First Republic Bank (FRC) 2012 Q4 法說會逐字稿

Welcome to the First Republic Bank fourth-quarter and full-year 2012 earnings conference call.

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

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

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 fourth-quarter and full-year 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; Mike Selfridge, Senior Executive Vice President; 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 Earning 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, Diane.

And thanks to everyone for joining our call today.

It was overall a terrific year.

Results across the franchise were very strong.

I'd like to start by highlighting a few numbers for the fourth quarter and then focus primarily on the full year.

For the quarter, core net income was up 51% and core earnings per share were up 39% versus a year ago.

For the full year, core net income was up 38% and core earnings per share were up 28%.

Loans, deposits, wealth management, and business banking all increased very strongly both during the quarter and the full year.

In addition to operating results, one of the key accomplishments of this past year was the continued diversification of our shareholder base and the considerable increase in liquidity of our stock as a result.

In the two years since our IPO, our private equity ownership which helped us buy the Bank back has been reduced from 73% to less than 14% at this year-end.

In 2012 alone, the market quite successfully absorbed 45 million shares or more than one-third of our total outstanding shares from these initial investors.

These shares were sold by our initial private equity group and are now part of our float.

This is a very important development.

On the operating front, the most gratifying achievement of the year has been the 28% growth in core earnings per share.

This year's very strong performance is the result primarily of our consistent execution of what is our very simple client-focused business model.

This model is built on a strong commitment to exceptional client service and exceptional asset quality.

Let me turn to the numbers for the full year for a minute.

Tier 1 leverage ratio continues to be very strong at 9.32%, and in fact, increased a bit over last year.

Book value per share was up 13.5% for the year to $22.08.

Book value has increased almost 50% since we bought the Bank back only 2.5 years ago.

Loans and deposits each grew more than 20% for the year.

Wealth management assets grew 55% for the year.

This includes the $5.9 billion in assets from the Luminous acquisition recently.

Even without this acquisition, our wealth management assets grew 27% for the year.

Quite importantly, credit quality remains very strong.

Non-performing assets were a low 14 basis points at year-end and charge-offs for the year totaled only one basis point.

As we enter 2013, we expect to benefit from the investments we've made in people, technology, and new offices.

However, we would caution that we continue to manage two challenges, primarily.

First, we'll continue to experience net interest margin pressure.

We are booking new loans at lower rates than current loans on the balance sheet and our loan payoff rates are still pretty high.

Second, while we had a very profitable year in mortgage banking, it's unclear how long we can generate such elevated loan sale gains.

Overall, it's been a terrific quarter and a terrific year for the Bank.

Let me turn the call over to Katherine.

Thank you, Jim.

Let me focus on some key numbers for the fourth quarter and then share a few noteworthy achievements for 2012.

Compared to the prior quarter, Bank assets and loans outstanding grew 6%.

Deposits increased 5%.

Loan originations were up 6% from the prior quarter and set records for both the fourth quarter and for the year.

Wealth management assets grew 28% for the quarter including the assets from Luminous.

Business banking also had a breakout year.

I'd like to spend a moment on our wealth management strategy beginning with a historical perspective.

Over the past several years, we've been building out our wealth management business, adding capabilities in all of our markets.

Our growth has been driven by three initiatives -- effective cross-selling of bank clients; the success of existing wealth managers growing their books of business; and the hiring of extremely experienced and talented wealth managers in all of our markets.

This approach has worked very well.

In December, we accelerated the growth of wealth management with the Luminous acquisition, which we believe will be a terrific fit.

This was a strategic opportunity in terms of clients, geography, and market segments.

The Luminous team has very talented people with a proven record of growth and this growth has continued since the transaction was announced.

As we mentioned, deposit growth was very strong.

We're particularly pleased with the growth in our checking balances, which rose 11% for the quarter and 43% for the year.

In fact, checking now exceeds 50% of total deposits.

Loan growth was another bright spot for both the quarter and the year.

