which is twice the banking industry average. That's just a simple way of measuring client satisfaction. So the growth in the bank starts with the fact that we don't lose very many clients every year. We have about a 2% attrition.

Most of the banking industry tends to run at about 8%. So that's the -- so keeping and satisfying the clients you have now is the No. 1 key to continued growth because if you keep them, you grow with them. Their checking account grows, they do more in the home lending area, etc.

And so that's the driver of the growth. And then they are very happy and they refer other clients. So that model has been successful year in and year out for 35 years. The loan line has probably compounded at about 15 to 16% for 35 years through thick and thin.

The margin is a little more complicated because it's very subject to macro conditions. We're holding up, as Mike just said, better than we had hoped, although our projections indicated we would, but we were -- there's a lot of pressure here. I would note the 10-year being up slightly recently is not a negative. But I think that the sustainability of it is, historically, clear to see.

Our job is to maintain our service quality. If the service quality is maintained, the growth will be maintained.

Bill Carcache -- Wolfe Research -- Analyst

If I may, as a follow-up, some of your competitors have hedging programs in place that have served as a source of support for their net interest margins, particularly as we move to ZIRP after the pandemic hit. But I don't believe we've seen you guys put on any hedges. Can you briefly touch on your hedging philosophy and whether you've ever felt like you're at all competitively disadvantaged by not putting on hedges? And also, since you're not receiving any hedging benefits today, you're not going to face any future headwinds as hedges roll-off. But I would appreciate your thoughts on just those hedging dynamics overall.

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

No. This is an interesting conversation. Mike, we do not hedge. Our hedge is basically a good business done with clients at a spread.

And we've resisted hedging over the years. Many times, we've been presented with good ideas, but we just don't take them. Our experience is that over a very extended period of time, hedges sometimes increase volatility rather than decrease it. They can go wrong or the accounting for them can go wrong.

Gaye Erkan -- President

And just to add to Jim's comments, the organic hedge of First Republic is the earning asset growth coming from within. The more clients we have, as long as they're happy, the more referrals we get. And that earning asset growth can largely offset fluctuations, small, modest fluctuations in NIM. So the NII growth continues to be strong with our organic growth and driven by client services, Jim explained.

Bill Carcache -- Wolfe Research -- Analyst

Very helpful thank you.

Operator

We'll take our next question from Ken Zerbe with Morgan Stanley.

Ken Zerbe -- Morgan Stanley -- Analyst

Great. Thanks. Good morning.

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

Good morning, Ken.

Ken Zerbe -- Morgan Stanley -- Analyst

Mike, can you actually just tell us where your new loan and security yields were in the quarter on the stuff that you put on?

Mike Roffler -- Chief Financial Officer

So new loans, if you look at home loans, high-twos, multifamily around three and a quarter, and CRE around 3 50. So when you sort of blend it all together, we're just shy of 3%.

Gaye Erkan -- President

And security side. So on the minis, it's 2 75, around 2 75, that's TEY. And then government agency, HQLA is around one and a quarter to one and a half.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. OK. And then just in terms of, I guess, the one and a quarter, one and a half, like security yields are certainly much higher, and I know you have a longer duration. But is it fair to assume that all things equal, that your security yields just continue to -- I mean and loan yields, presumably, if you're -- depending on what you're putting on, like just kind of creep lower? I mean I guess I'm looking at the numbers, and I could easily see sort of when you go out to 2021, 2022, call it, I don't know, 10, 20, 30 basis points lower asset yields as this was slowly repriced? Is that fair?

Gaye Erkan -- President

Yeah. So we don't -- our guidance for 2020 for NIM is 2 65, 2 75, roughly around the mid-range. We are not giving guidance for the next year given the uncertainty in general. So we typically do that in the fourth-quarter call.

