First Republic Bank Q3 2022 Earnings Call Transcript

Participants

Corporate Executives

• Michael Ioanilli, Vice President & Director, Investor Relations
• James H. Herbert, Founder & Executive Chairman
• Michael J. Roffler, Chief Executive Officer, President & Board Member
• Michael D. Selfridge, Senior Executive Vice President & Chief Banking Officer
• Robert L. Thornton, Executive Vice President & President, First Republic Private Wealth Management
• Olga Tsokova, Executive Vice President, Acting Chief Financial Officer & Chief Accounting Officer

Analysts

• Steven Alexopoulos, JPMorgan Chase & Co.
• Chris McGratty, KBW
• Manan Gosalia, Morgan Stanley
• Bill Carcache, Wolfe Research
• Andrew Liesch, Piper Sandler Companies
• Terry McEvoy, Stephens
• Tim Coffey, Janney Montgomery Scott
• Jared Shaw, Wells Fargo & Company

Presentation

[Operator]

Greetings, and welcome to the First Republic Bank's Third Quarter 2022 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions]

I would now like to turn the call over to Mike Ioanilli, Vice President and Director of Investor Relations. Please go ahead.

[Michael Ioanilli, Vice President & Director, Investor Relations at First Republic Bank]

Thank you, and welcome to First Republic Bank's Third Quarter 2022 Conference Call.

Speaking today will be Jim Herbert, Founder and Executive Chairman; Mike Roffler, CEO and President; Mike Selfridge, Chief Banking Officer; Bob Thornton, President Private Wealth Management; and Olga Tsokova, Chief Accounting Officer and Acting 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 to the bank's FDIC filings, including the Form 8-K filed today, all available on the bank's website.

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

[James H. Herbert, Founder & Executive Chairman at First Republic Bank]

Thank you, Mike. Good morning, everyone.

It was a strong quarter for First Republic, reflecting the continued strength of our long-term client-centric business model. Let me take a moment to provide some perspective on current economic and rate environment. So in the last 6 months of this year, the Fed has rapidly and aggressively raised interest rates to slow the economy and to fight inflation. Just since our last call, the Fed funds rate has increased 150 basis points.

Over the past 37 years, First Republic model of client service and steady client acquisition has performed very well through all economic conditions, including periods of rising rates. The strength of the model is its long-term ability to consistently produce safe organic growth. The recent pace of rate hikes has been more rapid than we've seen in other -- in recent cycles. Our challenge throughout this environment will be some margin compression, but it will not be credit, client satisfaction or household acquisition. Despite the interim rate conditions, our long-term focus always remains.

Maintaining exceptional credit standards so we can focus on the future rather than in the past, operating with strong levels of capital to support franchise growth as we serve existing clients and acquire new ones. Steady execution of our simple straightforward model and always acting in the best interest of our clients while consistently delivering extraordinary and differentiated service. Through this approach, we acquire great clients who stay with us for long periods of time and grow with us and reform more clients. This creates a unique compounding organic effect. The franchise remains very strong. Our client service levels are at all-time highs, and most importantly, credit continues to be exceptional.

Let me turn the call over to Mike Roffler, please.

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

Thank you, Jim.

It was another quarter of strong growth and financial performance. This quarter's results once again demonstrate the durability of our business model and service culture and the consistency of our execution. Let me now share a few results. Year-over-year, total loans outstanding were up 24%. Total deposits have grown 19%. Wealth management assets were down less than 1%, while the S&P was down 17% over the same period. Bob will touch on this more momentarily. Our growth, in turn, has led to strong financial performance. Year-over-year, total revenues have grown 17%.

Net interest income has grown 21% and earnings per share have grown 16%. And tangible book value per share has increased more than 11%. As Jim mentioned, maintaining strong credit and capital as a fundamental part of our culture and business model. Our credit remains pristine. Nonperforming assets were only 6 basis points at quarter end. Net charge-offs were only $1 million during the quarter. For perspective, this is just a fraction of a single basis point of our $159 billion loan portfolio. We remain very well capitalized with a Tier 1 leverage ratio of 8.6% at quarter end. This includes a successful common equity raise in August.

