First Republic Bank (FRC) 2013 Q1 法說會逐字稿

Welcome to the First Republic Bank first-quarter 2013 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.

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 first-quarter 2013 conference call.

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

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 could 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.

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

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

This was an outstanding first quarter.

We are very pleased.

First Republic reported record earnings, record first-quarter loan origination volume, record loan sale gains, and very strong growth in wealth management assets as well as -- and revenue.

Business banking also continues to do quite well, and our asset quality remains very strong.

Because of our strong results, we are also pleased to announce an increase in the regular quarterly dividend to $0.12 per share.

Let me focus on a couple of key financial highlights.

We sold more loans than we normally do in the quarter, and we made a very nice profit.

Our Q2 pipeline, loan pipeline, is extremely strong.

Wealth management is very strong.

Deposit growth was flat, but that appears to be due primarily to clients putting money to work in the equity and real estate markets.

Net interest margin pressure is real, but we are still doing a great deal of business.

If we would have kept loans instead of selling them, loan growth would have been annualized at about 11%, which is only slightly lower than normal.

Core net income was up 55% compared to the first-quarter a year ago and core earnings were up fully 47% per share.

Also, book value per share continues to grow rather nicely and is now up 50% since we bought the Bank back less than three years ago, and is $22.96 per share.

Also quite importantly, the ownership of our original private equity investor group, which backed us to buy the Bank back, continued to decline in the first quarter and now represents less than 10%.

That's down all the way from 73% at the time of our IPO in December of 2010.

During the quarter, mortgage banking gains were particularly strong.

Let me give some additional perspective to this.

The favorable conditions in the secondary market, which has recovered tremendously recently, allowed us to originate a greater volume of longer-term fixed-rate loans.

This is in response, in fact, to client demand.

Due to low term interest rates in all financing markets, clients increasingly want longer-term fixed-rate loans, which is not surprising.

We sell most of these loans rather than keep them on the balance sheet and always have historically, primarily for asset liability matching reasons.

In the first quarter, we chose to capitalize on the strong pricing and robust demand for the high-quality loans that we originate and we sold an unusually large volume.

Gains in the quarter were obviously quite good, twice the average for last year.

Whether we hold a loan or sell it, the transaction and the flow of business creates an opportunity to satisfy an existing client or to acquire a new client.

In either instance, we also have a very good opportunity to cross-sell banking and wealth management products, which we do quite successfully.

Plus the additional volume, whether kept or sold, is very valuable to us.

As this quarter demonstrates amply, mortgage banking remains a very good alternative funding source and business for First Republic, and is one I note that we have been quite active in since we started the Bank in 1985.

Despite the strength of the first-quarter results, some challenges are ahead.

They include continuing pressure on net interest margin; potentially less attractive pricing in the secondary loan market -- hard to tell; and so far this year, deposit growth has been a bit of a challenge for us, which we will discuss more in a moment.

Slower deposit growth does, however, appear to be not only a function of lower rates, but also reflects the positive outlook of our clients, interestingly enough.

In effect, our clients tend to be on the leading edge of investing and many drew down deposits in the first quarter to very actively take part in the real estate and equity market improvements that occurred, as well as business expansion opportunities.

Now let me turn the call over to Katherine.

Thank you, Jim.

I'd like to discuss a key number of factors for this quarter.

Compared to the first quarter a year ago, Bank assets were up 18% year over year.

Loan originations were up 12%.

As Jim noted, it was our highest first quarter ever for loan originations.

First quarter is usually seasonally a bit lower in terms of origination.

Loans outstanding grew 20%, and this is despite record loan sales.

Deposits year-over-year increased 15%, and wealth management assets rose fully 60%.

This includes assets from the recent purchase of Luminous, along with strong asset growth from our base of existing business.

Lending activity continues to be very strong, and we were extremely pleased with our current loan pipeline.

The success of our lending is driven by our reputation in the marketplace, the quality and efforts of our relationship managers, the efficiency of our loan closing process and the economic strength in our markets.

