First Republic Bank (FRC) 2013 Q4 法說會逐字稿

Greetings and welcome to First Republic Bank's fourth quarter and full year 2013 earnings conference call.

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

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

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

Please go ahead.

Thank you and welcome to First Republic Bank's fourth quarter and full 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, Senior Executive Vice President and 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 we may make forward-looking statements during today's call that are subject to risks, uncertainties, and assumptions.

In addition, some of our discussion may include non-GAAP financial measures.

For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and reconciliations of non-GAAP financial measures, see the Bank's FDIC filings including the Form 8-K filed today, all available on the Bank's web site.

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

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

2013 was a terrific year.

I'll cover the highlights for the full year, and Katherine and Mike Selfridge will review the fourth quarter in more detail.

It was a good year by almost all measures.

We had a number of accomplishments.

Core earnings per share grew 24%.

Loan volumes set a record, $17.8 billion, up 15% from the prior year.

Almost 50% of this volume was not single family home lending.

Quite importantly, asset quality remains excellent with only 14 basis points of non-performing assets.

Our loans outstanding were up 20% for the year, both as a result of strong loan volume plus a slowdown in repayment rates, particularly in our real estate loan portfolio.

Deposits grew 18% year-over-year.

We are particularly pleased that our checking balances throughout the year were on the average 49% of total deposits, up from 47% on the average during the prior year.

Private Wealth Management grew exceptionally well with assets under management up 33% year-over-year.

This growth was all organic.

Business banking had a strong year also.

Loans outstanding grew nearly $1 billion, with strong activity taking place in each of our markets.

Business banking deposits grew $3 billion.

We also continued to build our capital and added $400 million of perpetual preferred stock during the year.

Our total equity for the year grew 22%, commensurate with our asset growth.

Tier 1 leverage ratio at the end of the year was 9.2%, a very strong level.

In terms of asset and liability matching, we took a number of important steps during the year.

We sold fixed rate loans at the right moment early in the year.

You will recall, we made considerable gains on these mortgage banking sales, approximately $0.11 per share during the first quarter of 2013.

We raised permanent preferred capital at very favorable terms, and we locked in a fair amount of fixed rate FHLB term borrowing at attractive rates.

For the entire year, book value per share increased 11.4%.

The Bank's common stock had a good year, outperformed the regional bank index and the S&P 500.

While at the same time, our private equity investor backers, who helped us buy the Bank back, sold their remaining 25 million shares into the market.

Importantly, during the year we continued to strengthen our risk management process as well as our technology infrastructure.

We will continue as we go forward into 2014 to actively invest and emphasize compliance BSAAML, technology and risk management.

Overall, we're very pleased with the year and encouraged by the opportunities in front of us for 2014.

Let me turn the call over to Katherine.

Thank you, Jim.

An exceptional year was capped off by a very strong quarter.

Let me summarize the highlights.

Loan volume was over $4 billion for the quarter, a bit better than we had expected.

Core EPS was 8% compared to a year ago.

This is in spite of the fact that the fourth quarter of 2013 did not have the same level of elevated loan sale gains as the fourth quarter of 2012.

Nonperforming assets continued to be extremely low, charge-offs for the year were only five basis points of average loans.

As Jim mentioned, Wealth Management assets grew nicely, and Wealth Management revenues were up 10% compared to the third quarter.

The strong fee growth was driven by new assets, good market conditions, new client acquisition and effective cross-sell.

This higher year-end asset level provides us with a very good base going forward, since most Wealth Management fees are calculated in arrears.

Of this AUM growth during the quarter, about 60% was attributable to net client in-flows, and 40% was due to market appreciation.

Let me discuss loan volume for the quarter.

Robust economic activity in our regions and our focus on relationship banking continued to drive loan volume during the quarter.

Single family and home equity lines represented just over half of our total loan volume in the fourth quarter.

Importantly, over 58% of single family home loans were for purchases.

We believe the trend towards purchases should continue, and we are very well positioned to capture this business, though pricing for high quality jumbo home loans in our markets continues to be quite competitive.

Our pipeline is a bit lower than it was at the same time last year, primarily from the slowdown in refinance volume.