Turning to interest rates for a moment. As Jim mentioned, since our last call, the Fed increased rates very rapidly. Additionally, the market's expectation for future rate hikes also increased. We have responded to the sharp rise in rates by providing clients with attractive deposit opportunities through CDs and money market accounts. While this client-centric approach puts pressure on our net interest margin in the near term, it will allow us to retain and acquire great clients who will stay with us and grow with us for many years to come. Year-over-year, our households have increased 13%. This is the strongest level of growth in 3 years. These new households are all seeds for the future. We are delighted with this continued strong household growth. Importantly, our service model continues to generate strong net interest income, which is a product of our strong loan growth. We have always viewed net interest income as a key driver of our business performance.

Turning to markets. Our urban coastal markets remain healthy and attractive. As rates have increased, residential real estate prices have come down slightly as expected. Our pipeline remains robust heading into the fourth quarter. Our client service model continues to resonate with clients. Our Net Promoter Score of 79, is at its highest level ever. Given our differentiated level of service, we continue to see very attractive opportunities for growth. Overall, it was a strong quarter. Our business model is performing quite well, and we remain focused on the many opportunities in front of us.

Now I'll turn the call over to Mike Selfridge, Chief Banking Officer.

[Michael D. Selfridge, Senior Executive Vice President & Chief Banking Officer at First Republic Bank]

Thank you, Mike.

Let me provide an update on lending and funding across our business. Loan origination volume for the third quarter was very strong at $18 billion, our second best quarter ever. Our real estate secured lending remains well diversified. Single-family residential volume was robust at $7 billion. During the quarter, purchase activity accounted for 65% of single-family residential volume. Financing a home purchase is a great opportunity to demonstrate our differentiated service. And this is typically the start of a long-term relationship with First Republic. Virtually every new lending relationship also begins with a checking account.

Multi-family volume for the quarter was very strong at $2.7 billion. As a reminder, the median size of our multifamily and commercial real estate loans originated over the past 2 years, is less than $2 million with a loan-to-value ratio at origination of less than 55%. The continued strength of our markets and our clients is further demonstrated in a robust loan pipeline heading into the fourth quarter. We now expect loan growth for the full year 2022 to exceed 20% given our pipeline and year-to-date performance.

Turning to credit. We continue to maintain our conservative underwriting standards. The average loan-to-value ratio for all real estate loans originated during the quarter was just 58%. Business banking also had a good quarter. Year-over-year business deposits were up 19%. Business deposits represented 63% of total deposits at quarter end. Business loans and line commitments were up 15% year-over-year. The utilization rate on capital call lines of credit decreased to approximately 32% during the quarter, reflecting the general slowdown in the private equity and venture capital sectors. Importantly, our capital call commitments increased during the quarter as we continue to acquire new clients.

Turning to funding. We are quite pleased that deposits were up 19% year-over-year and more than 4% quarter-over-quarter. Deposits continue to represent over 90% of our total funding base at quarter end. Our deposit base remains well diversified. Checking represented 64% of total deposits at quarter end, CDs accounted for 9% of total deposits at quarter end. In a rising rate environment, we typically see CDs increase as a percentage of total deposits. As recently as 2019 year-end, CDs accounted for 15% of total deposits.

Let me take a moment to talk about our preferred banking offices. This network of over 80 offices provides an important service delivery point for clients, helping to further drive our exceptional Net Promoter Score and gather deposits. Our offices on average, had over $720 million in deposits at quarter end. Over the next year, we expect to continue to open new offices to deepen our presence in our existing footprint. Our service model continues to perform well. Our consistent client-driven approach is driving safe, stable organic growth.

Now I'd like to turn the call over to Bob Thornton, President of Private Wealth Management.

[Robert L. Thornton, Executive Vice President & President, First Republic Private Wealth Management at First Republic Bank]

Thank you, Mike.

