Categories Earnings Call Transcripts, Finance

First Republic Bank  (NYSE: FRC) Q1 2020 Earnings Call Transcript

FRC Earnings Call - Final Transcript

First Republic Bank  (FRC) Q1 2020 earnings call dated Apr. 14, 2020

Corporate Participants:

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

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

Hafize Gaye Erkan — President and Board Member

Michael J. Roffler — Executive Vice President and Chief Financial Officer

Analysts:

Steven Alexopoulos — J.P. Morgan — Analyst

David B. Lichtman — Senior Executive Vice President and Chief Credit Officer

Ken Zerbe — Morgan Stanley — Analyst

Chris Nardone — Bank of America Merrill Lynch — Analyst

James Herbert — Senior Vice President and Co-Head of Eagle Lending

Terry McEvoy — Stephens — Analyst

Casey Haire — Jefferies — Analyst

Arren Cyganovich — Citigroup — Analyst

Dave Rochester — Compass Point — Analyst

Brock Vandervliet — UBS — Analyst

David Chiaverini — Wedbush Securities — Analyst

Chris McGratty — Keefe, Bruyette & Woods — Analyst

Lana Chan — BMO Capital Markets — Analyst

Garrett Holland — Robert W. Baird — Analyst

Jared Shaw — Wells Fargo Securities — Analyst

Brian Foran — Autonomous Research — Analyst

Tim Coffey — Janney Montgomery Scott — Analyst

Presentation:

Operator

Greetings and welcome to First Republic Bank’s First Quarter 2020 Earnings Conference Call. [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 first 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.

Today’s speakers are joining from different locations. So I would ask that you please be patient if there are any technical difficulties. And now, I’d like to turn the call over to Jim.

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

Thank you very much, Shannon. Good morning, good afternoon, everybody. Needless to say, since our last call in January, the COVID-19 pandemic has changed a great deal about the US and the world. During this very challenging time, we’ve been particularly focused on our colleagues and our communities. Since 1985, First Republic’s 35 years of consistent profitability and durability had been grounded in a culture of taking very good care of our colleagues, serving our clients, while also maintaining strong capital and very strong credit, all of which continue to differentiate First Republic at this point.

Our strong relationship-based banking model has been built to withstand times of uncertainty, and it has done so successfully. We are supporting actively our communities, many nonprofits and are participating in the Small Business Administration’s payback protection program. Given current conditions, we are also providing prudent client-friendly loan deferrals that offer flexible terms for those clients that are directly impacted. You’ll hear more about each of these from Gaye in a moment.

Now, let me turn to the first quarter results. Total loans outstanding were up more than 23% year-over-year. We continue to expect mid-teens loan growth for the full year. Year-over-year total deposits grew 15% and have even been a bit stronger recently. Wealth management assets are down only 1% year-over-year in spite of market conditions. Total revenue over the year has grown 13.5%. Net interest was up 11.4%. And importantly, tangible book value per share has increased 12% year-over-year.

Safety and soundness have always been the key part of First Republic’s DNA. This is reflected in our strong capital, our strong liquidity and our strong credit record. For instance, over the past six months, new Tier 1 capital raised net was approximately $500 million. This includes a common stock offering just this past January, which of course at this point seems a lifetime ago. We always seek to — we seek to always maintain enough capital to support approximately two years of growth without access to the capital markets. Importantly, we never use and will not use our capital for share buybacks.

Liquidity remains quite strong. High-quality liquid assets were 14.8% of total average assets. Our conservative loan underwriting is a core pillar of the Bank and a key to our results. Net charge-offs for the quarter were only $202,000. Non-performing assets at quarter-end were only 10 basis points. For perspective, since July 2010, when we bought the Bank back almost 10 years ago, we have had cumulative net losses of approximately $38 million. As of this quarter-end, we had $542 million of loan loss reserves, or 14 times coverage of this 10-year cumulative experience.

Our long-standing and ongoing focus on high-quality credit is particularly important in the current environment. Approximately 80% of our loan portfolio was real estate collateralized. Our loan-to-value ratio on this 80% is a very conservative 55% overall.

Let me give you some further perspective. The weighted loan-to-value ratio for our single-family residential loans, which are — which represent over 55% of our total loan portfolio, is below 58%. Our multi-family loan portfolio loan-to-value ratio was below 52%. Our commercial real estate loan portfolio loan-to-value ratio was below 48%. Also, overall, we have very limited exposure to many of the areas directly impacted by the pandemic such as retail and hotels. These areas collectively represent less than 2.5% of our portfolio. We do not have automobile loans, credit card loans. We do not lend to oil and gas companies, casinos, airlines or most other travel-related businesses.

The second pillar of our — First Republic’s success is client service, and it’s a central to our brand. We’re very pleased to report that our 2019 Net Promoter Score, which we received quite recently, is stable at a very high 72. This level of client satisfaction remains more than twice the banking industry average and is the driver of our growth. In times like these, exceptional client service is even more important and create stronger bonds with our clients. I would also note that knowing our clients very well, for an extended period of time in many cases, improves credit quality and reduces risk.

The success of First Republic model lies in the experience of our management team, which has been together many years and through many cycles, and our truly outstanding very dedicated colleagues. In short, First Republic’s strength lies in our well-established and sustainable culture.

Now, let me turn the call over to Gaye Erkan, President.

Hafize Gaye Erkan — President and Board Member

Thank you, Jim. First Republic is a people-first organization, dedicated to serving our colleagues, clients and communities in good times and challenging times. In that regard, let me take a moment to summarize some of the precautionary steps we have taken across the organization.

In the early days of the pandemic, we moved decisively to ensure the safety of our people and the continuity of our service model. In late February, before public health orders were issued, we decided to cancel or postpone client and internal events, including our Annual Sales Conference. In mid-March, we quite successfully transitioned 90% of our colleagues to work from home in less than one week. In our preferred banking offices, we are closely following guidelines from public health officials. We instituted proper social distancing and are routinely sanitizing public areas and work spaces. We also implemented two-week rotations for client safety and to ease the burden on our colleagues.