But I would say in the new -- the way that we look at it just overall, new lending yields are coming in around -- just around 3% on the marginal and the marginal funding cost is around 30 basis points. If you take that as a rough cut so that's right in the middle of the range for NIM. And then I would also add, NIM is just one part of equation for First Republic. The strong NII growth, as we said, is largely offsetting modest fluctuations in NIM.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. OK. And just really quick and in terms of the NIM guidance, I guess, call it, roughly 2 70, does that include the benefit of the accelerated PPP amortization from loan forgiveness?

Mike Roffler -- Chief Financial Officer

So it does include it, but I'll say this, we don't expect much of that until 2021. At this point, we have submitted less than 50, I think, to the SBA for their approval. So it's early on in the process. I think that's more of early '21 dynamic.

Ken Zerbe -- Morgan Stanley -- Analyst

OK great. Thank you.

Operator

We'll take our next question from John Pancari with Evercore.

John Pancari -- Evercore ISI -- Analyst

Morning.

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

Good morning, John

John Pancari -- Evercore ISI -- Analyst

On the commercial real estate topic again, Jim, I just want to confirm, did you indicate that you don't expect to take losses in that portfolio at this time?

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

I wouldn't be that cavalier about it quite -- we don't know yet. If we have losses, they're going to be one at a time. It's going to be quite -- the loan portfolio -- that loan portfolio as a group is actually reasonably strong. And it starts out because we have very low loan-to-value ratios, which, of course, means high cash flow coverage on the other side.

John Pancari -- Evercore ISI -- Analyst

Right. OK. OK. Got it.

And then also on the commercial real estate front, can you just remind us what percentage of your commercial real estate portfolio is in those -- the more impacted areas, including office and hospitality retail?

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

The commercial -- of the commercial office space, about 30% is in San Francisco and 24% is in Manhattan.

Gaye Erkan -- President

And just to add, the COVID-impacted hotel retail restaurants overall is less than 2.5%, about 2.3% of our total loan portfolio. And within that, modifications are even less, roughly around $640 million. And within that, we are seeing -- we have a great collateralization real estate backed over 95% and personal guarantees in most cases.

John Pancari -- Evercore ISI -- Analyst

OK. Got it. And then just a follow-up on credit as well. How should we think about the loss or net charge-off trajectory here? I know your losses were up slightly in the third quarter.

Fair to assume that we see losses really gain steam, I guess, impacted by the pandemic in the next couple of quarters. And if so, is it fair to assume that that loss content has already been provided for your reserve and accordingly, we could start to see implied loan loss reserve ratio declines?

Mike Roffler -- Chief Financial Officer

So there's a lot to unpack there, John. But I think what you've seen with us and also the other banks this morning, I mean, provisions are a bit lower than they had been in the early part of the year, which I think is what CECL was intended to have happen when things start to improve. You're right, our losses have been very low. We've done a good scrub of the COVID portfolio and any losses that may come out of that, it's likely going to be in the 2021 calendar period versus something that pops here in the fourth quarter.

One of the things that I think Gaye mentioned was that our modifications were largely done in April and May, and so they're now coming off modification and back to regular payment status. And thus far, it looks like we're at about 90%, have already come back on to their regular payment status. So they're still in the COVID mod book right now, but October already has been a very good start to people just resuming their regular payments, which gives us confidence that the losses that Jim mentioned and whatnot look to be relatively low at this point, but it will be in 2021 when it will come home or sort of conclude.

John Pancari -- Evercore ISI -- Analyst

Got it. OK, Mike. Thank you.

Operator

We'll take our next question from Casey Haire with Jefferies.

Casey Haire -- Jefferies -- Analyst

Yeah, thanks. Good morning, guys. Mike, a couple of follow-ups on the NIM. Just on the funding side of things, the CD book, obviously, repriced a little bit meaningfully lower this quarter.

What is the opportunity for that to continue versus that 1 34 rate? And then also the FHLB advances at 1 68 are you guys going to continue to pay down those? And what is the rollover rate?

Gaye Erkan -- President

Let me start on deposit side, and then I'll turn it to Mike for the overall NIM guidance. On the deposits, the average quarterly rate was 21 basis points. The spots rate is in the low teens. And in terms of our funding cost, total overall liability, overall funding cost, there is a lot of tools in the toolkit that'll be dynamically optimized.

