First Republic Bank (FRC) 2015 Q2 法說會逐字稿

Greetings and welcome to the First Republic Bank's second-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 second-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'd like to turn the call over to Jim Herbert.

Thank you, Dianne.

Results for the second quarter were excellent.

Let me start with a few highlights.

Overall, our business continued to be very strong.

Lending, deposit gathering, private wealth management, and business banking all performed quite nicely during the quarter.

During the quarter, we did receive a one-time $9 million special dividend from the FHLB.

We've excluded this positive impact to our results from all of our core metrics.

Core EPS was $0.73 per share.

Core revenue for the quarter was up 12% year-over-year.

Very importantly, credit quality remains excellent.

Catherine, Mike Selfridge, and Mike Roffler will run through the quarter's results with greater detail in a moment, but first, let me focus on a few milestones that are worth noting.

This July 1, we celebrated our 30th year of business.

Since founding First Republic, we've achieved steady organic growth, coupled with very high levels of client satisfaction.

We've maintained exceptional credit quality.

We've maintained always a very strong capital position.

We've developed very robust business banking and wealth management divisions.

We've established an extremely strong brand, and importantly, we've been consistently profitable each of the 30 years.

July 1 also marked the fifth year since our buyback from Bank of America Merrill Lynch.

Since the third quarter of 2010, when we bought the Bank back, our quarterly core earnings have grown, from $0.35 per share to $0.73, or a 17% per annum growth rate.

Credit quality has remained very strong, and cumulative actual credit losses during the last five years have totaled only $21 million compared to over $0.25 billion of loss reserves that have been established.

Over these same five years, we've increased tangible book value per share by 16% per annum.

In short, it's been a terrific five years.

Let me provide a quick update on our progress as we approach the $50 billion regulatory threshold.

As our press release sets out, our most recent four-quarter average of ending total assets was $49.8 billion.

We will cross the four-quarter average of $50 billion in total assets as of September 30 this year, as we previously planned.

A year ago, we announced a series of substantial investments and staff increases to enhance our infrastructure and systems in several areas.

Important to this context, our core efficiency ratio in the second quarter was 59.8%.

And for the past 12 months, it's been well within our guidance of 57% to 61%.

To date, we've obviously completed our upgrades with regard to AML BSA, liquidity risk management, liquidity stress testing, internal audit, DFAST and the Volcker rule.

We, of course, are continuing to work on additional investments in these areas and making continuous improvements, as well as keeping up with the Bank's growth.

In terms of ongoing efforts, enterprise risk management is getting a great deal of attention at this point, and we have considerable resources that we are expanding in this area.

We're also focused on resolution planning or living well, which will be -- needs to be completed over the next year.

We're making good progress on both of these latter initiatives but still have much more work to do.

During the last 12 months, we spent approximately $60 million in incremental professional fees on upgraded systems and increased staffing dedicated to these various enhancement initiatives.

I'm very pleased, however, to say that strong revenues, plus an effective cost-containment initiative, have kept our core efficiency ratio below 60 for the past 12 months, as we hoped we'd be able to do.

Our overall results for the past year have been quite satisfying, and the enterprise is substantially stronger as a result of these investments.

Overall, it was an excellent quarter.

Now let me turn the call over to Katherine.

Thank you, Jim.

It was indeed an excellent quarter.

Let me talk about loan volume, loan sales and wealth management.

This was our best quarter ever for loan originations, which were $5.8 billion.

Generally, we experienced a bit of seasonality in the second quarter due to the very active spring buying season.

Originations in the quarter included $1.5 billion in business lines of credit and business loans.

We would note that utilization of business lines is typically about 35%.

Single-family home originations were split 50/50 between purchase and refinance.

Home purchase activity remains robust in all of our markets.

Historically, First Republic is particularly strong on a competitive basis at home purchased finance.

Our pipeline going to the third quarter is approximately the same as it was this time last year.

Loans outstanding over the past 12 months have increased 12.7%.

We expect on balance sheet loan growth for the full-year of 2015, excluding loans held for sale, to be between 12% and 14%.

Nonperforming assets continue to be extremely low at 11 basis points, with only $352,000 of charge-offs in the quarter.

Although loan pricing remains competitive, we continue to successfully win business.

That's due to our relationship-based, client-focused model, and a strong service culture that emphasizes teamwork and cooperation.

