First Republic Bank (FRC) 2013 Q2 法說會逐字稿

Welcome to the First Republic Bank's second-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 second-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; and Willis Newton, Chief Financial Officer.

Before I hand the call over to Jim, please note that any forward-looking statements made during this call, or 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 financial and business 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 reports 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 would like to turn the call over to Jim Herbert.

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

This was a very good quarter.

Let me start with some highlights.

First Republic reported strong earnings, which reflected continued excellent performance across our entire enterprise.

Core net income was up 37% compared to the same quarter last year, and core earnings per share rose 28%.

Our loan volume, at $5.3 billion, was the best we've ever had.

Deposit growth was quite good.

We resumed our momentum in deposit gathering, increasing both liquid deposits and certificates.

Wealth management had an outstanding quarter.

And business banking continued to perform quite well, achieving both strong deposit growth and new loan originations.

Most importantly of all, our asset quality remains strong, as it has throughout the Bank's history.

The sum of all this book value per share has risen 13% year-over-year and is now $23.50.

Our loan portfolio grew by $2.1 billion in the quarter.

This growth was funded by deposits, $1.4 billion, plus some longer-term fixed-rate FHLB advances and the issuance of perpetual fixed-rate preferred stock.

These longer-term liabilities are an integral part of our asset liability matching strategy.

We view the recent rise in rates generally as a positive long-term.

We will, however, continue to face some margin pressure in the upcoming quarters, as some of our higher rate loans continue to refinance.

We are offsetting this a bit and having some success in increasing the composite rate on our newer loans.

Let me briefly touch on the recently finalized Basel III capital rules.

The results are generally favorable for First Republic.

Specifically, and quite importantly, our single-family home loans, many of which have an interest-only period, will not incur an unfavorable capital risk-weighting after all.

This benefits the home loan business.

Our initial calculation indicates that are Tier 1 common equity ratio under these final rules would exceed 10.7%.

Let me also bring you up-to-date on our shareholder ownership position.

At the end of the second quarter, ownership by the initial private equity investors represent -- represented only 4.8%.

That is down from 73% at the time of the buyback three years ago.

Also, earlier this month, another initial investor, not private equity, sold about 5 million shares, approximately half their holdings.

Since the beginning of 2012, fully 62 million shares, almost 47% of our outstanding has been successfully absorbed into the market.

During the same time, our stocks has appreciated more than 30%.

Overall, it was a very good quarter and we are quite pleased.

Now let me turn the call over to Katherine.

Thank you, Jim.

Year-over-year loans outstanding were up 20% and deposits were up 17%.

We are pleased with this kind of annual growth rate.

We are also particularly pleased that wealth management assets are up 61%.

Compared to the first quarter, second quarter was very strong.

We continue to execute very well and build momentum in all of our markets.

Loans outstanding grew 7%, deposits increased 5%, and wealth management assets rose 6%.

Loan originations grew 34% compared to the same quarter a year ago.

This was our best quarter ever for loan originations.

Of our home loan originations, 44% were for purchases.

Loan demand in our markets continues to be good.

Our loan pipeline remains strong, as clients anticipate further rising rates and lock-in loans today.

Over the last year, many of our clients chose long-term fixed-rate loans.

Now, however, with rates rising, we are seeing increasing interest in hybrids or intermediate fixed-rate loans.

Early in the second quarter, we committed to sell long-term fixed-rate loans.

Loan sale volume in the quarter was $945 million.

The gain on sale was $8.8 million or 93 basis points.

Since the reemergence of the secondary market, our six quarter loan sale average has been approximately $750 million.

Given the rise in long-term rates and volatility in the mortgage markets, we're likely to sell fewer loans this quarter.

We are very pleased with the performance of our wealth management business.

Wealth management assets grew 6% or $2.1 billion during the quarter, and have grown 18% so far this year.

Wealth management revenues were up 69% from the second quarter a year ago.

Let me talk for a moment about the drivers of our wealth management business.

In December 2012, we purchased Luminous, and that integration is going very well.

Additionally, all of our wealth management professionals continue to bring new clients to First Republic, and our bankers are successfully cross-selling wealth management services to our banking clients.

Our brand and wealth management model is resonating well with clients in all of our geographies.

Wealth management fees were 10% of second-quarter core revenues, up from 7% a year ago.

Total revenue, including wealth management, was 19% of core revenues, up from 13% a year ago.

Overall, we are pleased with our performance and our position in the marketplace.