So there is some room for improvement. But I would go back to the -- I'll turn it to Mike for the 2 65, 2 75 for the year, we feel comfortable with that.

Mike Roffler -- Chief Financial Officer

Yeah. And just on your comment on FHLB, we do have not a lot of maturities left this year. So you won't see a lot of movement probably until next year. If rates stay where they are, next year, you'll see our FHLB funding cost, there is some opportunity there, which leads us back to what Gaye has said of why sort of we're comfortable for the margin outlook for the rest of 2020.

Casey Haire -- Jefferies -- Analyst

OK. Great. The next question is just on the efficiency. If we tease out the overage on the fee side of things, it looks like the efficiency ratio came in a little under 62% on what was a record origination quarter.

I know you guys aren't giving guidance on next year, but are you guys learning -- it sounds like there's an expectation that you could run more efficient? Or do we run back to historical efficiency ratios?

Mike Roffler -- Chief Financial Officer

So I think you're right, when you sort of tease off the one-off, we're just under 62% for the quarter. And I think for nine months, we're just under 62.5%. That has benefited a bit from a lack of advertising and marketing and a lack of travel and any sort of client activity or client event. There will be a point in 2021 that you'll start to see those costs tick up.

I think the stability of the margin, we talk about this a lot, it is the ratio and the stability of the margin has also had a flow-through benefit to the efficiency ratio. But I do think some of these costs that have been avoided given the pandemic will start to come back next year at some point, which is why we'll sort of look at another update in January.

Gaye Erkan -- President

And adding to Mike, we are long-term thinkers, and we take a long-term view on the business, and there are great client service opportunities, especially right in this moment. So now is the time for us to continue to invest in the strong organic business growth.

Casey Haire -- Jefferies -- Analyst

Understood. Just last question. On the loan growth, could you provide a little bit of color on the geography, just given what's going on in New York City? Like I think last quarter, you guys referenced there's a lot of New York City suburb activity, just the resi mortgage drove about 90% of the loan growth. By geography, could you just provide us some color there to give us some insights?

Gaye Erkan -- President

Yeah. Very strong. So total single-family residential third-quarter originations were quite strong at $6.8 billion across all of our key regions. Including New York, the purchase market has been strong quarter over quarter and year over year.

And majority of that purchase activity in New York specifically was in the suburbs and that picked up quarter over quarter. The refi activity also continues to be quite strong, now representing about 58% of the total activity, and that is consistent across all of our regions as well. And we have seen great activity in Los Angeles, too. That has been quite a strong market, especially over the last few quarters.

Casey Haire -- Jefferies -- Analyst

Great. Thank you.

Operator

We'll take our next question from Chris McGratty with KBW.

Chris McGratty -- KBW -- Analyst

Great. Thanks for the question. Mike, just going back to the balance sheet mix and the margin dynamic. You look at the last couple of years, securities as a proportion of assets have come down from about 20 to about 15% today.

Is there anything magical about the 15% number, given the size and liquidity being the level of liquidity you need? Or could that ratio drift a little bit lower, which would support NIM into next year?

Mike Roffler -- Chief Financial Officer

So one of our things that we're very focused on and we talk about every quarter is our HQLA levels, and we're always going to be above 12% of average assets there. We also do have some securities, largely municipals, that don't qualify as such. So I don't know that you go a lot below 15% from here. I think we have not bought as much recently given where yields have been for some of the newer agency type instruments.

We would just assume hold it in cash for now and deploy it into the lending portfolio for client demand because that's really our focus is to serve client need or client activity.

Chris McGratty -- KBW -- Analyst

OK. That's great. And maybe one, with the election a couple of weeks out, two items are getting a lot of press, one being tax rates and other being kind of regulation. You guys -- I think I asked this question last quarter about any thoughts on potential sensitivity to taxes with the Biden victory.

