First Republic Bank (FRC) 2013 Q3 法說會逐字稿

Greetings and welcome to First Republic Bank's third-quarter 2013 earnings conference call.

During today's call the lines will be in 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 third-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; 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 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 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 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 earnings release, which was issued this morning and is available on the Bank's website, presents reconciliation with 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 everybody for joining our call today.

This was a very good quarter in many respects.

The growth across the entire franchise was unusually strong, even for us.

Let me summarize the quarter from our perspective.

Strong client acquisition led to increased Wealth Management assets and loan growth which was more than funded by very strong deposit growth.

New clients and continued growth in both loans and Wealth Management will lead to even better things in the near future.

Core EPS was the same as the second quarter in spite of $0.03 per share less on mortgage banking income and a decline in net interest margin.

We are quite pleased that our growth continues to be entirely organic including quite importantly many new clients.

Core net interest income for the quarter was up 3% and 10% year over year.

Deposit growth for the quarter is particularly strong.

This resulted in fact in $1.5 billion higher average cash balances than during the prior quarter.

Three quarters of this cash growth originated from deposit gain and a quarter of it came from FHLB term advances, which we took down to match fund our assets and our liabilities.

For perspective, the strong loan volume that we experienced these past two quarters of $5.3 billion and $4.9 billion has been in fact quite unusual.

About 50% above our prior eight quarters which averaged $3.4 billion.

Let me turn to some other highlights for the quarter.

Core net income was up 23% compared to the same quarter last year.

And core earnings per share were up fully 19% year over year.

Wealth Management had a very good quarter.

Assets were up 5%.

Business banking, which is one of the most important components of First Republic, performed extremely well.

Business lending along with multifamily commercial real estate and other non-single-family related lending was, in fact, 47% of our loan volume during the quarter.

We continued to open new offices in our existing markets.

We opened a new office in New York at 30th and Park Avenue South, and in Sunnyvale, in the heart of the Silicon Valley.

Between now and the end of the year, we will open two additional offices, one in downtown San Diego and the other one in Cupertino, also in Silicon Valley.

Asset quality for the quarter remained excellent, nonperforming assets were 13 basis points.

We did have one unique loan-loss during the quarter which we referred to before and which we charged off fully.

Book value per share continues to rise nicely and is up 12% year-over-year at $24.13.

As a side note, but very importantly, our private equity ownership has been declining steadily and is actually now zero.

The last sale by our private (technical difficulty) [equity] investors took place in late July.

Let me take a moment to quite sincerely thank all of the private backers that we had in buying the Bank back.

Their support, their guidance and their counsel have been invaluable.

We simply could not have had better partners.

To our great benefit, both Bill Ford from General Atlantic and Tom Barrett from Colony have agreed to remain on the Board at First Republic.

Let me talk for a minute about net interest margin.

As we expected and have indicated on prior calls, we did continue to incur margin pressure this quarter.

At first glance, a 22 basis point drop in core net interest margin looks quite significant.

However, 14 basis points of this decline is due to excess cash from the deposit growth and FHLB advances.

Without this extra cash impact, so to speak, core net interest margin would have been down only about 8 basis points for the quarter or 3.29%.

We do expect margin pressure to continue next year.

Quite importantly, the growth in our net interest income, thanks to asset and earning asset growth, continues to offset net interest margin compression.

As most of you know, the culture of First Republic is intensely focused on delivering extraordinary service.

Over time, the financial needs and complexities of our clients grow and they do more with us.

Additionally, these very satisfied clients recommend us to their friends and colleagues.

They also take us along with them to their businesses and then on profits which they influence.

As the client base continues to grow, this positive word of mouth spreads.

This very simple approach is the foundation of our cross sell and the core of our relationship banking model.

The very strong growth of new clients directly related to our ability to deliver an overall client experience that is very unusual in today's banking world is the essence of First Republic.

Now let me turn the call over to Katherine.

Thank you, Jim.

Let me provide some additional details about the third quarter.

For the quarter, loans outstanding grew 6%.

Deposits increased 11% and Wealth Management assets rose 5%.

Loan originations were up 22%, compared to the same quarter a year ago.

This was the second consecutive quarter of very high loan origination volume.

For instance, loan originations for the prior eight quarters averaged $3.4 billion per quarter.

Our current pipeline would indicate that we are returning to a more normalized average.

I would note that during these same eight quarters the compounded average annual growth rate of loans was 21.4%.