The significant investments we have made in technology and operations over the last two years have enabled us to provide a high-quality digital banking experience to our clients. For example, our digital mortgage application now accounts for the majority of all single-family mortgage applications. It has been very effective in accommodating the high volume of loan applications in this interest rate environment. Our enhanced consumer digital banking platform has also translated into greater service convenience. Clients can now do more through our mobile app, including connecting directly with their bankers in one click. This frictionless digital-to-human connection is proving to be yet another effective way to deliver highly personalized client service. This is reflected in the accelerated adoption rate of our digital platform recently.

Caring deeply about our colleagues, clients and communities is who we are, and we are committed to assisting those adversely impacted by COVID-19. In that regard, we are making thoughtful loan deferrals. As of April 10, client requests for such deferrals totaled less than 3% of the total loan portfolio. As Jim mentioned, we are also actively participating in the Small Business Administration’s Paycheck Protection Program. We have been submitting applications for several days now and recently started funding loans.

To support our nonprofit community further, we have honored our sponsorship commitments even if the events were canceled due to the pandemic. We have also set aside additional funds to support such organizations as appropriate.

Now, let me provide some additional comments about the quarter. Loan origination volume was just over $10 billion. I would note that the average loan-to-value ratio for all real estate loans originated during the first quarter was a conservative 55%. Single-family residential volume was $3.5 billion. Refinance accounted for 69% of single-family residential volume during the first quarter. The majority of the refinance activity came from clients of other institutions. Multi-family and commercial real estate lending also performed well. Balances are up 17% from a year ago.

Turning to business banking, business loans and line commitments were up 17% year-over-year. The growth in outstanding balances was driven by a utilization rate of 42%, as well as new commitments.

In terms of funding, it was a very good quarter. Total deposits were up 15% from a year ago. We continue to maintain a diversified deposit funding base. Checking deposits increased by $5 billion in the first quarter and now represent nearly 62% of total deposits. Business deposits represented 55% of total deposits, in line with the prior quarter.

Turning to the wealth management, assets under management declined 9% from year-end due to market conditions but are down only modestly year-over-year. We are quite pleased with net client inflow of $5 billion during the quarter. Also during the quarter, we welcomed two new wealth management teams to First Republic.

Our first quarter results demonstrate the stability and agility of our operations during this challenging time. It also highlights the power of our service culture and the creativity and care of our people. Let me close by expressing our sincere gratitude to all of our First Republic colleagues.

Now, I would like to turn the call over to Mike Roffler, Chief Financial Officer.

Michael J. Roffler — Executive Vice President and Chief Financial Officer

Thank you, Gaye. Let me begin by discussing the impact of CECL, which was fully adopted this quarter. Our provision for the first quarter was $62 million. This included $48 million for loans, as well as $14 million for unfunded loan commitments, which is included in other non-interest expense. For perspective, this provision expense is over four times the amount we recorded in the first quarter of last year. I would note that our reserves under CECL incorporate a change in the economic forecast late in the first quarter to reflect the conditions caused by the pandemic.

Maybe just a brief comment to build on what Jim and Gaye discussed earlier. Our very low loan-to-value ratios are very important when we estimate expected credit losses over the future life of the loan. In addition, a reminder of a few of the things that we don’t do: credit cards, auto loans, lending to oil and gas, airlines and pretty limited retail exposure.

For this quarter only, let me compare the provision under CECL to the previous incurred loss method. Under our prior methodology, our provision for the first quarter would have been approximately $40 million, or $22 million less than under CECL.

As Jim mentioned, our capital position remains strong. In January, we successfully completed a common stock offering, which raised $290 million in new equity. As of March 31, our Tier 1 leverage ratio was 8.46%. Today, we also announced a $0.01 increase in the quarterly dividend to $0.20 per common share.

Our liquidity position also remains strong. HQLA was 14.8% of total average assets in the first quarter. The HQLA percentage was increased by approximately 80 basis points from the elimination of the reserve requirement by the Federal Reserve in March.

Our net interest margin for the first quarter was 2.74%, up 1 basis point from the prior quarter. We are pleased with the stability of our net interest margin at a time of significant interest rate volatility. While earning asset yields were down 6 basis points from the prior quarter, this was more than offset the 7 basis point decline in total funding costs. Given where we are today, we continue to expect our net interest margin for the full year 2020 to be in the 2.65% to 2.75% range. Importantly, net interest income increased 11.4% year-over-year, reflecting our growth in earning assets.

Our efficiency ratio for the first quarter was 65.1%. As a reminder, the efficiency ratio during the first quarter is typically elevated due to the front-loaded seasonal impact of payroll taxes. We continue to expect our efficiency ratio for the full year 2020 to be in the range of 63.5% to 64.5%. We have been able to maintain a stable efficiency ratio while providing a differentiated level of client service and continuing to invest in the franchise, including technology and infrastructure.

Our effective tax rate for the first quarter was 19.5%. We continue to expect our tax rate for the full year 2020 to be in the range of 20% to 21%.

Overall, this was a very good quarter. Thank you. And now, I’ll turn the call back over to Jim.

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

Thank you, Gaye and Mike. Our time-tested straightforward business model continues to be very focused on delivering the highest level of client service, while operating very safely and soundly. We take a very long view, which has helped us to be successful through widely varying economic conditions over an extended period of time.

Let me just end by saying thank you to all of our fantastic colleagues. They are doing an amazing job of preserving our culture, supporting each other and serving our clients during this very challenging time. I’ve never been more proud of this organization and everybody in it. We’d be delighted to take your questions. Thank you.

Questions and Answers:

Operator

[Operator Instructions] Our first question today comes from Steven Alexopoulos of J.P, Morgan.

Steven Alexopoulos — J.P. Morgan — Analyst

Hey, good morning, everyone.

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

Good morning, Steve.

Steven Alexopoulos — J.P. Morgan — Analyst

I wanted to start on credit. So, if you look at the San Francisco and Silicon Valley economies, it looks like they’re getting hit pretty hard. We’ve seen many, many startups announce job layoffs. Can you guys give us more color? Credit was obviously very good this quarter. But are you seeing underlying pressure specifically on residential real estate and commercial real estate, just given the job losses we are seeing in your local markets? And then, maybe I know Gaye said 3% overall forbearance. How does that break down between residential and commercial real estate?