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

Thank you, Katherine.

Let me comment on conditions in our markets, loan and deposit growth, as well as business banking.

Our markets continue to outperform the broader US economy.

While the San Francisco Bay Area market is particularly strong, market conditions in Boston, New York, and Southern California are also very good.

Loan originations for the quarter were a record $5.3 billion.

Our business banking and income property originations were strong, and these categories made up about half of all balance sheet loan growth.

This reflects greater diversification in our originations.

Led by multifamily loans, our income property loans were up 8% for the quarter and 26% year-over-year.

Our business loan outstandings grew 17% this quarter and were up 50% year-over-year.

Our pipeline in our income property and business banking categories remains strong.

Moving to deposits, our total deposits grew 5%.

This is a nice turnaround after a slight decline last quarter.

We have put a sharper emphasis on deposit growth through our four channels, which include our preferred banking offices, business bankers, relationship managers, and our wealth advisors.

Of these channels, the vast majority of growth this quarter came from business banking.

At the same time, we increased rates slightly and this also helped our growth.

Our office system is working well in generating new deposit accounts.

However, our higher net worth clients are continuing to invest in equities and real estate, which has reduced the average account balances.

Offsetting this, we are having success attracting new deposit clients overall.

As noted, a substantial portion of deposit growth was in business banking.

Business banking deposits increased $12.8 billion and now account for 45% of total deposits.

As we have said before, business banking lending generates just over $4 in deposits for every $1 of loan balances outstanding.

I would now like to turn the call over to Willis Newton, our Chief Financial Officer.

Thank you, Mike, and good morning.

Since this quarter marks the end of our first three years of independence, I would like to review the status of our purchase accounting adjustments, which were made on July 1, 2010, when we were required to fair value our entire balance sheet.

Generally, this accounting is working out as expected.

It has added to our earnings and to our capital, and its impact is declining over time.

Let me talk about the major components.

We started with $760 million of loan discounts and have accreted two-thirds of this amount into income.

We had about $140 million of liability premiums, and 90% of these have been added to income.

As an offset, we had $125 million of intangible assets to be amortized and we have expensed half of this amount.

In three years, the after-tax effect of these items has been an addition of approximately $320 million to our net income and to our capital base.

This is approximately $2.50 of book value per share, and we have nearly $1 of book value per share to go.

As a management team, we continue to focus on core EPS, core earnings, core efficiency ratio, and our contractual loan yields.

We expect the purchase accounting adjustments will continue to have a positive but reduced impact on future results.

For the second quarter, the dollar amount of core net interest income continued to increase, and was up 2% compared to the prior quarter and 13% year-over-year.

Core net interest margin was 3.37%, down 5 basis points from the prior quarter.

Our NIM will continue to be under pressure due to the repayment of higher-yielding loans and deposit rates that were increased beginning in May.

Importantly, during the quarter, we added $900 million of fixed-rate FHLB advances.

These borrowings had an average term of four years and an average rate just under 1%.

Our position of fixed-rate borrowings at June 30 was $4.4 billion at an average rate of 1.58% and an average remaining term of 3.5 years.

We were very pleased to raise $190 million of perpetual preferred stock in April at a coupon of 5.5%.

This was Tier 1 capital that helped increase our leverage ratio to a very strong 9.8%.

Our run rate for total preferred stock dividends for future quarters will be $10.4 million.

Our core efficiency ratio was 58.9%, compared to 57.3% for the prior quarter, and was within the previously disclosed range of 58% to 62%.

Our projected tax rate for the full year of 2013 declined slightly during the quarter to 26.0%.

Now I will turn the call back over to Jim.

Thank you.

As Willis mentioned, it's been three years since we bought back the Bank, and I thought it might be interesting to highlight quickly our progress since then.

Deposits have grown by 16% per annum; loans have grown by 19% per annum; equity has grown by 25% per annum; wealth management assets have grown by 37% per annum; and our core EPS has grown by 25% per annum.

Book value per share has increased 16% per annum.

This momentum is the result of our core business model operating quite successfully.

This model is built on extraordinary service delivery; the continuing strength of our coastal markets; a carefully-targeted client segmentation; and very clean credit.

Thank you for joining us.

We'll be happy to take questions.

(Operator Instructions).

Ryan Nash, Goldman Sachs.

As we think about the trajectory of growth from here -- you're running at something like a 20% year clip; you talked about clients looking to redeploy capital back into equities and real estate.

