First Republic Bank (FRC) 2014 Q1 法說會逐字稿

Greetings and welcome to First Republic Bank's first-quarter 2014 earnings conference call.

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

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

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

Please go ahead.

Thank you and welcome to First Republic Bank's first-quarter 2014 conference call.

Speaking today will be Jim Herbert, the Bank's Chairman and Chief Executive Officer; Katherine August-deWilde, President; Mike Selfridge, 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 10-K filed today, all available on the Bank's website.

Thank you and welcome to First Republic Bank's first-quarter 2014 conference call.

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

Thank you, Diane.

And thanks to everybody for joining our call today.

We are pleased with the first-quarter results.

Business activity overall was quite good and our credit quality remains very strong.

Our core revenues were up 5% over the current quarter and 8% year over year.

I will cover some of the highlights and I'll ask others to provide more detail.

Quarterly core earnings per share were up about 8% year over year if you exclude the unusually high level of loan sale gains that occurred during last year's first quarter.

You will recall that was our best quarter ever for loan sale gains.

During the first quarter of last year loan sale gains contributed fully $0.11 per share and this year they contributed only $0.01 per share.

Book value per common was $26.21, up 14% over the year.

During the quarter we successfully raised $240 million in our first primary common stock offering since our IPO.

We are quite pleased with having strengthened our capital position with this offering.

Our tier 1 leverage ratio, thanks to retained earnings from the new common stock equity, is a very strong 9.85%.

This was up 31% year over year with over [60%] of the growth coming from common equity.

We are quite pleased with announcing an annual increase in our quarterly dividend.

The common stock cash dividend will go from $0.12 a share to $0.14 a share.

Overall loan volume did decline in the quarter but only by 9% compared to a year ago.

We are rather pleased with this actually, given the much greater decline in single-family refinancings that has generally occurred in the marketplace.

Our loan volume's reflection of the compounding nature of our brand strength, word-of-mouth referrals from satisfied clients, who tell their friends, and the superior service provided by all of our people at all levels.

Very importantly, asset quality continues to remain excellent with only 12 basis points of nonperforming assets at quarter end, and charge-offs during the quarter remained extremely low as well.

Deposits grew 4.6% during the quarter.

We are quite pleased with this.

We are also very happy that checks and balances averaged 50% of deposits throughout the quarter.

Net core interest margin improved to 3.17% versus 3.06% last quarter.

We will also talk more about this in a moment.

Private Wealth Management had another exceptional quarter.

Assets under management grew 8.6%.

Very significantly, 90% of this asset growth can be attributed to net client inflows.

Our expense growth is somewhat related to this and Willis will discuss this in a moment.

Let me speak for just a second about our secondary market activity and its impact from loan sales.

We are pleased with the pricing as well as the depth and breadth of demand that we have seen for our high-quality home loans.

We did report a modest gain on loan sales in this quarter.

We sell loans in the secondary market primarily to manage interest rate risk.

We mostly sell our longer-term fixed-rate loans.

By doing this, we reduce our asset duration while also being able to continue to offer a very full variety of loan choices to our customers.

Overall we are pleased with the quarter.

Let me turn the call over to Katherine.

Thank you, Jim.

It was a very good quarter.

Let me add some comments about loan volume and the success of Private Wealth Management.

Loan volume in the first quarter returned to a more normalized level after record originations last year.

It is worth noting that last quarter's loan volumes reflect the second-highest first quarter ever.

It would appear to us that we are withstanding the decline in single-family loan originations better than some of our competitors.

Purchases accounted for 60% of this quarter's single family loan volume.

The dollar amount of our home purchase originations was up 32% this quarter compared to the same quarter a year ago.

That is quite meaningful.

Purchase demand remains strong although for-sale home inventory is a bit limited.

Our long-standing relationship with realtors and our high level of personal service are particularly effective in purchase markets.

Our pipeline is good although lower than at this time last year.

