First Republic Bank (FRC) 2015 Q1 法說會逐字稿

Greetings and welcome to First Republic Bank's first-quarter 2015 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 2015 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; and Mike Roffler, 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 website.

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

Thank you, Dianne.

We are very pleased with the results for first quarter of 2015.

Let me start with some quick highlights.

Business is quite good overall.

Loans, deposits, particularly checking deposits, assets under management, as well as business banking, all grew very nicely in the first quarter.

Importantly, our credit quality remains excellent.

Our loan pipeline is strong.

Conditions in our urban coastal markets are very good, particularly in our home market of San Francisco Bay area.

We are pleased to increase our common stock dividend by $0.01 per share, a 7% increase, to $0.15 per share per quarter.

Also during the quarter, we raised a little more than $200 million of equity in a common stock offering.

This offering further strengthened our capital position and supports our continuing growth.

We remain on track with our continuing investments in infrastructure, and the system is focused on regulatory enhancements.

We have a great many initiatives underway with more to do, but we are pleased with our progress to date.

We are also continuing the buildout of our high-quality liquid asset investment portfolio, and it is going quite well.

The most recent four-quarter average of ending total assets each quarter was $48.1 million -- $48.1 billion as of the end of this quarter.

We continue to anticipate that we will cross the four-quarter average of $50 billion in total assets at the end of the third quarter of this year.

Let me run through a few key numbers.

Core revenue for the quarter was up 13% year over year.

Loan volume was the best first quarter ever.

Core earnings per share were $0.68 per share.

The Tier 1 leverage ratio increased to 9.78% at quarter end.

Our deposit gathering continued to be quite successful.

Checking balances now represent almost 60% of our total deposits.

Business banking continued to be very strong contributing to the franchise, particularly on the deposit side, and private wealth management had an outstanding quarter.

Let me talk briefly about the conditions in our markets and the opportunities for First Republic.

From an economic perspective, our urban coastal markets are doing quite well.

We continue to benefit from their vibrant real estate and economic activities.

Our brand of extraordinary service-focused banking and wealth management is continuing to resonate with our existing as well as new clients.

We continue to focus on deepening our existing client relationships by winning new clients, primarily as a result of the one-off referrals from our client base that is happy.

In fact, as we found in several recent studies, more than 50% of the growth each year -- and this quarter was no exception -- can be attributed directly to our existing clients, while another 25% comes from their direct referrals.

This form of expansion is particularly stable and naturally safer.

Looking ahead, we expect that interest rate environment will remain challenging, at least in the short term.

This is due primarily to the uncertainty surrounding the timing of future interest rates.

We presume there will be a modest rate increase in the short end in due course, probably late this year.

Overall, we are optimistic.

Our markets are strong and very active, our clients are very active, and we continue to win new business every day.

Now let me turn the call over to Katherine.

Thank you, Jim.

It was indeed a good quarter.

I would like to talk about loan volume, loan sales and wealth management.

Loan originations for the quarter totaled $4.2 billion.

It was our best first quarter ever for originations.

50% of single family home originations were for purchases and 50% were for refinances.

Refinance volume increased due to the decline in interest rates early in the quarter.

We are particularly well-positioned to capture new business in both purchase and refinance environments.

The robust loan and volume was driven by successful business development and strong economic activity, particularly in the San Francisco Bay area.

San Francisco represents 45% of our loan portfolio.

Loans outstanding grew for the quarter 12.7% on an annualized basis.

We continue to expect on balance sheet loan growth of 11% to 14% in 2015.

Nonperforming assets continue to be extremely low at 10 basis points.

For the quarter, we had only $13,000 of charge-offs.

Our loan pipeline at this time is a bit stronger than it was at the same time last year.

The loan pricing remains competitive.

Our relationship-based, client-focused service model continues to be successful.

In the first quarter, we sold almost 750 -- sorry.

We sold almost $575 million of loans into the secondary market with a gain on sale of 32 basis points.

Sales in the first quarter included primarily longer-term fixed rate loans.

Prices in the secondary market have softened, and for the remainder of 2015, we expect gain on sale margins to be quite modest.