Loan growth is driven by our reputation in the marketplace, the quality of our relationship managers, the efficiency of our loan closing process, and the strength of our market.

As Jim mentioned, our credit record remains very strong.

I would note that our loans have always been fully underwritten and fully documented.

Needless to say, based on our historical credit record, our clients' ability to pay speaks for itself.

Loan sales were also very strong for the quarter and for the year.

Loan sales in the fourth quarter were $671 million.

For the year, loan sales were $2.4 billion.

Both volume and price were significantly higher than in recent years.

We continue to be pleased with the demand for our high quality loans in the secondary market but it is hard to predict pricing and volume going forward.

Overall, we are very pleased with the quarter and with the year.

Now I'd like to turn the call over to Mike.

Thanks, Katherine.

Let me provide some perspective on our geographic markets and then talk about the growth of loan originations and business banking.

Economic conditions in our markets remain quite solid.

First Republic continues to benefit from the very strong knowledge-based business sectors concentrated in our urban coastal markets.

Technology, financial, and professional services in these regions continued to perform very well, particularly in the San Francisco Bay area, which represents just over 50% of our loan outstandings.

The strength of these carefully chosen markets combined with our differentiated service model are driving loan originations, as well as business banking activities.

Loan originations for the year were a record $15.5 billion.

Home loans accounted for 63% of total originations, of which 37% were for purchases.

Commercial real estate and multifamily originations were also strong for the year, which led to 20% growth in loan outstanding for these categories.

Business lending was also up sharply, as were business deposits.

Business deposits were up 29% for the year and now account for 42% of total deposits.

The growth in business loans and deposits produced the best year on record for business banking.

A key reason for this is our continued focus on very attractive business segments such as private equity venture capital, nonprofits, and professional services.

These sectors are doing well and are providing First Republic with many high-quality referrals.

Business banking is also benefiting from First Republic's success in following satisfied personal banking clients to the businesses or the nonprofits they lead and influence.

Now let me turn the call over to Willis Newton, our CFO.

Thank you, Mike.

I would like to focus on core earnings, core net interest margin, and a couple of other key items.

We are pleased with the growth in our core revenues and the 28% growth in core earnings per share for the year.

As you may recall, we calculate our core revenue and expenses by simply excluding the positive impact of purchase accounting which originated when we bought back the Bank in 2010.

There are two items which contribute to the purchase accounting adjustment.

The largest is loan discounts, which are amortized into interest income.

Today, 43% of the original amount remains on the balance sheet.

Also, we have CD premiums which lower our interest expense and are down to 14% of their original amount.

As these two items come into income over the next several years, they will add approximately $1.50 per share to our book value.

Our core net interest income last year grew 20% due to the larger average assets on the balance sheet and an improvement in our funding mix towards lower cost checking balances.

For the year, our non-interest income increased $56 million on higher loan sales gains, increases in wealth management fees, and more Bank-owned life insurance.

Collectively, our total core revenues were up 23% for the year.

For the fourth quarter, our core net interest margin was 3.46%, declining only one basis point from the prior quarter.

On average, lower rates on new loans contributed to a decline in the yield on earning assets by six basis points.

Most of this was offset by a reduction in deposit costs of five basis points.

However, I would note that core deposit costs for the quarter were down to 24 basis points and really can't go much lower.

During 2012, we sold $2.4 billion of loans including almost $1 billion to the agencies.

Selling fixed rate loans has always been part of our historical strategy to actively manage our asset liability matching.

Pricing was particularly strong in the fourth quarter, as the average gain was 2.6% of the loans sold.

For the last 10 quarters, the average amount of gain has been $5 million.

The fourth quarter gain was $0.05 per share above this 10-quarter average.

Our core efficiency ratio was reported as 56.2% for the quarter.

The efficiency calculation benefited from the larger-than-average gain on loan sales.

Without these elevated revenues, the efficiency ratio would have been at the lower end of our expected range of 58% to 62%.

Importantly, our capital ratios remain strong.