With the rise in interest rates, which have retreated a bit recently, clients have shifted from long-term fixed-rate loans to hybrid (technical difficulty), mostly fixed for five or seven years.

This quarter was the second-largest ever of loan origination volume.

Importantly, of the loan volume for the quarter, 47% was attributable to business, multifamily, commercial real estate, and other non-single-family related lending.

Of the 53% that was single-family related, over 40% was for home purchases.

Business, multifamily, and commercial real estate loans accounted for more than one third of balance sheet growth this past quarter.

multifamily and commercial real estate loans were up 30% year-over-year.

Business loan commitments rose 28% year-over-year.

Business loans outstanding grew 43% year-over-year.

Conditions in our urban coastal market are strong.

San Francisco Bay area, our largest market, continues to be particularly robust.

Loan sale volume in the third quarter was quite low at $284 million, down from $945 million in the second quarter.

The gain on sale was only $1.2 million, down from $8.8 million in the second quarter.

We expect very modest loan sales volume to continue in the fourth quarter.

Mortgage banking gains tend to be cyclical.

We are actually quite pleased with the earnings performance of the franchise without elevated loan sale income.

Regarding deposits, growth was very strong for the second straight quarter.

We are particularly pleased with the growth of personal deposits which were up $1 billion.

We would note that in the last two quarters, average personal checking account balances appear to have stabilized.

Business banking deposits were up strongly and accounted for two thirds of our deposit growth.

Business banking deposits now represent 48% of total deposits.

Wealth Management had another good quarter, including market appreciation.

Assets grew 5% in the quarter, or $1.9 billion.

Year-to-date, Wealth Management assets have grown 22%.

Of that growth, about three quarters was attributable to net client inflows and one quarter to market appreciation.

The continued diversification of our franchise from personal banking to business banking and Wealth Management is working very well.

We are quite pleased with our performance across all lines of business.

Now I would like to turn the call over to Willis.

Thank you, Katherine.

Core net income is up 23% and core EPS is up 19% both year over year.

We continue to focus on growing the core earnings of the Bank while recognizing that purchase accounting adjustments will continue to have a positive but diminishing impact on future earnings.

Next, I would like to discuss core net interest income and core net interest margin.

We grow our core net interest income through the growth of our loan portfolio and the selected purchase of investment securities.

Due to higher earning assets on average, our core net interest income is up 10% year over year.

As noted earlier, our net interest margin had average cash balances greater than $1.5 billion compared to the prior quarter.

These balances at the Fed earned 25 basis points and do not contribute to our core net interest income.

As Jim mentioned, this excess cash reduced our core net interest margin by 14 basis points.

New tables in the back of the earnings release show the trends in core loan yields and core deposit costs, which are responsible for most of the remaining 8 basis points decline in core net interest margin.

Our weighted average contractual loan yield declined 6 basis points in the third quarter.

The new loans that we added to our loan portfolio in the third quarter had an average rate of around 3.3%.

This rate was slightly higher than the rate for new loans last quarter.

But it was less than the average rate on the overall portfolio.

On the deposit side, our core deposit cost for this quarter were 28 basis points.

This compares to 29 basis points a year ago and 24 basis points last quarter.

Importantly, our deposit growth of 22% over the past year has come with only a very modest change in the rates we pay.

Also, we continued our discipline of match funding.

During the quarter we added $800 million of long-term fixed-rate Federal Home Loan Bank advances.

These advances had an average rate of about 1.5% and an average term of 4.3 years.

Our asset quality remains excellent.

We had only 13 basis points of nonperforming assets at quarter end.

I would note that approximately 75% of these nonperforming assets are secured by single-family homes and only 7% are related to business loans.

During the quarter, the rate of loan repayments declined slightly to 20% and in September this prepayment rate was even lower.

Lower repayment rates and limited loan sales will contribute positively towards future loan growth.

A final comment on expenses and our efficiency ratio.

For the quarter, our noninterest expenses increased at a rate of 1.8%, well below the growth rate of earning assets.

We are continuing to invest in the franchise selectively with people, office, and technology while being prudent in our spending.

Our core efficiency ratio was 60.1%.

This is up slightly from the prior quarter.

However, this core efficiency ratio would have been unchanged from the prior quarter if we exclude the decline in mortgage banking revenue.

Now I would like to pass the call to Mike Roffler.

Thank you, Willis.

Let me talk about tax accounting in anticipation of a change that may be coming soon.

I will try to keep it simple.