We would note that the gain on sale for the first quarter contributed only $0.01 per share to our strong earnings.

Turning to private wealth management, we are very pleased with the quarter.

Wealth management assets were up 5.6% from year end and almost 25% from a year ago.

Wealth management revenues were up 22% from last year's first quarter.

The strong increase in wealth management fees was driven largely by effective cross-sell and net client inflow from both existing and new clients.

Importantly, core noninterest income was 18% of core revenues for the first quarter of 2015.

This is up from 10% of core revenues in 2010, following our divestiture of the Bank of America.

We were quite pleased with the ongoing diversification of revenues.

Our growing reputation for excellent service and customized wealth management solutions continues to win new clients.

At the same time, we are attracting very high quality investment advisors whose clients like our approach to investment management and private banking.

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

Thank you, Katherine.

I would like to cover deposit gathering, business banking, multifamily and commercial real estate lending.

Deposit activity was very strong in the quarter as balances grew 7.6% since year end.

We are pleased with the continued momentum in our deposit gathering franchise, as well as the improvement in the overall deposit mix.

We would note that checking deposits were 26% of total deposits in 2010 following our divestiture and were almost 60% of total deposits for the first quarter of 2015.

Business banking had another strong quarter.

The growth was reflected in both business loans outstanding and business deposits.

As of quarter end, business loans outstanding represented 13% of total loans.

Business deposits represented nearly 49% of total deposits.

Business banking has had a meaningful impact on our deposit franchise as we continue to follow our private banking clients to the businesses or nonprofits they lead and influence.

We are winning new business banking clients through our single point of contact approach, quick response times, and core competency in cash management services.

Multifamily and commercial real estate lending also had a strong quarter.

Multifamily represented 12% of the total loan portfolio at quarter end with an average loan size of $2.2 million and a weighted average loan to value of 56%.

Commercial real estate loans totaled 10% of the portfolio at quarter end with an average loan size of $2.7 million and a weighted average loan to value of 51%.

While we have been implementing a series of enterprisewide initiatives to operate in an enhanced regulatory environment, we continue to be quite successful in delivering extraordinary client service.

This success is reflected in the recent increase in our overall Net Promoter Score from 55% in 2013 to 62% in 2014.

Net Promoter Score is a direct measure of our client loyalty and satisfaction.

And now I would like to hand the call over to Mike Roffler.

Thank you, Mike.

I am going to cover our core net interest margin, core efficiency ratio, our investment portfolio, income tax rate, and book value per share.

Our core net interest margin was relatively stable during the quarter at 3.09%.

We were pleased to reduce our deposit cost by 1 basis point during the quarter.

We were very pleased with our core efficiency ratio for the first quarter, which was within our guidance.

As we previously indicated, we expect our core efficiency ratio to be between 57% and 61% after excluding seasonally higher payroll taxes in the first quarter.

Without such payroll taxes of about $8 million, our first-quarter core efficiency ratio of 61.5% would have been 59.5%.

We continue to expect the core efficiency ratio to be in this guidance range of 57% to 61% through the rest of 2015.

During the quarter, we made good progress in enhancing our on balance sheet liquidity by adding high-quality liquid assets to our investment portfolio.

We increased HQLA securities by approximately $600 million during the first quarter to $3.7 billion.

Total HQLA securities yielded approximately 2.6% for the quarter.

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

For 2015, our effective tax rate is expected to be approximately 25.4%, which is down from 27.3% in 2014.

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

As Jim mentioned, we were quite pleased with 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 145.6 million shares based on yesterday's stock closing price.

Our book value per share, which increased 12.4% from a year ago, is $29.45.

Overall, it was a very strong quarter, and now I would like to turn the call back to Jim.

Thank you.

We are very pleased with the quarter.

Results are good across the enterprise.

The loan pipeline is strong, and our markets are very active.

We remain on track in making substantial investments in enterprise infrastructure and systems, and we are satisfied with our progress, but have a great deal of work yet to do.

We continue to methodically increase our high-quality liquid asset investment portfolio and expect to do so throughout the rest of the year.