In addition to our good retained earnings, we raised a total of $500 million in 2012 through three perpetual preferred stock offerings.

Our Tier 1 leverage ratio is 9.32%, up from 8.8% a year ago.

It was a very positive quarter and year.

Jim?

Thank you, very much, Katherine, Mike, and Willis.

In closing, I want to reiterate that we're very pleased with the recent quarter and the entire year.

The increase in core earnings per share, the substantial diversification of our shareholder base, and the strong growth of our franchise on every front made it quite a year.

The environment in the financial markets, however, is still quite challenging and we will continue to be under NIM pressure, just as is everyone else.

Our markets remain strong.

Our employees are doing a superb job of serving existing clients and acquiring new ones.

We look forward to continuing to build the franchise one relationship at a time, as we have for many years.

Thank you for your time today.

Let me turn the call over for questions.

Operator?

(Operator Instructions)

Steven Alexopoulos, JPMorgan.

Maybe I'll start -- Jim, looking at the tax law changes that went through, impacting higher income individuals, I know it's early but have you noticed any change in behavior so far of your clients in terms of pulling away from real estate investing or any less demand for credit?

Anything notable at this point?

Actually, no, not so far, other than a couple people moving to Florida because of California tax law change.

But not really, no.

I think there will be some.

We saw a lot of activity at the end of the year as I'm sure every bank in -- certainly in private banking -- did, but no pattern yet.

And then, looking at the qualified mortgage rules that came out last week, did you see anything in there that could impact either the way you run the business or make jumbo less desirable of an asset class to hold?

Well, I don't think they're going to necessarily impact jumbo as an asset class.

The one thing in there, of course, is the interest-only issue.

And we have a lot of interest-only loans and have done them, as you know, for a number of years.

But obviously, our clients are very well-qualified in terms of the ability to pay requirements under the rule, but we're still studying it to make sure that that's the extent of the impact.

It's complicated and we're trying to think it through.

Right at this moment, I don't think it's too much of an impact but we're cautious.

Got you.

And then maybe for one final one, Jim.

If we look at the $4.3 billion of gross originations in the quarter, that's up around $1 billion from the year-ago period.

What would explain why loan growth continues to accelerate, particularly into year-end?

Is this just what you were saying, that high net worth people were more active in the quarter?

Is this New York coming online?

Just any color that you can help us think about why the origination volumes have reached this level?

There's several reasons.

The markets we're in are very strong.

There was a bit of year-end activity but actually there always is extra activity at the end of the year.

In the last 18 months, we also hired additional business bankers and relationship managers who, after 6 to 12 months, become much more productive.

And those are the reasons.

And low rates continue to impact it.

Refinancing is still quite high, and purchase finance is actually pretty strong.

Okay.

Thanks for all the color.

If I could add to that for one thing, Steve, the strength of our particular markets is not to be underestimated.

Ken Zerbe, Morgan Stanley.

Great.

Thanks.

Maybe the first question, just in terms of the gain on sale margins, Willis, I think you mentioned it was $0.05 above your 10-quarter average.

Have you seen -- or can you comment on any trends that you may have seen so far in January relative to the fourth quarter?

No, we don't.

We do have a few loans in the held for sale bucket at the end of the year, which are primarily going to the agencies in due course.

But we have not put out any packages for consideration in the marketplace this quarter.

Okay.

That's fine.

The -- in terms of additional wealth management acquisitions, now that you've got Luminous done or getting done, what is the appetite?

Was that just such a unique one-off situation or is there potential that if you find someone similar to Luminous again, you'd be willing to do another deal?

Well, we've done one in 10 years, as you probably know.

This was particularly a unique situation, and as you know, we prefer to hire wealth managers one at a time or two at a time so that we understand clearly that they want to be part of us and that they have the skills.

We look all the time, but this has been the first one that was compelling.

Understood.

Yes, that's why we were a little surprised that the deal was done to start with.

But I understand.

And then just really quick, the yield or the average yield that you might be putting on what's called the blended rate of new loans put on during the quarter?