During the quarter, we continued to add tax-advantaged assets.

As a result, our projected tax rate for the year decreased from 26% to 25.5%.

A meaningful contributor to our reduced tax rate is our ongoing focus on low income housing tax credit investment.

As a reminder, these investments reduce our income taxes, but also currently require that we expense a portion of the investment each quarter into our noninterest expense.

The amortization expense from these investments was fully $12 million this quarter.

Next month, the FASB has a meeting at which time the classification of such expense is likely to change and will be reported as part of our income taxes.

If this change is adopted, our noninterest expense will be reduced and our income taxes will increase by approximately the same amount.

Had this reporting been in effect today, our effective tax rate would be 30.5% year-to-date and our core efficiency ratio for the third quarter would decline from 60.1% to 56.5%.

We support this change because, in our opinion, it will more accurately reflect our true operating expenses.

Now let me turn the call back to Jim.

Thank you very much.

In closing, we are pleased with the quarter.

The franchise is performing quite well as was demonstrated by the growth of new clients, deposits, loans, business banking and wealth management.

Our long-term focus remains as always on quality delivery, new client acquisition, the focus on a few limited coastal urban markets and service delivery without peer.

These qualities are a particularly good example of client and franchise growth.

With that, let me turn it over to the Operator.

We would be happy to take questions.

(Operator Instructions).

Erika Najarian, Bank of America.

Good morning.

My first question is on the eventual deployment of the excess liquidity.

Your cash balance was $1.7 billion this quarter versus $178 million last quarter.

And from a timing perspective, I guess I am wondering how quickly do you think you will redeploy that?

Will that be solely dependent on loan growth, or will you also increase your securities balance?

Because based on your comments that this is mostly through a client acquisition, I assume that most of these new deposits are fairly sticky.

Your last assumption is correct, we believe, that the deposits are pretty sticky.

And actually, I would note that the fourth quarter of the year is usually a pretty decent deposit gathering period for us.

So it is possible that the fourth quarter will have an excess of deposit -- an excess of cash, sorry, throughout the quarter as well.

We will not probably alter our investment activities very much to utilize it.

We will simply allow the loan to grow into -- loan growth to eat it up.

We have further trimmed our deposit rates slightly backwards to try to mitigate it slightly.

As they say, this is a nice problem.

But it will take a quarter or two probably to overcome the excess cash completely.

Got it.

And, Katherine, thank you for the guidance on the mortgage banking run rate of revenues for next quarter.

I was just wondering, are there any expenses that you could flex down related to mortgage banking that is perhaps delayed in terms of coming out of your operating expense number?

There really aren't.

We run it very tightly and the people who are responsible for this have a lot of other responsibilities as well.

Okay, got it.

I will step away from the queue.

Thank you.

Steven Alexopoulos, JPMorgan.

Hello, everyone.

Jim, could you start -- I was looking for a little more color on the deposit growth and I heard what you said that you would expect to trim rates back a bit.

If we look at money markets it looks like they were up around 7 basis points.

Is it a case where you raised rates and maybe had better than expected deposit flows?

Trying to understand the motivation to raise rates and gather that much in the way of deposits.

Well, you are right.

It overran our expectations a bit.

The place it probably got ahead of us, however, was in business banking primarily, Steve, which is good.

We have landed -- what is easy to forget is that with two very powerful loan quarters like we have had, the way we operate this model, that brings with it a considerable flow of deposits.

It actually brought a bit more than we thought.

We did raise rates a little bit also in the second and third quarter and we provided some marketing and other support for deposit gathering, in response to the first quarter of the year, which was a bit of a strike deposit period if you recall.

And we probably overshot the market a little bit.

When you are growing, when you are running a company that is growing at 20% plus, it is almost invariable that you get a little out of tweak here and there on the assets, funds, capital, et cetera.

And you need to keep all the things in balance.

It takes a little doing.

And with the variable interest rate environment occurring, we actually exacerbated our problem, of course, by growing almost $800 million of FHLB borrowings in the quarter.

Right.

So, Jim, to follow up on that -- (multiple speakers).

Sorry, go ahead.

No, just to say to follow up given how much balance sheet growth you have had, the leverage ratio, I guess, is now about 120 basis points over your requirement.

Could you help us think about capital here moving forward?

Well, as you know, we don't ever project forward on capital.

But we are at about [9.18], I think at the end of the quarter on leverage.

We do need to be at 8 as you said or implied.