So, can you just help us understand what that means for both loan and deposit growth from here?

Can we continue to see growth continue at the current levels, given the backup we have seen in rates?

Or should we expect deceleration from here?

Well, Ryan, obviously, we don't actually project forward, and it is a harder moment, as your question implies, to be accurate on anticipating what's going to happen.

There's kind of a conflicting thing that happens.

As rates begin to move up in the single-family business, a lot of people that have been thinking about doing something, kind of jump out to do it.

And that sort of occurred this last quarter.

And it probably will continue to occur a bit.

We don't think the move in rates thus far is much of an inhibitor to activity on the purchase side.

In fact, it may be none.

On the refinance side, it hasn't yet slowed it down very much, but it probably will.

And so -- but as Mike pointed out, a lot of our growth this last quarter, in fact, was not from single-family home lending, but from business banking and from multi-family and commercial real estate income property lending.

And those markets continue to be quite strong.

Business banking is harder to call because it's a little lumpier and comes a lot from new clients, which is an ongoing solicitation process.

The deposit growth side is seemingly back on track rather well.

A lot of it did come from business banking this past quarter, and it's a little harder to predict, again.

So I think that if you look at our long-term growth rate in sort of the mid to high-teens, that has been sustainable for a while.

And with a bend in the road here and there, that seems to be what we are able to do.

Great.

And just a follow-up on the capital -- you said somewhere around 10.7%.

Given the higher capital that you will now have, does this at all change the way you think about capital allocation?

And do you think that the easing of the risk-weightings could ease the competitive dynamic in your market?

Let me talk first about the capital calculation.

That was a capital calculation as if it was fully phased-in today with today's balance sheet.

And while we believe we will be complying easily with the new rules as we understand them today, we would remind you that we have a Tier 1 leverage ratio requirement of 8% that would continue through the middle of 2017 or four more years.

Right.

Okay, and then just on one other question.

Given where we have seen margins move to on gain on sale, I think we're back down below 1%, how should we think about the sales from here?

I know you mentioned they could be coming in.

Should we think about below that [7.50] average that you have had over the last six quarters?

This quarter could be a bit lower if the market continues to stay as it is.

The move up in rates and some volatility in the secondary markets has made our secondary market sales very quiet for now.

As soon as that changes, we'll be back.

But this quarter looks to be a bit more modest.

Great.

Thanks for taking my question.

Erika Penala, Bank of America Merrill Lynch.

My first question has to do with how to think about the core margin going forward.

Your deposits, as you mentioned during your prepared remarks, deposit cost did tick up.

And it seems like we should expect it to tick up again next quarter.

Is there a loan to deposit ratio target that you're shooting for, in terms of how we think about how much the deposit costs will go up going forward?

I mean, you're [107] this quarter; I'm just wondering -- what kind of uptick we should be modeling in?

And what should -- what our benchmark should be that we are looking to?

If your loan to deposit ratio, for example, is at 100%, does that mean that you can flatline your deposit costs absent an increase in the short end?

Erika, it's mostly driven, in fact, by the need for deposit growth a little bit, has an impact on it.

Also, the loan to deposit ratio, the gap, remember, on that is filled in our case primarily by fixed-rate term FHLB advances, which we use as a core asset liability matching tool.

And so one of that -- that's one of the reasons that Willis spelled-out carefully the cost of such funds at this point for you.

I think the move up in rates this last quarter was probably reflected composite, you know, sort of 2 to 4 basis points on deposits as a composite, is reflective of what we would have to do if the rates continue to move.

We were pleased with the result.

The results of our deposit growth, though, what drove the deposit growth really was redirecting the organization and the efforts of everybody towards deposit growth, which we had looked away from by mistake, quite frankly, in the first quarter a little bit.

And it's a reminder for us, at least, favorably, that we've got a pretty powerful machine when we get people focused.

Got it, okay.

And on the core loan yield side, we're getting a core loan yield for the quarter of about [3.58].

I guess I was wondering if you could give us a little bit of color as you're looking at your pipeline of new originations that are coming on for the second half of the year, how much of a core decline in loan yields can we expect?

Erika, let me first talk about the decline in the loan yield for the quarter versus the prior quarter.

That was about 3 basis points, as you probably noticed.

The core loan yield did benefit from slightly higher prepayment penalties, which were collected during the quarter.

That added about 8 basis points to the core loan yield, which is up a bit from the 5 to 6 range that we've been experiencing the last couple of quarters.