And then also, any thoughts, either growth or credit from your student lending refinance business, given some of the proposals that are in the ballot?

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

Well, the taxes, if you mean by your question that are the taxes impacting our markets any, I would say there's a little bit of movement based on taxes out of the Northeast and out of California to lower-tax states, but mostly among people that were probably fairly ready to move already. I don't think we have a comment really on the macro impact of one candidate or another, obviously. But in terms of student loan refinance, it's actually holding up very, very well. Our volumes, we've shifted over to a broader-based personal loan line of credit lending.

That product is up and running and doing well. The delinquency in the portfolio is quite good. It's consistent with -- it's low. It's consistent with our single family, actually, much to our pleasure.

Operator

And we'll take our next question from Brock Vandervliet with UBS.

Brock Vandervliet -- UBS -- Analyst

Thanks very much. I just wanted to hone in a bit on the endgame with respect to these deferrals. So $3.9 billion, you've got a roughly 90% cure rate. So for example, say, 390, 400 million may not go back to normal P&I payments.

What becomes of those? Are those TDRs? Or are those modified under 40 13? What happens there?

Mike Roffler -- Chief Financial Officer

Yeah. Brock, so to the extent they're coming due this year, there is an ability, if it's a short-term challenge, which in many cases, it is, if you have to come back for another request, we likely would do a short-term modification under the CARES Act, and it would then be carried as a continued to be accruing loan. That relief under the CARES Act does run out at year end. And so after that, if you need any more, then you likely start to see a migration at that point because your totality of deferrals will have been up to a year in some cases.

The other thing I'd say is this, while it may go down that route, the loan to values are still in the mid-50% range. So the loss content, again, is still relatively modest from what we've seen at this point in time. And at that point, the total is about 40 basis points, using that math of the loan portfolio.

Brock Vandervliet -- UBS -- Analyst

OK. And just shifting gears over to mortgage. One, if you could describe that $10.3 million gain. And aside from that, it looked like the mortgage gain was 124 basis points that looked about in line with where it had been historically, albeit very volatile.

Are we kind of back to historical levels there?

Mike Roffler -- Chief Financial Officer

So on the gain, that was sort of a one-off. We had previously sold some loans that during the market dislocation, had an opportunity to buy them back at a relatively attractive price, which we did execute upon. Market since recovered. Securitization wanted to be done by one of the banks, and we delivered into it.

And that's why you saw the sort of the acceleration of that market dislocation from an earnings standpoint. We're pleased that the gain did improve to over 1% without that one-off this quarter. I will say that while we don't do a lot of conforming sales, we have started to do more, and that market has been pretty positive, given away Fannie prices. So I don't know that I declare it all the way back, but it is better that it's running at a more consistent rate of gain than it had in maybe the past few quarters, which it bounced around a bit.

Brock Vandervliet -- UBS -- Analyst

Got it. OK. Thanks for the color.

Operator

We'll take our next question from Dave Rochester with Compass Point.

Dave Rochester -- Compass Point -- Analyst

Hey, good morning, guys. Nice quarter.

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

Good morning, Dave.

Dave Rochester -- Compass Point -- Analyst

I wanted to start with the deposit growth this quarter. You had some really solid growth, and it was even more impressive since you had pretty much a normal tax season hit in July. 4Q is normally a pretty strong quarter for you guys as well. And I was just wondering, based on what you're seeing at this point, are you expecting that momentum to continue?

Gaye Erkan -- President

Thank you. And yes, we do expect the momentum to continue, both on the consumer side and on the business side, given the activity. And the single-family residential activity being so strong on the origination side on both purchase and refi also gives us a great opportunity to acquire new households, because most of the refi is actually coming from clients at other institutions that are also bringing their relationships over to us. And as you pointed out, second half is usually the strongest, and so you would expect that trend to continue.

Dave Rochester -- Compass Point -- Analyst

Yeah. OK, great. And then just on the comments you made earlier on the loan pipeline. It sounds like you said that was up meaningfully just from last quarter.