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

Steve, let me start with the answer, and then I’ll go to Gaye. But we also have David Lichtman, our Chief Credit Officer on with us, and he’ll be glad to step in. I think the — we all know that this is early days and — but the requests for forbearances are a pretty good early indicator, and their fairly — they’re modest at this point. And we’re working with people very, very, I think, user-friendly. We’re doing, as Gaye may have mentioned, six-month deferrals, which we think is good to get people through challenges. We don’t want to become their problem. The overall credit is holding up, and this mostly has to do with our very conservative underwriting for all these years, as you and others well know. The loan-to-value ratios are indicative of that. But also behind that are our credit numbers, FICO scores and all the things of the borrowers and their liquidity positions. But let me turn this over to David Lichtman to give you kind of an overall view of the credit picture. David?

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David B. Lichtman — Senior Executive Vice President and Chief Credit Officer

Great, thank you, Jim, very much. Before I, Steve, specifically answer your question, I just wanted to take a moment and step back and talk about our credit philosophy, which has remained very consistent since the Bank’s founding 35 years ago and of which, for the last 25 years, I’ve been the Chief Credit Officer. And as you know, we’ve always been very conservative lender. We’re always underwriting a borrower’s cash flow, liquidity position and ability to repay, coupled with a very conservative advance rate against collateral. We’ve always found that the best protection of our loan principal is a low loan-to-value ratio, which currently stand at 55% across our entire real estate portfolio. The weighted average LTV for our single-family portfolio is a conservative 57%. And as mentioned earlier, our real estate portfolio is approximately 80% of our entire loan portfolio. We have found that borrowers who have higher down payments are stronger financially, which makes for very safe loans. Our goal has always been to underwrite to zero losses, one loan at a time. We never compete by dropping standards. We compete with high client service and price for overall relationships. Our approval process for new loans is a unique partnership between credit trained bankers, who know their clients very well, and our seasoned credit approvers, who know our select markets very well, underpinned by a clawback provision that’s been in place since 1986.

It’s important to note that 90% of our loans since the Bank’s founding were originated by bankers who are still with First Republic. The system that I just described has gotten us through a number of challenging times, including the early ’90s, the ’01 dot-com burst, the ’08-’09 great recession. And while we don’t know exactly how this pandemic will play out, we feel confident in this system and in the strength of our loan portfolio.

And Steve, your question about Bay Area home prices and job losses, it is a little too early to tell. The rate of new home sales has declined a lot as people have been sheltered in place. But we are very confident in the strength of our borrower profile, average FICO of about 760 [Phonetic], lots of post-loan liquidity and conservative advance rates against collateral. And we think this portfolio will hold up well as we go through this challenging economic period.

Steven Alexopoulos — J.P. Morgan — Analyst

Okay, that’s very helpful, actually. And thanks David. For Mike Roffler, I’m sort of shocked that you’re maintaining the prior NIM guidance and pleased by it. But can you give us a sense where are new loan and securities yields coming in? I’m trying to figure out how NIM guidance hasn’t changed.

Michael J. Roffler — Executive Vice President and Chief Financial Officer

Sure. Steve, I think there’s two parts of it. One, while our loan yields have declined a little bit and earning asset yields are down a little bit, we’ve been able to move pretty quickly on our funding costs to match that decline. And so, in the first quarter, if you look at real estate loans, they came on the books at about 330 [Phonetic], which was pretty close to what it was last quarter. And then, I think the recent activity, given some of the drop in rates, is a little bit lower than that, but not a lot. And so, the loan yield decline is really driven in part by the floating rate portfolio, which has impacted the quarter and will impact the second quarter a little bit, along with a little bit of new [Phonetic] business. But we’re in a pretty good place where we’ve been able to reduce our funding cost to match that pretty well.

Steven Alexopoulos — J.P. Morgan — Analyst

And then, on securities yields, Mike?

Hafize Gaye Erkan — President and Board Member

Yeah, I can chime in. So, on the securities on the HQLA, it’s about mid-2s, 2.5% and munis on a TEY basis 3.25% to 3.5% compared to single-family low-3s and multi-family CRE 3% to 3.5% range on the new money.

Steven Alexopoulos — J.P. Morgan — Analyst

Thank you, Gaye. And then, maybe just one final one on the lending side. I know the refi volumes were strong in the quarter and that it will likely close in 2Q. Can you give us a sense what the volumes look like in 1Q so we can get a sense for this pipeline? And how is social distancing likely going to impact the purchase market in 2Q? Thanks.

Hafize Gaye Erkan — President and Board Member

Sure. I’ll start. Our current loan pipeline actually remains strong and is up compared to the beginning of March, 10% to 15% up, and single-family residential volume is holding up nicely, about a third. So purchase volume may go down, given what’s happening in the markets, and refi continues to remain strong. So we feel confident with our mid-teens loan growth guidance.

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

The bond — the backlog at this point, Steve, is meaningfully above this point last year.

Steven Alexopoulos — J.P. Morgan — Analyst

Okay, terrific. Thanks for taking my questions. I appreciate it.

Hafize Gaye Erkan — President and Board Member

Thank you.

Operator

Our next question today comes from Ken Zerbe of Morgan Stanley.

Ken Zerbe — Morgan Stanley — Analyst

Thanks. I guess, maybe to start off with sort of the CECL provision a little bit, you talked about that you did change your economic variables that underlie the CECL reserve as of really towards the end of the quarter. Can you just talk about what those variables are and like how much of a recession are you pricing into your CECL reserves? Thanks.

Michael J. Roffler — Executive Vice President and Chief Financial Officer

Yeah. I think, Ken, we did obviously move towards a recession-based scenario late in the quarter, given what has been evolving with the pandemic. And maybe just a couple of things that impact our estimate of loss, a couple of the biggest ones are home price, either appreciation or depreciation. At year-end, when we adopted, we had modest appreciation [Phonetic] included in the forecast, where that has now changed to be down a bit as we go forward. Commercial real estate prices also were sort of modestly increasing at year-end, whereas now, there is a drop in the first 12 months and even the second 12 months of commercial real estate prices. So that changes sort of your outlook on the recession.