Our wealth management model continues to perform very well. Year-to-date, total wealth management revenues are up over 20%. In addition to investment management fees, this includes strong growth in fees from brokerage, trust, insurance, and foreign exchange services. Fees from these latter services help diversify our wealth management revenue and can help mitigate the impact of market decline on asset-based investment management fees during market corrections. Despite the current market volatility that Mike mentioned, we continue to see strong net client inflows, particularly within our investment management business. Year-to-date, Investment Management net client inflows were up 32% versus last year. As we have noted before, our holistic approach to banking and wealth management is even more highly valued by clients during times of market volatility. We take these opportunities to engage our clients to understand their banking and wealth needs as market conditions change.

Our wealth management business continues to be a meaningful contributor to the bank's deposits through sweep balances and banking relationships. Our integrated banking and wealth management model also continues to make First Republic a very attractive destination for successful wealth professionals. Since our last call, we welcomed 4 new wealth management teams to First Republic. This brings the total to 8 teams hired so far this year, and we have additional hires planned for the fourth quarter. Overall, our Wealth Management business continues to execute very well. Times like these are a great opportunity to demonstrate our exceptional service, deepen existing relationships and acquired new households.

Now it's my pleasure to turn the call over to Olga Tsokova, Acting Chief Financial Officer.

[Olga Tsokova, Executive Vice President, Acting Chief Financial Officer & Chief Accounting Officer at First Republic Bank]

Thank you, Bob.

We continue to operate in a safe and sound manner with a continued focus on credit, capital and liquidity. Our credit quality remains excellent. Year-to-date, our provision for credit losses was $77 million. Net charge-offs for the same period were only $2 million. Our provision reflects our continued strong loan growth. Our capital position remains very strong. At quarter end, our Tier 1 leverage ratio was 8.6%. As Mike mentioned, this included the benefit from a common equity raise completed during the third quarter. Liquidity also remains very strong. High-quality liquid assets were 13.7% of average total assets in the third quarter. Throughout the bank's history, net interest income has been a primary driver of our financial results. This is true even during challenging rate environment.

Net interest income for the third quarter was up a strong 21% year-over-year. This was driven by robust growth in earning assets. Our net interest margin was 2.71% for the third quarter. This quarter's NIM reflects an increase in funding costs following two 75 basis point rate hikes during the quarter. Year-to-date, our net interest margin was 2.73%. Given the increase in funding costs following the first recent rate hikes and additional rate hikes expected this year, we now expect to be at the lower end of our guided net interest margin range of 2.65% to 2.75% for the full year of 2022. This assumes a Fed funds rate of 4.5% at year-end, which is in line with the current market view.

Turning to expenses. We continue to invest in client service and regulatory infrastructure to support our growth. Our efficiency ratio was 60.3% for the third quarter and 60.9% year-to-date. We currently expect to be at the lower end of our efficiency ratio range of 62% to 64% for the full year 2022. Our effective tax rate was 21.6% in for the third quarter. We continue to expect the effective tax rate to be in the range of 22% to 24% for the full year 2022. Overall, we continue to deliver strong financial performance, which reflects the stability and consistency of our model.

And now I'll turn the call back over to Mike Roffler.

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

Thank you, Jim, Mike, Bob and Olga.

For over 37 years, First Republic's business model has been focused on providing extraordinary client service while maintaining conservative credit and strong capital. This model has been successful in all environments. All of our colleagues at First Republic remain completely focused on serving clients each and everyday.

Now we would be happy to take your questions.

Questions and Answers

[Operator]

[Operator Instructions] Our first question today comes from Steven Alexopoulos of JPMorgan.

[Steven Alexopoulos, Analyst at JPMorgan Chase & Co.]