Let me spend a few minutes on loan sales, since they were such a meaningful part of the quarter.

We continue to benefit from strong pricing and strong demand for our high-quality home loans.

Loan sales volume for the first quarter was $1.2 billion.

This is two times the quarterly average in 2012.

Loan sale pricing was also very good.

The gain on sale was 2.1% of loans sold.

This is approximately one third higher than the 2012 quarterly average.

Of the loans we sold, 37% were interest-only loans.

The higher volume of loan sales contributed to lower loan growth on our balance sheet.

As Jim said, if we had operated at last year's quarterly average of about $600 million in loan sales, our loan portfolio would have grown at an annualized rate of 11% this quarter.

This was a deliberate decision to take advantage of the favorable conditions in the secondary mortgage market.

We are very pleased with the growth in wealth management.

Wealth management fees increased 71% compared to the first quarter a year ago.

Luminous contributed $7.6 million in fees; this is 25% of private wealth management fees for the quarter.

The remaining growth in wealth management fees came from cross-selling bank clients and from portfolio managers and wealth advisors acquiring new clients.

Wealth management assets grew 11% in the quarter, or $3.6 billion.

More than 75% of this growth came from net client inflows.

Overall, we are very pleased with the quarter.

I would now like to turn the call over to Mike Selfridge.

Thanks, Katherine.

Let me comment on conditions in our geographic markets and then talk about deposits, business banking and loan originations.

The San Francisco Bay Area economy is outperforming the broader US economy, with very strong regional trends in employment and housing.

This is driven by several factors, including the vibrant innovation sector in Silicon Valley.

The Bay Area, as a reminder, accounts for approximately half of our loan outstandings.

Boston and New York, which are primarily knowledge and professional services-based economies, also outperformed the US as a whole.

And while Southern California did not grow as fast as our other markets, we are seeing clear signs of improvement, particularly in housing.

Our new First Republic Markets Economic Index also confirms that our key markets are doing better than the national average.

This index compares economic activity in First Republic's markets with the national economy.

It will be updated quarterly as a part of our investor presentation, which is available in the Investor Relations section of our website.

Loan originations for the quarter were $3.5 billion.

Home loans accounted for 65% of total originations, of which 30% were for purchases.

Multifamily lending was strong in the quarter, as evidenced by the 9% increase in outstanding loan balances.

We remain pleased with the development of our business banking franchise.

Our volume of new business loans was good, and our pipeline is strong.

On average, our business banking brings in $4.00 of deposits for every dollar of loan balances.

Our business banking strategy continues to be highly effective.

Deposit activity slowed in the first quarter as total deposits declined 1% from the previous quarter.

And as Jim noted earlier, our clients began to move money into real estate and equity markets.

Importantly, however, checking deposits continued to be more than half of total deposits.

As expected, some deposits moved out of the Bank due to elimination of the unlimited deposit insurance.

Because of the expiration of deposit insurance, we reclassified $800 million of deposits from non-interest-bearing checking to interest-bearing checking accounts, which pay one basis point.

We would note that year-over-year, deposits were up 15%.

Although focused on this, we are not overly concerned.

New account opening rates are very strong.

As part of our continued efforts to grow our franchise and better serve our clients, we recently opened a preferred banking office in Palm Beach and at Madison Avenue and 56th Street in Manhattan.

We expect to expand our deposit franchise by opening six more offices in 2013.

Overall, we are quite pleased with our results.

And now I would like to turn this call over to Willis Newton, our CFO.

Thanks, Mike.

I have some color to add to a few of the numbers.

Our net loan growth is impacted by the rate at which our borrowers repay their loans.

The repayment rate on our term real estate loans last quarter was relatively consistent with the prior few quarters at the 18% to 20% annualized rate.

However, we did experience a higher level of repayment on our home equity lines of credit, our business lines and other lines of credit.

The average utilization of our HELOCs declined 3% to 43%.