The things that maybe aren’t as impactful to us as they are others will be like GDP because we don’t have a consumer credit card or auto that’s very much impacted and very sensitive to unemployment and GDP growth. We’re more tied to real estate values, which is why even a modest decrease in prices impacts us upwards in the reserve, but maybe not as dramatically as an unemployment rate change would.

Ken Zerbe — Morgan Stanley — Analyst

Got it. Okay, that helps. And then, I guess, maybe a multi-part question. Just in terms of loan growth, obviously, we’ve heard from some of the larger banks about commercial line draw-downs. I think you mentioned your commercial utilization was 42%. It seems a little higher than what it was last quarter. Can you just talk about, are you seeing activity from borrowers sort of hoarding cash or at least are drawing down their lines? And also kind of — and just if we can work into Jim’s comment, I think you expect mid-teens loan growth for the full year, which is consistent with what you had last year, but this quarter is very strong. Are you actually implying you’re suggesting that you might see weaker loan growth in the back half of the year? So, I know it’s a lot, but thanks.

Hafize Gaye Erkan — President and Board Member

No, thank you. So let me start with the capital call lines. On the capital call line side, the increase in the outstandings was driven by both the utilization rate at 40%, as well as healthy new commitment activity. And to comment on the utilization rate that you brought up, this is mostly the GPs have chosen to space out the capital calls to their LPs just to ease the burden, given the markets, but the LPs continue to be strong, and our capital commitments, 90 to 180 days in general and no change to the contractual draw periods with strong over-collateralization.

Ken Zerbe — Morgan Stanley — Analyst

And sorry, then on the loan growth outlook?

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

Ken, let me respond to that. The loan growth outlook, we’re being conservative because of the conditions. The initial backlog in the first quarter would indicate, as you imply, stronger than that. But we — I have trouble — you’ve been doing this a while, and I have trouble envisioning that the second half of this year is going to be as strong as the first half. But I still see it being pretty decent, though, actually.

Ken Zerbe — Morgan Stanley — Analyst

Okay, all right. Well, great, thank you for taking my questions.

Operator

Our next question comes from Erika Najarian of Bank of America.

Chris Nardone — Bank of America Merrill Lynch — Analyst

Good morning, guys. This is Chris Nardone on for Erika. Just a quick follow-up on the capital call line conversation. As we think about a potential downturn, how should we think about capital call lines? Can you remind everybody on the call the average duration of this book and whether you extend credit that helps enhance returns via leverage for funds? Thanks.

Hafize Gaye Erkan — President and Board Member

So we don’t do IR — to start with, we don’t do IR enhancement lines on the capital calls. These are mainly capital call lines to bridge the capital call to typically 90 to 180 days with very strong quality LPs, strong LPs behind it. And also our capital call commitment to loan commitment uncalled capital coverage ratios are typically very strong as well. And so far, we are seeing healthy activity and continuing — GPs continuing to work through their deals in the pipeline.

Chris Nardone — Bank of America Merrill Lynch — Analyst

Thank you. And as a quick follow-up on your resi mortgage conversation. We saw two big banks this morning see declines in common equity Tier 1. So, how should we think FRC should perform in single-family with disruption in mortgage markets and a potentially more strained balance sheet capacity from the big banks?

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

We’re not likely to chase extra business. I’d like to — a big reminder that’s quite important here, and it goes to Ken’s question earlier. More than 55% or 60% of our business every year is with repeat clients that are already clients of the Bank. That’s where a big part of our growth come from. That probably will not change even in these conditions, might go down a little bit but not much as a percentage. And so, we’re less driven by what other — the competitors are doing. It obviously impacts us, don’t get me wrong. But it — we’re more driven by what our clients are doing and their immediate colleagues who they recommended us to. That’s the main driver.

Chris Nardone — Bank of America Merrill Lynch — Analyst

Thank you. And if I could squeeze one last in. Can you guys give a quick breakdown of the industries of your student loan refi customers where they work? Thank you.

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

Let me turn that over to James Herbert, who runs our student loan lending and our Eagle banking area.

James Herbert — Senior Vice President and Co-Head of Eagle Lending

Good morning. Majority of our clients are in the legal, health care and finance industries, industries which should fare quite well. As a reminder, let me give some color on this client base and the purpose of these loans. Our clients are young urban professionals with an average FICO of 770 [Phonetic] and average income over $200,000 and more than 85% have graduate degrees. These are consumer loans to very high quality borrowers who have been in the workforce for several years on average. As a reminder, we have never done any in-school lending, and these loans are only to refinance pre-existing educational debt for those who have graduated. Our refinancing offers remain very attractive with rates as low as 1.95% and a portfolio weighted average of 3.1%. We don’t charge any application, origination or prepayment fees, and we’ll actually rebate borrowers up to 2% of their original loan amount they repay in four years. We’re very pleased with the quality of our portfolio and our borrowers.

Chris Nardone — Bank of America Merrill Lynch — Analyst

Thank you, everyone.

Operator

Our next question comes from Terry McEvoy of Stephens.

Terry McEvoy — Stephens — Analyst

Good morning. Thanks for taking my questions. First off, let me start with wealth management. Can you just talk about what impact the first quarter decline in equity values will have on second quarter wealth management, and then, how this [Phonetic] market disruption would impact the new hires going forward?

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

Let me just start with that, and then I’ll turn it to Gaye. The overall wealth management activity in the Company has actually held up very well. It’s a combination of the flow of new money coming in from existing clients and new clients coming into the business. Also the mix is different. And I’d like Gaye to speak — ask Gaye to speak to the mix in our wealth management. But it’s held up very well — it’s held up well, given conditions. We’re pleased. Gaye?

Hafize Gaye Erkan — President and Board Member

Yeah. We are very — as Jim said, we are very pleased with the net client inflow coming in. And as far as the fees are concerned, 75% of the PWM fee revenues come from FRIM investment management, which builds based on the AUM at the end of the prior quarter. So given our first quarter 2020 FRIM AUM is $60 billion, we expect our second quarter FRIM fees to be around $8 million to $9 million [Phonetic], so down 9% from the first quarter.

Terry McEvoy — Stephens — Analyst

Thank you. And then, just as a follow-up, in Jim’s prepared remarks, you talked about [Technical Issues] loan portfolio under 2.5%. Could you just go through exactly what you are including within that 2.5%?