It's a little over 3%, that's in the home loan category and a little higher than that on multifamily and commercial.

Okay.

Great, thank you.

Brian Zabora, Stifel Nicolaus.

Brian, are you there?

Sorry about that.

I think I was on mute.

Can you hear me now?

We can.

Okay, great.

Sorry about that.

The strong deposit growth you had in the quarter, you highlighted that interest bearing was extremely strong.

Was there anything that you changed as far as the makeup of the -- incentivize people to move to that from other categories, or was it that you had a good in-flow?

Just had a good in-flow and the business banking that Mike alluded to was very strong, and of course, that brings primarily checking with it.

And we have continued to work through our CD book to either cross-sell it -- to encourage cross-sale or to move CD -- single-product CD clients out.

So it's just -- it's really an ongoing process.

What we don't know yet is there may have been a particular strength at the end of the quarter as a result of all of the liquidity, but so far it looks very stable.

And then from the TAG program expiring, have you seen any impact so far in January?

No, not really.

Okay.

We've had a few movements but not a meaningful amount at all.

Great.

Thanks for taking my questions.

Dave Rochester, Deutsche Bank.

Hey, good morning, guys.

Nice quarter.

Just a quick one on the expense side.

You had given an update last time on how much of that fiscal build out expense was in the run rate for 3Q.

Was just wondering how far along we are now in 4Q, and what the timing is on that growth slowing a bit in 2013 on the expense side?

Well, from a branch point of view, an office -- a new office point of view, we have a number of offices that we're going to open next year because they're in process, and we'll probably open eight or nine new offices yet.

That's the pipeline being completed, basically, that we have put in place over the last 18 months or so.

We have not in the last quarter or two, I'm just hesitating here to be sure, really signed anything else up.

We're completing out the pipeline.

Yes, Brian, I think we said last quarter that on those eight or nine offices, we are including about $1 million a quarter for the rent of those offices.

We have slowed down the opening of them, which means we don't hire the people or begin to incur costs like utilities and depreciation.

But those will come on over the course of the year.

Okay.

Thanks.

And just a quick follow-up on the expense side.

I notice the comp expense growth slowed a little bit this quarter.

Was just wondering if there were any bonus accrual adjustments in that or if something else drove that this quarter?

I don't believe there was anything unusual in the bonus line this quarter.

Next year -- next quarter we will have first quarter payroll tax issues as most people do and we'll start over with an estimate for the year as a whole.

Great.

And one last one.

You guys had had some great growth on the loan side and the deposit side.

I was just wondering on the loan side if you could update us on the pipeline there, how that looks and if you expect to see that strong C&I growth continue into 1Q?

The pipeline looks as good as it looked as we were going into the year-ago in 2012.

We can't predict what that's going to be but we're pleased with the strength of the pipeline.

All right.

Great.

Thanks, guys.

Paul Miller, FBR.

Yes.

Going back to the gain on sale, you gave us some pretty good comparisons on gain on sale over the last 10 quarters.

I didn't get a chance to calculate it yet, but what was the gain on sale up from the third quarter?

The gain on sale was up about 1.6% in the third quarter, and about 2.6% in the fourth quarter.

So it was up about 1%.

We put a table in the press release to help everybody with that math.

And was that mainly -- and that's a huge jump from quarter to quarter.

Was it -- can you just talk, add some color to that jump?

Just conditions in the market, really.

Thank the Fed.

That's when they started their mortgage buying.

And do you -- are you still seeing as -- and you said you did $1 billion to the agencies, and you sold about a $0.5 billion into the private label?

Well for the year, we sold $1.5 billion of non-agency and $922 million of agency paper.

Page 10 of the press release.

Okay.

Yes.

Okay.

And so going forward, you had 5.5% growth on the balance sheet.

Should we expect that type of growth given, if rates stay where they are today?

I know -- I believe you said it all depends on what the deposits are doing.

But given your growth, is this something that's sustainable throughout the year?

Well, Paul, the truth is, there's no way to know.