The other half of the NIM pressure was primarily in the deposit area.

And let me turn it back to Katherine, maybe to talk about what we're seeing as we go forward.

Well, new loan locks are coming in at a higher rate.

And although they're a small percentage of our total balance sheet, over time, that will cease the increase -- the pressure on margin, but it will take a while for that to fully come into play.

So each new loan that we lock, we like the rate, each new loan that we lock has a bit higher rate than it had two or three months ago.

And that's good.

When the loan rates of our current balance sheet are no longer refinanceable at such lower rates as they were before, we will see refinancings slow.

And that will also be good for us.

Okay, I just wanted to make sure, Katherine, that I understood what you were communicating.

In terms of the higher rate, are you talking about your origination -- your new loan locks are higher than loan locks last quarter?

Or is it higher than the current yield of the book?

They're higher than the loan locks last quarter.

Okay.

I'll follow-up off-line.

Thank you.

And Erika, that point, though, thank you for making it, is exactly the point.

The current -- the new loan locks, although higher than last quarter, are not yet above the total book.

Got it.

Thank you.

Thank you.

Joe Morford, RBC Capital Markets.

Just a follow-up, I guess, first on Erika's question on the deposit costs and all.

Do you plan to run other promotions this quarter?

Do you have other plans to secure additional longer-term funding, additional advances, things like that?

Well, I don't -- yes.

I wouldn't say that we ran -- I wouldn't call them promotions necessarily, Joe; we just adjusted.

We got a little behind the curve.

So the adjustments probably are in place for now and will stay there.

We are -- CD-wise, we are out advertising a little bit, although we may pull back on that a little.

But I think in terms of ongoing growth of the deposits, it feels pretty good right now.

Okay.

And then also just to follow up on that gain on sale margins, can you just talk a bit more about the driver to the decline there, relative to the first quarter, just since the drop was much greater than we've seen in some of the other banks who've reported so far?

Well, the first quarter gain on sale margin was very, very high.

Unusually high.

And considerably higher than our average over the many years we have been doing this.

So we were not surprised to see the decline.

And it's a function of the demand and the price on the rate on the loans that we sold.

Okay, thanks very much.

Steven Alexopoulos, JPMorgan.

I want to start, Jim, in the past, you talked about an incremental NIM on new business at around 3%.

With the curve steepening, what does this new level move to, roughly?

Well, it's a little higher than that, Steve.

How much higher I would be a little hesitant to say.

And one of the reasons is that the mix of multi-family, commercial and business banking has kind of altered the way we think about that slightly.

The percentage of those -- the growth in those loan books to our total was higher this quarter, as you noticed, than normal.

At the single-family level, I would say that that incremental margin is probably up 10 basis points, maybe; maybe 15.

And that's a guess.

I don't know the number, actually, but that's the magnitude of direction.

Jim, if you look at the ARMs that were held in portfolio, roughly how much higher are they going into the portfolio today?

About 25 to 40 basis points.

Okay.

Now you said ARMS, but we answered hybrid, I think.

We answered hybrid ARMs, that's correct.

Hybrid ARMs, right.

Okay.

And, obviously, a lot of focus on the deposits.

Just two questions.

So this quarter, you did make some adjustments to rate; total deposit costs were up 3 basis points.

Is there a carrythrough into next quarter from that repricing?

And maybe could you help us think about how much?

And then looking forward, do you think you need to keep bumping up deposit rates and continue that growth coming in?

Or are they now at a level where you can continue to drive the growth with the refocusing you have done?

I think the answer to that -- the first -- the answer to the first part is, we bumped the rates about mid-quarter, so you ought to figure that we had about a quarter of a quarter on the average worth of the bump.

And then, number two, it looks like the rates right now are fine.

Okay.

And just one final one, just given the steepening of the curve we've seen, have you seen a shift towards more ARM and variable-rate product in the 30-year fixed or in the mid-4's?

Absolutely, Steve.

We've seen that both in our single-family and our income property loans are coming in for five-year as opposed to seven-year ARMs, because people are going for the lower rates.

Okay, thanks for all the color.

Matthew Clark, Credit Suisse.

Maybe first on the production this quarter.

I know if you hone in on just single-family resi, any sense for maybe how much of that was attributed to kind of a rush to lock in?

And what might a more normal origination quarter -- I mean, do you -- it sounds like there's still that phenomenon is continuing here into the third quarter, but any sense for your expectation on how long that might sustain itself?