And obviously, this quarter, you had some great loan growth. I was just wondering what the mix of that looks like. If you're still driven primarily by resi, which I would imagine, that that momentum is still continuing. But also, I was curious to hear about the capital call business as well, what you're seeing there.

And it sounded like you talked about utilization rates and business banking remaining fairly stable, and I guess, that was the case in the capital call business as well?

Gaye Erkan -- President

Yeah. So let me start with the first one. The pipeline is meaningfully strong compared to both last quarter and last year. When we look at the six-week rate-lock volumes in single-family residential, for example, it's double the same time last year in terms of volume.

So we're very pleased with the strong pipeline and client activity. In terms of -- and single family continues to be strong purchase and refi. Multifamily continues be strong as well, and we are very cautious on both debt service coverage and loan-to-value ratios and CRE is, relatively speaking, slower volume. Capital call commitments grew 17% year over year and utilizations are in the mid-30s.

We would expect that in that mid-30s, low-40s type of -- mid to high-30s type of range. The PE remains attractive given rich equity valuations and low rates. And with the specs being a tailwind for the monetization of PE assets, we are seeing great activity in the PE space. In addition, I would end with the diversification on the deposit side has also come from professional services, the nonfinancial services sectors as well, including professional service and nonprofits.

Dave Rochester -- Compass Point -- Analyst

Great. All right. Thanks, guys.

Operator

We'll take our next question from Andrew Liesch with Piper Sandler.

Andrew Liesch -- Piper Sandler -- Analyst

Hi. Good morning, everyone. So far this year, obviously, seen very strong loan growth. Previously, you guys were discussing a mid-teens space, but with the strong pipeline here heading into the fourth quarter, is it safe to assume that the growth at the end of the year is going to be stronger than your initial thoughts?

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

Well, it will certainly be at least the mid-teens. What you don't know is fall out, our closing rates. We're quite busy and closing challenges continue to persist in some of the pieces of the chain of closing. But it should be -- we're about 17% year-to-date.

And that's obviously eliminating PPP as well, which was in the year. We have to be careful to take that out. So I think we're probably mid-teens, high mid-teens.

Andrew Liesch -- Piper Sandler -- Analyst

OK. And then it sounds like you had some good growth in new client inflows in the wealth management business. How does the pipeline look for adding new clients there?

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

The wealth pipeline is a little harder to estimate because they just -- the sales cycle in wealth management is quite different than lending. You don't have necessarily the pipeline kind of analysis that you have in lending. Obviously, our growth comes from both growing of existing clients, adding new clients by wealth advisors and wealth managers that are already with us and bringing in new teams. The last part of the year is the slowest part of hiring of new teams generally.

Andrew Liesch -- Piper Sandler -- Analyst

OK. Understood. That's very helpful. And just a couple of follow-up housekeeping questions on the fee income side.

The BOLI income for the quarter even backing out the gain was still up substantially. Is this a good run rate? Or how should this level -- or how should this number bounce around going forward?

Mike Roffler -- Chief Financial Officer

Yeah. So there's two things I'd probably pull out to get to a better run rate. One would be the claim that we had, the proceeds, so that was just over $5 million. And then each year in the third quarter, we have an annual benefit from one of our policies.

It's roughly $2 million, call it. So if you took those out, that probably gets you back to a better-normalized run rate going forward.

Andrew Liesch -- Piper Sandler -- Analyst

OK. Thanks for taking my questions.

Operator

[Operator instructions] We'll take our next question from Arren Cyganovich with Citi.

Arren Cyganovich -- Citi -- Analyst

On the residential lending side, maybe you just talked a little bit about the -- the purchase volumes continues to be pretty good for you guys, it's been almost 42% is what you said, but the refi, obviously, still elevated from the low rates. How long of a runway would you have for the refi to remain somewhat elevated in this kind of low rate environment?

Gaye Erkan -- President

So there are two sides to the refi. There is the -- first of all, the client refi and there is the non-First Republic client refi. And in this type of rate environment, we do see clients giving us more trial and the refinance provides an opportunity to do so. And over time, our trusted advisors deepen the relationship.