It obviously depends on demand and on our repayment rates.

As Katherine said, the backlog at the beginning of the year is holding up pretty well.

The first quarter, just some seasonality to the mortgage business, generally, the way we do it anyway, and the first quarter is often a little slower than the fourth quarter and then so on.

But that can move around from year to year.

But it's -- the year's starting off relatively strong but this was a stunningly busy year and it's hard to do an encore on this year at these levels.

And then the efficiency ratio dropped about 52%.

That's mainly driven by the fact that you just -- your earnings weren't -- were very strong this quarter.

Should we model -- how should -- looking at it on a modeling basis, should we be modeling back up to 55% because you do have some new branches coming online?

We would prefer to focus on the core efficiency ratio, which was 56.2% for the quarter, and as I indicated, without the elevated gains, it would have been within the lower end of our 58% to 62% range.

So we are still looking at the 58% to 62% range with a more normal mortgage banking revenue.

On core.

On core.

On core.

Okay.

Hey, guys, thank you very much.

Thank you very much.

Casey Haire, Jefferies.

Just a question on capital.

Tier 1 leverage ratio at 9.3%, I know you guys got plenty of room versus that 8% level, but obviously the earning asset growth could be strong enough to erode that further.

I was just wondering what is your -- would you like to keep a buffer above that 8% level?

And would you use more preferred issues like the November one as a vehicle to maintain that buffer above that 8% level?

We do want to keep a buffer above the 8% level always and we're aware that we've been a growth Company for a long time so we run our capital activities very, very carefully and I would like to think thoughtfully.

We would, if appropriate, use additional preferred to support needs if we have them.

Okay.

And then just a clarification on NIM.

I just want to make sure I'm thinking about this correctly.

If I back out the discount accretion on the loan yields, the core yield, the contractual yield on the loans is about 3.80% and your new production is in -- seems like it's in the low 3%s, which basically means there's about 70 bps of repricing risk within the loan portfolio.

Does that sound accurate?

That sounds about right.

That sounds about right.

We're currently, as we've said a couple times in the past, recording prepayment penalties which add 5 to 7 to our loan yields.

So you take that off and then you get to the contractual rate on the loans.

Okay.

Great, and -- okay.

And then is there any -- it doesn't sound like there's any offset on the funding costs anymore, but is there ability to push the cash balances lower from this current level as you did this past quarter?

We averaged about $1 billion for the year and we could take that down to about 50% that level, but it's -- with our deposit growth, it's been difficult to get much lower.

Got you.

Okay.

Thank you.

John Pancari, Evercore Partners.

Good afternoon.

On the margin front, can you talk a little bit about the outlook for the margin ex accretion, just given the pressure that you implied, and we're certainly seeing the pressure on new money yields.

Is it fair to assume that low to mid single-digits compression on a quarterly basis is likely here over the next several quarters?

Without putting a number on it, because it is a little hard, because prepayment speeds have a lot to do with this.

It isn't just the rate of new booking.

It's the rate of payoff of old.

It's a compilation of those two items.

The -- yes, I would think so.

It's -- we were fortunate this quarter.

We had some extenuating circumstances.

We were able to push the deposits down a little more.

But they are -- they're in the mid to low 20s as we said, 20 basis points, that is, and it's a little hard to get much lower than that.

We keep working on it.

And -- but I think it's -- that's probably an accurate range to think about it.

Okay.

All right.

That's helpful.

And then on the balance sheet side in terms of loan growth, can you give us a little more color on the drivers of the C&I growth that you saw this quarter.

I know it's been accelerating, but it was particularly strong this quarter and also, outside of that, can you talk a little bit about the drivers around multifamily, again, particularly strong and just want to get your thoughts on the outlook?

Sure.

This is Mike.

On the business loan front, the majority of the growth came through two areas -- the first was schools and nonprofits; and the second was capital call line activity to private equity and venture capital funds.

And in the multifamily, and smaller -- and CRE area, why, it's just an ongoing business for us.

