First Republic Bank (FRC) 2012 Q3 法說會逐字稿

Welcome to the First Republic Bank third-quarter 2012 earnings conference call.

During today's presentation, the lines will be in a listen-only mode.

Following the presentation, the conference will be open for questions.

(Operator Instructions)

I would now like to turn the call over to Dianne Snedaker, Executive Vice President and Chief Marketing Officer.

Please go ahead.

Thank you, and welcome to First Republic Bank's third-quarter 2012 conference call.

Speaking today will be the Bank's Chairman and Chief Executive Officer Jim Herbert, President and Chief Operating Officer Katherine August-deWilde, Senior Executive Vice President Mike Selfridge, and Chief Financial Officer Willis Newton.

Before I hand the call over to Jim, please note that any forward-looking statements made during this call are made as of today, are based on Management's current expectations, and are subject to risks, uncertainties, and assumptions.

Potential risks and uncertainties that can cause the Bank's business and financial results to differ materially from these forward-looking statements are described in the Bank's periodic reports filed with the FDIC, including the Bank's current report on Form 8-K filed today.

In addition, some of the financial information discussed on this call includes non-GAAP financial measures.

The Bank's earnings release, which was issued this morning and is available on the Bank's website, presents reconciliations to the appropriate GAAP measures and explains why the Bank believes such measures are useful to investors.

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

Thank you, Dianne, and thanks to everyone for joining us today.

We are very pleased with the third quarter results, as well as our results year-to-date.

Let me run through a few key numbers.

Core EPS was up 29% for the quarter year over year, and up 24% for the first nine months year over year.

Our book value per share increased 4% for the quarter and 15% from a year ago.

Tier 1 leverage ratio continues to be very strong at 9.33% up from a year ago.

Importantly, credit quality also remains excellent.

Non-performing assets remained at a very low 13 basis points.

I'd like to comment for a moment on the growth in lending, which continues to be quite strong.

All of our lending is direct retail origination and is historically of three primary types.

The jumbo single family home loan business, which has always been a core client acquisition product for us, is currently priced very competitively as everyone knows.

As is self-evident from our volume this quarter and this year so far, we're holding our own just fine.

Our strong client-service culture and our brand are prevailing.

Since 1985, First Republic has been active in the secondary market for loan sales through mortgage banking activities.

Conditions are particularly favorable in the secondary market right now, particularly for highest quality of loans, as this quarter represents in our numbers.

We're taking full advantage of the opportunity by applying this extensive experience.

The increase in our loan volume that we've seen is primarily reflective of the Federal Reserve's policies on low rates.

Importantly though, also, our five core coastal urban markets are generally experiencing an accelerated economic recovery, relative to many other areas of the country.

The result of both of these trends is that we have had meaningful demand for home loans, both refinance, and increasingly, purchases.

In terms of credit quality, it's very important to note that we continue to apply exactly the same careful approach to lending, which we have done for 27 years.

Not a thing has changed in our standards.

In our judgment, with the strengthening economic conditions in our markets, very low interest rates, historically high housing affordability, and recently improving home prices, the loans that we are now originating are as safe as any that we have originated in our entire 27 year history.

The next largest segment of our loan portfolio is secured by income properties, both commercial and multi-family, located within our markets.

We have, likewise, originated these types of loans quite successfully since 1985.

These loan characteristics have never been stronger as measured by loan to value ratio and debt service coverage ratio.

The average loan size of these multi-family commercial loans is fairly modest, about $2 million.

Most of the remaining loan growth has been in business loans in a few, very carefully chosen segments.

Two market areas represent more than half of our business lending.

The first is what we refer to as capital call lines of credit to venture capital, private equity, and real estate funds, of which we now bank several hundred.

The other is loans to non-profits, particularly independent schools.

We've been in each of these areas for between 10 and 20 years with virtually no losses.

Mike Selfridge will talk more about this in a moment.

Overall, we're very pleased with the quarter.

New client acquisition continues to be extremely strong.

Loan origination and loan sales are very strong.

Asset quality remains excellent and wealth management continues to expand very nicely.

We're also additionally pleased to have declared another quarterly cash dividend of $0.10 per share.

Now let me turn the call over to Katherine.

Thank you, Jim.

Third quarter results continue to reflect the strength of our business model.

During the quarter, loans outstanding increased 5%, deposits rose 6% and wealth management assets climbed 7%.

In each of the past two quarters, we originated $4 billion of loans.