I wanted to start -- so with mortgage rates moving up very dramatically this year, the initial concern on your stock was that loan growth would slow, right? With that said, you're now 3/4 in a row, you've done over basically 20%-ish growth. So that's not a concern anymore. But the concern is now that either one: there won't be enough deposit funding in 2023 to fund strong loan growth, right, given what's going on with QT. And if there is enough deposit funding, that your NIM will just compress materially trying to fund that loan growth, right? We see the stock down over 10% right now. So my question is, given the yield curve, which is likely to invert even more in coming months, one, could you see a scenario where you would need to slow loan growth? And two, irrespective really of that answer, could you walk us through your NIM expectations for 2023? And how bad could it get if this forward curve does play out?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

Thanks for the question, Steve. On your first part of that, I think you're right. I mean, with rates rising, we've continued to grow our loan portfolio. And if I stand back from that, we've always been focused on service first and foremost, and that is what has driven loan growth, frankly, in any environment. When you saw 2016 to '18, the last time rates rose, we grew the portfolio at mid-teens to high teens rate year after year. We continue to price lending at a pricing because we have A credit. And one of the hallmarks of First Republic for 37 years has been pristine credit through any cycle. And right now, that's very important.

And as we look to 2023, the safety and stability of the bank's loan portfolio is absolutely critical and we continue to serve clients each and every day. And that's always been our objective, and that has put some pressure on the margin, as we talked about in the prepared remarks because we are growing the loan portfolio and then funding it a little bit differently than we had in the past couple of years, given the market forces you talk about, right? The Fed has aggressively raise rates. They've begun quantitative tightening, which in September was the first month at full capacity.

And so you are -- there is going to be some pressure on the margin here as we go into the fourth quarter and the early part of next year. But the Fed will eventually get to a place where they've been successful in reducing inflation. And if you look to the other side of that hill, for example, the bank will be mid-teens percentage larger, maybe a little bit more, will be safe and have come through credit very well. And we'll be ready to go from there with a much bigger client household base because we continue to acquire clients.

[Steven Alexopoulos, Analyst at JPMorgan Chase & Co.]

Okay. Mike, I know you guys are looking past the hill or to the hill ahead but can you help frame for us at the margin where you think the NIM could trend to over the near term, like how bad we get?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

Sure. As Olga said, we think we're going to be at the lower end of our annual guidance range for this year, right, which means the fourth quarter is going to come in a little bit below that guidance range and that's where you'll sort of start 2023. After that, it depends on when does the Fed stop, right? Are they successful in getting inflation down, and could it stop in the first quarter, for example. Loan rates are starting to come up a little bit and they're starting to catch up, which is a positive. But the next couple of quarters, are likely to be a little bit below the bottom end of our current range as we start into 2023.

[Steven Alexopoulos, Analyst at JPMorgan Chase & Co.]

Okay. That's helpful. In terms of the incremental NIM, I speak to investors, a lot of them point to the CD promotions, right, which many of them actually see and scratch their heads, how your NIM is not going much lower, right? Would you see a 3% or 3% plus CD promotion. So at the margin, can you help us understand, you said loan yields are coming up a bit. Where are current loan yields today? And how does that compare to your current funding cost?

[Michael D. Selfridge, Senior Executive Vice President & Chief Banking Officer at First Republic Bank]

Steve, it's Mike Selfridge. I'll talk on the current lending yields we're getting. And so looking more currently, single-families coming in around 480 basis points multifamily about 550. Commercial real estate, about 490 basis points. So you add it all up for real estate, it's about 490 basis points business banking. As you know, capital call lending is the largest segment of that is still maintained about a prime minus 75 to 100 basis points yield, so call it 525 to 550.

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

Steve, I might just add, CDs are only 9% of the total. So it's a very -- and I think maybe we started the year 4% or 5%. So it's only on the incremental that you're talking about that challenge and the pressure. And with our overall funding cost at just 55 at the end of the quarter, yes, the incremental business is less than the current margin, but it's not as pronounced just because CDs are a much smaller proportion of the total at this point in time.

[Steven Alexopoulos, Analyst at JPMorgan Chase & Co.]

Okay. And then finally, so Mike Roffler, if we end up at a place where the NIM is under a pretty nice pressure over the next couple of quarters, how should we think about the efficiency ratio? I mean, does this just roll through and hit the revenue line? Or are there offsets that you're planning on the expense side to keep the efficiency ratio, I don't know if 60% to 62% is a good range because we've been at 60% or if you think we go back to 62% to 64%, but if you could flesh that out, that would be great?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

Yes. No, thanks for the question, Steven. Having been here for about 13 years, and in my prior CFO role, both obviously sort of the funding and liquidity and CDs have been deep into that many years. And also a couple of times when the margin has compressed a little bit through yield curve inversions, et cetera. We've had to look at where we can make some adjustments to our expense base, and we would absolutely do that as we go forward.