So we would continue that trend -- we would continue to see that trend over some time. And then the purchase activity is picking up quite meaningfully quarter over quarter, including in San Francisco, West Coast as well as in New York, given that there is more price discovery, although not complete yet, which also brings additional activity to the origination space. So we're very pleased. The pipeline is quite strong as it stands right now as well as the rate lock volume is double last year's volumes.

Arren Cyganovich -- Citi -- Analyst

Thank you.

Operator

We'll take our next question from David Long with Raymond James.

David Long -- Raymond James -- Analyst

Good morning, everyone.

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

Good morning. Sorry. The mic won't on.

David Long -- Raymond James -- Analyst

No worries. Two things. The first one I had is on the deposit side. Is there a level of your deposits that you've taken in over the last quarter or two that you may say has been simply because of the pandemic and your customers trying to keep a little bit more cash on hand? I guess, I just wanted to know if there's a portion of your deposits that you think could be at risk of running off if the economy picks up steam and we get back to same degree of normalcy next year.

Gaye Erkan -- President

Yeah. So on the -- let me start addressing. On the consumer side, we do see the average account sizes year over year slightly up because of that. And the business -- on the business side, we have seen both our clients deepening their relationships as well as we have gotten -- on the back of the PPP, given the service, we have gotten a lot of referrals on the back of that program as well.

We expect those deposits to be stable given the great service and the deepening of the relationships with our bankers. And also I wouldn't underestimate, in addition to the service, the safety and soundness of the bank in these type of times are also attracting more deposits coming in. In addition, when you look at the non-deposit funding alternatives, given the rate environment, there's a lot of tools in the toolkit. So we do, do a dynamic optimization.

And as part of that, we switched from the barbell of CD and checking to more checking in money market given that the CDs are not that attractive from the client perspective from a rate perspective, but they continue to be a strong part of our business and client acquisition.

David Long -- Raymond James -- Analyst

Got it. And then the second question. On Slide 21, you break down some of your business exposures in more detail. Maybe can you provide a bit of color on what types of loans are included in the aviation, the professional service and clubs and the membership buckets? Those seem like a -- they carry maybe a little bit higher risk, but just curious what exactly you're talking about in those areas?

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

I'll take that. The aviation is mostly airplane finance to our higher net worth private clients, mostly guaranteed. So I don't know that there's -- and, of course, the market value on aviation assets is actually quite determinable. Professional service firms, those tend to be guaranteed -- partner guaranteed lines of credit to law firms, occasional accounting firm, that sort of thing.

And then we have some -- and then clubs would be -- there aren't very many of those, but the lending in there would be probably a facility's improvement type of loan with a first trust deed.

David Long -- Raymond James -- Analyst

Got it. Thanks I appreciate that additional color. That's all I had. Thanks.

Operator

We'll take our next question from Jared Shaw with Wells Fargo.

Jared Shaw -- Wells Fargo Securities -- Analyst

Hey. Good morning. Just going back to the CRE deferrals. I'm assuming that the loan-to-value is at origination.

I guess could you comment on what the impact of continued cash flow disruption is on some of those CRE categories that are more at risk at the office and retail and hospitality? Are you seeing any impact on valuations, whether it's through sales or through reappraisals?

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

Well, it's a good question. And of course, there are -- I would say this is not clearly determined yet to be accurate. On the other hand, what we are noticing is that there are beginning to be price discovery in the form of deals now on hotels as well as office buildings, more hotel properties and some retail properties. And the price discovery in hotels would indicate, and this is anecdotal but it's beginning to mount up, in the kind of 30% range and slightly higher, maybe on a non-branded intercity facility.

But in the office space, there haven't been very many transactions, so it's hard to call. They're down clearly. They settle the cap rate on free cash flow. The cap rates have come down.