Importantly, we have not relaxed our credit standards in any way.

We continue to lend very conservatively.

Each loan is retail originated, fully documented, and fully underwritten.

Home loans were two-thirds of total loan originations for the quarter.

Of these, almost 40% were for home purchases.

Our weighted average loan-to-value on home loans originated continued at 60%.

The current low interest rate environment presents a challenge to our net interest margin.

However, these low interest rates also create an opportunity to attract many new clients.

And on the plus side of lower rates, we have been able to realize substantial mortgage banking gains on the sale of loans.

For those of you who may be newer to First Republic, we have been very active in loan sales and servicing as a mortgage banker since we were founded.

Because of the high quality of First Republic's mortgages, we've historically had robust demand from investors in the secondary market.

This was true in the third quarter.

We sold a larger amount of loans at higher prices than we have in the past.

During the quarter, investors bought $774 million of loans and we realized a gain of $12.5 million.

As has been our experience over many years, mortgage banking sales were countercyclical.

When rates decline and margins are under pressure, we can usually originate and then sell more loans through our mortgage banking activities.

In a way, this is our best model since we average seven to nine other products with our clients, moving the mortgage off the balance sheet preserves capital, while keeping all of the related deposits and wealth management assets.

Deposit growth continues to be quite robust.

Total deposits rose to $25.7 billion, up 6% for the quarter.

The continuing improved mix and asset management of deposit rates reduced our average deposit cost to 29 basis points for the quarter.

The growth initiatives in wealth management continue to show very positive results.

Assets under management rose to $24.8 billion, increasing $1.5 billion for the quarter, up 7%.

Assets were up $4.4 billion, or 22% for the year.

And net new client flows for the quarter were over $800 million.

During the first two years of our independence, we carefully invested in the franchise to promote earnings growth and maintain our excellent level of client service.

And as we said last quarter, we are now pausing a bit on new hires and focusing on the integration of new people to maximize their productivity.

As a result, hiring is down from prior quarters.

Most of the people we added in the third quarter were to support the operational side of our business.

In part, because of the slowdown in hiring and other initiatives, our core efficiency ratio declined to 58.6% for the quarter, down from 60.5% in the second quarter.

In short, we have very good momentum across all of our businesses.

And now I'd like to turn the call over to Mike Selfridge.

Thank you, Katherine.

Let me briefly discuss the conditions in our markets and also our business banking.

Economic conditions in all of our geographies remain quite solid.

Home sale activity is strong and inventory is constrained.

Apartment and commercial rents are rising and vacancies are falling.

The San Francisco Bay Area, which as you know represents just over half of our loan book, continues to perform particularly well and the real estate fundamentals in this market remain very strong.

Business banking also continues to perform well.

This has been an important contributor to our franchise both in terms of loans and deposits.

Business deposits were up 11% in the quarter and now account for 46% of total deposits.

I'd like to underscore that our approach to business banking, much like our home lending, is very focused, straightforward, and driven by relationships, just like everything we do.

One key measure of the quality of our business banking clients is that they are very highly liquid.

They bring to First Republic Bank on average $5 in deposits for every $1 in loan balances.

I also want to note that we typically bank clients in industries that we have known for many years.

We have been banking non-profit organizations for more than 20 years with only 1 small loan loss.

We've been making capital call loans to venture capital, private equity, and real estate firms since 1999 without a single loan loss.

Today, these two categories represent 58% of our business loan commitments.

We remain very deliberate in our business lending, which is based on a deep understanding of a few carefully chosen market segments.

And now I'd like to turn the call over to Willis Newton.

Thanks, Mike.

I would like to highlight some of the key elements of this very good quarter, and indeed, very good nine months.

Our core net interest income for the third quarter was up $14 million, or 6% over the prior quarter.

This increase was primarily due to higher average assets earning a comparable margin.

We are pleased to report that our contractual net interest margin was 3.47%, only 1 basis point lower than the prior quarter.

While our loan yields continue to decline somewhat due to disciplined pricing on the deposit side, we were able to reduce our contractual deposit costs by 9 basis points in the third quarter to a very low 29 basis points.

Our NIM also benefited from a $200 million decline in average cash balances for the third quarter versus the prior quarter.

As Katherine noted, we had an outstanding quarter for mortgage banking both in volume and in price.

We sold $774 million of single-family home loans.

This volume was 50% above the quarterly average of loans sold in the first half of this year.