There was a similar decline of 3% in our business line utilizations to 33%.

We believe this is mostly a seasonal paydown from a peak level at year-end.

For the first quarter, core net interest income was up 1.3% compared with the prior quarter.

Our core net interest margin was 3.42%, down four basis points.

Our NIM will continue to be under pressure due to the low interest rates on new loans, the sale of higher-yielding fixed-rate loans and deposit costs which really can't go much lower.

In aggregate, the increase in our non-interest expense as compared with the prior quarter is the result of two unusual items and the Luminous acquisition.

First, as expected, our payroll taxes added $5.4 million to salary and benefits in the first quarter.

This is a one-time first-quarter-only cost.

Secondly, the cost of tax credit investments rose $5.1 million.

As Mike Roffler will discuss in a minute, these costs are projected over each calendar year and are completely offset by higher tax benefits.

As to Luminous, in the initial quarter, they added $2.2 million to salary and benefits and $2.1 million to the amortization of intangible assets.

However, these costs are more than offset by their incremental revenues.

Our core efficiency ratio was 57.3%.

We realize this ratio did benefit from the unusually large gain on loan sales.

If we use about half of the first quarter's gains, our core efficiency ratio would be 59.6%.

Our credit quality remained excellent.

Nonperforming assets were a low 14 basis points at quarter-end, and net charge-offs totaled less than one basis point.

It was indeed a positive quarter.

Mike?

Thanks, Willis.

During the first quarter, our costs associated with tax credit investments grew $5 million from the fourth quarter to approximately $11 million, as we continue to invest in the housing needs of our communities over the past few years.

Let me briefly explain this expense.

The Bank invests in funds that operate low-income housing properties and receive benefits in the form of tax credits.

As we record these benefits, we need to reduce our recorded investment by a charge to noninterest expense.

While we have increased quarterly expenses due to our additional investments in low-income housing, we also benefited from higher tax credits.

These increased tax credits reduced our effective tax rate approximately 3% and are the primary reason our effective tax rate has declined to 26.5%.

In 2013, we project the run rate for this expense and the corresponding tax credits would be approximately at the first quarter's level for the remainder of the year.

There is a current proposal with the FASB that would change the separate recording of this expense in the income statement.

In our case, it would reduce operating expenses by moving this cost to income tax expense.

However, it would not change net income.

This reporting change would improve our reported efficiency ratio while increasing our effective tax rate.

We support this clarifying proposal, which could possibly become effective late in 2013.

Now let me turn the call back to Jim.

Thanks very much, everyone.

I would reiterate that we are very pleased with the first-quarter results.

Core earnings per share were very strong.

Substantial increase in book value per share continues.

Ongoing diversification of our shareholder base has been quite successful.

The strong growth in the franchise, particularly wealth management, has added up to a very good quarter.

The increased dividend we are pleased to be able to report.

What you saw in the first quarter was really the resiliency and flexibility of our overall model.

While growing rapidly, acquiring clients, continuing to cross-sell, we were also opportunistic in selling loans because of the very favorable pricing in the secondary market.

Our ability to do so has relied upon many years of active mortgage banking and building a reputation in that secondary market area.

I wouldn't make too much out of one quarter's loan sale volume one way or the other.

As Katherine said, our backlog remains very strong, business remains good, and very importantly, our markets are strong and expanding relatively rapidly.

Thanks for your time.

We've would be happy to take questions.

Operator?

(Operator Instructions) Steven Alexopoulos, JPMorgan.

I wanted to start, Jim, a couple of questions on the loan side.

Looking at the originations declining from $4.3 billion last quarter to $3.5 billion this quarter, from your view, is this an expected seasonal decline, or were there other factors at play, maybe a shift in refi purchase or something?

No, it was pretty much seasonal, I would say, Steve.

Okay.

And then Jim, if we look at the decline in the funded loan volume percentage, was this tied to more of a customer appetite for fixed rate loans or were you more active in selling variable rate production as well?

Katherine, do you want to answer that?