In the second quarter, we sold $887 million of loans into the secondary market, with a gain on sale of 39 basis points.

For the remainder of 2015, we expect gain on sale margins to be quite modest.

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

Despite a slight decline in the market overall, wealth management assets were up 2% for the quarter and 18% from a year ago.

Wealth management revenues were up 19% from the second quarter a year ago.

We're also very pleased to have announced the acquisition of Constellation Wealth Advisors, and look forward to having them join us by the end of third-quarter.

Their products and services are consistent with our current wealth management offerings.

Constellation is a perfect strategic fit with our client base, geographic footprint, and service-based culture.

We are very pleased with the quarter.

And now I'd like to turn the call over to Mike Selfridge.

Thank you, Katherine.

I'd like to cover our progress in strengthening our infrastructure and systems, along with deposit gathering and business banking.

As Jim mentioned, our systems and infrastructure enhancements over the past year are helping us better manage risk, and importantly, are also strengthening the enterprise overall.

Our enhanced data management and analytics are proving to be beneficial for business development and in looking at opportunities across the franchise to better know and serve our clients.

We have been particularly pleased with the way our frontline teams have incorporated these initiatives.

While we have made good progress in meeting enhanced regulatory requirements, we will continue to build and refine these functions.

Turning to deposits, balances are up 20% from a year ago.

Deposit activity continues to be quite strong, and our overall deposit mix continues to improve.

Checking balances now represent over 60% of total deposits at quarter-end, contributing to a reduction of 1 basis point in the cost of deposits.

Our average contractual cost of deposits for the quarter was 15 basis points.

Business banking had another strong quarter.

This was reflected in both business loans outstanding and business deposit growth.

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

Business deposits represented 52% of total deposits, and had a cost of only 2 basis points during the quarter.

Business banking continues to have a meaningful impact on our deposit franchise.

Our service-focused culture, quick response times, and core competency in cash management services helps us win new business each day.

Now I'd like to turn the call over to Mike Roffler.

Thank you, Mike.

I'm going to cover core net interest income and margin, our core efficiency ratio, the investment portfolio, and purchase accounting.

As Jim mentioned, we have excluded from all core metrics in the second quarter the one-time special dividend of $9 million from the Federal Home Loan Bank.

We continue to focus on growing core net interest income, which was up 13.5% year-over-year.

We would note that this is the 16th consecutive quarter of double-digit growth of core net interest income.

During the quarter, our core net interest margin was 3.12% compared to 3.09% for last quarter.

The modest improvement in our core net interest margin was primarily the result of lower average cash balances, which were deployed into loans and securities.

We are continuing to enhance our regulatory-related functions, and invest in the growth of the overall franchise and the client experience.

While we continue to make these investments, revenue growth and cost-containment help to effectively offset these expenses.

Looking ahead, we expect the core efficiency ratio will remain within our previously guided range of 57% to 61% through the remainder of this year and 2016.

At quarter-end, total high-quality liquid assets, including cash, equaled 7.7% of total assets.

We will continue to increase HQLA as part of our on-balance sheet liquidity strategy.

We do retain flexibility in timing and will look to be opportunistic in the market.

During the quarter, we issued $100 million of noncumulative perpetual preferred stock, further strengthening our Tier 1 leverage capital position.

Now that it has been five years since our divestiture from Bank of America, I want to provide an update on our purchase accounting.

Purchase accounting contributed a modest $0.03 per share in the second quarter to GAAP earnings, compared to $0.07 the same quarter a year ago.

Future purchase accounting will add about $0.39 in total to book value per share over the next few years.

Approximately 88% of all purchase accounting has now been recognized as income.

Book value, which increased 12% from a year ago, is now over $30 per share.

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

Thank you.

It was an excellent quarter overall.

Results were good across the enterprise.

In closing, let me highlight three points.

First, the substantial investments we've made in infrastructure and systems are going quite well, but we remain committed to doing an excellent job in implementing each of these various initiatives.

Second, we are delighted to have been able to invest so heavily in these enhancements while maintaining our core efficiency ratio under 60% during the past 12 months.

Third, we are also very pleased that growth across the enterprise continues, and has resulted in a 12% increase in core revenue year-over-year.

Overall, our simple, service-based, client-focused business model is continuing to perform very well.

Thank you.