Although pricing is competitive, our relationship based model continues to power our growth as demonstrated by our cross-sell success.

Last quarter, due to higher interest rates and client demand, we originated fewer long-term fixed rate loans and more hybrid ARM loans which we generally retain in our portfolio.

In the fourth quarter, the annualized repayment rates on our home loans slowed to 13%.

This compares to an average of 20% for the first three quarters of 2013.

This is a fairly meaningful decline, and, if it continues, it will have a generally favorable impact on future results.

We are very pleased with the quarter, and I'd now like to turn the call over to Mike Selfridge.

Thanks, Katherine.

Let me provide some perspective on the strength of our relationship-based model, geographic markets and business banking.

Our relationship model with a single point of contact and client-focused service culture continues to perform well.

We are able to deliver banking and Wealth Management services through a team-based approach which leads to satisfied clients and their word of mouth referrals.

We've also seen our brand recognition grow as a result of our franchise investments over the past few years.

As the national economy continued to strengthen, conditions in First Republic's geographic markets have improved at an even faster rate.

In particular, the very strong technology sector is positively impacting all of our core markets, the San Francisco Bay area, New York, Boston, and Los Angeles.

This economic strength is reflected in the stronger employment in these regions which leads to improved housing conditions and rising personal liquidity.

The improved national economy is also having a positive effect on business banking which is reflected in both loan and deposit growth.

In terms of deposits, there is some seasonality.

We would note that, based on average balances, deposits in the fourth quarter were up 8% as compared to the third quarter.

So far this year, cash balances are back up well over $1 billion.

Our non-single family lending business, multifamily and Commercial real estate loans accounted for 43% of balance sheet growth during the year.

Multifamily and Commercial real estate loans were up nicely year-over-year.

The average size of our multifamily and Commercial real estate loans is about $2.2 million, and the average loan to value in each case is under 60%.

The ongoing diversification of the franchise from private banking of individuals to the businesses and nonprofits they lead and the resulting Wealth Management opportunities is working very well.

During 2013, we opened five offices, upgraded our online banking and launched very successful mobile banking and social media initiatives.

Each of these enable us to better serve our clients across all channels.

During 2014, we don't expect to enter any new markets.

We're pleased to note that our new downtown San Diego office opened last week, and only two more office openings in our existing markets are scheduled during 2014.

We look forward to optimizing the investments in our existing footprint and continuing to focus on cross-selling and new client acquisition.

Overall, we are quite pleased with our performance across all lines of business.

Now let me turn the call over to Willis.

Thanks, Mike.

We are pleased with the growth in our core EPS, which was $0.66 per share.

By way of comparison, the fourth quarter of 2012 had unusually high gains from the sale of loans, about $0.07 per share.

Without such mortgage banking gains, core EPS last year in the same quarter would have been $0.54.

Given current market conditions, loan sale gains in the first quarter of 2014 will likely have a minimal contribution to core EPS.

For the year, core EPS was up 24%.

We continue to focus on growing core earnings, recognizing that the positive impact of purchase accounting is diminishing, and it was only $0.09 per share last quarter.

Future purchase accounting will only add about $0.75 to our book value per share, so the quarterly difference between GAAP and core EPS will decline to a very small number over the next couple of years.

This is why we focus operationally on core earnings, core EPS, and core net interest income.

We are pleased that our core net interest income continues to grow nicely, up 11.5% for 2013.

This is in spite of pressure on our net interest margin.

Our NIM has been declining due to the low interest rates, lower prepayment penalties, and in the past two quarters considerable liquidity in the form of higher average cash balances.

Our core loan yield for the quarter was 3.46%, down 6 basis points from the prior quarter.

This decline resulted from a slightly lower contractual loan coupon and also from lower prepayment penalties on slower loan repayments.

Another element affecting our reported NIM is the amount of average liquidity we hold.

Last quarter we had on average almost $2.6 billion in cash, or 6% of total assets which earned 25 basis points.

As noted in the Earnings Release, this level of liquidity caused seven basis points of the nine basis points decline in core NIM.

Finally, on NIM, we are pleased that the contractual rate on our deposits declined three basis points in the fourth quarter.

Now let me turn the call over to Mike Roffler.