One thing I'd now is similar to other banks that have released today, checking balances have come down a bit in the industry overall, a significant part of our compensation is tied to growth in checking, lending activity, assets under management, fee revenues. So as there's some change there or migration there, there is a big portion that's variable compensation. And so that also is why you saw a pretty limited growth in expenses this quarter is reflective of that. So there are some, what I'm going to call, natural levers that occur just from the business model and the way we're structured.

And then second, the team has an unbelievable ability to come together to prioritize and make adjustments as necessary to adapt to the environment that we're in, and we fully expect that to happen. And so the last thing I'll close with, sorry, this is a ratio. And when the margin is under pressure, that does tip us a little bit higher so the 60% is probably not a good launch point for the fourth quarter and for the next year, I would say.

[Operator]

The next question comes from Chris McGratty of KBW.

[Chris McGratty, Analyst at KBW]

Mike, I just want to follow up on the deposit cost for a moment. By my math, your beta in the quarter was around 40%. Can you just remind us what your assumptions are for the full cycle? And how might that beta change for Q4?

[Olga Tsokova, Executive Vice President, Acting Chief Financial Officer & Chief Accounting Officer at First Republic Bank]

Chris, this is Olga. So the assumption for the beta so far, we are about 12%, but we believe for this cycle will be in high 20s which is higher than we experienced in the last cycle that we said we were like 19%, 20%, and this was given the velocity of Fed fund rate hikes. So we expect the beta to be higher this cycle. And for -- it's not other assumptions. We expect the Fed fund rate at the end of the year be around 4.5%, which includes 75 basis points trade hike in November, an additional 50 basis points in December. And importantly, when we look at our -- we talk about the pressure on margin, but what's important, even that doesn't change our guided NIM range for full year 2022, which reflects the consistency and stability of our model. Although now we expect that rate within the range, but on the lower end of the range?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

Chris, I'd just say your beta refer, I'm not sure how it's calculated. But when we look at the beta, we look at sort of all deposits, including the zero cost checking the noninterest accounts. So that's why we -- the 12% is where we're at today.

[Chris McGratty, Analyst at KBW]

Yes. I was doing just interest-bearing, but I appreciate that. Maybe a follow-up on the asset side, does the asset beta accelerate as you get further into the cycle. I know there's a lag, given the fixed rate piece of the book. But just trying to get a sense of repricing, whether that starts to catch up a little bit more in the next 6 months?

[Michael D. Selfridge, Senior Executive Vice President & Chief Banking Officer at First Republic Bank]

It's Mike Selfridge. The beta -- we've got about 60 basis points if you look at originations from Q2 to Q3, and we get a little bit. We get more on the prime based but it's still competitive out there. And so we go and grow new households and look for, as Mike said, a clients with a pricing.

[Chris McGratty, Analyst at KBW]

Okay. And if I could just sneak one in. The last one, just the mix of deposits is getting a lot of attention, obviously, for obvious reasons. How should we think about just the mix of noninterest-bearing deposits if the forward curve plays out? Like how much more outflow risk or migration risk you do presume to be in that in your book?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

Chris, we were obviously pleased to have checking balances remain 70% of more deposits for many quarters. And I think for the past 9 years, we've been over 50% checking balances. And so it's been a consistently high proportion of our deposit levels. So it probably could come down a little bit from here. But given the amount of working capital for both businesses and consumers. It's probably not a lot lower, but probably a little bit lower from here.

[Operator]

The next question comes from Manan Gosalia of Morgan Stanley.