We sold fixed-rate or long-term hybrid fixed rate loans.

Okay.

But was that similar like through the quarter?

Because I know rates moved up early in the quarter.

I wasn't sure if you saw maybe more of an appetite for fixed rate early in the quarter.

No, we tend to take the loans that our clients are asking for, be they fixed or adjustable or hybrid, and resell those that have a longer duration.

And (multiple speakers) all the time.

Okay.

So if we think about the funded volumes (multiple speakers).

Okay.

Got it.

So if we think about the funded volumes, should they be around the $1 billion level?

Is that what you're thinking?

Because I know they've been running around 2, right?

Funded volume, well, our loan originations were down slightly from the fourth quarter, but they were up significantly from first quarter of last year.

And what we sell -- we should think of us as having sold about twice as much as we usually sell.

Okay.

But should we think about what ends up in portfolio as declining?

Because I think the gross was around -- it may have been running around $2 billion, $2.2 billion, right, and we're down to 900 some odd million this quarter?

The biggest reason for that was the higher loan sales and the fact that some of our lines had lower utilization than they had a quarter ago.

That was what Willis was getting at when he pointed out that on the balance sheet loans, the CPR is running about the same as it has been.

The only real decline on the balance sheet was the draw under HELOCs and bank and business lines, which at least, at this point, looks to us like it is a seasonal paydown.

Got it.

Jim, just one final question.

On the incremental NIM, you had spoken about 3%-ish is where new business was going on.

Is that still about the case?

Yes, maybe a little lower.

A little lower, okay.

Okay, thanks for the color.

Erika Penala, Bank of America Merrill Lynch.

Good afternoon.

I just wanted to follow up on Steve's question, because it seems like the pace in both loan growth and mortgage banking were similarly unusual relative to what we are used to seeing in 2012.

I think, Jim, you mentioned 11% loan growth this quarter if you hadn't sold, like Katherine mentioned, twice as much.

But that pace about 24% last year.

And I understand that you sold twice as much as usual, but I think the mortgage banking number in the beginning of last year was much smaller, at about a $5 million pace, than it was in the beginning of the year.

I guess could you give us a sense of what we should be expecting in terms of how those numbers can shake out for the rest of the year?

Because it just seems unusual just for this quarter relative to if we look at the historical trends in all of 2012.

I think -- I don't think it's -- we are not feeling as if it is that unusual.

The quarter was, as we said, the best first quarter we've ever had.

But it wasn't up 20% over last year, so to speak.

And I would say that this time last year was very, very strong, as you know.

However, we are about as busy as we've ever been.

And our backlog, as Katherine referred to earlier, is extremely strong.

So I think it is a combination of percentage growth on larger base a little bit.

And -- because the base this year is about 20% above the base at this time last year.

And then you have the loan sale decision on our part, unusually large loan sale decision on our part.

So the numbers are -- I would say the 11%, 12%, 13% range is probably how it feels like it is operating to us, net growth.

The thing that is a little unusual for us was the paydown of both HELOCs and business lines from the end of the year.

It's strictly a guess, but I'm going to guess that will climb for the rest of the year, but we don't really know.

Got it.

And I know this fluctuates so much, but is it fair to assume a $10 million quarterly run rate on mortgage banking?

Boy, you know, it does fluctuate, and we actually don't know.

The market does continue at this very moment to be strong.

Okay.

And if I could just slip one more in.

In terms of your level of cash, I know that in previous calls we had talked about the deployment of this, and that seemed to happen this quarter.

Are we at the correct level -- or sort of the -- not correct, but the right level of cash for your size balance sheet at this point?

And if we could just get a little bit more color in terms of what drove the significant decline in securities yields quarter over quarter and what we should expect given your reinvestment strategy going forward.

The level of cash is about where we would like to see it -- $500 million, $700 million range for the balance sheet at its current size.

The reinvestment rate on investments was driven to some extent by a slight mix change in the investments.

Willis, do you want to speak to that?