We have continued to prequalify many clients who are actively looking to purchase homes.

Another big story this quarter was wealth management.

Wealth management assets have continued to grow nicely over the past two years.

Assets under management were up 8.6% during the first quarter.

As Jim noted, [90%] of this asset growth was from net client inflows.

Total wealth management assets are now over $45 billion.

Importantly, our wealth management revenues are up 31% year over year.

In terms of expenses, private wealth management typically operates at a higher efficiency ratio.

And as we grow, there is some frontloading of compensation for both wealth managers and the bankers who cross-sell wealth management.

We are succeeding in growing wealth management for several reasons.

We are fulfilling our clients' needs with a comprehensive range of investment management, brokerage and trust services.

We have hired excellent portfolio managers, wealth advisors, brokers and financial planners who are delivering our brand of exceptional client service.

And we have been increasingly effective in cross-selling wealth management services to our personal and business banking clients.

The growth of wealth management highlights the coordinated nature and strength of the First Republic model.

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

Thanks, Katherine.

Let me discuss our geographic markets, business banking and our cross-selling throughout the enterprise.

A shortage of housing inventory is affecting virtually all of our markets.

Our bankers and local real estate professionals report that housing demand is strong.

In our markets it is entirely common to have multiple offers on single-family loan origination.

Given this activity, we remain focused more than ever on credit quality.

We are not loosening the underwriting for home loans.

I would note that at the end of the first quarter, we had only one REO which has since been sold.

Total net charge-offs were only 1 basis point for the quarter.

Turning to business banking, this area continues to be an important contributor to the franchise of our overall deposit mix.

We're successfully adding new business banking relationships and expanding existing ones within our footprint.

Business deposits were 46% of total deposits in the quarter, which is consistent with prior quarters.

The growth of our business deposits has contributed significantly to checking account balances and improved our deposit mix over the past few years.

Loans to businesses continue to represent 10% of total loans.

As with all loan originations, we are not changing any of our underwriting standards for new business loans.

Multifamily and commercial real estate loans were up 25% year over year.

New originations for multifamily and commercial real estate loans are all within our core markets and in many cases made to our existing, very experienced clients.

As with the rest of our portfolio, these loans are very carefully underwritten.

The average size of our multifamily and commercial real estate loans during the first quarter was approximately $3.4 million and the average loan to value ratios were 51%.

As we have noted many times, the markets in which we operate tend to outperform the rest of the country which can be seen in home purchase activity this quarter.

While loan volume is down our teams have focused even more on cross-selling and there continues to be significant opportunity to deepen and broaden our relationships with existing clients.

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

Thanks, Mike.

First, on core net interest margin, which increased 11 basis points to 3.17%.

About 10 basis points of this increase was due to having lower average cash balances during the quarter.

Looking at other elements of our core NIM, our average loan yield for the quarter declined about 4 basis points compared to last quarter.

At the same time, we were pleased to achieve a 4 basis point reduction in average deposit costs, so this effectively offset our lower loan yield.

There was virtually no change in Federal Home Loan Bank borrowing costs for the quarter.

I would like to remind everyone that our $5.5 billion of advances were all fixed-rate, with an average remaining duration of three years.

We use these borrowings to lengthen our liabilities.

We believe modest NIM pressure will continue for several more quarters as new loans are still coming on to the balance sheet at somewhat lower rates than our current average loan yield.

Also we may have higher average cash balances in the second quarter due to the current cash position as well as planned loan sales.

Let me talk about our investment purchase activity.

During the first quarter, we started to build high-quality liquid assets under the proposed LCR rules.

We added $200 million of such assets in the quarter and we purchased over $100 million more so far in April.

We expect to continue these purchases throughout the year at approximately this pace.

These securities have an average yield of a little over 2%.

We will continue to sell longer term fixed-rate loans in the second quarter.

We have approximately $500 million already in the held for sale category at quarter end.