[Manan Gosalia, Analyst at Morgan Stanley]

I just wanted to dig in a little bit on the NIM side. I appreciate the forward guidance given where the Fed fund is going. Can you help us with the puts and takes on the funding side. First, if you have it, the spot deposit rates on September 30? And then second, just in general, how are you thinking about the funding avenues, right, whether it's CDs or FHLB or wholesale funding, what do you expect to do from here given the strong loan growth that you're getting? And what sort of loan to deposit ratio would you be comfortable running at, just given where loan growth is right now?

[Olga Tsokova, Executive Vice President, Acting Chief Financial Officer & Chief Accounting Officer at First Republic Bank]

Manan, this is Olga. For spot rate on deposits as of September 30, we were at 76 basis points. And this is really the reflection of our client-centric model where we provide attractive deposit opportunities for our clients. And that will continue to diversify our deposit base and funding base. So you've seen the increase in CDs, but it's still a relatively low. It's higher than we had over the last few years, but it's still about 9% and historically we've been in mid-teens levels. And even if we look at longer-term back, it's even higher than this. So it continued to diversify the funding base. We continue to tap into FHLB where we have a lot of capacity. But even historically, FHLB levels of finding a relatively lower compared to historical where we've been.

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

Maybe I'll just add a little bit. Thank you for that, Olga. Our deposits funding has been 90% of our total funding. And as Olga mentioned, CDs have become an important strategy in terms of when rates rise this fast. If you recall, as Mike Selfridge mentioned earlier, our 80 retail offices are a fantastic service point for our clients and also have an ability with which to engage with clients, especially in times like this when CDs become much more important. As Olga mentioned, we've been in the mid-teens before.

And if we go back to when I joined the bank, we were well above that in 2010. So we've been here at a point where we've got CDs as a meaningful part of our deposit base. And that would always be the first choice as opposed to wholesale. We used the FHLB as an important tool. But if you can do client acquisition and deepening of relationships, that's always what we would choose first.

[Manan Gosalia, Analyst at Morgan Stanley]

Got it. So it sounds like CDs over FHLB. Got it. Okay. And then just maybe on the asset side, again, it looks like securities actually grew on a Q-on-Q basis. Can you help us with what the runoff is or what the -- how much cash is generated through securities pay down each quarter that you might be willing to use to fund loan growth?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

The runoff has been pretty light. It's probably between sort of $300 million and $500 million a quarter that we would reinvest either in lending opportunities or in the securities portfolio.

[Operator]

Next question comes from Bill Carcache of Wolfe Research.

[Bill Carcache, Analyst at Wolfe Research]

Mike Roffler, following up on your NIM comments. If we assume that the Fed hikes and holds throughout 2023, can you frame maybe add anything to your earlier NIM comments? And I think we're getting lots of questions, I think, just around where ultimately NIM would settle under that scenario?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

Yes. Thank you for that, Bill. I think it's a good question because they'll get to a point where they do stop, pause, possibly even reduce. And at that point, you'll continue to have a bit of an uptick in your asset yields and a leveling off of your funding costs. And that's where you should see a little bit of expansion start to grow upwards at that point when the Fed stops. And if they reduce, you probably see a little bit faster. But it's this period of the rapid rise where you see a little bit of the compression, but you're right, 2 quarters from now, 3 quarters from now, when they're done, given the nature of the CD portfolio that we've talked about, it is a bit of a short-term issue and a short-term challenge because the Fed will -- they will get to a successful point in this battle. And at that point, it will get better from there.

[Bill Carcache, Analyst at Wolfe Research]

Understood. And following up on your commentary around funding sources, can you remind us how much you have in off-balance sheet funds that potentially you'd be able to bring back on balance sheet? And what some of the dynamics are around that, what that would entail?

[Olga Tsokova, Executive Vice President, Acting Chief Financial Officer & Chief Accounting Officer at First Republic Bank]

Bill, we have about $7 billion of balance sheet deposits, which represents about 4% of total deposits, which can be another source of bringing it on balance sheet.

[Bill Carcache, Analyst at Wolfe Research]

Okay. And is there any scenario where you'd envision selling held-to-maturity securities for liquidity purposes?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

No. This -- we -- no.