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

You’re going a bit in and out, but I believe the question, Terry, was about the 2.5% of the portfolio that I think, David, I can turn to you, but consisting mostly of some retail and other. But David, can you give us some profile breakdown?

David B. Lichtman — Senior Executive Vice President and Chief Credit Officer

Sure. So the — what you’re referencing is the retail portfolio and the hospitality portfolio of the Bank is approximately 2.5% of the Bank’s overall portfolio, and that has an average loan size of just under $3 million and a median loan size of only $1.5 million and the weighted average LTV is 50% and the debt coverage ratio is 2 times. So it’s a very strong safe [Phonetic] portfolio that will recover when the economy gets rolling again.

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Terry McEvoy — Stephens — Analyst

Perfect. That’s exactly what I was looking for. Thank you, both.

Operator

Our next question comes from Casey Haire of Jefferies.

Casey Haire — Jefferies — Analyst

Thanks. Good morning, everyone. A follow-up on the CECL. And I know it’s tricky, but I’m just trying to get a sense of how conservative the macro outlook was in driving reserve build this quarter? Do you feel like it was conservative enough that next quarter will require less reserve build, understanding that loan growth will obviously play a part and it’s obviously a fluid situation on the macro front?

Michael J. Roffler — Executive Vice President and Chief Financial Officer

Casey, I think the last thing you said is probably the most relevant because it is a fluid situation. We looked at it and we looked at house — as I mentioned before, home prices are a big driver. And so, we felt it was a conservative appropriate view of the forward-looking economy. But obviously, things are developing very quickly. And also the government is doing a lot to try to help consumers and things like that. So you sort of have all these factors in play. But we felt it was an appropriate view of home prices at the time for this quarter.

Casey Haire — Jefferies — Analyst

Got it. Okay. And just big picture question on the jumbo market competitive landscape. It does feel like the larger banks have largely backed away from competing in the space, which has been beneficial for you all from a volume perspective and gaining share, as well as pricing. With the NIM stable outlook and you guys still expecting mid-teens growth, how much of that — do you expect that competitive landscape to remain the same for the balance of the year? Or do you expect some of the larger banks to come back into the jumbo market later in the year?

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

I wouldn’t speculate on what they’re going to be doing really. Needless to say, their pull-back doesn’t hurt us any. But we basically don’t chase deals. We have always been very much more conservative probably than some other lenders who witnessed low LTVs and the high credit scores. And so, the amount of business we do is mostly determined by our client base, first and foremost, and then by their direct referrals and by our ability to focus on the marketplace and take advantage of the demand that is there.

Casey Haire — Jefferies — Analyst

Okay, great. And just last one from me. The capital management Tier 1 leverage ratio up to 8.46%. You guys have plenty of time till you phase in the CECL adjustment. But will that — given that it is essentially lower for that adjustment, will you guys be a little bit more aggressive in shoring up capital going forward? Or will it still be sort of managing at that 8% level?

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

We would expect to continue to manage right at that level. The main thing is, we’ve built — we’ve tried to build a very strong vessel to go through a storm, and we believe we have, and we will find out fairly soon. But we believe we’re in very good shape for it. But we will not wake up with capital too low under any circumstance.

Casey Haire — Jefferies — Analyst

Great, thank you.

Operator

Our next question comes from Arren Cyganovich of Citi.

Arren Cyganovich — Citigroup — Analyst

Thanks. I just wanted to follow up on net interest margin. I guess, from a longer-term perspective, if we stay in this kind of very low long end rate environment, I would think that there would be some sort of longer-term pressure on the net interest margin because of the heavy proportion of resi. And it feels like today, spreads are a bit wider than they had been. So, I was wondering if you could just kind of comment about how your business might trend over the next few years, if we are in this kind of lower for longer environment.

Hafize Gaye Erkan — President and Board Member

Sure, I’ll take it. This is Gaye. We feel confident with our 2.65%, 2.75% net interest margin guidance that we have given, assuming this rate environment continues, the reason being, while we are seeing some slight decline on the asset yields, we have room to improve on the funding cost side as the mid — the spot deposit rate is in the mid-30s, to give an example.

Arren Cyganovich — Citigroup — Analyst

Yeah, I kind of get it for this year. I guess, I’m thinking about — and I know you don’t — I’m not asking for guidance. I’m just trying to think of just holistically the loan yields in the 10 years has dropped more than your deposits can possibly come down over the coming years. I’m just trying to think about how you can mitigate that longer term.

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

They — it’s speculative, so I don’t want to go there too much. But the home loan market, which is 55% of our loan portfolio, is holding up pretty well in terms of rate. It’s good for consumers, but it’s still a decent rate. And then the — as Gaye had mentioned previously, our investment portfolio is holding up quite well. So at this point — and the demand for — the cautious demand for multi-family and commercial is still in the kind of high-to-mid 3s. And so, at that point, we’re — if that holds — it’s hard to tell if there is a further reduction in rates, but I really don’t want to speculate on that.

Hafize Gaye Erkan — President and Board Member

Yeah. And just to add, the earning asset growth, so when we look at our net interest income, which really pays the bills, our net interest income is driven by safe or consistent earning asset growth. So — and slight decreases in NIM over time in that type of scenario would be offset largely by the safe credit and consistent growth.

Arren Cyganovich — Citigroup — Analyst

That’s a good point. And then just lastly, it looks like you had some mortgage loan sales for the first time in a while. Was this done pre-COVID? Is there actually a bid for mortgage assets? And do you expect to do additional loan sales ahead?

Hafize Gaye Erkan — President and Board Member

We intend to stay active in the secondary market, although the numbers — the volume varies depending on the secondary market activity. We sold about $500 million during the quarter, as you know, after not selling very much in the prior quarters. And as of quarter-end, we have about $350 million loans held for sale on the balance sheet. So depending on the activity, we intend to stay active. Thank you.

Arren Cyganovich — Citigroup — Analyst

Okay. Thank you.

Operator

Our next question comes from Dave Rochester of Compass Point. Please go ahead.

Dave Rochester — Compass Point — Analyst

Hey, good morning, guys.

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

Hi, Dave.