Credit quality remains excellent.

Wealth management, assets and revenues grew nicely.

Business banking had a strong year, and we successfully raised additional equity capital.

In short, our simple client-focused business model continues to perform well.

While our business continually evolves, the model and fundamental philosophical base remain unchanged: work hard, stay humble, keep it simple and clean, and always focus on the client.

Thank you very much.

We would like to open the line for questions.

(Operator Instructions).

Erika Najarian, BofA Merrill Lynch.

My first question is for Mike.

Could you give us a sense -- you said that you were going to be methodical about building your HQLA.

Could you give us a better sense on the quarterly progression that you expect?

If you expect a 2.6% yield to be a good buy-in rate from here and given that loan origination continue to be robust, what you're going to fund that build with.

Yes.

I think this pace of acquisition of HQLA is going to be pretty consistent as we go forward as we are building towards the roughly double where we were at year end by the first quarter of 2016.

We think mid to high 2s% feels right on yield, and I think we continue to hopefully fund with our deposit activities.

Okay.

And the second one is for Jim.

Clearly, one of your closest competitors were acquired this past quarter.

Do you feel that that is going to create disruption and potential hiring opportunity for First Republic or customer acquisition opportunity?

It is really too early to tell.

They are very much a head to head competitor, particularly in LA, not necessarily in New York or Northern California.

But it is a little early to tell.

I think later in the year and as we get closer to closing the deal.

It isn't going to hurt.

Steven Alexopoulos, JPMorgan.

I wanted to start on the originations.

I can't think of a quarter that the first quarter was on par with the fourth quarter or relatively close.

And I know that there has been a supply shortage in California.

I am curious, is the growth coming just purely from share gains, or are you seeing additional supply finally start hitting the market?

The market is still a little bit supply constrained.

There are increasingly -- there is increasingly more supply coming on the market.

We had a very strong quarter in originations for several reasons.

Our clients who have been looking for houses were able to acquire them.

We also did good business in multifamily business and commercial real estate, but the person who can't buy a house or couldn't buy a house last year because they didn't win in a multiple bidding situation kept at it and bought a house this last quarter.

As we come into spring, we are seeing increasing supply.

But we seem to be both picking up new clients and our clients are doing a better job of acquiring the houses they want.

Okay.

Regarding the common raise, is that essentially just more of a buffer as you cross the $50 billion level, or is that related to the strong originations you are seeing in a need to have more common just to support balance sheet growth once you cross the SIFI threshold?

It is actually a little bit of both, Steve.

It is margin for error and support of growth all wrapped into one.

Okay.

And maybe a final one for Mike Roffler.

If we look at the quarterly expenses, Mike, could you break out for us what would you consider to be one time?

I appreciate all the efficiency commentary as you prepared across $50 billion.

Thanks.

Yes.

I would say that our prior expectations for run rate of our costs on regulatory enhancement are consistent with where they have been in the last call we did, which is around $10 million a quarter this year, and then that should drop off to about 80% of that number in the future.

Jared Shaw, Wells Fargo Securities.

Talking a little bit about the asset growth, first on the loan sales, have you changed what you will now consider or consider for the portfolio now that you have crossed $50 billion?

Have you changed the parameters of what is a loan you would sell versus a loan you would portfolio?

No, we haven't.

As you can look through our history, we have sold loans every quarter.

We particularly focused on selling our longer-term fixed rate loans first and then, to some degree, to manage asset liability matching and to manage our balance sheet, our deposit growth with our loan growth, we sometimes sell more of what the market would like.

But we have done this for every quarter since we started the Bank.

Okay.

So when we look at the amount that was sold this quarter, as well as the gain on sale, that is just more reflective of where we are in the market right now, and barring a change in that, we should expect to see that stay consistent probably for the next few quarters?

We expect to see modest gains on sale, and the amount we sell, about $600 million will be at the lower end of the range.

It might be a little bit more than that.

Okay.

And then, on the commercial originations, it was obviously a very strong quarter for you.

Was there anything unique or anything that changed this quarter as you look on the commercial side specifically, or is that just a result of having been in the space for a little while now and getting good traction?