Our gain on loans sold was 162 basis points, compared to approximately 110 basis points in the prior quarter.

Higher loan volume sold at better prices resulted in the higher gain on sale of loans of $12.5 million.

I would point out that during the prior eight quarters we recorded total sales of $2.3 billion and net gains of $20 million, which on average was 85 basis points.

During the quarter, loans in our servicing portfolio we paid at a historically high rate, nearly 30%.

As a result of the downward trend in mortgage interest rates, we recorded a $3.4 million impairment charge to reduce the carrying value of our mortgage servicing rights.

Such a charge is above our level that we have taken in prior quarters.

After this charge at September 30, our total MSRs were carried at $16 million, or 38 basis points on the total loans serviced.

While we enjoyed very good mortgage banking results, we were pleased to also generate positive operating leverage.

If we exclude the mortgage banking gains net of MSR write-offs, our net interest income plus fee revenues were up $15 million compared to the prior quarter.

This is 22% annualized.

Our non-interest expense was up $6.6 million, or 16% annualized, thus creating operating leverage of over $8 million.

I would note another pro forma calculation.

If our mortgage banking results had been the same as last quarter, our core efficiency ratio would have been 59.7%.

This is still somewhat of a decrease from last quarter.

We continue to be strongly capitalized.

Our Tier 1 leverage ratio was 9.33%.

Importantly, our core EPS for the third quarter is 29% above the same quarter last year.

And our core EPS for the first nine months is 24% higher than last year.

In summary, our well capitalized, clean balance sheet continues to deliver high quality, stable earnings.

Now I'd like to turn the call back over to Jim.

In summary, we're very pleased with the quarter, as well as our nine month year-to-date.

First Republic continues to effectively execute its long-term business plan, which is focused on asset quality, extraordinary service, and the building of relationships.

We're especially pleased with the 15% after-tax increase in book value per share over the last 12 months.

The continued strong demand for our very high quality home loans in the secondary market is very positive and gives us considerable control over our balance sheet.

Finally, this quarter's results also reflect our successful efforts to continue to lower the cost of our deposits and manage our expenses.

We're pleased with both our net interest margin and efficiency ratio changes and the strong earnings growth.

Now I'd like to turn the call back to the Operator and take any questions.

(Operator Instructions) Your first question comes from the line of Erika Penala with Bank of America Merrill Lynch.

Your line is now open.

Good morning.

Good morning.

Or rather good afternoon.

My first question is on the efficiency ratio.

I appreciate the comments that Willis made that if you exclude the mortgage banking activity this quarter that the efficiency ratio would be closer to 60%.

But you also mentioned that you are pausing your new hiring.

I guess as we look at the efficiency ratio for 2013, and assuming it feels like this refi tail wind will continue at least through the first half of next year, should we look more for a 58% efficiency ratio?

Or is 60% a better assumption on a go forward basis?

Hi, Erika.

We are continuing to invest in our franchise in many areas so our expenses will continue to grow.

The range for our efficiency ratio, we think will still be in the 58% to 60% level on pretty much a normalized basis.

And we will expect to continue to sell loans and to have mortgage banking results.

And in terms of how we're thinking about the split between what you retain and what you end up selling, so if we make, let's say we assume something like 20% to 25% loan growth next year, is there sort of a certain level of growth where you say we should originate some of our production because there's so much more demand for it?

Or is it really -- it really fluctuates from quarter to quarter?

It's Jim, Erika.

It will fluctuate from quarter to quarter.

As Katherine said in her comments, the mix of what we sell is driven to some extent by selling the longer-term fixed.

The market currently wants that, obviously, so we're generating quite a lot of that.

But it's a little bit reactionary to what the mix is and also to our balance sheet considerations in terms of growth.

Okay.

Thanks for taking my questions.

Thank you.

Your next question comes from the line of Aaron Deer from Sandler O'Neill & Partners.

Your line is now open.

Hi.

Good morning, everyone.

Good morning.

If I may just follow-up on Erika's question.

Trying to get at the expense line and how that might be correlated with the gains in the quarter.

Is this -- is the compensation level that we saw this quarter is that something to build off of then?

Or was there any sort of accelerated comp expense that would have been tied to the mortgage sales in the quarter?

Aaron, the compensation is driven from the mortgage origination side, as well as the growth in deposits and assets under management.

It does not relate to the sale of loans.

You'll see that solely in the gain on sale line.