Thanks, Willis.

I would like to update you on an accounting change for tax credit investments which adjusts how we report our operating expenses and income taxes.

This new FASB standard reduces our non-interest expense and increases our tax expense.

The Bank has adopted this new presentation in the fourth quarter and retroactively.

We have included a supplemental schedule in the back of the press release which shows the adjustments made to our non-interest expense and tax expense in the calculation of the core efficiency ratio for all quarterly periods since our divestiture on July 1, 2010.

The impact of this change on our historical net income and diluted earnings per share is minor, and this reporting does not change the amount of taxes we actually pay.

As adjusted for this accounting change, which we believe more accurately reflects the results of the enterprise, our core efficiency ratio was 56.9% for the fourth quarter and 55.8% for the entire year.

The efficiency ratio in the fourth quarter remained relatively consistent with the prior quarter.

Under this new FASB standard, we expect the range of our core efficiency ratio to be 55% to 59%.

The increase in operating expenses in the fourth quarter was due to several factors including the hiring of additional employees commensurate with our growth, continued investments in technology and some seasonality in advertising and marketing.

The core efficiency ratio will also be impacted by expenses associated with heightened oversight as well as new regulations.

Finally, as adjusted for the new FASB standard, our effective tax rate declined from 33% in 2012 to 30.4% in 2013.

Our effective tax rate in the current year should be slightly lower.

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

Thank you, everyone.

2013 was a very good year.

During 2014 we expect to optimize the investments we've made to acquire a substantial number of new customers in the past year and to deepen our relationships with the existing ones by increasing our cross-sell focus.

We'll continue to invest in infrastructure to compliance with numerous new laws and enhance regulation affecting the industry.

Among these new laws affecting us the most are the qualified mortgage rules, capital stress testing, increased emphasis on BSAAML and planning for the recently proposed liquidity coverage ratio rules.

The liquidity coverage rules are currently only in draft form and don't apply to us at this time.

However, they are reasonably likely to apply to us in the future, and we're planning accordingly.

In spite of the yield curve steepening, we expect some continued net interest margin pressure during the forthcoming year due primarily to very competitive conditions in the highest quality loan market in general, and jumbo home loan pricing in particular.

We also expect a slowdown in single family home refinances which we have already seen.

This probably will continue to impact our loan volume in 2014.

However, we see good demand for home purchase business in our markets.

The economy continues to improve in our markets and has benefited us disproportionately, and we are in very -- we are very encouraged by the activity level of our client base.

It's good for our business and creates many opportunities.

Applying our service first relationship based model we're uniquely positioned to further cross-sell.

In the year following large loan volume historically we typically experience very high cross-sell results.

This should benefit both private Wealth Management and business banking.

We're cautiously optimistic about 2014 and are well positioned to further expand our relationships and our franchise.

Thank you.

We'd like to take some questions.

(Operator Instructions)

Your first question comes from the line of Steven Alexopoulos of JPMorgan.

Your line is open.

Hello, everyone.

Can we just start taking a look at some of the comments you had around margin, and, Willis, your comments around the core loan yield at 3.46%.

Can you talk about what's the blended rate or yield new loans were added in the fourth quarter?

Sure, Steve.

The loan rates came in right around 3.25% to 3.15%.

We had pretty good loan volume this quarter, and we kept most of the hybrid ARMs that were put on.

We weren't making very many longer-term loans, and that contributed to that level of average loan yield.

Okay.

Willis, it looks like you put some of the excess liquidity to work, just looking at the growth of the securities book at period end.

Can you talk about what you added in terms of securities?

Is it all still munis, and maybe what yield you were able to pick up there?

The average munis were a little higher this quarter.

Let me look at that number, and get right back to you, Steve.

Okay, and --

While he's doing that, I would point out that the average liquidity in the quarter, on the average, was, in fact, up about $600 million or $700 million versus the prior quarter.

Yes.

Maybe while, Willis, you're looking that up, although I suspect this question's for you -- just on the reserve formula, the reserve-to-loan ratio is pretty flat at 45 BPS.

Are you now at the point where you really only need to provide for loan growth and charge-offs, and don't need to incrementally build the reserve here?