[Bill Carcache, Analyst at Wolfe Research]

Okay. Fair. And final question on your mix of debt relative to your overall funding, that's still well below 4Q '19. Is it reasonable to expect that's going to gradually remix back to pre-COVID levels?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

Which mix of funding back to pre-COVID?

[Bill Carcache, Analyst at Wolfe Research]

Just your debt, overall debt, essentially any non-deposits?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

It could go a little bit higher from here. We're very attuned to FHLB versus client. And as I said a little bit earlier, we would always choose the client first. And I think that would be our focus, first and foremost. But we do have much capacity for FHLB for sure.

[Bill Carcache, Analyst at Wolfe Research]

Does the noninterest-bearing deposit mix revert to pre-COVID levels?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

So I think I mentioned this before. Checking is 64% of deposits, which includes both noninterest and very nominal interest we pay on checking, could trend a little bit lower from here, but we feel like probably not a lot given the working capital needs of our clients.

[Operator]

The next question is from Andrew Liesch of Piper Sandler.

[Andrew Liesch, Analyst at Piper Sandler Companies]

So I hear what you're saying on the margin guide and the efficiency ratio also being a function of that. But even to get to that low end of the range, that implies a pretty weak step-up in expenses here this quarter. I guess, what would be causing that?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

No, I think it's more the revenue side that has a little bit of a challenge from the margin compression we talked about versus the expenses. We -- like I mentioned earlier, there is a bit of a revenue variable-based compensation that will be tied to checking in particular. So I think it's more about the ratio and where the margin drives versus our total spend level, which our expense growth rate is actually on a sequential basis, slower than it has been.

[Andrew Liesch, Analyst at Piper Sandler Companies]

Got it. All right. That's helpful. And then part of the loan growth this year has been driven by multifamily. I'm just curious, what are you seeing in that business that has driven this growth of the design to grow this portfolio?

[Michael D. Selfridge, Senior Executive Vice President & Chief Banking Officer at First Republic Bank]

I would say, first of all, opportunity with existing clients that drives a little more than half of that business. And it's been a more strong performing asset class. So the -- when you look at things like occupancies in the mid-90s rents maybe have plateaued coming off a little bit, but it's performing quite well, and we are there to serve the needs of our clients. So we're just taking care of clients one at a time.

[Operator]

The next question is from Terry McEvoy of Stephens.

[Terry McEvoy, Analyst at Stephens]

Maybe first question, on the topic of acquiring households that Mike mentioned earlier, could you just help me understand, I get a sense of offense versus defense in the third quarter within that CD growth? Or is it more forward-looking given that new 5-month product that I think you called the ATM rebate checking that is specifically for new customers?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

Terry, thanks for the question. We actually play a bit of both, right? One is it's a great time to acquire clients in a period where our relationship managers, wealth managers are leaning into discussions with prospects, and then we're also deepening relationships. And so the business model, if we stand back has always been about acquiring households for the long term. And in periods of uncertainty like now, it's as good of opportunity as any because of the strength of our colleagues and the way they take great care of clients and the reputation the bank has. And so some of the things we're doing, like you mentioned, those are definitely attracting people to the bank along with what they hear from a service perspective of how well our reputation is in the communities we serve.

[Terry McEvoy, Analyst at Stephens]

And then on -- as a follow-up, just how are these high-yield online savings accounts coming up in your discussions with the clients? And I ask given Apple's announcement yesterday that they're offering or will be offering interest-bearing deposit products.

[Michael D. Selfridge, Senior Executive Vice President & Chief Banking Officer at First Republic Bank]

It's not a material competitor in our mind. And again, our lower serving clients that value the relationship. And as Mike said, we're being competitive on both lending and deposits, but we're acquiring new households at a nice clip.

[Operator]

The next question comes from Tim Coffey of Janney Montgomery.