And we like to stay well-capitalized.

Okay.

And a final one for Willis.

Maybe you can help us think about provision expense.

Reserves to loans declined a bit.

The provision rate to fund of loans declined.

Why did these go down?

And how should we think about what you need to provide, relative to, say, funded loan growth?

The provision for loan losses for both the quarter and the year-to-date reflect the overall improvement in the underlying credit quality of our loans.

Our home loans, our multifamily and commercial real estate.

In our markets the real estate values have firmed and the debt service coverage ratios have been improving.

We took that into account as we looked at the rate of provision and the adequacy of our allowance.

In spite of the one-off loss, much of which -- some of which was reserved and the rest of which was charged against our unallocated reserve.

Thanks for that color, Willis.

Appreciate it.

Ken Zerbe, Morgan Stanley.

First question just in terms of mortgage banking.

I am looking at the loan servicing fees line.

Is that where you may have some, I guess, MSR writeups?

Is that in that line and if so how much?

This is Mike.

That's right.

Because of the slowdown in repayment on the servicing portfolio with the rise in rates, we had about a $1.7 million reversal of a prior established valuation allowance in the quarter.

And there is not much that remains that would be reversed in the future.

Got it.

So if we take the 1.7 out of the 3.4 then that is probably a decent stable or normalized run rate.

Okay, great.

I think that is about right.

Okay.

And second question, in terms of loan growth, I guess with the -- I was going to say the 10-year, but mortgage rates having pulled back a little bit, does that change how you think about growth?

It seemed that your comments on the loan pipeline returning more to a normalized average may be indicative that the 6% is probably unsustainable.

But was there anything fundamental that you were trying to imply by your outlooks or comments on the loan pipeline?

I was reflecting that our loan pipeline is where it has been on average for a long time except these last few, very strong quarters.

And we are still looking towards good growth, very good growth.

But we wanted to reflect that the last two quarters were very high.

And the consumer is not very predictable.

And so we can't predict beyond that except to tell you what our pipeline says.

We have a good team of people who will find lots of purchase loans, but we can't predict beyond what the pipeline would say.

All right, great.

Thank you.

Ryan Nash, Goldman Sachs.

Good afternoon, everyone.

Just a follow-up on the net interest margin questions.

Jim, when you said the margin continued to decline, are you referring to the core or the reported margin?

And then just in terms of Willis's comment around the 3.3% average yield, assuming that you have now taken funding costs back down, should we assume that implies a slightly above 3% new money margins which is where new assets are coming on the books now?

Let me take that.

The new loan booking rate is (technical difficulty) [3.23%].

And our incremental costs of deposits is probably stable or possibly down a little bit from the 28 is what we are implying.

The -- your first part of your question on core margins, when I -- my comments were operating relative to that what I would think of as adjusted core in the sense of pulling out the impact from just extra cash.

That will continue to decline, I think, a bit for -- in the foreseeable quarters just because of Willis's comment that the new booking rates although up from the prior quarter on loans are still below the average on the balance sheet as of just now.

Got it.

Just trying to get a sense of where the margin may bottom out.

And then just in terms of the origination.

So of the [$2.3 billion] of resi originations, what was the mix this quarter between refined purchase?

I know that 2Q historically has been seasonally strong.

And then I guess a follow-up to a comment that Katherine had made, given the movearound we have had in rates.

Are we still seeing more of a migration towards adjustable rate products relative to fixed rate?

It was about 42% of the resi business was purchase and we are seeing a move away from the fixed-rate loan -- long-term fixed-rate loans to 5 and 7 and some amount of adjustable.

Got it.

Thanks for taking my question.

Herman Chan, Wells Fargo Securities.

I want to ask about new office openings.

You had articulated two additional openings in the fourth quarter.

How do you think about office openings for the new year?

For 2014, you mean, Herman?

Correct.

We have about three to four more in the works.

But it is not really a very large backlog at this point.

We are doing some -- we have a Canal Street location in New York and then we have a location on Market Street in San Francisco in the Twitter building that will open.

And the -- we are basically looking at new sites beyond that, but we don't have anything else contemplated other than some renovation and upgradings.

Understood.

And how should we think about charge-off levels from here?

Should we expect any sort of lumpier performance given a more diversified loan portfolio for the Bank these days?

We would hope not, of course, but we don't think so.

The charge-off we had this year was very much a one-off in several credit respects.

I would like to not go into any further detail because we are working on recovery actively.