It's been there a long time.

The demand is good.

We have hired a couple of folks that are particularly good at it as well.

But mostly it's been demand from our client base and activity level.

Okay.

Great.

Thank you.

Matthew Clark, Credit Suisse.

Can you talk just a bit about the resi mortgage portfolio growth.

It slowed a little bit here, at a 16% annualized on balance sheet.

And just curious if we should, as we look out, consider with gain on sale maybe moderating that the pace of the portfolio growth might pick back up, because it has been slowing the last couple of quarters?

Well, we manage the growth based on our plans and based on our asset/liability matching.

So when we make more long-term fixed rate loans, we tend to sell more loans.

When we make more adjustable, we tend to sell fewer loans.

And so it depends on what the mix is.

This is a market where some consumers, some clients want the 15 and 30-year fix, which we tend to sell.

So that does mitigate growth.

We see good originations continuing and then determining based on the mix and our ALCO matching, we'll decide what we'll want to sell.

Okay.

And I'd add that last year we originated $8.4 billion of home loans, not including the HELOCs, we sold $2.4 billion of that.

That leaves $6 billion.

About 50% of it went for payoffs and about 50% of it went for the net loan growth.

Got it.

Okay.

And as the Luminous deal comes into the numbers here, at least on a full run rate basis, are we going to -- it sounds like you're going to continue to manage that 58% to 62% core efficiency ratio.

Is that fair?

And then can you remind us the revenue contribution that you anticipate from those assets under management.

I think that number is around 50 basis points but just want to confirm?

Yes.

The contractual revenues on the $5.9 billion that Luminous had at the end of the year is about -- approximately $30 million.

And so that is around 50 basis points.

The efficiency of any wealth management activity is usually not as attractive as a bank's efficiency ratio and that's true of Luminous as well, although they are very profitable.

And so -- but their impact on our efficiency ratio is probably fairly de minimis.

Okay.

Thank you.

Aaron Deer, Sandler O'Neill & Partners.

Just a couple of quick follow-ups on things you've already touched on.

The big jump in the premium on the mortgages sold, it sounded like you're attributing that to the change in rates and demands during the quarter.

I'm also wondering if there's any other factors, because it was such a big difference, if there is any difference in the mix type of the loans sold in terms of the agencies versus privates or anything like that, that would have driven that?

We sold the loans that were 15 and 30-year fixed, and what Jim described in terms of the additional buying of mortgages by the Fed helped the price we expect significantly.

There's also good demand for our mortgages because of the high quality.

Okay.

And then, I might have missed it, but what was the split between purchase versus re-fi's in the quarter and also, if you can give some color in terms of where the geographic distribution was?

Aaron, it's Mike.

There -- I can't say there was any geographic dispersion.

It seemed to be nicely balanced, and the purchase activity was 37% for the quarter.

Okay.

Great.

Thanks for taking my questions.

Joe Morford, RBC Capital Markets.

Thanks.

Good morning everyone.

Congratulations on a good year.

Thank you, Joe.

Really pretty much everything's been asked.

One follow-up.

It's curious if you could talk about the risk adjusted margins in multifamily lending right now.

I noticed volumes were up a bit or a bit stronger this quarter and -- but other competitors talk about the market getting overheated and the pricing is pretty aggressive as well.

So, just be curious on your perspective?

We would agree with the other comments.

I don't know that risk pricing is off.

We're pretty conservative underwriters so we don't really price to risk.

We decide to take a risk and then the pricing is what it is.

The pricing pressure is considerable and the question -- the theoretical question, I think is, are properties beginning to be over-valued?

And I would say, every once in a while, yes.

But we're in a 0.25% world, so -- which cap rate is right?

I don't mean to be flip, it's really -- it's a serious question.

And I think from the point of view of cash flow coverage on our lending, however, we've not varied our underwriting standards.

Okay, that's helpful.

Thanks, Jim.

(Operator Instructions)

Herman Chan, Wells Fargo Securities.