We have committed to deliver these loans at slightly higher prices than we achieved in the first quarter.

The core efficiency ratio was 58.9% for the first quarter, which is typically higher due to payroll taxes.

If seasonally high payroll taxes of about $5 million are excluded, the core efficiency ratio would have been about 57% or in the middle of our targeted range of 55% to 59%.

Let me drill down a little into the expense trends.

Other than payroll taxes, compared with the prior quarter the other increases in our expenses are primarily in the compensation line.

In the first quarter we absorbed the annual increase in healthcare costs and annual employee salary increases.

Also, our producers have been very successful in growing wealth management assets, which have boosted those revenues by over 30% year over year.

However, compensation for this activity is higher in the first few quarters after these assets first come in.

With the remaining quarters of this year each of these components -- salaries, healthcare and wealth management compensation -- should increase at a slower rate.

And the total compensation line will increase more in line with our headcount than other factors.

Now let me turn the call over to Mike Roffler.

I would like to talk about loan repayment rates, our effective tax rates and a few items related to our recent capital activity.

With lower home loan refinance activity, repayment rates continued to decline on our single-family portfolio.

During the quarter the repayment rate on our single-family loans fell to an annualized rate of 11% compared to 13% in the prior quarter and 18% for all of last year.

The repayment rate on income property loans is declining in a similar fashion.

With regard to income taxes, we estimate the effective annual tax rate at the beginning of each year.

For 2014, our effective tax rate is expected to be approximately 27%, which is down from 30.4% in 2013.

This is primarily driven by a level of tax-advantaged investing done over the last few years.

Finally, we were quite pleased with their recent capital-raising activities.

The first quarter of 2014's earnings reflect the full cost of all of our preferred stock issuances including the recent Series E offerings last October.

The $13.9 million total is our current run rate.

With respect to our common stock offering in late March, our diluted share count was modestly impacted in the first quarter.

For the second quarter, our estimated diluted share count is approximately $142 million, assuming a similar average stock price to today.

Now I would like to turn the call back to Jim.

Thank you, everyone.

Let me close by spending a moment on our continued emphasis on high-quality underwriting.

Our credit discipline remains strong, just as it has since our establishment almost three decades ago, irrespective of what competition may do from time to time.

Most importantly, the credit standards on new lending including this quarter are just as strong as our existing loans.

We noted several of the metrics on our new loans in the press release.

Let me make a fundamental point.

It's worth noting that we operate in four of the largest urban markets in the United States, dominated primarily by the largest banks in the country.

These are very target-rich environments for new clients.

Given the magnitude of the opportunities in these markets for us to grow our client base does not require lowering our loan volume standards.

Our increase in clients over time is not at all a function of lowering credit standards.

It is rather the result of our compounding reputation for service and the active acquisition one at a time of new clients by our very talented, hard-working people and by remaining very product and price competitive in terms of offerings.

Overall, we are very pleased with the quarter and the momentum going forward into the year seems to be quite good.

And we will be happy to take questions.

(Operator Instructions) Steven Alexopoulos of JPMorgan.

Maybe I'll start, just to follow up on Mike's comments that the supply of housing is limited, is that supply restriction enough to dampen the typical seasonal pickup we would see in the second quarter in origination volumes on single-family?

Steve, as Katherine mentioned, our pipeline is off a little bit.

It might restrict somewhat but we are seeing activity increase.

So I think it's too soon to say.

Okay, okay.

On the $700 million or so of originations that were for refi, do you guys think that is sustainable at this level?

Is there still a downside to that through the year?

I think that's probably a level that is likely to continue.

Okay.

And then just on the expenses, maybe for Willis, do you have the actual breakout of how much the increase was for wealth management incentive comp?

And do I understand the guidance correctly?

You are saying that will continue to grow off these levels for the rest of the year?

Thanks.

Yes.

Hi, Steve.