Yes, Matthew, I first wanted to just take a note to say that we did put in a detailed table on page 10 of the release describing the components of the total loan originations.

Previously, this had been in our 10-Q, but we wanted to be able to provide this information more timely to you this quarter.

So now I'll turn it back over to Katherine.

Thank you, Willis.

Part of it was, not surprisingly, a rush to lock in.

And that happened this -- in the second quarter significantly.

We have always focused a lot on the purchase market.

And purchases don't have quite as much to do with rates, as long as they're affordable.

And at these rates, we believe they still are.

Okay.

And on gain on sale margins, I assume they will continue to normalize, but drift a little bit lower here.

Any sense for where longer-term those margins might settle out for you guys?

We would expect them to be more like our average, which is a bit less than the 93 basis points.

Okay.

And then any update on QM, I guess your view of it?

I assume you obviously are going to remain committed to the product?

There's no reason not to, but just curious on any thoughts there.

We don't have any plans to change.

And, in fact, in each of our loan packages that we've sold, we've sold interest-only loans as well.

Any sense -- any change in pricing there?

Or no, not really?

The pricing change with rates going up is throughout the loan products.

Right, okay.

Thank you.

Casey Haire, Jefferies.

I'd like to dig in a little deeper on the deposit formation if I could.

One, through the quarter, is it something that got stronger with each month?

And then, two, was tax season -- if you could quantify the drag that tax season was with your client base?

Well, currently, our client base ended up paying more taxes, particularly just given that we are about 70% California.

And so they had both federal and state hits.

And that -- we did not get the normal deposit pump in the tax season that we have historically.

We got a bump, but it was lower than normal.

And that was one of the things that sort of we misjudged going into the spring -- the first quarter of the year.

And we may have kind of a new normal.

We're not sure.

The ongoing nature of the deposits growth, though, seems to be pretty strong.

This quarter was quite unusually almost all of the net growth came from business banking.

The -- but the retail office growth is picking up steam very nicely.

And we are booking a large number of new private clients.

At some point, the number of new private clients in their initial deposits with us will outrun the continuing decline of the average balance of our existing client base.

And that -- I don't know when, but those lines will cross, and then we'll have a net growth in that category again.

It really depends on how strong the economy comes and how much drawdown our existing client base has for real estate and equity investing.

Obviously, such activities, on the other hand, are very positive.

So we don't see it as a problem; it's just a bit of a challenge interim -- an interim challenge.

Okay, thanks.

And then on the -- switching to loans, like, could you provide a little more color on the commercial categories?

CRE and C&I, obviously, had very, very strong bounce-back quarters, loan growth-wise.

Just a little color there would be helpful.

Well, a couple of things first.

Let me remind folks that if you look at our CRE and our multi-family, although we do some larger loans, the average CRE loan is probably about $3 million or less; and the average multi-family is below $3 million too.

And the LTVs run in the sort of 60% range.

So these are generally quite conservative loans.

They almost all are also loans to private banking clients or their related entities.

It just picked up steam.

There is a lot of activity.

We are well-known in this field, as we have been doing it since the beginning of the Bank, actually.

And we did hire a couple of new loan relationship managers that have a particular focus on commercial real estate.

And they're doing a lot of business.

Okay, thank you.

Ken Zerbe, Morgan Stanley.

Question on deposit growth.

Obviously, if you're having more of a focus on deposit growth, increasing rates a little bit to sort of drum up business, my question is just on the difference between commercial deposits versus retail deposits.

It seems that retail might be a little more swayed by a couple of extra basis points or a phone call.

But do you get the same benefit or can you drive a similar level of commercial deposit growth by changing rate?

Or is that -- does that just have different dynamics in terms of what drives the commercial deposit influence?

You know, Ken, it's interesting.

It's a good question.

Actually, the effectiveness of a proactive call program and a modestly competitive rate, moves more commercial deposits than it does retail.

And, of course, if you stop and think about it, the obvious reason for that is that our commercial customers have a lot more deposits to move around.

We stopped -- we didn't stop calling, but we let our guard down in the first quarter.

And when we asked everybody to help us, basically, and we set out some sort of group goals, it worked very, very well.

So it also is reflective of the fact that most of our clients -- this goes back to the thing that I think Mike said -- overall, our business banking provides us $4 of deposits for every $1 of outstanding.

The clients -- our business clients, to whom we lend money, are, in fact, very cash-rich as a group.