[Tim Coffey, Analyst at Janney Montgomery Scott]

First question I had is on the -- do you have a -- can you provide some color on your thoughts on tangible common equity in relation to both how the balance sheet is expected to grow this next year and the forward rate curve?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

Thanks, Tim. We're really pleased that in August, we were able to raise capital opportunistically like we have done over many years. And growing tangible book value per share at 11% continues to support our balance sheet growth and it supports 2023s growth that will be coming as a result of service. So we feel like we're in a really good place right now. We're not as exposed as others to the available for sale mark-to-market challenges that I think are showing up in a lot of the numbers today, but we feel like we're in a really good place to capitalize and tangible book wise.

[Tim Coffey, Analyst at Janney Montgomery Scott]

Okay. And then a question on expenses this next quarter. Specifically to say compensation, it's not unusual to see, say, a 5% to 10% sequential increase in that line item. Are you suggesting that it could be at the low end of that range or even lower?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

Yes, even lower.

[Tim Coffey, Analyst at Janney Montgomery Scott]

And then in terms of looking at the fees from Wealth Management business, I recognize it does take some time to move assets over and given when billing is done in the beginning part of the quarter, is there any kind of like insight you can give us on kind of what that number might look like for 4Q?

[Robert L. Thornton, Executive Vice President & President, First Republic Private Wealth Management at First Republic Bank]

This is Bob. I think you're right. It's a little bit of a mix of how many accounts opened during the quarter and when in terms of the fees we collect. It's also a little bit of a mix. We had a little bit of a shift a little bit more to fixed income. But I think we look at for the fourth quarter, probably between $135 million and $140 million of investment management fees.

[Operator]

And The next question comes from Jared Shaw of Wells Fargo.

[Jared Shaw, Analyst at Wells Fargo & Company]

I guess on the CDs, where you'd referenced 15% as a percentage of the total mix in the past. Could you see that going higher than 15%? So as we're through this cycle with customer new band there?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

I think it's hard to say, but I think I give you a perspective when the Fed peaked, we were around 15%. It's probably a good rule of thumb that we could end up there given our continued focus on serving clients and the products that they're interested in now also.

[Jared Shaw, Analyst at Wells Fargo & Company]

And then when you look at a lot of the CD specials that you have right now, it seems like it's a little shorter duration 4- and 5-month products. I guess what's the expectation for when those mature and we're potentially in a higher rate environment, will that to sort of roll into another shorter-duration option? Or would you look to extend duration on some of those CDs?

[James H. Herbert, Founder & Executive Chairman at First Republic Bank]

Jared, it's Jim. One of the reasons we're staying short is that historically, most of the run-ups like this. And the steep lasts for not a long period of time, the steeper they are, the less long they lasted. And basically, what's going on here is a temporary problem on the margin coming from the steepness of the run-up. We're funding it with CDs. We have a very, very strong capacity to raise CDs funding is not an issue. And basically, we're sticking to our game plan of growing the bank and bringing in great clients. And the mortgage book will catch up in a relatively short period of time in a few quarters. And so basically, we want to stay short of the CDs in order to ride the other side of the hill down.

[Jared Shaw, Analyst at Wells Fargo & Company]

Okay. Great. I appreciate that. And then just finally for me. As we look at the efficiency ratio going into 2023, do you think that you'll be able to keep it in that 62% to 64% range with that broader rate backdrop and margin expectation? Or could you see that potentially be a little more elevated for parts of the year there?

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

No, we think 62% to 64% is given what we know now pretty good. And obviously, the first quarter tends to be a little elevated. But during the year, we think it'll be in that range as we look at it currently today.

[Operator]

That concludes today's question-and-answer session. At this time, I will turn the call back to Mike Roffler for any additional or closing remarks.

[Michael J. Roffler, Chief Executive Officer, President & Board Member at First Republic Bank]

Thank you for joining us on the call today, everybody, and we would just like to reiterate just a few points that First Republic was built on a service model for clients each and every day. This continues to drive our strong growth through all environments. And this medium-term pressure will pass. And as we mentioned earlier, when you get forward and get through this, the bank will have double-digit more households and continue to receive referrals and serve clients well and come out of this even stronger than we are today, given our continued pristine credit through the cycle. Thank you, and have a great day.

[Operator]

[Operator Closing Remarks]