The way we are looking at the remaining quarter of the year is that we have established a run rate for wealth management incentive comp for the annual -- mostly for the annual salary increases and for the healthcare costs, which started at the beginning of the year.

Going forward, the total compensation line will increase more in line with additional headcount as opposed to any other factors.

I would say that a fairly significant portion of the net increase in non-payroll tax-related costs were related to wealth management, which operates at a higher efficiency ratio than the Bank overall.

And one follow-up -- I saw you hired a new PSA AML chief.

Is that also an area we should be expecting an increasing expense build through the year?

Yes.

We are continuing to focus on all of the things that we need to do as we develop our franchise.

Compliance is one.

We are also working on technology, and we are also continuing to develop several other areas as well.

Okay, thanks for the color.

Erika [Najarian] with Bank of America.

I just wanted to get a little more color on the remarkable progress in terms of wealth management.

Could you give us a sense of how much of the increase in AUM came from new or existing clients, just to give us a sense of how successful the cross-sell is being?

And also if there is any sort of regional pattern in terms of whether the client acquisition is more successful and on the West Coast versus the East?

The client acquisition is actually quite successful throughout the country.

About a third of the wealth management growth comes from cross-selling bank clients and the rest comes from Private Wealth Management professionals, either adding to existing accounts or more likely bringing in new accounts.

And to ask a question another way, of your target current clients that you think could be cross-sold the product, how has your penetration rate progressed?

The penetration rate is increasing but there is still a tremendous amount of clients who do not have wealth management.

So it is very target-rich.

I'm not sure if that is responding.

Is there anything else I can add on that?

I don't have (multiple speakers) additions to existing accounts.

Okay.

As you become more successful and continue to be successful in wealth management, does that change the natural efficiency ratio of the overall Company in that perhaps the more penetration you get on, the more AUM you grow, the more the efficiency ratio moves to the higher end of that 55% to 59% target?

To the degree that wealth management assets grow faster than bank assets and wealth management revenues grow faster than bank revenues, that would seize the efficiency ratio up towards the higher end definitely.

There's no capital requirement in wealth management, but it does run at a higher efficiency ratio.

Got it.

And just one more follow-up question, if I may, on another topic.

You mentioned that cash balances may be up from the $1.3 billion that was posted in the first quarter.

I guess, could we get a sense as to -- what are the puts and takes for the rest of the year in terms of cash deployment versus the continued build at HQLA?

Well, Erika, we are looking opportunistically to build the HQLA.

We have a little over $300 million so far as of this date.

And we did indicate that we would expect to continue to add to that either over the rest of the year at a similar pace.

We are continuing also to have good franchise development in our deposits.

We plan to sell a few more loans this quarter.

So we might be a little higher on average because we are starting the quarter at about $1.8 billion in cash and we may not be able to work that down on average for the quarter.

Got it.

Thank you for taking my questions.

Ken Zerbe with Morgan Stanley.

I just want to follow up on the comp expense a little bit more.

Because obviously you spent a fair amount of time talking about how the comp is higher when you get assets coming in the door at least for the first couple quarters and how it seemed to affect the numbers this quarter, which I guess I understand.

But at the same time you have had really strong asset growth for a long time.

This quarter was really high and I get this payroll seasonality aspect of it.

But I'm just trying to reconcile why that sort of why -- in the first couple of quarters, why that doesn't affect growth going forward because I would still expect you guys to grow wealth management assets at a pretty good clip.

But you are saying that is not going to be an issue going forward?

How do we reconcile that?

We had significant growth this quarter.

We also have, when we hire people or -- a year and a half ago made an acquisition, we had some targets and bonuses that are paid out over time as targets are reached.

The differences we will continue to grow compensation through wealth management but probably not at as high a pace as we are growing and as we grew them this quarter.

And I think another element is that when we have fewer loan originations we have more of our producers out doing the cross-selling and they are being rewarded for that.