And so with a bit of emphasis and a little bit of sort of reason to move, call it rate tweaking or opportunity, we have actually a pretty big pond in which we can fish.

Okay, that helps.

And I guess in terms of average balances -- and I don't know if that's the best way of looking at it, but -- if you think about average balances versus the number of customers that you have, are we at sort of more of a stable position in terms of the existing customers with their given balances, are likely to keep those balances with the Bank?

Or do you still expect to see some volatility in the amount of cash they have with you,.

depending on how you change your pricing?

The truth of the matter is we don't know.

The -- we're not -- pricing, modest pricing changes will not stop somebody from buying the extra piece of real estate or going into equities, if that's where they want to move their cash.

I would call the decline in average personal account balances in the category of lack of fear in the economy, and then shifting over towards the greed side.

And that's just what happens.

And there was an unusual blip up over the last three years or so in average personal account balance size -- with us, anyway.

And we're reverting back a bit more to a higher, but norm, number.

That's still going on, so I wouldn't call it over yet.

Got it.

Okay, thank you.

Aaron Deer, Sandler O'Neill and Partners.

Going back to the mortgage originations in the quarter, Katherine, you suggested that there was something of a rush to refi here as rates have come back up.

But I also thought I heard you say that the purchase volumes accounted for about 44% of the total during the quarter.

And if I'm not mistaken, I think that is up from where it has been running closer to 30%.

So I'm just trying to reconcile those two factors.

It is up from 30% in the last quarter.

There is seasonality to purchases, and the spring quarter tends to be relatively high.

We have always built very strong relationships with realtors throughout our markets in the purchase market, and so we are the beneficiary of increasing purchases.

And we are seeing that in our markets.

Aaron, the purchases were 42% in the second quarter of 2010 of single-family -- 2012, excuse me, of single-family; and the year prior, 2011, they were 50% of single-family home loan volume.

Now that is, in fact, the highest quarter for a percentage in each of those years.

Okay, that's helpful.

And then, Willis, also, you had mentioned the duration on your terms on your average terms on your borrowings.

Can you provide those again?

I missed those.

At the end of June, we had about 3.5 years remaining, on average, of our FHLB borrowings, and the cost was about 1.58%.

For the quarter, we added $900 million at a little less than 1%, and it had a four-year average term.

Okay, thank you.

That's helpful.

Hey, Aaron, it's Jim.

Let me just go back for a moment to your mortgage question, just on a kind of a macro level.

You hear a lot about mortgage volume slowing down on refinance and so on, which should probably -- well, it sort of is and it probably will continue to as rates go up.

The purchase market seems to us to be quite strong.

But when you think about those macro sort of events and you think about First Republic, it's probably worth remembering that the four largest banks in the country -- JPMorgan, Citi, Wells and BofA -- have about $7 trillion in assets, something like that.

I mean, it's a lot.

And if it even only 10% of their asset base is a similar type and geography of our client base -- which I think is probably a conservative number -- that's $700 billion.

We're trying to find $3 billion of that, roughly -- maybe 0.5% of their business.

I think our service model can probably do that.

Great, thanks for the additional color.

Paul Miller, FBR Capital Markets.

You know ,going back to the loan sales, I mean, right now, the securitization markets is pretty much shut down.

And I think a lot of your loan sales went to those entities that were securitizing them.

Do you sell to other entities that just portfolio them?

Or is it just to those entities that securitizes them?

We sell to Fannie Mae.

We sell to a couple of slow basis purchasers.

In the last two quarters, a lot of our loans have gone into securitizations; but historically, that hasn't been true necessarily.

And so we have sold to whomever in the market wants to buy, and whomever needs the balance sheet growth.

Okay.

And then we also know that Wells -- and following in their footsteps, JPMorgan and BBAC -- are pricing some of their jumbos below their conforming product.

Are you finding a lot of price competition out there?

Or is just your customer base is not their customer base?

There is considerable price competition, as we have said, over the last 12 months, for sure.

We are now finding the competition is easing just a little bit, I think as people's channels are getting perhaps filled up, or some people may have underpriced if they wanted to sell.

So price competition is easing just a tad, but it is a very competitive market.

Okay, yes, thank you very much.

Thanks a lot.

Dave Rochester, Deutsche Bank.

Hey, guys, nice quarter.

Thank you.

Katherine, on the loan side, you mentioned the pipeline remains strong this quarter.

How does it compare to last quarter's pipeline and the year-ago pipeline?