Steve, yes, that is correct.

The provisioning this year has benefited from strong increases in real estate values in our markets, continued low charge-offs, and our asset quality is improving.

When we file the K, you can see that the level of substandard assets continues to diminish.

All of that affects the level of provisioning.

We are at about 52 basis points on the loans that need to build a reserve.

And if the mix stays around the same, it will be somewhere in the 50- to less than 60-basis-point range on average.

The tax-affected yield on the muni purchases this quarter was a little above 6.5%, almost 6.70%.

Okay.

Thanks for all the color.

And we also purchased some adjustable-rate securities in the available-for-sale portfolio, and those had about a little less than 2% margin.

Okay.

Thanks a lot.

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

Your line is open.

Thanks.

Question on the wealth management platform.

Is there anything that you guys need to do from here to continue to build that out?

Or are you largely where you want to be, in terms of the infrastructure and the management of that?

Thanks.

We have a management team with which we are very pleased.

We have the product suite that we need.

We will -- because we have grown so much and see good growth, we will continue to build infrastructure.

Okay.

Does that come with higher expenses as you do that, or any noticeably higher expenses?

A little bit, although they're inside of our technology plan.

Okay.

All right.

That helps.

And then, just back to the excess cash -- obviously, you were deploying some of it, but what is the plan for the rest of it?

I mean, just given the loan growth or -- is this something where you want to just keep it very, very short term or in cash to support loans?

Or are you thinking about that in a different way, or do you expect some of it to flow out?

Thanks.

The cash position, you mean, Ken, overall?

Correct, yes, what drove the lower NIM.

I would say that the -- we're in the process of adjusting for the liquidity coverage ratio thinking.

We're going to be entering into a very systematic program of establishing high-quality liquid asset purchases, and that will be ongoing throughout the year.

We've recently adopted some policies and guidelines around that, and done a lot of thinking.

And so, I think you'll see throughout the year a steadily -- a steady buildup of high-quality liquid assets.

That should draw down the cash, in addition to loan growth.

Okay.

Perfect.

All right.

Thank you.

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

Your line is open.

Hi.

Thanks.

With the re-fi activity teased out of origination volumes in Q4, is your Q4 performance a good run rate for origination levels going forward?

It's a generally good run rate.

But there is some seasonality to our Business, and the fourth quarter, on average, tends to be a bit better, and the first quarter, on average, tends to generally be a little bit weaker.

Understood.

And given the normalization in refi, as that opportunity wanes, and new client acquisition also wanes, is there a sharper focus for cross-sell at this time?

How do you think about that opportunity going forward?

There is a sharper focus on cross-sell.

And (inaudible) as Jim said on the call, in a year when we have particularly high volumes, and this was certainly that year, it is difficult for people to spend as much time with each client as they need to, to cross-sell as successfully as they can.

So, we would expect to see much more energy spent on cross-selling some of those clients.

We will still be acquiring new clients, but we will go back to the existing clients, and go back to cross-sell business banking, more deposits and wealth management.

It's Jim.

I would add, Herman, that 2013 was one of our best new client acquisition years, probably ever.

And that isn't going to slow down too much in 2014, because a purchase market is particularly attractive for that activity.

Got it.

Thank you very much.

Your next question comes from the line of Ryan Nash of Goldman Sachs.

Your line is open.

Hi.

Good afternoon.

Just first, a question on the expense base.

If I hear what you're saying, Jim, you're only adding two new branches this year, but yet you're talking about having to actively invest for technology, whether it's -- once you become a bigger bank.

How do we think about the growth trajectory of expenses relative to the growth in revenue?

Can we see revenue growth outpace expense growth in 2014?

Let me answer that in a general way, and then ask Mike Roffler to weigh in.

In general, the two areas -- and I want to correct something.

The question -- previous question about wealth management: Our margins are improving in wealth management.

So, although we are still investing in infrastructure, generally speaking, we're outrunning that investment on the revenue side.

The bank side is mostly driven by NIM more than anything else.

Our expense -- the absolute expense levels are pretty under control.

Mike can speak to a couple specific areas.

But cross-selling is generally incrementally more profitable than new client acquisition.