The compensation for bringing in wealth management assets is higher over about the first full year, and then it becomes more of a longer term sort of a maintenance level.

Let me also add that when we bought [Lumina] as part of the transaction it involved an upside bonus to them after the first year.

And we are delighted to say that they are achieving that bonus.

And so we will share in some of the unusually good growth that they are achieving with them in terms of bonuses.

All right, that helps.

And then the other question, just on the tax rate, I guess I -- has anything materially changed or have you added a material amount of tax-advantaged investments just in the last quarter to and does it relate to the high-quality liquid assets, because I would have expected the tax rate to be a little bit higher, given the tax change that brought up tax rates and lower expenses.

So it's a cumulative effect in that the investing done last year, you don't necessarily get much benefit for, whereas if I have invested in a tax credit investment for loan compounding late in the year you don't get a lot of benefit and this year we will get a full benefit from it.

So it's a mix of the timing of when we make investments and what the expectation is for those investments through the rest of this year.

Gosh.

Okay, and inventory 7% -- is that for, for lack of better guidance, a decent run rate beyond 2014?

It's probably too early for me to say that at this point.

But it's probably not an unreasonable place to be for now.

All right, thank you.

Ryan Nash with Goldman Sachs.

Good afternoon, guys.

Just to follow up on one of the questions from before, if my math is correct it sounds like you are adding about $1.5 billion to somewhere around $2 billion of securities at this pace for the year.

My first question is, would that put you at a position for you would actually be LCR compliant at that point?

And then in terms of the reinvestment strategy are you just reinvesting all prepayments into HGLA assets or do you actually intended to build the securities book from here?

We are going to continue to build the securities book from here, Ryan, but remember we do have a fair amount of cash and we have carried it in the past.

And we have a deposit firm that's actually quite strong.

And so, your math is a little high.

Willis was implying that year to date we have put out about $300 million, and that is an annualizable run rate, more or less.

Remember, the beauty of high quality liquid assets is they are highly available.

So I think that we are doing it -- we try to do everything quite methodically around here and we are basically very methodically building up the growth of those assets.

The biggest challenge, of course, is that LCR is not yet final.

So none of us really know the details of the full -- of the needs.

And as it relates just to how much but it has quite a lot to do with the makeup of your liability side obviously and some of that is still being determined.

So we are basically moving towards an orderly position, mid-late 2015/early 2016.

Got it.

Just to follow up on the wealth management business, just thinking about the margin we have heard some of the bigger players talk about something in the 25% to 30% pretax margin.

I think the point of their businesses look -- have different strategy and don't look exactly like yours.

But longer term, should your margin look that dissimilar from a lot of the larger peers in the 25% to 30% range?

We are looking to take the margin to about 20% in the intermediate term.

The reason that it is not as high as others is part of our assets include trust custody and trust administration and, also, we are growing very quickly, which impacts the margin because of the frontloaded expenses.

Got it.

And then, if I could just squeeze in one other quick question, it sounds like, given the limited amounts of supply, the pipeline is slower.

Was that specific to just residential mortgage and how do pipelines look?

Outside of that are you still seeing continued strong momentum outside of traditional resi mortgage?

Let me clarify something.

The pipeline is not lower.

The pipeline is higher than it had been going into the first quarter.

Okay?

I think we have had a misunderstanding, maybe.

It's not quite as high as it was this time last year but you will be reminded that this time last year was the highest in the history of the Bank.

So I don't want to have a misunderstanding here.

We are doing fine.

The markets are very alive.

The purchase market is actually very alive.

The limited supply is the biggest constraint on it being even more so.

Got it.

Thanks for taking my questions.

Casey Haire with Jefferies.

A question on the loan yields.

Willis, you mentioned maybe it was under some pressure here.

What is the new money yield on new loans?

So it's a little bit up from where it was at the end of year.

If I looked at our real estate loans, which is about 90% of the portfolio, it's about 3.20, which is up just slightly from the end of the year.