The interest rate drop, however, is also catching them. And so I think what's being overlooked is everybody's looking at the gross revenues on these buildings and forgetting that the carry cost from debt is down substantially too. So it's really more a case of getting more transactions in order to discover it, but I don't think -- I don't feel overly exposed given our very conservative loan to values going in. We're below 50% on the portfolio in each case, and in Manhattan, we're actually below 40%, and we have guarantees on about half of it.

Jared Shaw -- Wells Fargo Securities -- Analyst

OK. That's great color. And then I guess maybe tying with that, how has the environment of working from home changed your thoughts of the need for office space for the bank? And does that change your thoughts on Hudson Yards and potentially looking at other bigger projects like that?

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

Let me take that kind of overall, and then ask Gaye to speak on the specifics. But we -- Hudson Yards rental activity -- leasing activity, surprisingly enough is holding up reasonably well. I think everybody's aware of Facebook taking the entire Moynihan station. That's part of Hudson Yards really, 750,000 square feet.

They were in negotiation before COVID had. They've recently signed the lease, it was down about 10 to 11% from the original negotiations, and they took the whole building. And it's a high-tech -- obviously, a high-tech enterprise. Regular leasing in other buildings is actually proceeding slower than it was, but it is proceeding and the general rates are down about 10 to 15%.

We're not at all concerned about Hudson Yards, actually. It's going to be delayed in its delivery, delayed in its optimization probably about a year. By the time this is done, we don't know because we're not out of this yet, obviously. In terms of our own use, let me turn to Gaye on what we're thinking in terms of our own offices.

Gaye Erkan -- President

So during COVID, primary focus is safety of our clients and colleagues. So about 25% of our colleagues is in the rotational program. And our -- obviously, our preferred banking offices are fully open with the exception of two, where they're on the campus of employers that they're also working from home. So we are fully in business in our branches.

And our plans for openings on the PBOs, we do expect to go ahead with the openings, there are four offices, the PBO office in Hudson Yards in the next 12 to 14 months. And in the next 15 months, we would expect to open about six new offices in the New York City area, and we just opened Portland in the third quarter. And so we are looking forward to serving our clients in those offices.

Jared Shaw -- Wells Fargo Securities -- Analyst

Great. Thank you.

Gaye Erkan -- President

Thanks.

Operator

We'll take our next question from David Chiaverini with Wedbush Securities.

David Chiaverini -- Wedbush Securities -- Analyst

Hi. Thanks. I had a question on the tax rate. So back in 2017 when the corporate tax rate was reduced to 21 from 35%, First Republic's tax rate didn't really change much.

I was wondering, after the election, if the corporate tax rate were to increase to 28%, to what extent could that impact First Republic's tax rate?

Mike Roffler -- Chief Financial Officer

So Dave, thanks for the question. You're right about back in 2017. So the bank has had a pretty optimized, tax-efficient portfolio between municipal securities, low-income housing, bank-owned life insurance. And so as a result, if, let's say, 28% were the new corporate tax rate, that would be a 7% increase in the federal rate.

Our rate would go up about 4% because those investments would have greater value from a yield perspective when looking at our overall taxes.

David Chiaverini -- Wedbush Securities -- Analyst

Great. That's all I had. Thank you.

Operator

That concludes today's question-and-answer session. At this time, I will turn the conference back to Jim Herbert for closing remarks.

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

Thank you very much, everyone. We're delighted to have you on today. We're delighted with the flow of business. Backlog is strong, and we expect to continue to have a strong rest of the year.

Thank you very much. Have a good day.

Operator

[Operator signoff]

Duration: 63 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

Bill Carcache -- Wolfe Research -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

John Pancari -- Evercore ISI -- Analyst

Casey Haire -- Jefferies -- Analyst

Chris McGratty -- KBW -- Analyst

Brock Vandervliet -- UBS -- Analyst

Dave Rochester -- Compass Point -- Analyst

Andrew Liesch -- Piper Sandler -- Analyst

Arren Cyganovich -- Citi -- Analyst

David Long -- Raymond James -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

More FRC analysis

All earnings call transcripts