Sure, Jim.

During the quarter, we added to our portfolio of available-for-sale investments some high-quality adjustable-rate CLO paper.

And that had a lower-than-average yield relative to the municipals and other assets that were in that category.

Got it.

Thank you for taking my questions.

Herman Chan, Wells Fargo Securities.

Thanks.

The flat balances in commercial business, was there anything in the quarter that drove the flow over to the loan growth, aside from the lower utilization rate?

I'm sorry, Herman.

Could you repeat that again?

Sure.

The flat balances in commercial business, it looks like it was flat quarter over quarter.

And the commentary mentioned that utilization rate in some of the lines was lower versus the fourth quarter.

Was that really the driver for the flat balances in Q1?

Yes, it was.

That was predominately the lower utilization of lines of credits, and again, as we mentioned, the acquisition of new clients remains very good.

Great.

And I just what to get an update on the recent hires that you guys have done in recent years.

Now that they've been integrated into the First Republic culture, how is their productivity looking relative to expectations?

Have these hires turned to profit in the normal one to two year time frame?

The hires are doing exactly as well as we expected.

They are turning a profit, as we expected, depending on when we hire them.

We are very pleased that they are coming onstream and over the next several quarters, we will continue to see very good production from them.

Great.

Thank you very much.

Ken Zerbe, Morgan Stanley.

Great, thanks.

My question -- in terms of the funding of your loans, you talked this quarter about deposits, how they really didn't grow that much as your customers were doing other things with their money.

When you think long-term, if, heaven forbid, the equity market keeps going up, if customers still have a use for their funds or their deposits, how do you guys think about funding?

Or kind of where is the incremental funding source for the deposits?

And maybe a different question is if your expectations or deposits stay I'm going to say flattish, does that naturally imply that we just sell off or that you sell off a lot more of the loans through securitizations?

It is a good question, and it's really a matter of finding a balance.

Your comment about, heaven forbid, the markets stay good, let's presume they do for a moment to be optimistic, and let's presume the real estate stays good as well.

Then our real challenge is to have the growth rate -- the rate of our acquisition of new clients outrun the growth rate of the loan demand.

We have always looked at mortgage banking as a valve, as a control valve.

We can sell assets at a profit almost always.

If you go back many, many, many quarters, 15, 20 quarters, you would find that we very seldom did not make a profit in the sale -- in the mortgage banking market.

A few quarters we didn't, but not very often.

And so we have a valve that that is a control mechanism for managing the growth of the enterprise.

We find that actually extremely attractive and somewhat unique in the model versus others, and we utilize it as we see appropriate.

We also use it for asset liability matching.

I don't really want to be booking low 3% 30-year fixed-rate mortgages at this point, and we're not going to.

And so what we have to do is outrun the decline in the excess liquidity that our particular type of clients -- remind yourself of the makeup of the client base of the Bank.

It is not a broadly diversified, mass consumer funding source.

It is a high -- it is a concentrated version of a type, mostly people who have self-made a fair amount of money.

They tend to be very activist.

When they see a turn, they act.

And that is what is going on.

We saw the run-up of the size of accounts on the average, both, actually, business and consumer.

And we basically took the approach of managing that run-up in our asset liability matching thinking by putting the amount of run-up in a more volatile category.

That has proven to be somewhat correct.

And we put it there not for the risk on the downside in the economy, but in fact for the risk on the upside.

What has happened is that it has actually taken place.

That got coupled with the termination of unlimited insurance, which impacted our deposit base probably slightly more than other deposit bases.

That hasn't been a particularly large thing, as near as we can tell, but it clearly has been a slight negative.

And so we are at a particular point where we just need to outgrow that dip, whether it's one-time or not; I think it probably is.

So it is going to be a new client acquisition challenge, which I think we're up to.

Okay, great.

And just a quick follow-up.

The loans that were sold in the quarter, were they all newly-originated loans, or was there a little bit longer -- I don't know -- life loans in there?

Meaning did you originate them recently?