I would say the latter.

Nothing has changed.

We continue to win new clients through the strategy of following our private banking clients to the businesses they influence.

Okay.

On the capital raise you did this quarter, do you now think that -- is this enough to get you through the de novo period in June of 2017 given the growth that you have been having?

It should be, but you can't ever really tell.

And, as I said a bit in response to Steve's question, it was a combination of supporting our growth, as well as margin for error.

So the margin for error requirements can always change.

Right, right.

And then, just finally, if we saw an increase in the SIFI threshold, would we expect to see the HQLA build dramatically slow at that point?

Probably not.

We are on a course of building it up.

We think it is the right thing to do.

It might alter it slightly, but it really wouldn't change it very much at all.

Ken Zerbe, Morgan Stanley.

This goes more to Katherine's comments about modest gain in some margins.

Can you just remind us why your margins may have been so much weaker this quarter?

I think some of the other banks have reported and certainly not had nearly the decline in gain in some margins that you guys saw.

What is the difference?

The difference is that we are selling often jumbo loans, and they may be having similar margins that they had in prior years on what they are selling in terms of agency loans.

But in the jumbo market, it is somewhat dependent on the securitization market and it is somewhat dependent on who is buying.

And there was a fall off of interest at the kinds of prices we got last year.

So if we do sell every quarter, we are a price taker in that.

We obviously have many people we sell to, people -- our loans are in high demand.

But from quarter to quarter, the prices do move around.

And if you look back over several years, you will see sometimes the prices are very high and sometimes they are low.

But we have a much different mix in agency to jumbo ARM or private sales than many of our competitors.

Got you.

Okay.

That's fine.

And then, Jim, just maybe a follow-on to the last question on the SIFI buffer.

I understand that the SIFI buffer doesn't change, right?

And you are a DFAST not a CCAR bank and that is fine, but currently you want to be in the spirit of the law, right, that you hold HQLA, and you comply with LCR because it is the right thing to do.

But if the SIFI buffer gets increased, there is no law.

There is no right thing to do anymore.

Why would you continue to build HQLA when it is not even a requirement for other banks of your size?

Well, Ken, first of all, it is speculative, but there is always a right thing to do and whether it is the law or not.

And the proper thing is to have a liquidity level as the bank grows.

It is -- liquidity is not unrelated to the amount of checking, for instance, that we have.

As we know, those funds can move a little more actively than CDs, for instance.

So building up liquidity in the type of bank we have is really the right thing to do.

The targets might modestly change, but I don't really want to speculate too much on a legislative activity that has only modest headway.

Understood.

And, although we love to speculate on those sort of things, is there any other things that you may need to change or you may want to change if the SIFI buffer does increase?

If it were to increase, we might have a pacing change on some of the implementation of issues, but not generally the results.

Aaron Deer, Sandler O'Neill.

I wanted to follow up with you, Katherine, on the gain on sale question.

I'm just curious if you could give a little bit more color behind your expectations that those premiums remain fairly thin and how much of that is driven by, say, the rate environments, investor appetite, or other factors that play into that?

I don't really want to speculate on what I think our buyers are going to do.

But if I look back over the last three years, we have had some quarters with very strong gains followed by quarters where there was less investor demand.

And, as a result, we sold at lower prices.

And then, surprisingly, a few quarters later, very strong investor demand.

The first quarter seemed to be a quarter of investor demand but at lower prices, and I wouldn't expect that to change for the rest of this year.

But then we are sometimes surprised when it does.

Right now, it seems like there is demand for our loans -- quite a lot of demand for our loans.

And it may be that people are expecting rates to go up at some point -- we don't know when -- that is causing them to be a little bit more cautious in their pricing.

Would it be your sense that -- I guess, all things equal, that this would be at the low end of a range where you might expect to see sales going forward?

Because your guidance says that we see something similar going forward, but it seems like there is probably more upside potential than downside risk with respect to those gain on sale margins.

I don't want to speculate an upside potential.

At the moment, there is modest demand.