Compared to last quarter, it's about the same.

Compared to a year ago, it's higher.

Great, thanks.

And switching to the margin, you guys talked about a number of items that will end up impacting that next quarter.

And I am just wondering, when you combine all those from the reduced pressure on loan yields, and with the higher rate longer-term borrowings you added, and then the carryforward from the deposit cost adjustment, are we looking at something of a similar progression in the margin for 3Q?

I think we should anticipate that, yes.

It's going to take a while to turn that directionality of the refinancing activities going on.

And business lending, albeit very profitable, does not tend to raise that.

Great.

And then one last one.

I guess, given your comment that you think your deposit rates are probably good here to maintain the deposit growth you're looking for, I would imagine you're looking for a lot less pressure going forward beyond Q3?

Well, it's hard to call, because it will depend on market and Fed.

Yes, but assuming the current interest rate environment for SIFs?

I think it's exactly the situation for SIFs, we probably -- we appear to be landed okay.

Great.

All right, thanks, guys.

John Pancari, Evercore Partners.

Back to the business loan side, can you talk a little bit more about the outlook there, what you're seeing in terms of the pipeline?

And could this case of growth that you're seeing continue for a little while?

Our business banking pipeline for lending is quite strong.

Some of it are loans that come on the balance sheet and stay -- for example, our nonprofit loans.

Some of the capital call lines are good at origination, but they are volatile in how much outstandings they have.

But we have hired more business bankers and more relationship managers to bring us business loans.

And so we have a good pipeline, and we expect to see good volume into the next quarter, for sure.

Okay, and how much of the growth was the capital call lines?

The capital call lines probably added about $75 million out of the $345 million.

Okay, good.

And then on the wealth site, the increase on the AUM on the wealth management assets, can you give us the split about how much of that was driven by the market versus new assets?

Almost all of it was new assets.

And the reason is, at the end of the quarter, there were marks on fixed income.

And the equity markets were a bit volatile towards the end of the quarter.

Okay, good.

And then, lastly, on the FX income took a good jump this quarter, can you give us a little bit of color on the drivers?

And then also how that should look the coming quarters?

Well, I think you should look at the average of the last four quarters as being representative.

From time to time, because we do a lot of private equity for FX, we have some particularly high volumes that we can't necessarily predict.

We have hired several more FX professionals, and so we have more coverage.

So, overall, we would expect that to grow a bit.

But this quarter was particularly strong, and I'm not sure we can count on that every quarter, except for the new people we've hired, who will add to volume.

Okay, thank you.

Lana Chan, BMO Capital Markets.

Could you talk about expenses a little bit?

I think that if we look at the year so far, the operating leverage has been a negative.

And thoughts were was some of the investment spending slowing coming this year?

When do you think we will see more positive operating leverage?

Hi, Lana, it's Willis.

We have continued to invest in our franchise, and we would expect particularly that the investment systems, information system spending, is kind of at a higher run rate.

We talked a little bit last quarter that the tax credit investments have grown as an expense line item, is really unrelated to the efficiency ratio and the -- that really is, and we hope that the gap will come around and make that part of the net tax provision.

So stripping that out, we were really rather pleased with how our expense management has been going.

Okay, and on a related matter -- I don't know if it's actually related -- but it is my understanding that for all the California banks, some of the tax credits related to California enterprise zones are going to expire -- or go away at the beginning of next year.

Does that impact you guys at all?

I believe you're correct on that, but we are not a participant in the enterprise zone tax credits in a major way.

We have been purchasing low income housing tax credits that are primarily a federal benefit, and there has been no change that we're aware of in the prospects for those.

Okay, great, thanks, Willis.

Julianna Balicka, KBW.

I have a couple follow-up questions.

One, on the investment property multi-family loan growth, you had said during your remarks that -- or during one of the answers that most of those clients are coming from your existing private client base.

So what is the outlook for continuing origination growth in those business lines?

Is your existing client base fairly tapped out on that?

Or is this something that we can see several more quarters' worth?

And/or are you getting new clients in this particular business line originations?

Julianna, we're actually getting -- we are actually doing both.

The majority is still from existing clients.

But we are bringing in a fair number of new clients in this area as a result of a couple of hires that we made.

We're pretty comfortable with the demand.

It's really -- it's a competitive price market as well, particularly at the quality that we look at.

We are looking for kind of 60% LTVs, maybe even lower.

And so -- but I think the demand is pretty strong.