But the -- although we don't expect full recovery, but we might get a partial.

But it is pretty unusual.

But you never know because business banking is a more broadly spread activity than obviously home lending is.

Yes, Herman, one comment is that we would expect our net charge-offs for the year to be in the range of 5 basis points.

This is below our 10-year long-term charge-off rate of 9 basis points.

So while this was an unfortunate situation, we need to just keep it in perspective.

And the nonperforming assets that we -- and nonaccrual assets and loans that we have on the books are largely single-family home loans now which would generally have a lower loss content than certain other kinds of loans.

Understood.

And lastly, we did see securities yield pick up.

Could you give us some color on what occurred there?

Nothing very unusual, really.

It was the normal portfolio.

As you know we do buy municipals and municipals back up a bit.

That gave us an opportunity for some good purchases actually.

And you are probably looking at a tax adjusted yield, Herman.

So that is part of the situation there.

Understood.

Thank you for your time.

Casey Haire, Jefferies.

Good morning.

So, big picture question for you, Jim.

In terms of $41 billion in assets today, it is -- albeit it sounds like growth is kind of normalized a little bit here, but it is not crazy to think that you guys could be at $50 billion in assets at some point in the next couple of years.

What sort of implications does that have for you guys in terms of obviously be a tougher regulatory backdrop, more expenses, when you are hiring more people to deal with increased contact with regulators and/or running with higher capital ratios?

Well, interestingly enough on the latter point, we have been running with capital ratios because of our de novo status that exceed the larger -- the higher capital ratios that you are referring to anyway.

So that actually isn't an impact.

And one of the biggest impacts of getting to $50 billion which, just to confirm your comments, we will definitely be at in the next 24 months, subject to something quite unusual happening, the stress test analysis and the pressure of stress test analysis is one of the larger items there.

And we have been doing that, as you may recall, voluntarily, for two years already.

We anticipated the value of that.

Actually we do actually see a lot of value to the stress testing.

And we use it as a management tool quite actively.

And then enterprise risk management is an area that needs to be stepped up a lot.

We actually are very active in the enterprise risk management already.

And, again, it is a very powerful management tool.

And so we have -- so, most of the areas are already dealt with in the Bank.

So we don't see a significant increase in expense.

We will see some, but we have geared ourselves to be this large, well in anticipation of arriving there.

I would also add that if you cross $50 billion in one call report period, you are not a covered institution until that has occurred before for four periods as a whole.

So it might not be quite as immediate as you would think.

Got you, thanks.

And just one quick on the expensive side.

Professional services and others stepped up.

Just wondering if there is any noise and -- one-time noise in those run rates?

On the expense side?

I don't think there is anything unusual.

There were some ups and downs in other categories and we felt comfortable, overall, that the increase was only 2%.

Okay, thank you.

Dave Rochester, Deutsche Bank.

Good morning, guys.

Jim, you mentioned that you think you may have more NIM pressure next year.

But given your commentary on deposit cost may be stabilizing or potentially going down a little bit here, and then you have got that 14 basis point impact from the excess liquidity, a lot of which may unwind at some point next year, are you just trying to be a little conservative here?

Because it seems like you don't really have that much additional pressure to deal with on the loan yield side going forward.

Well, of course, David, it depends on rates.

Only, obviously state the obvious -- let me state the obvious.

But I actually wasn't referring to the net interest margin as adjusted for the 14.

I was actually referring to it prior to the 14.

It is really just a case of loans rolling off on our balance sheet that are still a little higher than the loan, than the incremental loan volume we are booking.

And that is just kind of an ongoing process.

And at the core margin level, the GAAP margin level of course has a different element in it from the GAAP purchase accounting.

And so, I just think that if rates -- if you steady-state everything right now, presume rates don't change much for about 12 months, we will continue to incur some additional margin pressure.

I think so far we have done a very good job of overcoming it with net interest income and asset growth without changing the standards.

Our standards are still as equally high on credit as they have always been.

So, I don't know that we are being conservative.

We are just trying to be very realistic.

Got you.

Can you talk about how much prepayment penalty income you had this quarter versus last quarter?

Was there any delta there?

It is about the same as it was last quarter and I think that contributed about 8 basis points in both the second and third quarter to the margin.

Great.

And one last one.

I saw that the C&I originations were up nicely this quarter but the growth in that portfolio slowed a little bit.

Was wondering what you guys were seeing there and do you see that growth rebounding a little on 4Q?