There is good demand, but there is modest interest in paying the higher prices.

And one day that may change, but I wouldn't want to predict when that would be.

Okay.

And then, a follow-up question for Mike Selfridge.

I was just wondering if you could give a little color -- the deposit growth this quarter was really extraordinary, and I am just wondering if you could give some more color behind where that is coming from and if there is any concentration in there that helped drive that?

It was really across the board, both consumer and business banking, and also I would say it was well diversified across our key markets.

Okay.

So nothing in particular that supported that, just bringing it in.

Good momentum.

Exactly.

Paul Miller, FBR Capital Markets.

This is actually Thomas LeTrent on behalf of Paul.

Of the $2 billion in residential originations that you did this quarter, was it only $575 million of it that was fixed, or can you give me some more color there?

$575 million was not all 30-year fixed.

It was a little bit more than half 30-year fixed.

The average loan we are originating is the five- to seven-year intermediate loan, and we keep very little of our 30-year fixed.

Right.

I understand that.

And given the fact that margins are expected to sort of, I guess, remain weak for the rest of the year, does that limit your appetite on the residential side for those types of our originations?

Would you scale that back at all?

Actually, no.

I think it is very important to realize that when we bring in a client with a loan, we do many, many more things with that client.

That client brings us deposits.

They bring us assets under management and other fee income, and other loans -- often, they are business loans over time.

So you should think of the single-family loan origination not only as an asset on our balance sheet -- I wish you would make a spread -- but as the acquisition of a client.

And that client not only does a lot with us but does more with us over time and then recommends colleagues to us.

So it is a basic tenet of our business.

So we would continue to grow resi loans as a market and at the price that the market is demanding we make them at.

Whether people want to pay a premium for them doesn't matter.

In fact, even if we made a loan and sold it at par, with all the other things we do with a client, we would still be pleased to have that client.

Okay.

And then, one last question.

I think the guidance is for 11% to 14% loan growth in 2015, and you expect to cross the four-quarter trailing average to $50 billion, I guess, in the third quarter.

Would it be -- without putting words in your mouth -- would it be fair to say that second quarter might be the slowest quarter of growth just to give you some more time to ramp up your tech and whatever else other costs that you are putting in the system?

I would say that we feel very confident that the third quarter of 2015 is when the four-quarter average will cross $50 billion.

I think you'll see us, as Katherine has said, be active in selling loans in the secondary market to help make sure we manage that appropriately and client activity, and the pipeline continues to be good so we will have good activity during the quarter.

Casey Haire, Jefferies.

I wanted to follow up on the loan growth.

Obviously, very strong originations in the face of a tough winter in the Northeast.

I am just wondering, did the Northeast set you back this quarter, and is there an expectation that could be stronger going forward?

Actually, you are very right.

Winter in the Northeast -- New England, even, more than New York -- but the whole Northeast being so cold, it was not a good time for people to go out and look for properties to buy.

However, what we are hearing is that, as April has warmed up a bit, there is now very much increased activity in the Northeast, and we would expect to see more robust originations.

It was a very, very, weather-wise, nice winter in California, and we may have had increased demand for that reason.

Okay.

Great.

And then, Mike Roffler, a question for you.

Sorry if I missed this, but the cost-containment initiatives, I think -- are those now fully in the run rate, or can we expect more help?

I think there is a good portion of them in the first quarter, but I think the second quarter is when they will be fully implemented.

Okay.

Got you.

Any color on amounts?

It is similar to where it has been.

Roughly half of the expense related to regulatory enhancements that we are occurring right now.

Okay.

Great.

And then, Jim, final question for you.

You mentioned the capital rates had something to do with the margins of safety at being above $50 billion.

Just curious, I know you guys have talked about when you hit that in middle of 2017, you get that relief out of that probationary period with your regulator.

But, obviously, the Bank is above $50 billion run with leverage ratios substantially above that, even though you guys do have a cleaner risk profile than those banks.

Just curious, are we now approaching a dynamic where you guys are not looking at maybe 100 bps of capital hold relief?

Well, no, I wouldn't necessarily say that, but we are really just now beginning to plan passed that point.