The way we win the business is by being very decisive and quick.

Closing carefully, but giving a fairly direct, quick, straightforward yes or no at this level.

And that usually brings first-call, what-do-you-think kind of inquiries, as opposed to grinding out a four-month -- or four-week, rather, process, and then coming back with a different deal than you thought -- which is happening in the market a lot of places.

Okay, that makes sense.

And then in terms of the loan origination growth in the commercial side, which includes, I guess, the business banking as well, to these investment properties, do you have -- can you give us more color on the geographic growth behind --?

Yes, business banking is doing well in all of our geographies.

Obviously, in the bigger markets -- San Francisco, New York, L.A. -- is where the majority comes from.

But we are seeing it across our geographies and across our different verticals.

I guess the way I was asking -- what I was trying to understand is, if the strong growth were to continue, is there going to be a point where we shall see an incrementally stronger growth coming out of your East Coast franchises that kind of ramps up and gains traction?

I think we'll see stronger growth -- continued stronger growth coming out of our East Coast franchise, but there is also strong growth coming out of our West Coast franchise.

So they are both or all markets growing very nicely.

Okay, that makes sense.

And then a quick follow-up on the tax rate, if I may.

For the low income tax credits that you have coming online that will be releasing your effective tax rate, what is the dollar amount of the tax credit that we should be thinking about in each quarter's tax expense?

Or at least -- or a rate; I don't know which way is easier to present the information.

Well, what we do is, every year, we estimate what our effective tax rate will be for the entire year.

And our estimate in the first quarter was 26.5%.

So we have revised that down to 26.0%.

So that meant the provision for the second quarter had to be about 25.5%.

So we are continuing to add to not only low income housing tax credits, but also to our muni portfolio, our bank-owned life insurance, and loans to tax-exempt organizations, which are the four legs of creation of our tax preference items.

But we will take a fresh look at where those are for 2014 next year.

But right now, our best estimate is an effective tax rate of 26% for the third and fourth quarters, and 26% for the year as a whole.

Great.

Thank you very much.

Your last question comes from the line of Matthew Keating with Barclays.

Your line is open.

Yes, thank you.

I had a question about your interest rate or asset sensitivity.

I appreciate the disclosure in your Q's and K's, for the kind of the impact of a parallel shift in rates.

I was hoping you could talk about what the benefit might be from a yield curve twist?

And like we have currently seen only the long rate increasing.

So if you could talk to that, it would be appreciated.

Thank you.

Well, the benefit is, of course, favorable, and how long it is favorable depends on the length of the steep curve.

Listening to Bernanke this morning, he emphasized rather strongly that they expect short rates to stay down for an extended period of time, even if he decelerates his asset purchasing program.

What we do when we extend out our liabilities by FHLB borrowing, quite frankly, is take some of that steep yield curve and spend it on insurance policy costs in order to stay matched.

We try hard to stay carefully matched.

The risk of mismatching right now is probably lower, given the Fed's focus on keeping the short end low.

But nonetheless, we are not prepared to bet the Bank on that.

Understood, thank you.

And you have one more question from the line of Herman Chan with Wells Fargo Securities.

Your line is open.

Thanks for taking my question.

Just a quick question on credit.

The Bank continues to build its reserve despite continued low charge-offs.

Just wondering how you think the reserve coverage of loan shakes out over time, considering the momentum the Bank has on the commercial real estate and business-banking side?

Thanks.

Yes, hi, Herman, it's Willis.

We continue to be required under GAAP to provide an allowance against the loans that we've originated since our independence.

And as you can see on the table that we have there in page 10, that today, about 75% of the loan portfolio has been originated over the last three years.

The allowance relates to those loans at about 58 basis points.

And that's probably there or a little lower, depending upon the credit quality and the mix of loans is probably where we will be as we go forward, provided that our charge-off rate continues to be as it is very, very low at 1 basis point for the first half of this year.

We will continue to provide reserves as we build those loans.

The left-hand column in that page has the $7.5 billion of loans.

And as those loans pay off, most of that net unaccreted discount of $270 million that we talked about on the call, will come into income.

That is more, on a percentage basis, than the allowance that we are providing through our income statement.

Understood.

Thank you very much.

And with no further questions, I will turn the call back over to Mr. Jim Herbert, CEO.

Great.

Thank you all very much for listening in today.

We appreciate your questions and look forward to following up further.

Thank you.

And this concludes today's conference call.

You may now disconnect.