We are, this is Jim, we are, as Katherine said, slowing down the hiring of new relationship managers and integrating in those that we've hired.

We have hired quite a number, as you probably know, and we want to take the time to integrate them in properly.

They traditionally turn to profit between one and two years with us.

And so we're going through that process right now.

And our focus is also on the support functions in the enterprise, the back office, and making sure that they are in line with the volume and productivity of all of the new hires on the relationship manager side.

Okay.

That's helpful.

And then, Willis, on the margin, obviously the core margin held up very well this quarter.

I'm just wondering with declining level of excess liquidity that you're putting to work and given the yield pressures, what kind of margin pressure might we be looking for on a core basis going forward?

Well, I think the trends with the announcement and expectations that rates will stay low for quite awhile, I think we will continue to see pressure on our loan yields.

And there's really not a lot more we can do on the deposit side.

We benefited from an improvement in the mix, as well as some pretty tight pricing, but that's almost all we can do on that side.

The deposit growth continues to be good, so putting our liquidity to work when we sell loans is still a challenge.

Okay.

Great.

Thanks.

Our focus is to continue to grow our net interest income line through the increase in the average balance of interest earning assets earning a strong, if perhaps, slightly lower margin.

Okay.

Thank you.

Your next question comes from the line of Ken Zerbe with Morgan Stanley.

Your line is open.

Great.

Thanks.

Hi guys.

Just a question on expenses.

How much of the growth is discretionary?

I would like to think that you're just taking the profits of the higher revenues and you are reinvesting in the business to grow more revenues in the future.

But I don't know to what extent it's that mentality versus simply you originated more so you have to pay more so your sufficiency ratio is essentially set irrespective of what you choose to do.

Does that make sense?

No, the question does make sense.

The answer is not quite as clear as you'd like it.

But, as you know, we have a strong bonus compensation program in the Bank.

Importantly, it's not just driven by loan volume, in fact, our typical relationship manager would get a little less than half their take home from loan volume.

The larger share actually comes from assets under management or deposits and other products.

And so it is driven by volume to some extent, but to the extent that the productivity of our volume is driven by a limited number of people, or a set number of people, the adding of support people for the larger balance sheet is in fact incrementally less expensive, and has some operating leverage in it.

The high touch model though, and the last part of your question is sort of implying this, the high touch model that we run has historically been a relatively expensive model, albeit very successful and predictable.

And as a result, we have always thought of our efficiency ratio operating between 58% and 62%.

And that's been true for quite a long time.

It's been true somewhat irrespective of margins fluctuating between 300 and 340 over the years.

Okay.

I think that helps.

The other question I had, a quarter or two ago, you mentioned the average yields on new lending was maybe 325.

Do you have a similar number to what you're putting on today, or in third quarter?

Yes, in the third quarter the average yield was 319, versus last quarter 320.

So really unchanged.

Okay.

Great.

Thank you very much.

Your next question comes from the line of Steven Alexopoulos with JP Morgan.

Your line is now open.

Hi, everyone.

Hi, Steve.

Not to beat a dead horse on expenses, I guess every one of us has now asked a question on this.

Jim, I know since it came out of B of A, there was a backlog of expenses to be incurred, just running through all the line items, they are all running now mid 20% above a year ago.

How close are we to finally realizing the incremental expense bill that was required?

You know new markets such as New York, building out wealth management, I guess we're all struggling to say is 20% a run rate given the performance of the Company?

Or is there an incremental build still in the numbers today?

Well, that's a good question.

And the answer is there's still an incremental build in the numbers today in a couple of areas.

We have about 10 more offices that are in the works and opening over the next 12 to 15 months.

All of those basically have been in the works for awhile.

There aren't any new names on the list.

And I think the latter comment is relatively important.

There aren't any new names on the list.

And other than Palm Beach, which we've been working on for awhile and have approved for, we have not added any new for a couple quarters now.

We are doing more office space because of the back office support needs, but not very much.

It's building out.

So the physical build out of the enterprise is probably past half way done in terms of the expansion, maybe even more.

In terms of relationship managers, as you know, that's entirely discretionary.

So we tend to -- we went, we took advantage of the opportunity when we first came out of the dislocation that was in the marketplace.

That dislocation has settled down a little bit and we have hired some very, very good people.

And so we've shifted our focus to improving their results and their efficiency.

And so I think that piece of the build out will probably never, well never is a bad word, but we don't foresee it attaining the same rate that we've been going through recently, or in the last three or four quarters until this last quarter.