And I would just add that we have continued to invest prudently in technology and offices.

And we try to keep the right balance between revenue growth opportunities and re-investing in the Franchise, which is why we're sort of in that band of efficiency between 55% and 59%.

And yesterday's margin put pressure -- it may tick a little higher, but as margins improve, it hopefully ticks a little lower.

And if I could just ask a follow-up question?

While you guys don't fall under the LCR provisions at this point in time, but given the pace of growth, it's obviously not that far away.

Can you just give us some metrics or color -- how much of a build you need to get to, to become compliant?

How do you see the path of adding securities, and maybe a little bit of color around the duration of the securities you'll be adding?

Well, I can't actually give you too much color yet on the amount that we need.

We are still calculating that and, of course, the rules are still in a state of flux.

And a lot of it is dependent upon individual type of account analysis.

And I would note that the primary -- certainly one of the primary asset classes that qualifies is cash.

And so, we will need to increase our investment portfolio by several billion dollars, probably, before we're done.

But we would -- I would expect to keep that in a reasonably intermediate- to shorter-term instruments.

But we're still understanding it.

It's a couple years away for us -- 1.5 to 2 years away, maybe longer even, depending on growth rates obviously.

And so, we're well ahead of our need here.

But we want to -- like everything else, we try to stay ahead of where we're going to end up.

And we're working hard to do it in a thoughtful and sort of progressive manner.

And if I could just squeeze one last one in there -- just a follow-up to Steve's question from before?

It looks like the end-of-period cash did come down a lot, but I think you referenced in your prepared remarks that maybe it's coming back up.

How do we think about, over time -- I know the deposit ebbs and flows tend to be volatile, but how should we think about, at this point in time, given all the new rules and regulations -- what is the right level of cash for you to run at over the next year or so?

I would think we ought to be in the sort of $0.75-billion to $1.5-billion range for cash -- in that range.

But the reason I'm hesitating is that very short term, highly liquid -- high-quality liquid assets are the surrogate for cash.

That's what the LCR is really all about.

And so, as we move in that direction, we may shift some of our cash to those quite short-term treasury type instruments.

Great.

Thanks for taking my questions.

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

Your line is open.

Good morning, guys.

Hi, Casey.

Just a follow-up on the LCR stuff.

I know you guys historically have -- I know this is longer term -- but have tracked margin between 3% to 3.3%.

Under an LCR policy, presumably with a larger securities book at a lower yield, would that pressure that long-term historical NIM average?

It probably would pressure it a little bit.

I think that is going to be the case for anybody that isn't already there.

The question: Is it incremental asset or is it utilization of assets?

It would have been loaned.

And there's not -- currently, I can't give you an answer to that.

Got you.

Okay.

And then, just switching gears to capital.

Obviously, a big preferred raise in October, and a very strong asset growth this quarter.

You're kind of running in place.

You obviously have some opportunity to self-fund from the excess liquidity position.

I'm just curious: Is there an opportunity to self-fund, or are you still -- you going to be vigilant on your Tier 1 leverage base?

We'll always watch our Tier 1 leverage base.

I mean, that's something we anticipate actively in our business planning, and we stay ahead of our needs.

We're pleased with the growth of the enterprise.

It's possible that balance-sheet growth will be a little lower in 2014 because of the volume, but I don't really know.

We're going into 2014 well capitalized.

We did a good job.

We took advantage, I think, of opportunity fairly well in the year.

When you look back, you'd always do something a little differently.

But I think we're in pretty good shape.

I would note that we did do that last raise in October, so, mostly that was a negative impact on the fourth quarter slightly -- couple cents.

Okay.

And then just last question: How much pre-payment penalty impacted the margin this quarter?

The pre-payment penalties for the quarter was about 4 basis points, and in the third quarter it was about 8.

Okay.

And the expectation, I would think, is that that would diminish.

We would lose that 4 BPS going forward.

It will be a smaller amount going forward, yes.

Thank you.

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

Your line is open.

Hello, good morning, guys.

Hi, Dave.

Jim, if I remember correctly, your margin guidance generally excludes the impact of liquidity changes.

Is that right?

We try to do that, yes.