We'd like to open the line for questions.

Erika Najarian, Bank of America.

My first question is just on maybe where you are near-term going to be within that core efficiency ratio range?

Are there any expenses that have built up ahead of crossing that $50 billion threshold specifically that could potentially go away when you cross?

Or, given your comment, Jim, on continuing to invest back in the franchise in this way, we shouldn't really think of crossing $50 billion as any sort of marker for the absolute level of expenses?

It's a good question, Erika, and obviously, we have been dealing for the last year with a lot of things we have not done before.

I've been actually quite pleased with the way it's been handled.

A little more expensive than we thought, but it's coming out, I think, quite well overall, and the business has grown into the expense, so to speak.

There are some elements of these expenses -- as we indicated previously, and I would indicate the same now -- that are temporary.

I'd put them in the category of building versus running.

But Mike Roffler, do you want to comment further?

Sure.

I think in the first sort of 9 to 12 months, there's -- you've seen an elevation in our professional fees, and that's primarily tied to consulting dollars.

And as Jim mentioned, during the building phase, we use them a bit more.

And there will start to be a dissipation of those costs and consistent, we've been adding internal resources as the enhancements have been built, and now are operational.

So, you should start to see professional fees tail off as we pass $50 billion.

And in terms of where they could tail off to, this quarter last year was about $10.8 million.

Is that just not a watermark that you could see again?

I think that's probably a little bit low, just given that we are also a larger enterprise with respect to consulting dollars; probably doesn't go back to that level, given larger enterprise and the things that we are doing.

But it's going to dissipate from the $20 million it was this quarter.

Got it.

And if I could just sneak one in.

Jim, I think some of the pushback that I get on the stock is how the margin could trend in a rising rate environment.

We've been asking all the bank CEOs during this earnings season, could you give us a sense of how you think deposit repricing for your bank will turn out if we do enter a rising rate environment?

And given that business deposits are now 52% of the total, could that mean a lower beta than you experienced in the last cycle?

On the latter point, it undoubtedly will.

How much, we can't be sure.

In the last cycle -- and actually in all the cycles we've been through over the years, both in this Bank and the predecessor Bank starting in 1980 -- the upside trailing cost on deposits runs between [0.6] and [0.7].

But that was with very modest business deposits in the most recent run-up in the sort of 2004/2005 period.

And so we are hopeful -- although we have not excessively modeled this in our disclosures in our 10-Q's -- but we are hopeful that it will lag even more.

And we are sitting at 60.5% on checking.

When we took the -- when the Bank came back from BofA, I believe that number was somewhere in the 30s.

So, it's doubled.

Got it.

Thanks so much for the question.

Steven Alexopoulos, JPMorgan.

Maybe I'll start -- maybe for Mike Roffler, just to follow-up on Erika's question, Mike, what's the update -- you had previously given an amount and expected timing of when some cost saves would start coming through.

I think it was 1Q, like $4 million or $5 million a quarter was going to come out.

One, could you give us an update there?

And secondly, following up on Jim's point about enterprise risk management, any notable incremental spend required to build that out?

So, on the first, on cost containment, we are really pleased with how it's gone, and it's largely in the second-quarter numbers you see it.

What also is in the second quarter results are also investments in the franchise and the fact that we did more business in the quarter also.

Relative to enterprise risk management, it is an area that we are very focused on now, and have invested resources, and will continue to do so here as we go to the latter half of this year and into 2016.

But I would still always come back to our efficiency targeting range as where we are -- you know, all these costs are leaving to, coupled with the revenue side of the equation.

Okay.

So the cost-containment initiatives are basically done.

And then, like you've said earlier, professional services fees will normalize down somewhat over time, right?

Okay.

That's right.

And the cost-containment initiatives will -- those will continue as we go into the future in terms of being part of our cost base.

Okay.

I wanted to follow-up on Katherine's comments, that the long pipeline is at the same point as last year.

Does that apply that you expect 3Q originations more in line with what we saw last year?

Or should recent origination activity, which has been well above the year-ago period, continue?

The second quarter, Steve, was unusually high.

And one of the reasons it was unusually high is our business loans grew significantly.

And as I mentioned, a lot of those are business lines of credit, which have less usage.

So they are not -- they don't grow the balance sheet as much as the origination number would suggest.

So it was an unusually high quarter for business loans.