So that's slowing down.

On the wealth management side, we continue to look at and hire producers but of course that doesn't take capital.

It does impact the efficiency ratio but it's not a capital leader.

Okay.

That's helpful.

Maybe just shift gears just to follow-up on the loan yield pressure.

I guess core loan yields are running down around 15 basis points, almost per quarter over the last few quarters.

From a high level should we expect this level of pressure?

Or does QE3 accelerate that a bit just given what's happening with refis?

We're not really sure is the honest answer.

It remains to be seen what QE3 will do.

I think one month doesn't yet tell the tale.

It's clearly accelerated a little bit the pressure on the fixed rate end because they're buying mostly agency, fixed agency it appears.

People don't really know but that's what it looks like to us.

And so that probably puts some more pressure on it.

But that's mostly mortgage banking activity for us anyway when you get out to past 10 fixed.

Whether it's going to put more pressure on the part of the portfolio we keep on our balance sheet remains to be seen.

So far, not a lot of additional pressure, a little bit, but not too much.

Got it.

Jim, maybe for last question you've been through many mortgage cycles.

You've been in the business a long time.

Just what's your best guess how long this refi wave goes on with QE home prices going up.

Do you think this could potentially go straight through 2013?

Strictly a personal guess, yes.

Thanks.

Appreciate the color.

Your next question comes from the line of Joe Morford with RBC Capital Markets.

Your line is now open.

Thanks.

Good morning, everyone.

Good morning, Joe.

I was just curious first to follow-up on the deposit growth.

It's pretty broad based this quarter.

Mike touched on a little bit with the business bank.

I wondered if you could talk a little bit more to the drivers of that this quarter?

And any color on is a lot of it just coming from additional cross sell or gathering a lot of new relationships as well?

It's coming from several areas.

We are continuing to add new relationships.

The new relationships and business bankers we hired bring us more deposits and we have a very good momentum in our business banking area, which each time we land a business client the deposit growth accelerates.

So it's across the board.

Okay, and then a follow-up to some margin related issue.

The security field held in very well this quarter around 5.5%.

I was just curious what purchases you made in the quarter?

What types of investments and what kind of yields you were getting?

The incremental purchases in the quarter are actually fairly modest.

We continue to buy some additional municipals and we bought a few CMOs, commercial CMOs, a very modest amount actually, and the yields are holding fairly well.

That's primarily a fixed rate portfolio as you probably know, so it's natural it would hold up and it's benefiting us quite considerably right now.

Okay.

Thanks so much.

Your next question comes from the line of David Rochester with Deutsche Bank.

Your line is open.

Hi.

Good morning guys.

Hi, Dave.

If you could just update us on the competitive landscape, just generally what you're seeing out of the larger competitors?

And then perhaps if you could drill down into the various loan products as to where your pricing resi ARMs for example, where the buy down rates are today on average?

And maybe also on the C&I and CRE?

In the market for home loans it's quite competitive.

It's also competitive for income property loans.

And we're working hard to strike a careful balance between pricing and acquiring clients.

And as I think you know, we base our price on relationships and we focus on cross sell and all of the large banks are active in the single family as well as the income property lending.

Our business banking tends to be adjustable with the exception of our non-profit lending.

And in terms of rates, where you're seeing buy down rates today on the resi side and maybe all in on the resi?

It's really hard to say.

Pricing depends completely on a matrix.

We value price so that it depends on how we do it with each client so it's hard to say.

Okay.

And then just switching to the deposit side, I know you mentioned there isn't much room there.

But I was just wondering what the timing of the adjustments you made was in Q3?

And if you could expect to see any partial quarter impact from that flowing through into Q4 that might help offset yield pressure?

Yes.

Hi, Dave.

It's Willis.

We made most of these actions around the middle of the quarter, so there's a potential for a little impact, positive impact on the pricing.

But equally importantly is the high balance of, higher balance of checking which is our lowest cost deposit product.

Great.

Thanks and just one last one.

It seems like you could probably move the cash balances down more.

Where would you see a good floor on those as you deploy the excess cash?

Like around $400 million or $500 million, that level?

Yes, that's about right, Dave, $400 million to $500 million is what we would need to operate the Bank on average.

Of course when you sell loans, you generate extra cash.

And when you have deposit growth, you have extra cash.

Okay.

Great.

Thanks, guys.

Your next question comes from the line of Casey Haire with Jefferies.

