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Refis help push First Republic's loan volume to new highs even as credit standards heighten

Even as First RepublicBank enjoyed record loan volume in part because of mortgage refinancingactivity, management said they are heightening credit standards, during the bank'ssecond-quarter earnings call July 14.

The bank reportedsecond-quarter net income available to common shareholders of $147.6 million, or97 cents per share, compared to $116.9 million, or 80 cents per share, in the year-agoperiod.

The bank hit a high-water mark for loan volume, at $6.5 billionfor the quarter, and its guidance for full-year growth may now hit the mid-teens,which was the higher-end of its previous range. Single-family residential loanshad a "particularly strong quarter," said COO Jason Bender, growing 20%over last year. He said the median loan amount was in-line with past quarters andwas "relatively modest" given the high housing costs in the bank's footprints.Refinancing activity made up 56% of single family residential loans, and is expectedto remain high going into the third quarter as interest rates have fallen and areexpected to remain low. First Republicviews refinances as "a terrific opportunity" to bring new clients intothe bank and deepen existing relationships by providing more cross-selling opportunities,Bender said, adding that nearly half of refis in the quarter were for loans madeby other institutions.

Management said they are seeing real estate values and rentsin the San Francisco Bay area level off, which they believe will be healthy forthe market. Housing demand in New York remains strong with the exception of thehigh-end range, which is not an area in which the bank has been very active.

Business loans outstanding grew 16% over last year, boosted bythe increase in capital call lines of credit and loans to nonprofits. Business linesof credit grew to 34% at the end of the second quarter, up from 31% at the end ofthe first quarter and are now more in-line with historical utilization levels.

But the bank is also keeping a watchful eye on the appreciationof real estate values, and has tightened its credit standards across product linesin recent quarters. An executive said they are specifically watching loan-to-valueratios at origination for real estate loans, compared to historical trends. Still,First Republic is encountering "robust demand" for loan products, an executivesaid.

Management added that the bank also decided to increase its companywideminimum wage to $20 for all employees in all markets, a move that was effectiveJan. 1. The announcement, which was absent from both the fourth-quarter 2015 calland the first-quarter call, came after JPMorganChase & Co. Chairman, President and CEO Jamie Dimon that the bank would increase minimumwage for the bank's tellers from the current minimum of $10.15.