And in addition, the spring buying season is usually a particularly strong quarter.

And we usually have a little bit of seasonality in the summer, as the buying season isn't so strong and people are also traveling.

Okay.

Got you and thanks, Katherine.

And then, finally, the five to seven-year part of the curve has been volatile, but very recently it's improved, at least for you guys.

You saw some modest margin expansion in the quarter.

From these levels, are you thinking the margin holds in relatively stable?

We think the margin is relatively stable.

On the margin for a minute, loan rates are slightly up from the prior quarter, in terms of new bookings.

And as you saw, the cost of funds was, in fact, down a basis point.

The unknown component of the margin, as opposed to net interest income, is the degree of average cash throughout the quarter.

It's nice to have from a liquidity point of view, but it's, of course, a drag on earnings.

We are currently -- we are watching probably $1.5 billion of average cash through the quarter, something like that.

It's a little higher than we've carried in the past, but we are larger.

And so, that's the only probably drag on the NIM.

Otherwise, everything else seems to be trending ever so slightly positively.

Okay.

Great.

Thanks for all the color.

Jared Shaw, Wells Fargo.

Just, I guess, following up on the NIM discussion there, will there be any additional impact to the NIM on the timing of the liquidity deployment this quarter as we go into third quarter?

You know, it really does depend -- I think Jim touched on a key point -- is, deposit activity, which could lead to higher cash balances early, and how quickly that's deployed would impact sort of the margin stated rate.

But again, we are trying to more focus on net interest income growth and putting those deposits to work effectively.

Okay.

Okay.

And then on Katherine's discussion on the growth on the outlook for loan growth for the full-year at 12% to 14%, and then the corollary with the discussion on the pipeline, given where we are over 8% so far this year, that really, I guess, is looking at a more steeper pull-back in growth within the last two quarters of the year.

Is that the right way to look at it?

What normally happens is that the third quarter is a bit lighter and the fourth quarter is usually very strong.

But we are looking at that range that I stated for the year, yes.

And that excludes loans held for sale.

Okay.

And then finally, just on the -- looking on the single-family residential side, are you noticing at all a push to get business done in advance of a rate increase?

Or is that more -- have we already seen that more in the past?

Or is that still something that you feel could potentially be in the market right now?

There are certainly some people who have loans that might be intermediate fix that are eager to refinance them, but we are not seeing any major push in general to move quickly to refinance.

Okay.

Thank you.

Any more than we saw a year ago.

Ken Zerbe, Morgan Stanley.

First question, just in terms of wealth management, obviously, you had Constellation -- you purchased Constellation this quarter.

You did another one a little while ago.

Is this the new strategy for First Republic, just given now you are becoming a SIFI bank, that you have folks to focus on fees and we should expect additional wealth management acquisitions going forward?

Actually, Ken, no, that's not our plan.

What we generally do is hire people, one or two people at a time, and that's what we've been doing for a long time.

That continues to be our strategy.

Occasionally, if we find a perfect fit of modest size in our market, it's something that we would look that.

We've done two deals in about 10 years.

So it's not something that you should expect.

When the perfect deal comes, we certainly look at it.

Understood.

Okay.

And then on HQLA, just obviously you are over $4 billion now.

I know you said you are going to continue to build.

But are we essentially done with the HQLA buildout for the most part, and then from here, it's incremental?

Or do you still have -- or do you feel that you need noticeably higher HQLA balances?

So we are continuing to be in process, like we have stated on prior calls.

If we look out, HQLA is going to increase as a percentage of our total assets.

And if -- we are thinking more towards the end of 2016 at this juncture, it will continue to add incrementally, and it sort of gets to roughly double that number by the end of 2016.

So $8 billion of HQLA by the end of 2016?

Yes.

Okay.

All right.

Thank you.

Casey Haire, Jefferies.

I wanted to follow-up on the efficiency ratio.

Sounds like you guys are talking about that holding at that 57% to 61% level through 2016.

I was curious, does that assume that there is no interest rates?

Given that you guys are showing asset-sensitive, I would think that that would actually help you on the efficiency ratio front.

Yes, we are not assuming any great change in the environment, that it remains sort of as-is through that period.

Okay.

So, said another way, if we did get -- start to get interest rate hikes towards the latter part of this year or early next year, you -- could you do better than that 57% to 61% range?