They were both newly-originated and originated in prior quarters.

What we do when we go to sell loans is we decide what type we are going to sell and we accumulate them all and we put them out for bid.

And we don't look at when we originated them.

But some of those from prior quarters could have had higher yields than where you would have originated them currently?

Not really.

Most of them were originated in the last three quarters, and the yields were about the same.

Got it.

Okay.

Thank you very much.

Dave Rochester, Deutsche Bank.

Good morning, guys.

Jim, back on the loan pipeline just real quick, you mentioned that is extremely strong.

Was just wondering if there are any particular areas of strength in terms of product or geography there.

And then was also wondering if you are seeing just a typical seasonal uptick in the pipeline coming into 2Q or if you are seeing more strength given your clients are getting more confident with what they are seeing in the economy.

We are seeing uptick across the board and our pipeline is strong compared to where it was a quarter ago.

It is also strong compared to where it was a year ago.

So that would say it is more than seasonal.

Our clients, as Jim has said, are quite active, and the markets are good and they are very engaged in buying things and we are financing them.

Great.

And then you mentioned -- I think I caught this -- the incremental NIM being a little less than 3% today.

Did I hear that right?

Yes, on the new bookings.

Not including business banking.

Okay, so it is all-in loan production that is still above the 3%, I would guess (multiple speakers).

All-in loan production is a bit above 3%.

That's correct.

Would it be fair to say that spreads have continued to be relatively stable versus last quarter then?

I think that's right, yes.

I would say so.

Okay, great.

Just one last one real quick.

You mentioned you are down to six branches that are opening this year.

I was just wondering how much of those expenses are now in the run rate at this point and when those will fully be in the numbers.

Probably about two thirds to three quarters of those expenses are in the numbers.

They are under construction.

The signs are up.

We are paying the rent.

But we just don't have them fully staffed and we are not depreciating.

Perfect.

Great.

Thanks, guys.

Casey Haire, Jefferies.

Good morning, guys.

So I was wondering if you could give us an update on how the gain on sale margins are holding up versus that [213] thus far in the quarter.

Gain on sale is always something we are not sure of until we've put the loans out to sell, but it seems like they will be relatively good.

And we don't predict, but so far, the secondary market has been holding up nicely.

Okay, and then the multifamily bucket was down.

That has prior to this quarter had some decent momentum.

I was just wondering if you guys could provide some more color as to what is driving that.

We are originating multifamily and commercial real estate loans.

We have a few more people hired who do that business and our clients are interested in that asset category.

Okay.

And then just lastly, on the CLO floaters that you guys put on in the securities book this quarter, was that relatively spread throughout or was that front-loaded or back-loaded?

Just trying to get a sense on timing, how much of it hit the quarter.

That was relatively evenly through the quarter.

It was mostly done by, I'd say, the middle of March.

And it is adjustable-rate, and we are pleased to have added that asset category.

We got into it a little early, and so the most recent tightening on spreads has slowed down our investing.

Okay, got you.

Just the incremental yield on that, did you guys disclose that?

We did not.

Okay, thank you.

Joe Morford, RBC Capital Markets.

Thanks.

Good morning, everyone.

I guess just a quick follow-up.

You talk about a sizable increase in the securities portfolio overall.

Was it partly because the loan growth was slower this quarter, or what should we expect in terms of incremental securities growth, particularly if the deposits aren't growing as much?

I think we are pretty comfortable with where our securities portfolio is right now in terms of a percentage of our assets as a whole and where the yields are.

Okay.

And then the other question was how much did prepayment fees or prepayment penalties contribute to net interest income this quarter, and how would that have compared with last quarter, say?

Joe, it was probably a little bit lower than it had been in prior quarters, which I think we are running at about six or seven basis points.

So it was just a little bit lower.

Okay, that's helpful.

Thanks so much.

Lana Chan, BMO Capital Markets.

Good afternoon.

Could you -- is there any way to quantify how much of the, I guess, money shift from deposits you saw into your wealth management assets this quarter?