Hi.

Good morning, guys.

A question on ALCO strategy.

I know last quarter you mentioned you didn't see a need in a lower for longer the environment to draw down FHLBs.

Just wondering what your thoughts are here?

I know we're obviously a little bit lower for longer, just wondering if that's still the go forward policy to avoid the FHLB draws.

At this point it is, Casey, because an addition to that discussion that you reference, we're clearly selling a lot of fixed rate assets.

And so we're adjusting on the asset side a little more aggressively than we were and previously we were adjusting on the liability side.

As the origination mix shifts towards fixed, we have a little less pressure to match fixed capital on our balance sheet with fixed rate draws.

Having said that, we keep a very close eye on it.

We're still slightly positive asset sensitive.

Casey, I'd also add that we did a preferred stock offering in June and that added $150 million of very long-term liabilities as we think about them in our structure.

So that helped us to continue to be very closely matched.

Got it.

And then just switching to capital, obviously still strong at 9.3% Tier 1 leverage but it did come down 20 basis points.

Just wondering if this growth keeps up, how does that change your growth strategy and/or capital return?

Well, we watch our capital very carefully as you know and we always anticipate needs in advance if we possibly can.

We're very comfortable at 9.33%.

It's a good capital ratio for us.

Our target overall is 8% or better and we don't intend to get right up to it.

But we're pretty pleased with the ability to sell the loans.

And on the mortgage banking side, we are going to watch for another quarter and see how that plays out.

That actually is a very useful safety valve, so to speak, for growth in the face of strong volume which is in fact right where we find ourselves.

Casey, I'd also add that we are continuing to a accrete loan discounts.

We've just passed a half way mark, but we still have about $370 million of discounts to come into our earnings over the next several years.

And this will continue to add to our capital base.

Got it.

Last one for me, just tax rate at 30.5%.

Is that the go forward rate?

We believe that's a good rate as we go forward.

This is based on a GAAP concept and we'll take a careful look at the end of the year and that will give us our best guess as we go forward for next year.

Great.

Thanks.

Your next question comes from the line of Lana Chan with BMO Capital Markets.

Hi.

Just one question for me, in terms of the loan pipeline as of today, how would you characterize it versus the beginning of the previous quarter?

You said the loan type line?

Pipeline.

Sorry.

The pipeline remains strong and we're pleased.

Okay.

And then just also on the expenses again, in terms of the planned branch openings, the 10 that are in the works, is that -- how much of the expenses related to those are sort of already embedded in the current run rate?

I'd say about 40% of the expenses, primarily the lease costs for all of these locations, has been included.

We have not completed the build out.

So we won't have the depreciation cost until we open it.

And then several months before we open a branch, we will begin to hire personnel so that they will be fully trained by the time those branches are open.

Okay.

Thank you.

Your next question comes from the line of Paul Miller with FBR Capital Markets.

Your line is open.

Yes.

Thank you, very much.

We all know that in the conforming market we're seeing some of the highest gains on sale that we've ever seen.

And we are also seeing a very strong, looks like a gain on sale number, for you guys in that $12 million range.

Is there anything that's a one-time benefit in that?

Or is that just you selling your 30 year fixed into the secondary markets?

Are you experiencing the same type of gain on sale margins as the conforming markets?

There's nothing unusual about that.

We sell 30 year, 15 and 10 year fixed rate loans and we were rewarded with good pricing.

And we keep servicing.

Always keep servicing.

So given that we're in the midst of this very strong refi boom, should we be modeling something in it as the numbers going forward for the next couple quarters or as long as we think the refi boom will exist?

We sell loans every quarter we have from our beginnings but we don't predict in advance how much we're going to sell.

It depends on management of our balance sheet and the amount of fixed rate loans we originate.

But we would expect to see good pricing for awhile.

Okay.

Thanks a lot, guys.

Your next question comes from the line of Julianna Balicka with KBW.

Your line is open.

Good morning.

Good morning.

I wanted to follow-up on the integration of the new hires you'd made as you're slowing down the new hires and integrating the people you've recently hired.

In terms of their productivity, what kind of increase in productivity, originations, deposit growth can we start to see from them kind of getting their run rate going?

Well as a practical matter, there's two sides, kind of two components.

In spite of all of the new hires we have, we have incredibly productive long time bankers here.

And so the incremental add from the new hires is moderate.

The real issue is when do they cover their expense carry.

And they cover their expense carry generally at the end of about their 12th or 14th month, somewhere right around there.