So, I guess you could see a little bit at least of support in the first half, given you'll be engaged in that new program to reinvest in securities and that cash balance should drift down.

That should be the case; that's right.

Great.

And can you talk about where you're adding hybrid ARMs, in terms of yields in the quarter?

Our overall real estate assets are coming on at about 3.14%.

3.14%?

A majority of them are hybrid ARMs, but that also includes multifamily and some longer-term ARMs.

Great.

And can you also compare the loan pipeline at the end of 4Q to the pipeline at the end of 3Q as well?

I know you give a year-over-year comparison.

One minute.

Let me check that.

Great.

It was down a bit.

Down a little bit.

Okay.

Yes.

Perfect.

All right.

Thanks, guys.

Thank you.

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

Your line is open.

Hi, good morning, everyone.

Good morning.

Mike Selfridge, not Roffler, in your comments, you sounded pretty optimistic about the business banking part of the Business.

I'm wondering: Obviously, the C&I book was up very strongly again here in the fourth quarter, and more so obviously year over year.

Can you talk about how much of the growth that you've seen recently has been coming from your private equity customers versus from, say, more traditional commercial customers?

And what the outlook is going forward for that part of the book?

Yes.

I would characterize the growth as fairly broad-based.

As you know, we focus on about nine segments, distinctively.

And while the dollar amounts were more concentrated in private equity and schools and non-profits, the overall growth was well balanced.

I think for 2014 we're in a good position looking forward, but it's still too hard to say.

Okay.

Great.

Thank you.

Your next question comes from the line of John Pancari of Evercore.

Your line is open.

Good morning.

Good morning, John.

Just to clarify a little bit again -- I'm sorry, back to the cash balances, just so I understand this correctly.

Linked quarter for next quarter, your average balance of $1 billion and change right now -- or it was up $1 billion, I'm sorry.

Your average is right around $2.6 billion.

That should decline, given the reinvestment that you already started this quarter, correct?

That is correct.

Okay.

And then, the end-of-period balance, which is closer to $800 million or so, what should that do on a linked-quarter basis?

That's, I think, subject to some seasonality.

I would think with tax payments being made in April, we might well have depositors building up some money to make payments in April.

That is typical.

Last year was a bit of an exception due the tax rate changes.

Okay.

That helps.

All right.

And then, on the loan side, the decline in the loan originations in the fourth quarter versus the third quarter, looks like half of that did come from the resi portfolio.

But can you give us a little bit of color on the declines that you saw in the multifamily originations, as well as in CRE?

I think they all came down a little bit because of just a slower quarter in general, and general rise in rates in general.

The rate increase, as Katherine implied, affected both CRE and multifamily, as well as single family.

It's very competitive.

And occasionally, we're choosing not to compete.

Okay.

That's helpful.

We will not -- it gives you -- I'd like to emphasize something.

We're seeing the very leading edges of term diminution of the quality issue.

We will not chase that, under any circumstance.

Okay.

And then lastly, around the retained residential mortgage portfolio, can you give us just a little bit more color around your expectation for that balance?

Is it that you should still see growth but abatement in the pace of growth, given the higher rates and the pullback in refi, or is it likely that you can see an inflection in that balance?

We actually expect to see balances increase nicely, for several reasons.

Along with fewer refinances, we have much lower repayment rates.

So long as that continues, we're going to see positive impact of increasing of loans on our balance sheet because people are not refinancing -- aren't paying them off.

That does a lot of good things for us.

It causes us to have lower loan-related costs -- keeping the loan is a very valuable thing to do from an income statement point of view.

It also stabilizes our servicing income.

Okay.

Thank you.

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

Your line is open.

Thanks.

Good morning, everyone.

Just following up on John's questions there -- just I guess, more broadly, if you could just talk about your outlook for the pace and mix of loan growth in 2014, particularly given this changing mix of originations with less single family production.

Just curious what you're seeing as some of the other bigger growth categories.

I suspect business banking probably part of that.

Actually, our growth across the board's pretty good.

We were pleased with the quarter.

As Katherine implied, it was a little better than we thought it would be on loan volume.

Basically speaking, the opportunities obviously flow from an improving economy.

And the markets we're in are doing better even than the national improvement that's occurring.