So I would like to defer your question a little bit.

Given the simplicity of our asset mix and the risk weighting of it and the new introduction under Basel III, we have possibly some opportunities.

But that is a couple of years away.

We do plan out that far, but we are really focused on the more intermediate regulatory enhancements of getting past the $50 billion.

I would like to take the opportunity to make one comment, if I could, on some of the questions, if you don't mind.

This gain on sale issue that has been discussed, I would just point out that in this quarter we only really had a single $0.01, roughly, of gain on sale.

And so this quarter result has only $0.01 in it from gain on sale.

So the bank is not at all dependent on the gain on sale income.

Lana Chan, BMO Capital Markets.

Just to follow up on the record first-quarter originations, given the strong start to the year, do you think that the full-year originations could exceed last year's?

We think the full quarter of originations will be very good.

It is too early to tell whether it will exceed last year, but it looks on pace to continue to be very strong.

Okay.

And, as a follow-up to the HQLA question, have you done further work in terms of parsing out what potentially could be considered more of the liquid munis if there were some change in terms of inclusion of the munis into HQLA?

We understand the regulators are obviously looking at that issue and considering whether part of the municipal securities could be HQLA.

We do look at our portfolio and consider what might be, but, again, it is probably too early to speculate as to any amount that could be considered liquid at this point in time.

Okay.

Thanks, Mike.

And just one last question, if I could, I saw in terms of the cash balances at the end of March were double what they were at the end of 2014.

I guess just expectations in terms of the margin going into the second quarter, how should we think about that increase in excess liquidity?

The excess liquidity, it, obviously, moves around a little bit.

We sort of think cash in the range of $1 billion to $1.2 billion makes sense, and sometimes it is going to fluctuate from that.

We are obviously pleased that the margin remains stable in the first quarter, but it is a challenge every day with where interest rates are at and with where competition is on loans.

Joe Morford, RBC Capital Markets.

I guess maybe a question for Mike Selfridge.

I was just curious, how much of your deposit growth is coming from your technology clients in the Bay area and the fundings, financings that many of them are doing in higher valuations and larger deals?

Joe, with perspective of the entire franchise in deposit growth, I would say it is minimal, and at least in the business banking side, the growth tends to come in the verticals on which we concentrate.

Okay.

And then, the other question was just maybe for Mike Roffler, better understanding of the drivers behind the increase in the core margin this quarter.

There has been some expectation that there was some downward pressure on loan yields, but are new money yields now coming in better?

And income, what is your outlook for the margin in general?

So we were pleased.

It is relatively stable.

It is helped by deposit costs, which were down a basis point, reflective of the checking mix that we talked about earlier.

During the quarter, loan yields were pretty stable, but the thing I would say is, the new money yields were probably slightly above 3% for the quarter, which is a little bit less than the portfolio, so there is still a very competitive market.

And, with where rates are, some potential modest pressure on loan yields, but if deposits remain with a strong mix, we think the margin remains around this level, but there is a challenge every day with where rates are.

John Pancari, Evercore ISI.

Just want to go over the cost side of the equation one more time.

Sorry if you have already alluded to it.

But can you just remind us how much more by way of this investment in infrastructure spending and risk management spending do you have to do?

How much is left, and when do you expect that that is completed?

So, for the balance of 2015, it is a similar run rate to what it was, really, in the early part of this year, which is around $10 million a quarter.

But it is already sort of in the numbers.

And then, as we get into 2016, there is some temporary element of that $10 million, so it will drop off probably 20% or so when I get into 2016.

Right.

So the actual legwork in enhancing the infrastructure and the risk management infrastructure, et cetera, that is -- is that largely done, and the expenses are now in a run rate?

What I am getting at is, what are the main restrictions remaining right now on you guys continuing to grow this balance sheet at a pretty brisk pace?

So I would say relative to what we are doing, we are continuing to add people in our infrastructure.

You will start to see sort of a reduced professional fee spend, but we are replacing that with permanent people.

There is a lot of this, which is ongoing costs, to support a larger enterprise that doesn't go away.