Dave Rochester — Compass Point — Analyst

Hey. On your deferrals, I was just wondering how you are classifying those loans, or if given the recent guidance, those are still considered past grade. And then, in terms of the requirements from a reserving standpoint, can you just talk about that as well if you had to bump those up at all?

Michael J. Roffler — Executive Vice President and Chief Financial Officer

So, given the both the CARES Act and the regulatory guidance, the deferrals that we’re making will continue to be accruing loans. They won’t be reported as past due or non-performing. In terms of reserve requirements, we actually hadn’t completed a lot as of March. Most of them have come in April. But it will be very much a look at, as we’ve talked about in this call, the loan-to-values at the individual level and the individual client circumstance to decide if we need any increase to reserve or not as we get through that portfolio. But with LTVs very low, for example, if you have a 55% single-family loan and we talk about a six months deferral at a 3.5% rate, you end up at a 57% loan-to-value at the end of the six month. And that doesn’t drive very much of a credit loss in that environment.

Dave Rochester — Compass Point — Analyst

And then, you mentioned six months. I’ve seen that in the language too, but I’ve heard you could potentially go up to a year on those deferrals. Is that right?

Michael J. Roffler — Executive Vice President and Chief Financial Officer

We’re starting at the six months because we think that’s the right level of time to sort of go through the shelter in place orders, dentist office to open back up, businesses open back up, and for people to get back to normal. And so, we think that’s the prudent thing to do at this point in time.

Dave Rochester — Compass Point — Analyst

Yeah. And then on that…

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

And I might add to that, what we’re doing is, we’re deferring and then we’re re-amortizing over the remaining life of the loan. We’re trying to be as consumer friendly as possible in our deferrals. We do not want to be the problem. We want to be the solution.

Dave Rochester — Compass Point — Analyst

Okay. And then, how much of that deferral segment is in the process of participating in the PPP with you guys? Is some of that already covered at this point?

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

Actually the two are generally pretty separate.

Dave Rochester — Compass Point — Analyst

Okay. Got you. And then, on the capital call segment, appreciate all the detail there. I was just wondering if there’s any concern with just the disruption in market activity that new pipelines are slowed or there is not a whole lot of future pipeline growth. I know you mentioned they were working through it and that’s a driver for loan growth today. But in terms of just the market disruption, if there is new business that’s being added as well, new investment [Technical Issues] big sign?

Hafize Gaye Erkan — President and Board Member

So, let me answer it in twofold. You’re right, as GPs work through their pipelines and deal volumes, as the volumes slow, we would expect the utilization rate to trend back to the historical levels of mid-to-high 30s. At the same time, the increase in our outstanding balances was in addition to the increase in the utilization rate, also driven by healthy activity of new commitments, which includes existing client doing more with us as well as new clients and households that we’re acquiring. And we feel comfortable with the credit quality, given the underwriting to the LPs and GPs and the collateralization. Thank you.

Dave Rochester — Compass Point — Analyst

Great. And then, just one last one if I could. You mentioned home prices are a driver of your CECL reserve. I was just wondering what you guys are assuming at this point and baking into that for any changes in home prices at this point?

Michael J. Roffler — Executive Vice President and Chief Financial Officer

So I’d just say a modest decline in it is obviously something that we’re going to be focused on as you start to see more transactions here in the second quarter, but just a modest decline sort of over the next 12 months for sure.

Dave Rochester — Compass Point — Analyst

Okay. Is that the…

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

The main thing I would add to that is, remember, the markets we’re in, they’re very supply constrained. So it’s not as if they had a lot of excess home supply to begin with.

Dave Rochester — Compass Point — Analyst

Very good. All right, thanks guys.

Operator

Our next question comes from Brock Vandervliet of UBS.

Brock Vandervliet — UBS — Analyst

Thank you. Good morning. I think you hit on the characteristics of the student loan and the professional loan finance program in terms of the types of borrowers. But could you talk about any changes in terms of the credit conditions there, what you’re seeing in terms of forbearance requests, any changes in the credit stress in those two categories?

David B. Lichtman — Senior Executive Vice President and Chief Credit Officer

Yeah, we’re very pleased with the portfolio of the performance to date with only six delinquent loans out of over 25,000 loans and only 2 basis points of lifetime net charge-offs as of March 31. So far, we’ve received 935 hardship requests, representing less than 14 basis points of the Bank’s total loan portfolio, about 3.6% of the outstanding SLRs by loan count, and just under 5% of SLRs by dollar size. Importantly, inquiries last week declined about 35% to 50% from the prior two weeks, and we are seeing good the response from our clients. Overall, we remain pleased with the credit of the portfolio and the profile of our borrowers to the long term.

Brock Vandervliet — UBS — Analyst

Okay, got it. And we’ve obviously never seen a downturn like this since you’ve been in that program. What’s your sense of the ultimate take rate in those — in the forbearance option there?

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

I think we’re seeing great reaction so far from our clients. Remember, 85% of them have graduate degrees and they have average incomes of over $200,000. So this is a very employable and re-employable borrower base from that perspective. So I think that we’re quite — we remain cautiously optimistic about how they come through this, and we’re pleased with the construction of portfolio and our credit standards.

Brock Vandervliet — UBS — Analyst

Okay, thank you.

Operator

Our next question comes from David Chiaverini of Wedbush Securities.

David Chiaverini — Wedbush Securities — Analyst

Hi, thanks. I had a follow-up on the payment deferrals of less than 3% of loans. Do you have a sense as to how high you expect this to go?

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

We really don’t. Obviously, we’re in new territory for everybody. James’ comment about the student loan deferral requests, student refinance deferral requests are declining is indicative a bit. We’re seeing — David, we’re seeing the same decline in single-family homes. Is that correct?

David B. Lichtman — Senior Executive Vice President and Chief Credit Officer

That’s correct. The single-family home requests for hardship modifications as well as other loan types has decreased by about 50%, not quite 50%. And so, may be this will end up in the 4% to 5% range for the entire portfolio.

David Chiaverini — Wedbush Securities — Analyst

Okay. And you mentioned that you’re classifying them as accruing. Are you also including them in special mention or watch list?

Michael J. Roffler — Executive Vice President and Chief Financial Officer

I would characterize them as internal watch list, so they don’t meet the definition of a special mention loans yet because we’re responding to client inquiry for the COVID-19. So it will just be tracked and monitored a little bit separately.