Business banking has that in it where commitments may not result in outstandings because of usage.

And in particular since we do a lot of just-in-time lines to venture and private equity firms, that is -- that can be up and down.

We are continuing to grow the originations very nicely.

The degree to which the commitments turned into outstandings is each person's business.

Great.

All right, thank you very much.

Aaron Deer, Sandler O'Neill & Partners.

Good morning, everyone.

A quick follow-up on the margin discussion.

I just want to clarify, you mentioned the 14 basis points from excess liquidity, which I think is related to the [1.5 million] delta between average cash equivalents this quarter versus last quarter.

If that is all excess, I guess that means that you are comfortable running with an average balance closer to $200 million that we had last quarter.

Is that correct?

Yes.

If we look at the average balance sheet in the back of the press release, you would see that we had about $200 million of what I am going to call core working capital for our activities.

And then we had about $200 million of interest earning cash.

$178 million last quarter and $1.7 billion on average this quarter.

That is the delta that we are talking about.

Our overall cash position seems that need -- minimum need to be $400 million of which $200 million to $250 million is non-earning.

Okay, perfect.

And then, Willis, just following up on the thoughts with respect to provision and reserve.

Given the mix kind of shift and the efforts to do more on the commercial side, and some of the slowdown and mortgage, what kind of level of provision do you expect going forward?

Is it going to be something north of the 45 to 50 basis points per -- for new loans coming on or can it remain at this level?

Well, rather than quote our rate of provision as a percentage of origination, I would direct you to the table that presents the loans that have been originated since our divestiture.

And there, about 80% of our total portfolio, $25.8 million has an allowance on it.

That allowance averages about 52 basis points right now depending on the mix of those loans.

We would expect it to continue to be in the 50 to 55, 58 basis points sort of range.

Terrific.

That is all I have got.

Thank you.

John Pancari, Evercore.

Good morning.

Go back to the margins.

Factoring in the excess liquidity of the 14 bps, considering that in terms of your margin outlook, so you could see a snap back in the margin when you take that into consideration?

I know you said excluding that you will consider -- you would still expect some margin pressure, but factoring in so is it fair to assume we should see some upside?

Well, yes.

If the cash came down on the overall core margin, you would see it rise.

So you would see it improve.

The thing we are trying to do and we are not trying to make it complicated, we are actually trying to make it simpler, but we distinguish between the impact on margin from the fluctuations in excess cash versus the core earning margin on assets.

And the core earning margin we would adjust so to speak to about 3.28%, 3.29%, something like that.

That probably will continue to decline slightly.

The amount of cash will drive the 14 basis points either up or down.

The -- let me go back to something kind of spinning off of Steve's comments earlier.

This is a 20 -- this is an 18% to 22% company that grows in terms of assets and liabilities.

It is not our target, it is just what happens.

The clients like us, they bring their friends.

We do business.

If we don't see good business, we don't do it.

So it is not really what we set out in the morning to do.

We just take care of what is in front of us.

But, when you have something moving that fast, it is a little challenging and a little -- as it gets bigger, a little challenging to get things, keep them perfectly in proportion at all times, particularly the fudge factor, so to speak, called cash.

And so that is really what happened this quarter.

And as we get larger, it gets slightly more challenging.

Okay, that is helpful.

Just trying to get an idea if we can see a snap back there in the margin.

In terms of the deposit flows in the quarter, can you give me a little bit of color as to why push CDs here?

I know they were up almost $500 million and also was any of that brokered?

None of it is brokered.

We weren't really pushing as much as responding to client requests for -- we have a core banking client base, for home CDs are in fact part of their world.

And we don't really want to, so to speak, chase them away to other banks just over CD rates if we can avoid it.

Our rates are generally competitive or below other rates.

The possible exception may be two or three very largest banks.

And our CDs are meaningfully in our office system.

But we did respond with an increase in CD rates after the first quarter last year, which -- or first quarter this year, rather, which we didn't really have the deposit growth we were looking for.

We probably did.

We probably overcorrected slightly and we fixed that.

Also, it is possible to take some CDs at the two and three year points, which we think are maybe valuable hedges for a rise in rates and that is below the window that we have been working at the Federal Home Loan Bank advantages, which has typically been four to six years.

Okay, that's helpful.

Lastly, on the loan growth outlook, I wanted to see if we could get a little bit more color there.

What areas do you think could moderate in terms of the pace of growth, just given your pipeline commentary?