Okay.

All right.

So that -- so there is some still tempering of the growth being done while you're getting those people in place.

That is correct.

Okay.

And then, lastly, I know you had -- gave us some initial detail on commercial growth.

Could you give us any more color on the actual drivers of the C&I growth, either by borrower type or whatever, just so we can get a better idea of how to project that if it could remain at that relatively rapid clip?

Thanks.

The growth in C&I lending, again, was consistent with the verticals on which we concentrate, the majority being venture-capital private equity, as well as schools and nonprofits, and it was diversified across the key geographies in which we serve.

Okay.

And, remind me, have you quantified those verticals in terms of the size of the portfolios?

In terms of loan outstandings, we have, and that is in the 8-K that we just filed today.

Okay.

So we have updated numbers for this.

Okay.

Good.

Juliana Balicka, KBW.

I have a follow-up on the expense question and then a separate question.

On the expense question, you had just discussed the $10 million per quarter that is already in the numbers, and kind of looking at the expense savings that you think will come in by the second quarter, half of that would imply $5 million.

But then, of course, on top of that, you have some regular business growth expenses.

So how much regular business growth expenses should we be thinking about?

I mean, should we be thinking basically at flat expenses or slightly up expense -- total expenses, do you know what I mean?

I think I would try to point you back to our efficiency guidance is probably our best guide we can give you of 57% to 61% because we are always balancing investing in the franchise, along with the other things that we are doing from a regulatory enhancement perspective, and we are pretty comfortable in that range of guidance for the balance of the year.

Okay.

And then, on this issue, in your slide deck, you have the slide where it shows you the different areas that you have to add to your infrastructure and meet regulatory standards.

So, as you are doing that work, you at the stage now where the regulators are simply reviewing the work that you have done?

Are you still building the building blocks?

I am talking about like slide 13 in your slide deck.

Maybe it has moved around by now.

It is probably a little bit of both.

There are things that are being reviewed and discussed, and there are still things that are being built out, and that will continue for the balance of the year, and then it is an ongoing dialogue as things are reviewed.

Got it.

And then, if I can switch gears real quick, on the wealth management asset growth, how much of that this quarter came from asset appreciation?

More than half came from new client inflow.

Our asset appreciation was in line a little bit better than market.

But only about half of our assets are managed by our own portfolio managers.

Some of it is self-directed.

And, in that case, we don't really have control over how well that does, but we had a nice mix between market growth and new client flow.

And then, on the new client flow, do you have a breakdown of how much of those clients flowed in from the bank, say, starting with a deposit or mortgage customer versus how much of the new clients flowed directly into wealth management?

We have three kinds of -- three ways in which business comes in.

One, it comes from bank clients who do more with us over time, and that has been running at a nice clip and increasing each year.

We have portfolio managers who have been with us whose clients do more with us or refer colleagues to us, and those clients also over time have become bank clients, but they started out as an investment client, did some banking, and then also grew their investments.

And the third category is the hiring of new advisors whose clients tend to follow them, and all of those things are on all cylinders.

And so is it pretty equal flow in from all three channels?

It is not exactly equal, and it differs from quarter to quarter, depending on the new people we hire.

But we are very pleased with the diversity of the channels through which that business comes.

Dave Rochester, Deutsche Bank.

I was just wondering if your business is at all impacted by the Department of Labor fiduciary duty proposal, and if you could just kind of give a sense for how much of that wealth management division's compensation is commission based versus fees again?

I could tell you that wealth managers are paid more or less the way they are paid in other companies, which is based on, depending on their job, a combination of salary, bonus, and some commissions.

Okay.

That would be great.

What would be the breakdown there?

We don't have that breakdown available at this time.

Okay.

Any anticipated impact from the proposed rule?

We actually don't think so at this point.

Okay.

Great.

That's all I have.

Thanks.

There are no further questions at this time.

I will turn the call back over to Mr. Herbert for closing remarks.

Thank you all very much for taking your time today.

We are pleased with the quarter, and we appreciate all the questions.

Thank you very much.

This concludes today's conference call.

You may now disconnect.