David Chiaverini — Wedbush Securities — Analyst

Okay, thanks for that. And then, shifting gears to deposit growth, we’ve seen in the industry that deposits kind of surged at the end of the quarter. What’s your outlook for deposits in the coming quarters?

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Hafize Gaye Erkan — President and Board Member

Yes, we are very pleased with the deposit growth and especially the checking growth as well, as you have mentioned. So it continue — the client activity continues to be strong and diversified, both across client types as well as across geographies. In general, second half of the year tends to be, historically speaking, always better than the first half. Having said that, we would expect the tax outflows to start coming in around late second quarter, early third quarter, given the push on the tax deadlines. So far, we feel comfortable with the both availability and the diversification of our deposit funding. And we will optimize the overall total funding base as we go.

David Chiaverini — Wedbush Securities — Analyst

Thanks very much.

Hafize Gaye Erkan — President and Board Member

Thank you.

Operator

Our next question comes from Chris McGratty of KBW.

Chris McGratty — Keefe, Bruyette & Woods — Analyst

Great, thanks. Just building on that question, is the right way to think about kind of medium-term deposit funding — sources of funding perhaps a little bit less on the higher cost borrowing? You took the short-term down to zero. Is that the right way to think about the mechanics, Mike, in terms of next two, three quarters?

Hafize Gaye Erkan — President and Board Member

Yeah, the — go ahead, Mike.

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

Got ahead, Gaye.

Hafize Gaye Erkan — President and Board Member

So we would expect our deposit activity to continue. In addition to that, we do also keep an eye on the overall funding as well. So for instance, when we did the senior debt earlier this year, the — when you take all the fees and FDIC, some benefit into account, the all-in cost was actually pretty much on top of with some of the FHLB advances. So it was pretty cost-effective to do that. So that’s what I meant when I said, we’ll look at the overall funding. And then, when we look at — availability is definitely there, as well as the deposit rates are trending downward, which is helping the NIM outlook, thus the 2.65%, 2.75% guidance, given the mid-30s spot deposit rates we’re expecting.

Chris McGratty — Keefe, Bruyette & Woods — Analyst

Great, thanks. And maybe, if I could just sneak one more in on expenses. I think you guys have all talked about the ability at Investor Day to kind of slow discretionary spend if the environment changed, and obviously we have changed. Maybe sources of potential pullback in expenses over the next few quarters to stay within the efficiency guide that you laid out? Thanks.

Michael J. Roffler — Executive Vice President and Chief Financial Officer

Yeah, I think, similar to how we’ve talked about in the past, we’re looking at things that are going to continue to help improve client service and our infrastructure investments, and we’re going to keep making those. But there are things we can pull back on. We mentioned earlier, reduction in events, both internal and external. That will have a benefit here as we go forward during the year. And then, also what I call other projects that maybe can be better put off to later. So we do manage that very actively to make sure we’re doing the right things to help client service and our infrastructure.

Chris McGratty — Keefe, Bruyette & Woods — Analyst

Okay. Thanks Mike.

Operator

Our next question comes from Lana Chan of BMO Capital Markets.

Lana Chan — BMO Capital Markets — Analyst

Thanks. Good morning. A question around CECL again. In terms of — I think you mentioned you did build in a recessionary scenario into your modeling forecast. And then assuming that there is a recovery probably modeled in the back half of the year, wondering if the recovery takes longer to take hold. Is there a risk that we see another potential CECL build in 2Q?

Michael J. Roffler — Executive Vice President and Chief Financial Officer

So we’ve been very conservative at our March 31 estimates of loss reserves, and obviously, as the economy develops or the recovery develops and takes hold, we’ll update out accordingly. But I think it’s probably too early to say what’s the recovery going to exactly look like. But we do expect more, I’d say, in the second year of a forecast recovery versus any time in the first.

Lana Chan — BMO Capital Markets — Analyst

Great, thanks. That’s helpful. And then, just another modeling question, Mike. On the personnel line, the payroll taxes this quarter, how much do you estimate that’s for [Phonetic] elevated personnel?

Michael J. Roffler — Executive Vice President and Chief Financial Officer

Probably about $15 million to $18 million.

Lana Chan — BMO Capital Markets — Analyst

Okay. That’s all I had. Thank you very much.

Operator

Our next question comes from Garrett Holland of Baird.

Garrett Holland — Robert W. Baird — Analyst

Good morning. Thanks for taking the questions. You’ve covered most of them. But I just had a follow-up on the net interest margin outlook. How should we think about the quarterly NIM progression within the context of the full year guide? Even with the funding cost offset, should we expect a much larger decline in Q2 following the recent action by the Fed?

Michael J. Roffler — Executive Vice President and Chief Financial Officer

So I think, we are really pleased with the 2.74% in the first quarter and the ability to be stable, even up 1 basis point. It probably trends several basis points lower from here, but still well within our guidance range. There is going to be a little bit of a decrease in our loan yields because there is a lag from the Fed moves that impact the prime portfolio. And so that’s not fully reflected into the second quarter. But as Gaye mentioned, we’ve been able to reduce our funding costs quite well to keep us inside our range, but probably just a few basis points down from where we are in the first quarter.

Garrett Holland — Robert W. Baird — Analyst

That’s helpful. Thank you.

Operator

Our next question comes from Jared Shaw of Wells Fargo Securities.

Jared Shaw — Wells Fargo Securities — Analyst

Hi, good morning. Just on the provision, it looks like the provision rate for new loans is around 1%. Is that a good rate that we should use for new growth going forward? And then if you could also address what the provisions are on unfunded commitments at least at a similar rate and the balance of unfunded commitments?

Michael J. Roffler — Executive Vice President and Chief Financial Officer

So, I’ll start with unfunded commitments. I do think that’s a little bit of a jump given the change in economic outlook and some higher utilizations assumed as we go forward. So the higher utilizations is a one-time thing a little bit and then it will be driven by what’s your estimated loss going forward. So that’s probably larger than normal in the future. And on the percent of run rate, yes, 1%. I’ll trust your math. But it’s hard to say just because it will depend on sort of how the economy develops in the future, whether it’s at that level or a bit lower in the future.