Is that possible to quantify?

I don't think we can quantify that.

We had a terrific quarter in wealth management.

We grew $3.6 billion, and 75% of that was net new assets.

But we really don't have a way to judge how much shifted from deposits.

Many of them were new clients and so that wouldn't have been a deposit shift.

It is worth noting -- you are on a point that is very attractive to us.

It is worth noting that business banking and wealth management now fund more than half our deposits in total.

That is quite a game-changer in the last sort of 18 to 24 months.

Okay, thank you.

And on the loan loss provision, that came in lower than expected this quarter.

What is the expectations for the rest of the year?

We will continue to provide for loan losses given the growth in the newly-originated loans that we are making.

And as we had a lower growth in loans and we had lower growth in our business loans, that is what contributed to the lower provision.

If we continue to grow similar to the growth in last year's quarters, we would be providing at a similar rate.

Okay, great.

Thanks, Willis.

Aaron Deer, Sandler O'Neill & Partners.

Thanks.

Hello, everyone.

Actually, just following up on that last question, Willis, what is the kind of basis points provision that you're giving delineating between, say, new residential mortgages versus what you are doing on the commercial side?

Well, we provide at the lowest level for our higher quality home loans, and our business lending is more at the 180 to 2% level.

So when our business loans don't grow that much, the average incremental provision has been running around 60 basis points.

Okay.

And then Katherine, discussing the pipeline and expectations going forward, it sounds like the pipelines are still very strong.

Can you break that out also kind of between what is going on on the residential side versus the commercial side, and where you expect growth to predominately come from or kind of how you see that playing out?

That's a very good question.

We actually don't break out our pipeline by either geography or by type.

So what we are expecting is the pipeline is strong across most of our types of lending and most of our geographies.

I'm sorry to say we don't have that breakout right now.

Okay.

Thanks for taking my questions.

Matthew Clark, Credit Suisse.

Good morning, guys.

Can you update us maybe first on QM and how maybe the loan sales this quarter may have -- whether or not that played a role, anticipation of QM, and your thoughts maybe on pricing, when you start to see the risk retention rules come out and implementation?

We did sell 37% IO loans this quarter.

And that was the percentage that was in the buckets that we decided to sell.

So we didn't go out of our way to sell it, but those were the ones that we sold.

And there didn't seem to be any difference in pricing on IO loans versus fully amortizing loans.

And that 37% compares to what in the prior quarter?

It is probably a tad bit higher, but it is mostly focused on, again, what the client demand was in those different product types.

Okay.

And on the tax rate as we go into 2014, is it fair to assume that will stay at that 26.5% for now?

Well, the tax rate, once again, is coupled with the increase in the expense item that we talked about.

So it would have been 29.5% if you take that expense item and put it down into the tax line.

So if you are going to follow the way we are currently reporting our numbers, 26.5% would be the level that we would expect, and that we would have a run rate on a quarterly basis of about $11 million in the noninterest expense line item.

Got it.

Okay, that's it.

Thanks.

Paul Miller, FBR Capital Markets.

This is actually [Thomas Laterno] on behalf of Paul.

Most of my questions have already been answered, but I do have one quick follow-up, just to make sure I'm thinking about this the right way.

You've had an elevated level of loan sales for a few quarters now.

Would it be fair to say that gain-on-sale margins would have to sort of retreat back to sort of -- 2Q 2012, I believe they were just north of 1%.

Would it be fair to say they would have to go well south of here for you to start portfolioing more product?

How should I think about that?

That's a good question, Thomas.

The answer is we are driven to some extent by profits.

But each quarter, we deliver out on a flow basis a certain amount of loans as well, which end up in the sold category.

Agency delivery is that way.

We have some forward commitment lock-ins, so to speak, with various buyers, loan by loan.

And so we have always had some loan sales, ranging dramatically obviously in the 2008, 2009 and 2010 period, down to almost zero.

But since then, they fluctuate.