Okay.

And commercial is coming on?

The book is --

If you think about single-family has been right around 3%, multifamily about 3.5% and CRE yields a little bit higher than that, about 4%.

It hasn't changed a great deal in the last 90 days.

Great.

And then, Willis, just a follow-up.

I'm still not following the comp line guidance.

If I understand you correctly, you have absorbed the annual merit increase, the healthcare and with wealth management doing very well that's now in the run rate as well.

But if we start -- we are still starting from pulling out the $5 million of FICA in the second quarter, meaning -- so we are starting at [115.6] and then baking in growth from headcount as well as cross-sell success.

Is that the right way to think about it?

Yes, that's spot on.

The payroll tax is seasonal.

But if you have a bigger base, your ongoing payroll tax and other costs would go up.

But if we have an X percentage increase in headcount, then we should probably have an X percentage increase in comp going forward.

Okay, thanks very much.

Dave Rochester with Deutsche Bank.

Just quickly back on the loan yield, would you also happen to have the prepayment penalty income figure for the quarter?

It was down from last quarter, it was a pretty modest impact.

I think it's less than $2 million for the quarter.

Okay, great.

And you talked about building the high quality liquid asset portfolio.

I was just wondering what types of securities you are buying there and what the average duration was on this purchases this quarter.

The securities have been level one and the duration is in the three- to five-year range.

And I saw multifamily production picked up pretty meaningfully this quarter.

Was that a function of greater activity in the market or did you have a greater appetite for product this quarter, given a little bit of softness on the resi side?

Mostly just more activity in the market.

Perfect.

And you are still doing generally 5-1's or are you also doing 7's and 10's?

We do a few 7's and 10's.

It's mostly 5-1's, 5 and 7 on the multifamily.

Great.

Thanks, guys.

Aaron Deer with Sandler O'Neill.

In addition to seeing the very strong growth in assets under management your deposit inflows were very strong.

I'm wondering can you delineate how much of that was just from your cross-sell efforts or new clients and if there was anything unusual in there that might have been seasonal or other factors that helped give that such a big boost this quarter?

There really wasn't anything that was seasonal.

It's really across the board.

The offices are doing well, preferred bankers are doing well, wealth management is -- the sweep accounts are increasing, the wealth management-related accounts are increasing.

So it's really across -- in business banking, importantly, is bringing quite a lot in.

But the makeup, the blend of the deposits did not really change in the quarter either by source or by type.

Okay, and then, given the comments heard about the low amounts of inventory and I guess added a fair bit of construction loans in the quarter, but given the demand for housing and the lack of inventory, is that an area that you guys might be looking to step on the gas a little bit?

Well, we don't really tend to step on the gas.

We respond to demand and the demand for construction loans, as you would imply with your question, is in fact increasing a bit.

We do very little speculative construction.

It's almost all owner-user construction.

And one last question on the reserve.

I know that with the book that's covered by purchase accounting continuing to diminish as a percentage of the overall, your reserve level is coming up a little bit.

I am just wondering what is the reserve ratio that you are putting on new C&I or new single-family residential?

Just trying to gauge how we should anticipate that growing over time as the book continues to grow.

I think we have been pretty consistent.

If we look at our reserves on the -- across the newer loan, at sort of the 50 to 60 basis point range on those loans and if it is a bit more commercial business lending, it will tend towards the higher end of that range and if it's more single-family it will be a little bit towards the lower end.

We do build in overall general reserve as well.

Right.

Thanks for taking my question.

John Pancari with Evercore.

Your line is open.

One question on the increase in held for sale.

Of that $500 million increase, is the gains on that already reflected in this quarter's gain on sale?

Or is it not yet reflected because of how you are accounting for it?

It's not yet reflected.

We caused a gain on sale when we sell the loans.

Okay.