Jared Shaw — Wells Fargo Securities — Analyst

Okay, thanks. And then, on the capital call lines, Gaye, I know you said 90 to 180 days is typical duration for those. Are you seeing any extension in duration from lines overdrawn as we moved through the end of 2019?

Hafize Gaye Erkan — President and Board Member

No. We are not.

Jared Shaw — Wells Fargo Securities — Analyst

Great. Thank you.

Hafize Gaye Erkan — President and Board Member

Thank you very much.

Operator

Our next question comes from Brian Foran of Autonomous.

Brian Foran — Autonomous Research — Analyst

Hey. Good morning. I guess, as you just talk to clients and especially the high end of your customer base, banks, a lot of people with really significant wealth who are going to be fine regardless of the exact timing of the recovery and stuff, but when you talk to them, is the general mood you pickup that the world is on sale and now is the time to invest? Or is the general mood more, we don’t where this thing is going. It could be a depression. Now is the time to hunker down. And I am sure there is a range. But you do have a unique window into people with very significant wealth. I am just curious, what you are hearing from those clients?

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

It’s an interesting question, and we don’t of course have any near or perfect view of it. But generally speaking, I think they are very conservative. This is new for everybody, self-evidently so. And so, I think what’s happening is they are watching and deciding. Economic downturns are one thing but the pandemic is quite another, and there is really not an experience base among even our client base. On the other hand, I wouldn’t call them — I would not call them excessively depressed either. They are active. They are doing things. We are still getting home purchases. We are getting some multi-family purchases. We are certainly — but the stock, as Gaye has been speaking about deposits, the amount of money in our sweep accounts is up to as a percentage of the account. So that indicates their conservatism there. But I would say that it’s very cautious continued activity, is the way I would describe it. But very cautious.

Brian Foran — Autonomous Research — Analyst

Thank you.

Operator

Our next question comes from Tim Coffey of Janney.

Tim Coffey — Janney Montgomery Scott — Analyst

Great. Thank you. Jim, you’ve always talked about wanting to be aggressive and improving the client base when other banks are starting to pull back. Are you seeing any indication that other banks are starting to pull back in a way that you could improve your client base?

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

Well, I think — let me just focus on the word improve for a second. Our concept there would be to acquire new households and get trial for First Republic. And in that regard, I think there is always opportunity and the disruptive moment to get people to try something new, and if they are not with us now, possibly they would consider coming with us for whatever reason. So we think that that opportunity, the acquisition of new households definitely is in this situation. But we are not excessively focused on it. We are really focused on the clients we already have and taking very good care of them and obviously protecting the credit of the Bank. And as we mentioned earlier, the PPP program is a significant — short-term significant effort. And so — but I think there will be opportunity in this as institutions are distracted by one thing or another.

Tim Coffey — Janney Montgomery Scott — Analyst

All right. Well, thank you very much. Most of [Phonetic] my questions have been asked and answered.

Operator

Our next question comes from Ken Zerbe of Morgan Stanley.

Ken Zerbe — Morgan Stanley — Analyst

Hey, thanks for the follow-up. Jim, actually just wanted to follow up on your comment just about the PPP program. Can you just talk about the impact that we could potentially see in terms of fees? And then, I just want to make sure I understand that’s right. Is it that second quarter could see significantly higher fee income given the PPP? I think the loans are only outstanding for like a couple months. So that could boost loan balances, and then after that, loan balances fall or those piece — that piece goes away. Is that the right way to think about it?

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

Ken, to be perfectly frank, we are still trying to figure it out ourselves. What we’ve been focused on is — and Gaye has been leading this effort and doing an extraordinary job with a whole team of people, including Jason Bender and others in the organization, is to take care of the clients and get this brand new program out. I think it’s worth us all reminding ourselves, it’s only about 10 days old, and an agency took on a brand new and very large thing here. And many banks have stepped up to the credit I think of the banking industry in general. They have stepped up by in large numbers to do something they do not normally do. The fees are — honestly, we haven’t focused on them. They are very secondary to getting the job done well. And what we see is, mostly trying to get them closed. And of course, the money is, as we know, being committed rapidly. So we do need a — this program is going to need additional funding for sure. But let me turn to Mike here for a second to talk about how the flow of the activity might be on the balance sheet and for income.

Michael J. Roffler — Executive Vice President and Chief Financial Officer

Yeah, there — Ken, obviously because it is so new, there are lots of questions being asked about the income stream and the fee stream. And so, I think it’s very likely that that fee is part of the loan you’ve originated, which typically means you recognize it over the life of the loan, which could be anywhere from a short period of time to possibly two years. And that fee also is typically recognized within your net interest margin. So, I think there is something to develop here and get clarity on. But as Jim said, our focus right now has been to get the clients through the process so they can take advantage of the program appropriately that the government has put together.

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

Let me add one thought. We’ve been designing how we respond to this since we are not an SBA lender, have not been one for at least a decade. We’ve reached out to two or three very good partner participants that are in the business. And so, some of our business, have probably a half of it roughly, maybe a third to a half, is going through third-parties that we are referring it into. We felt that was a better way to get up and running quickly to get our clients the best possible service. We will not be collecting fees on that portion of the business or very modest fees. They will be collecting that and we are quite happy with that. What’s happened is, that’s been very helpful to us being able to deliver for our clients.

Ken Zerbe — Morgan Stanley — Analyst

All right. Great. Thank you.

Operator

Ladies and gentlemen, that concludes today’s question-and-answer session. I would now like to hand the call to Jim Herbert for any additional or closing remarks.

James H. Herbert, II — Founder, Chairman and Chief Executive Officer

Thank you all. Thank you very much for the time and the good questions. I’d just remind everybody that we’ve always built the Bank on a very conservative base. We are very cautious lenders and have been for a long time. For many, many years, you can be careful in your credit, and you sometimes wonder, are you being too careful? Then something like this happens and you are delighted you have been. So, we try to build a very strong ship with a lot of capital, good credit and client closeness and knowledge of the client base, and we think we are in a — we think that’s the case as we sit here today.

Thank you very much for your time today. We appreciate it. Good bye.

Operator

[Operator Closing Remarks]

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