The area where we see moderation is in single-family refinances and, just a smaller degree, other real estate refinances.

And the point is if someone has already refinanced, they are not going to refinance again.

Now we are seeing more purchase activity and there has been an issue in our markets of not enough supply as prices increase.

There is more supply coming into the market.

So we would expect to see pretty good purchase volume.

But it's the refinances where you wind up -- which we created the extra volume in the last couple of quarters and which will be mitigated in this next quarter.

Just add to that for a second.

We operate primarily in San Francisco, Los Angeles, Manhattan, really, greater New York -- Manhattan and Boston.

And if you stop and think about it, it is hard to think of four cities, four markets in the United States that are doing better economically and real estate-wise at multifamily, commercial, and single-family levels.

So what has fallen out of those markets is the refinance-driven volume.

But two things are relevant to First Republic.

And when we get up in the morning we respond to current client needs.

And those needs have shifted now from refinance to purchase.

The purchase is actually quite strong.

Katherine's comment about inventory shortages is a key point.

It is really very low inventory in the Bay area, San Francisco Bay area, which is 48% of our business.

And then number two, we get up in the morning and take clients away from other banks.

And the clients are less inclined to be moving around if the refinance is down a little bit.

So it is a little harder to get their attention.

Okay, great.

Thank you.

Lana Chan, BMO Capital Markets.

Good morning.

Most of my questions have been answered, but could you give us any color on in terms of your client acquisitions this quarter, how much of it came from West Coast, San Francisco versus the newer markets?

The client acquisition in the last couple of quarters has been nothing short of extraordinary, both in numbers and quality.

We have actually not experienced this previously and we have been successful for a long time.

It is coming generally across the board, consistent with the mix we now have with the possible exception that we are picking up slightly more proportionally in the San Francisco Bay area and in Manhattan than we are elsewhere for a couple of reasons, but mostly it is proportionate to where -- what we now have.

And the reason for that is it comes primarily, it is primarily driven by positive word of mouth from current clients.

But of course the San Francisco, Silicon Valley, Bay area is experiencing and unusually powerful economic resurgence.

Okay and I know it has not been part of your MO in the past, but in terms of thank acquisitions do you see any opportunities since we have seen sort of a pickup in deal activity in the smaller inside in the last couple of months?

We have only bought one bank in 29 years.

So we are not really acquirors in the bank sector.

Okay, thanks, Jim.

Joe Morford, RBC Capital Markets.

Good morning, everyone.

Maybe just following up on this loan topic just one last time.

If the shift of the product is moving more towards the adjustable product which you are willing to portfolio on this less churn from refi activity, why wouldn't the loan growth in a sense be strengthening going forward?

Actually you are on a very good point to the degree that there are less loans that we sell and to the degree that the payment rates are down, which happens if people have refinanced and are not going to do it again, you would see that incremental loan growth on our balance sheet.

And we don't want to predict it, but we would expect certainly to have some of that.

And then just lastly, as a clarification along those lines.

Can you just -- what was the percentage of the residential originations this quarter that was fixed-rate and how did that compare with less quarter's percentage?

The fixed-rate loans that we closed this quarter that were not locked at the beginning of the quarter are definitely down.

Most of the lock activity this quarter was hybrid or adjustable rate loans.

Okay, thanks.

Thanks, everyone.

Paul Miller, FBR.

There's been a lot of things in the press about how the jumbos especially the 30-year fixed-rate jumbos are trading below conforming.

We have heard that that pricing has corrected itself and it's coming from the bigger boys.

Can you talk a little bit about the competition you are seeing with the big jumbo lenders out there for some of this product?

As we have said on a number of prior calls, the competition is intense.

People realize it is a very good asset and they are eager to acquire that client, as we are.

In some cases, we do a pretty good job of winning that business and our job is to go out and win some of it every day from our competitors.

But it is definitely a competitive marketplace particularly in terms of pricing.

And you talked about -- I know this has been asked like three or four different times, I just want to get it down straight that your portfolio and mainly the 5/1, is that the product of choice right now for the jumbo world?

5/1 and 7/1 is the primary product for the single-family world, yes.

(multiple speakers) and that happened when 30 year fixed picked up a bit about six months ago.

And then the loans that you did sell was roughly, what, $287 million?

Were they all fixed-rate?

They were primarily fixed rate.

So going forward, if rates stay here and if 5 and 7/1s are -- continue to be the product of choice, and you said this in the past, I just want to make sure I get it straight, that we would expect to see a lot more portfolio product than we would see products that you would sell off.