And then separately in terms of your balance sheet retention for the one-to-four family books, can you just remind us what you are retaining on the balance sheet now?

I know traditionally you have been retaining the 5-1's and 7-1's and we are evaluating the 10-year retention.

Have you decided to retain 10-year product?

We generally try to sell 30-year, 15-year and 10-year and try to keep mostly five.

Sometimes we also sell 7. We keep all of our adjustables, also.

So you are not retaining any of the 10-year production?

We are retaining some.

But when we can, we sell it.

We also don't make that many 10-years, more 5's and 7's.

And then separately on the business lending side, your business loan origination volume dropped pretty significantly in the quarter.

But is that primarily seasonal?

It looks like it was coming off a high level.

It's coming off a high level.

The fourth quarter tends to be seasonal with a lot of activity.

Okay.

That's it for me.

Thanks.

Joe Morford with RBC Capital Markets.

Just to follow up on John's question there, is some of that business banking drop just reflected in capital call line activity, or what happened with that kind of loan type in the quarter?

As you know, most of the activity, we do -- at least in terms of loan outstandings, is centered in capital call activity as well as schools and nonprofits.

And while it was down for the quarter based on the seasonal activity I just mentioned, it's up about 26% year over year.

And more important, note that the deposit taking that we are getting from business banking continues to be quite strong.

We are getting just over $1 in deposits for every loan we put outstanding.

So 4.4.

Okay.

And then just to follow up, you mentioned repayment rates are down to 11%.

I was just curious how much lower you think that can go or is it likely to stay around these levels?

It's at a pretty low level.

I don't think it's going to step down much from here, just given the nature of our client base.

I would think this range is probably pretty close to a low.

Okay, thanks so much.

Julianna Balicka with KBW.

I have a couple of questions to follow up in terms of the balance sheet and one quick question on the wealth management.

Maybe I'll start with the wealth management one first.

Is there any impact that we should be thinking about from your recent acquisition of Nigro Karlin?

I think it will be very modest.

We hope to cross-sell more of their clients but it will be a modest impact.

Okay, thank you.

In terms of the average balance sheet just while I'm sitting about you are building up the high-quality assets and your cash balances, as you said, will be a little bit higher this quarter since you are starting off at a higher base, start at the higher end of period balance.

But thinking prospectively not just one quarter forward, but in general, what kind of level of cash should we be thinking about that would make sense for your model, given that you are building up HQLA?

Well, either going forward what we hope to have is good deposit growth to support loans and to put some of the excess cash more productively to work.

Of course, within the confines of -- at some point rates may rise, which will affect the pace at which we really seek to add these assets.

I would say that by the end of the year, we hope to have $1 billion or slightly more in the HQLA and that will cause a reduction maybe to somewhere in the neighborhood of half the current balance of cash that we have.

Very good.

And in terms of your securities portfolio, this quarter in particular your average balance of $5.3 billion was higher than your end of period in both December and March.

So I'm wondering what some of the more detailed flows were in there.

I know you are adding the $300 million or $200 million in the first quarter of HQLA.

But what was your average balance of munis or what were some of the other moving parts?

We added modestly to our muni portfolio.

We did sell about $100 million -- $120 million of the CMOs that we had in our available-for-sale category at the end of the quarter and that's why you see the average being slightly above the two points.

Okay, that makes sense.

And then a final question and I will step back.

On that held for sale portfolio you have earmarked some for sale this coming quarter.

But as you are looking out into 2015, and the rest of the year, into 2015 discussing about resi rates, should we be thinking about that level of loans in your held for sale or will it go back to where you used to run at?

It will jump around from time to time, depending on the demand in the market and what we originate.

And let me comment that the loans in the held for sale are not earmarked.

They have been committed for delivery to specific buyers at specific prices.

And that will vary.

We normally deliver the loans in the held for sale category within the next three months or in the second quarter.

Got it, thank you.

Matthew Clark with Credit Suisse.