There's was another press article today about a larger competitor looking to become more aggressive in the residential mortgage business.

Have you experienced any sense of renewed competition in your markets?

Well, I must say, we never experienced a decline of competition, but it would be naive not to think that as the BofA comes back into the market, we won't have some renewed competition.

We've managed to fare fairly well in the face of pretty heavy competition already, but we would have preferred they were pulling out rather than coming in.

Right.

Thanks.

Also, the Bank has signaled muted hiring in recent quarters.

Meanwhile, the Bank was able to demonstrate a slower core expense growth in Q4.

Excluding Luminous, should we expect a slower expense growth trajectory in 2013 with hiring less robust?

Herman, it's hard to say.

We would like to think so, and we are -- we're staying in that muted hiring mode, as you put it, at least as of now.

We take advantage of opportunities as they come up, if we're particularly interested.

Otherwise, we are basically, as Katherine implied, spending time absorbing people that are new to the Company, not new to the business, necessarily, but new to the Company, and they are becoming effective and efficient quite rapidly, and that's very positive.

Great.

Thanks for taking my questions.

Julianna Balicka, KBW.

I just wanted to follow up on a couple topics that have been discussed.

On the gain on sale margin, the 2.6%, do you have a breakdown of that one, and I'm sorry if I missed it, between the margin on the non-agency loans that you sold and the margin on the agency loans that you sold?

No, we don't, Julianna.

We had good execution this quarter on all of the loans that we've sold.

So if we think into 2013, and you had alluded to the gain on sale income line trending back down to your historical levels, is it because you will likely sell a lower amount of balances or is it because the particular gain on sale, the 2.6% will drop back down to the 1.5%, 1% range, what have you?

First, let me be clear.

We don't know where the gain on sale is going.

What we were doing was providing you with some historical perspective to try to put into context the magnitude of the unusual nature of the gain.

Our volume of sale, as Katherine implied, is more driven by the mix of the product we originate.

We do not want to hold 30 and 15 fixed.

The gain on sale is driven by the Fed's activity primarily, actually, and the quality of our product, but more the former than the latter, although the latter matters a lot.

We wouldn't necessarily anticipate at any particular quarter whether it's going to be better or worse than the last quarter.

We just don't know.

The volume we have a slightly better handle on than the price.

Price is market price and it's hard to call.

Okay.

That makes sense.

And then just to follow-up on that margin.

You had discussed declining outlook for the core margin as some of your levers have already been pulled.

In thinking about your margin decreasing as you manage next year, to the extent that you're net interest income starts to decline, all things being equal, would you then push up growth in order to maintain growing net interest income with a declining margin, or how do you think about that trade-off?

Well, the net interest income versus the NIM might not decline.

The question is, can net interest income growth with good quality loans offset or make up for the NIM compression on the total balance sheet.

We don't drive growth, however, ever to accomplish any particular objective.

We only do good business when we see it.

And so the volume of our business is almost always a result of the amount of good business we've been able to track as opposed to a target or an objective, which we do not operate with.

Okay.

Very good.

And then final question, and I'll step back.

As you think about the momentum behind the re-fi market, which of course has been an important part of your business line as well, how do you think about what will be -- how you will be reacting once that starts to peak, whether it peaks in the third quarter of this year or the beginning of next year?

What's your thoughts about the top down versus bottom up thought of managing for the turn in the market?

Well, this is Willis.

As the re-fi market dissipates, what we would expect to see is not only lower volume but lower prepayments within our balance sheet as well.

So our goal would be to continue to originate sufficient amount of loans to achieve our growth targets, and if we were able to have extra loans, we would then sell them into the marketplace.

Okay.

Very good.

Thank you very much.

There are no further questions at this time.

I will now turn the conference over to Jim Herbert for closing remarks.

Thank you all very much for today.

Obviously, the year and the quarter were good, and we're pleased with it, and 2013 is starting off with some challenges but with a lot of activity.

Thanks very much.

Thank you.

This concludes today's conference call.

You may now disconnect.