And then they tip over into profitability for us and of course they're delighted as well because their book of business is building and has come over with them.

And so to the extent that most of our hires really occurred in the 12 months ending this past June or so, then we are now in that full year period for most of them.

And so I hate to be that soft on the answer but it's complicated.

But it's really actually also very simple.

12 months after we hire somebody, either they're not here or they're breaking even.

Okay.

That makes sense.

And then in terms of your origination volumes, I mean what's the real limiting factor on your growing originations, much more aggressively and selling more loans more aggressively?

Quality.

Quality of service delivery, quality of assets, just how many can you do well.

We are dogmatically driven by doing it well.

We aren't quantity driven, we're quality driven.

Okay.

Thank you.

Your next question comes from the line of Tim Coffey with FIG Partners.

Hi.

Good morning, everybody.

Good morning.

I had a question off the deposit growth in the quarter.

It seemed like there was acceleration this quarter compared to previous quarters.

Is this a one-time thing or do you see this as an ongoing trend?

We continue to grow deposits nicely from our existing clients as well as from the new clients.

And one of the benefits you see of our continued good business and the new producers we hire leads to more deposit growth.

Our offices are also quite productive and get increasingly productive over time.

We would also just alert, we and others face this and that is the unlimited insurance ends at the end of this year, at least as of now on business checking accounts and on checking accounts.

And we don't know how that will play out, nor does anyone else because it hasn't occurred before.

So I would just note a word of caution for your thinking, not only on us, but everybody.

On the other hand, the deposit success across the franchise has been in fact quite considerable.

Okay.

Great.

And then my other two questions were on the mortgage business.

As a percentage terms of what you're originating right now, how much of that is purchase versus refinancing?

About 40% is purchases.

Has that changed say in the last four quarters?

Yes, it has.

It's up a bit from the low 30%s over the last year and this quarter looks like it will continue to be 40% or more.

Okay.

And then on the net margin, the net loan sale margin, is that number positively correlated to the volume that you sell?

No.

Each sale is based on bidding, unless they're flow basis.

And it's based on what the market thinks of our quality of our mortgage loans, as well as the pricing at the time and the product we're offering and the yield on the loan.

We have lots of bidders when we put out a package.

We have many people competing for the loans.

Okay.

Great.

Thanks.

Those are my questions.

Your next question comes from the line of Herman Chan with Wells Fargo Securities.

Your line is open.

Thanks for taking my question.

Revisiting the question on competition, are you seeing sense of differentiation in competition within your main markets?

And I'm also curious on the dispersion of jumbo production within your markets.

Thanks.

We are seeing some of the largest banks be competitive in all of our markets on both coasts.

And we're not seeing too much difference.

The largest banks are the most competitive.

We are doing about the same amount of jumbo production across the country.

Most of our business would fit into the jumbo category.

Great.

Thanks.

I have a question on wealth management as well which has seen some pretty steady growth in recent quarters.

How much of the AUM growth has been driven by the effect of new hires bringing on board previous relationships?

And how much is more of a function of traditional cross-selling?

It's more than 50% new hires.

But we're doing a very good job with our existing long-term relationship, wealth managers bringing in continued business as their clients refer their friends.

And we're doing a good job cross-selling our bankers clients into wealth management.

So I'd say it's a little more than 50% new, but not more than that.

Thanks for taking my questions.

Your final question comes from the line of Brian Zabora with Stifel Nicolaus.

Your line is open.

Thanks.

Sorry if I missed this but did you provide how much of your mortgage production was fixed versus floating in the third quarter?

We did not.

Do you have any sense of what that was third quarter versus maybe second?

It's probably not very different and most of the 30 and 15 year fixed are sold.

Okay.

And then just one more question on home equity.

It was down in the quarter.

Are you seeing people rolling balances into firsts now or is this a trend that we may see going forward?

Whenever mortgage rates decline, people often take advantage of that to put on a new mortgage at a lower rate and then their home equity line may pay down a bit.

Thanks for taking my questions.

I will now turn the call over to Jim Herbert for closing comments.

Okay.

Great.

Thank you, very much.

Well, thank you for all your questions and we appreciate your focusing on us.

We know it's a busy time.

Bottom line, it was a good quarter.

Credit holds up well.

Earnings were good.

Book value continues to grow.

Our volume is strong.

So we're quite pleased.

We thank you very much for your time.

This concludes today's conference call.