It is competitive, but the good news is it's competitive around increasing loan demand as a result of business improvement conditions improving.

The home piece is the hardest to call.

The refinance craze is clearly over.

But purchases are pretty active in our markets.

The biggest problem in most of our markets is lack of inventory.

We have many hundreds of pre-approved clients that cannot find a house they want, at the price they think it ought to be sold at, mind you.

And that's slowing the whole -- that's slowing it down a bit.

But generally speaking, historically, the Spring tends to bring out some inventory, and that may happen again.

So, we're cautiously optimistic, and we have plenty of demand to handle.

And our ability to cross-sell, and what our people are doing is, in fact, going back to clients that they were too busy to really spend quite enough time with in terms of cross-sell, not getting their transaction done, and talking to them about opportunity.

And it's actually a pretty good -- it's a pretty good -- usually the year after this kind of loan volume is quite a good year.

Okay.

That's helpful.

The other question was just on the deposit side.

Relative to the past couple of quarters, we saw a bit slower growth.

I was wondering: Are you seeing your customers put more money into the stock market.

And did you do much as far as changing any rates -- pay down any of the accounts this quarter?

We tightened our rates slightly.

And people are much more active, both in the markets and in real estate.

And the businesses are drawing down cash position to invest.

So, it's the best of what you would like in an economic recovery.

Great.

Thanks, Jim.

Thank you.

Your next question comes from the line of Matthew Clark of Credit Suisse.

Your line is open.

Hello, good morning, guys.

Good morning.

Maybe just on QM, I know it's very, very early since it's been formally implemented.

But just any commentary -- any color around QM and what you might be hearing, seeing?

We expect to continue to originate the kinds of loans that our clients want us to, so long as the credit quality is very strong.

And as you know, we've had a very long history of originating loans where the borrowers are well able to repay.

So, we don't expect that to change.

We will make the kinds of loans that our clients are looking for.

On the secondary market, any commentary there?

Any change?

The secondary market is a bit slow at the moment.

We understand from people we've talked to, they're investigating and deciding what they'll do with QM.

But at the moment it's slow for other reasons, which has to do with pricing -- pricing demands on the part of the buyers.

Right.

And then, back to capital -- just quickly, you guys absorbed the preferred pretty quickly here, and I think you're now at -- preferreds are 23% of Tier 1. I think you guys tend to prefer preferred and common.

Just given that you guys were quick to come to market after you fell to this level, just curious as to any changes in your appetite for the types of capital.

Just thinking about the capital stack, and any other related comments.

Well, the mix is pretty good, as you point out, and it's where it ought to be.

We have a guideline of 25% maximum preferred in the capital stack.

And we're pretty close to that.

But we're going into the year well capitalized.

And if it's a somewhat slower growth year on balance sheet, I'm not sure how much slower it will be, but might be.

We're in good shape, we think.

This is Willis.

I'd also point out that the average assets for the quarter were above the ending assets.

So, we can raise that cash back, put it to work, and still be at the current level of leverage ratio that we reported at the end of the quarter.

Got it.

Okay.

Thank you.

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

Your line is open.

Great.

Thank you.

Good morning.

Good morning.

Jim, I'm wondering: How long do you think it will take you to grow into the investment that you made in the Company in the last year?

Probably a year or so.

Okay.

And then, I was wondering if you could give me any kind of commentary on what you're seeing in the general San Francisco market?

A couple questions ago, you mentioned you were starting to see some indications of quality issues -- early indications.

I'm wondering if that was specific to the Bay area or not.

The Bay area is having a considerably strong run around the technology and, of course, a disproportionate share of the IPOs in the market activity are hitting here.

But there's just a strong surge of innovation going on.

In our super core market, which is the city of San Francisco and immediate surrounds, and the county San Mateos and Santa Clara, about 33% of the bank, the demand for housing, the liquidity opportunities, the innovation, the formation of new companies is quite extraordinary actually.

I've been doing this here since 1980, and this is as strong as I've ever seen it.

I don't think it's really overheated, but that's probably more of the risk than a slowdown.

And it's not all -- well, it's all technology of one type or another, but the medical area, the biotech area is also extremely strong.