For single-family loans we would definitely expect to see in the next quarter or so many fewer loan sales.

Okay.

Thank you very much.

Julianna Balicka, KBW.

Good morning.

I was hoping to get a little bit more color on some of the loan pricing.

You talked about the blended on portfolio rates on new loans of 3.33% and I was hoping you would be able to give us more color in terms of the pricing that you are seeing and originating out for new multifamily loans, new commercial real estate loans and new C&I loans to separate out the resi impacts.

In terms of originations for the third quarter, multifamily and commercial, multifamily are closer to 3.50% and commercial are about 4% and single-family is lower than that.

Okay, very good.

On the deposits with the business deposits now making up you said 48% of your deposits, could you give us a sense of what the size is of your 10 or 15 largest deposit relationships or whatever is around that number there just so we can get a -- how many relationships make up the loan growth that you have had this quarter?

Our loan growth is -- our deposit growth is very diversified across all markets in a variety of industries.

And we will have tables for you in our 10-Q that show by geography and preferred banking versus our office growth.

What about like an average deposit relationship size of your most important relationships?

Actually we don't have that number.

Okay, very good.

And then final question and I will step back.

The gain on sale margin this quarter was -- and I'm sorry if I missed it from your earlier remarks, the gain on sales margin was significantly below your historical run rate.

Was there anything unusual in that or and should it trend back up to normalized or was that just the current status quo for the new foreseeable future?

That is the current status quo certainly for the fourth quarter.

Maybe even a little lower.

Very good.

Thank you very much.

[Michael Rosado], Credit Suisse.

Hello.

Can you talk about what you are seeing in terms of commercial business demand?

You have had some nice growth in this business lines over the last 12 months.

Do you anticipate demand to hold firm as we look forward?

We continue to see business demand growing, yes.

Even with the backdrop of the political landscape, the debt ceiling, you haven't had I guess too much impact from what you are seeing from your client base or feedback from your client base?

We have not had impact so far from our client base.

Obviously we can't speak about what would happen if it continues, but so far we have very good deposit, business banking growth.

Great, thank you.

Matthew Keating, Barclays.

Thank you.

Along those lines, obviously, your clientele tends to be first movers how we saw in the first quarter where they move deposits into real estate and the stock market.

Given the turbulence we are seeing in DC, I know that you mentioned that your average client deposits had stabilized.

Can you talk about what you are seeing early in the fourth quarter in terms of deposit trends at your customers?

Thanks.

Actually it is a good question, but we are watching pretty carefully for all kinds of reasons, including that.

But so far there is no clear indicator from their actions.

Stable is the word that applies.

They have been stable for two quarters now, which tells us that they are kind of -- I would -- this is strictly an interpretation.

People are kind of watching and waiting.

Understood.

And then, I guess, you mentioned that you may have overshot in terms of deposit growth this quarter.

But with the loan to deposit ratio still above 100%, can you just -- I think you have said in the past that you are comfortable around 100% level, but can you maybe categorize why you thought you overshot given where the ratio still is?

Really just a case of taking in more cash than we needed.

It is -- we are not driven by that ratio.

We do pay attention to it, but it is not our driver by any means.

And we do use the FHLB for term matching.

And when you use that, it naturally drives your loan to deposit ratio up a little bit.

Yes and, Matthew, we have such a strong residential real estate origination capacity and credit record that we don't really have any resi mortgages in our investment portfolio.

If we had the same percentage of resi mortgages and we moved them from our loan portfolio to our investment portfolio, our implied loan to deposit ratio would be in the low 90s.

Got you.

That is helpful.

And my final question, obviously, it will get in the 10-Q, your loan mix by geography, but I think in the second quarter at least in the New York metro area actually outgrew San Francisco Bay area in terms of net [period end] loan growth despite being a smaller overall mix of your business.

Can you talk about trends in the third quarter broadly between New York in particular, how loan growth has been trending in that marketplace?

Actually what happened and you are right -- that is very observant.

In the second quarter the New York market had quite strong CRE lending and that is really what happened there.

Got you.

All right.

Thank you very much.

And there are no further questions.

I will turn the call back over to Jim Herbert.

Okay.

Well, thank you all very much for your time today.

We appreciate it.

And we will speak with you next quarter.

Bye-bye.

Ladies and gentlemen, this concludes today's conference call and you may now disconnect.