Pricing is one of the elements that is taken into consideration.

Not wanting to hold long-term fixed rate is the next and actually the most important element.

We simply will not hold a 30-year fixed-rate mortgage, and so it is going to be sold.

And if people want those mortgages, then we're going to be selling a little more.

But it's very important to think about this in the right way.

We sell eight other things on the average to a mortgage client.

If we can take the mortgage and lay it off into the secondary market at a very handsome profit, keep servicing and keep the eight other things, that is the single best return on capital model that exists for this Bank.

Right.

That's fair.

So this is not the bad news.

This is the good news.

I understand.

I was just trying to make sure I'm thinking about it the right way.

Thanks for taking my question, guys.

Julianna Balicka, Keefe, Bruyette & Woods.

Good morning.

I just wanted to follow up on a couple of topics that were even discussed.

In terms of thinking about volumes which you choose to sell versus portfolio, if your pipelines continue to be strong and your markets continue to do well, although you called this quarter unusually strong in terms of gain on sale, there really isn't any particularly good reason to consider this to be unusual and that it wouldn't necessarily recur.

I mean, it could be recurring for this year.

Theoretically it could be, yes.

All things being equal, okay.

And then in terms of the gain on sale margins, could you differentiate between what you were seeing on conforming versus nonconforming loans?

At the moment, the conforming loan margins are slightly lower than the jumbos.

Right, but can we get a little bit more quantification?

I don't think we are giving out that quantification right now, but it is an unusual anomaly right now that it is a little bit less, a little bit lower.

That's not normal.

Normally, you get higher pricing on conforming, but at this moment we are not.

Okay, got it.

And then switching topics for a second to the wealth management, the asset growth has been really good.

In terms of thinking about how to improve the profitability of the assets that you are gathering, how should we think about the outlook for profitability growth -- in terms of the revenues generated off the assets and stuff like that?

One of the biggest differentiators is which assets we're booking.

And so we earn our highest return on investment advisory.

We also do some custody and some money market mutual funds, where we have very low basis points.

So as you see the growth in investment advisory and trust, which is hard to grow quickly, but primarily the investment advisory, that will lead to slightly higher overall growth in the basis points on our assets.

It is a mix issue.

Okay, very good.

Thank you very much.

Tim Coffey, FIG Partners.

Thanks.

Good morning.

Does the Company have a target or preferred loan-to-deposit ratio?

I wouldn't say we operate with a target.

If you look at us over a fairly extended period of time, we tend to revolve right around 100%.

Okay.

How do you feel about where the Company is right now in the loan-to-deposit ratio?

I would like to see the deposits catch up a little bit with the loans, but I am not very worried about it.

Okay, okay.

And then second question -- and I'm sorry if I missed this earlier -- but the number of buyers for your non-agency mortgages, has that number increased recently, or is there any kind of change in the buyer market right there?

As you may have noticed, there are a lot more securitizations being done.

So that has changed the mix a little bit to the people who are securitizing mortgages, and there are more of them.

But we have always a good number of bidders when we put out a package.

Mix changes from time to time.

This is more heavily securitizations.

All right.

Do you have any opportunity to forward sell contracts on the non-agency mortgages at this point?

We could perhaps do that, but that's not the way we choose to operate.

When we are ready to sell loans, we put out a package and there always are some fixed or long-term adjustable-rate loans that we could sell.

We get better pricing when we put it out to the bid rather than forward.

Our experience in this area is instructive in that regard, I think, because we never have to sell mortgages.

It's discretionary.

And being in that position is always the best, rather than locking in forward and trying to anticipate forward events.

Okay.

Those are my questions.

Thank you very much.

There are no further questions in queue.

I now turn the call over to Jim Herbert, Chairman and Chief Executive Officer, for any closing comments.

Okay.

Well, thank you all very much.

We appreciate it.

It was a good quarter from our perspective, and the business has a very good backlog and a lot of momentum.

We look forward to speaking to everybody during the next quarter.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.