So, the San Francisco Bay area is really experiencing an unusual growth rate.

Those are my questions.

Thank you.

Thank you.

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

Your line is open.

Good afternoon.

Hi.

Hi.

Couple of questions.

One, you talked a little bit about the range of the reserve, given your current loan mix.

But as you continue to grow your commercial loan and business banking, how are you thinking about what kind of longer-term reserve implications that would have?

Well, we tend to establish a higher level of reserves for a number -- for several categories of business C&I loans or non-profit loans, but that's why we gave you a range of 50 to 60 basis points on average.

We don't see the mix changing that much, that dramatically.

Got it.

And then, in terms of the cross-sell that you were talking about as having a higher volume of cross-sell next year, could you give us a little bit more details about that?

I mean, are you thinking like your retail mortgage customers -- transitioning them to wealth management and therefore, what kind of incremental fee income would you see from that?

Or are you talking about taking your mortgage customers who are, say, lawyers or whatever and trying to develop business banking out of that?

Both of those things happen.

So, particularly when someone purchases a house, the last thing they want to talk about is all the other things they might do with us in the future.

So, we need to give them a reprieve, and come back to them after they've moved in.

But when our bankers are very, very busy making loans and taking the next phone call, they don't have quite the time to do the in-depth job they do, and that is in all product categories.

It's in fee-based wealth management, which could be investment management; it could be brokerage; it could be trust.

And it's also in other loans they might have or deposit needs.

We also focus a lot of attention on following them to their businesses, but that too takes a little bit of time.

You may meet the person who runs the business, and then you get introduced to the CFO, and that does not happen as quickly as buying the house and doing a mortgage on it does.

So, we see all of the cylinders experiencing more cross-sell as our bankers have a bit more time.

Are you able to put any quantitative parameters around that yet at this time?

Historically, you have not been doing as much commercial banking, so this is a slightly different situation.

We're not able to put parameters around it because we respond and help our clients with what they need.

We act as their advisor.

We are eager to work with them to meet all of their needs, and you'll see it over the course of the year.

Got it.

Thank you very much.

Your next question comes from the line of Matthew Keating of Barclays.

Your line is open.

Yes.

Thank you.

I was hoping you could define the annualized home loan repayment rate?

Is that just -- if it's dropping from 20% last quarter to 13% in Q4 -- is that essentially assuming that 13% of those loans will be repaid throughout the year now vis-a-vis 20% in the prior quarter?

Yes, Matthew.

What we said is that in the first three quarters of 2013, the annualized average repayment rate was at 20%.

So that if you had $1 million worth of loans, 20% on an annual rate would pay off basically 5% a quarter.

Now, in the fourth quarter, that has slowed to a 13% annualized rate.

It's been cut by a third, and it's approaching single digits, which is something that we haven't seen for a number of years.

Got you.

Thank you.

That's helpful.

And then, you talked about the markets where technology's big, obviously having a helpful impact on loan growth.

While it's tough to tell until the Q is filed, it did seem, from your slide deck today, that your Boston market had a particularly strong quarter.

I was just hoping you could comment maybe on some of the drivers of that loan growth trends in that market?

Thanks.

We have a increasingly experienced team in Boston under very good leadership.

They had a lot of opportunities.

They had a tremendous amount of client referrals.

The non-profit business and the venture capital, private equity business is particularly strong in that market.

Okay.

And my final question would be: I guess, according to your latest Capgemini study, you banked about 43,000 high-net-worth households in your footprint.

I know you haven't done the study in a while, or maybe it's coming out fairly soon, but where would that number be at the end of 2013 now, in terms of the number of high-net-worth households that First Republic is banking?

Thanks.

Well, we don't really know, of course, and the study will be coming out in the next six or seven months, roughly.

But it's up -- maybe up quite a lot, actually.

Fair enough.

Thank you.

There are no further questions in queue.

I turn the call back to Jim Herbert for any closing comments.

Great, thank you very much.

Thank you all very much for your time and attention.

We're pleased with the quarter.

We're pleased with the year.

And we're in great shape going into 2014.

So, we look forward to staying in touch with everyone.

Thank you.

Bye-bye.

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

You may now disconnect.