On the core efficiency ratio ex-purchase accounting, now that wealth management has become a bigger piece of the business and based on what you have seen this quarter, have you thought about recasting your expected range of where that number should be over time?

Is it also fair to assume that that ratio should be higher on average, say, this year and next, relative to last year?

I think we are just going to watch it for a year and see.

It really, as Katherine said, depends on the relative growth rates of the two.

The good news is if the efficiency ratio moves up on us as we resolve the growth and wealth management.

That's a success, not failure, if you know what I mean.

And so it's a nice problem.

Okay.

That's it for me.

The rest of my questions have been asked.

Thanks.

Lana Chan with BMO Capital.

It was nice to see your deposit costs come down a little bit in the quarter, especially in the money market side.

Do you feel like you still have room to move that down a bit?

I don't know.

I don't think so.

We are getting pretty close to where I think we can operate in the current environment.

I know that Chairperson Yellen has extended the concept of how long rates might stay down today, and that might help a little.

But I think it's hard to go much lower.

Okay.

And on the expense side again, the comments about going forward, growth will be more in line with headcount growth.

Could you give us budgets or indications on how much personnel or headcount you are expecting to add on for the remainder of the year?

We don't give that kind of information out.

We add as we need.

We will add to continue to grow infrastructure, technology and compliance.

We don't have a particularly large budget for adding headcount compared to prior years.

Okay, thank you.

The next question --

We have a modest level of new branch openings this quarter.

We have only two for the rest of the year.

So we won't be needing to expand our headcount to fill those locations.

We have been at more along the six office openings in the prior couple of years.

John Moran with Macquarie Capital.

Willis, I just want to make sure I understood the commentary around gain on sale and loans held for sale properly.

Sounds like there's $500 million sitting there but that might grow a little bit.

And then gain on sale margins -- it sounded like you are indicating could be a little better than the 82 basis points that we saw this quarter.

Is that correct?

The $500 million that isn't held for sale we have committed to deliver it at prices that are a little bit better than we averaged in the first quarter.

So you are correct with respect to that.

We will also deliver as we originate flow loans, and the demand has been reasonably good at points of time for our loans.

But we are going to be happy to deliver what we guided into held for sale balance.

Got it, thanks.

And then the second one for me -- given the success and wealth management and the success of the Loomis transaction, I know you guys have historically been particularly acquisitive.

But is there opportunity or do you think you need to bolt on there, and any kind of thoughts that you have around that?

Most of our acquisitions and wealth management are the acquisitions individual producers.

And we have continue to look at that and we will do that over time when we find the right fit.

We look at acquisitions from time to time and it has to be a particularly excellent fit for us to decide to do that.

As you say, we have done it very rarely.

Got it.

Thanks very much for taking the questions.

Matthew Keating with Barclays.

I was hoping you could reconcile something for me on fee income.

It looks like the brokerage and investment fees were down this quarter despite a pretty big pickup in assets under management in brokerage accounts, about 12% in linked quarter.

And most of the wealth management growth in turn was still driven by investment advisory fees.

Can you just talk about what drives that brokerage and investment fee line item?

So brokerage and investment is driven a little bit more by transaction volumes than it is a relative amount under management.

So it's more a function of activity in the quarter just being down a bit from the fourth quarter of trading volumes.

Understood, that makes sense.

Following the recent primary common equity issuance can you just talk about your preference as it relates to future capital raising?

I knew you've got a self-imposed limitation of about 25% on the preferreds as a percentage of tier 1 capital.

Maybe you could just at a high level talk about what your preferences are looking out?

Thanks.

Well, we are very comfortable now with the 9.8-plus percentage leverage ratio and we are going to probably ride with that for a while.

Fair enough, thank you.

There are no additional questions at this time.

I would like to turn the call back to Mr. Herbert.

Thank you all very much.

We appreciate the time.

This concludes today's conference call.

You may now disconnect.