Yes, that's right.

If we started to get some movement, there is a possibility of some modest improvement.

Okay, great.

And then just following up on the wealth management momentum, obviously doing very well, up almost 20% year-over-year.

Just looking for some color on what's driving that.

Is it better penetration of your borrower base?

Or is it just the hires that you are making just bringing in their clients to your platform?

It's three things.

It is better penetration of our client base that hasn't had wealth management.

It's the increase in wealth management of clients who have tried us and like us.

It is the new hires that we bring in, who bring their book of business with us.

And also, our wealth management professionals are also, over the course of each quarter, adding to their books.

So it's working across the board very well.

Got you.

And just a last one for me.

The HQLA, shooting for $8 billion by year-end 2016, I missed what it was at 6/30.

At 6/30 this year, it's about $4.1 billion.

$4.1 billion?

Yes.

Got you.

Okay.

Thank you.

Paul Miller, FBR.

You know, on your loan book, you've been growing your loan book very strongly outside of the resi side of the equation.

You talked a little bit about the commercial business was an outlier.

But the commercial real estate multifamily has also been growing very strong.

Can you add some color about some of the things that you are doing to grow that?

And what -- and going forward, what should we be looking for on that growth?

Multifamily and CRE are a long-standing business for us, I mean, going right back to the founding of the Bank.

I don't think we are doing anything different other than getting more brand recognition and newer -- and new clients.

The average LTVs are the same.

The average size of the deal is somewhere between around $3 million in each case.

And the -- we are lending within our markets.

I mean, one of the characteristics of our real estate lending in this Bank is that 88% of all of our loans are within 20 miles of an office.

So, it's kind of more of the same, really.

We are doing maybe a little more multifamily in the New York market than we did before, but not too much.

And most of these loans -- is the -- is it also in your major footprint where your branches are?

Or are they more national in nature?

No, no, no.

As I just said, 88% of all of our loans, real estate collateralized, of all kind in the Bank are within 20 miles of a branch.

20 miles of the branch?

Yes, I missed that.

And on the --

And we don't go -- I'm sorry, go ahead.

No, you don't really go outside your footprint?

No, we don't.

Okay.

And then can you talk a little bit about on the loan sales, you are getting roughly about 30 to 40 basis points.

And my guess, that's all cash, right?

On the jumbo loan sales?

The fixed?

They are sold for cash.

Is that your question?

Yes.

Yes, the answer is yes.

Okay.

Thank you very much.

Julianna Balicka, KBW.

I was hoping that you might be able to elaborate a little bit more about the Constellation wealth management acquisition.

The product set and the footprint strategically fit with you very well, but, as you add such a large amount of assets onto your book, can you talk about maybe the potential longer-term outlook for improving operating leverage in the segment, or any other side effects from the acquisition over time?

Actually, Constellation operates at about the same kinds of margins we do.

As we grow the business, we have seen modest improvement in the return.

And we'll continue to see modest improvement, but it will not be any dramatic difference.

As you know, I'm sure, the efficiency ratio is much different in the wealth management business than it is in the Bank.

Got it.

And then maybe I can take another question in terms of the multiyear big picture kind of business model question, when one thinks about the private bank in Europe but is much more fee-revenue-oriented versus NII spread-income-driven, compared to your private bank model, which is still more mortgage-driven.

So could you talk about whether or not we should be thinking about, on a long-term basis, your business model transitioning towards more of a European-style private bank?

Or how would you compare yourselves?

I think our model is pretty well set.

I mean, never say never, but we generally don't focus on fees very much.

We focus on the deposits and the cross-sell, and the stickiness and the low turnover, and the low attrition components of the compensation that we get from high service, rather than the fees.

The elements of value to us basically come from very low attrition, great stickiness, very high cross-sell -- nine products per client -- and cost of funds of 15 basis points, and wealth management cross-sell in particular.

So, I don't see us changing the model very much towards a European model.

Got it.

And then final question and I'll step back.

Since you just mentioned the wealth management cross-sell, and you have mentioned in the recent past that something like -- I think you said 4,000 to 5,000 of your 145,000 -- 149,000 households at the Bank are also wealth management clients.

Do you have a -- an outlook for how much of your Bank clients you can convert into investment management and the timing for that, to see the improvement in that 4,000 to 5,000 number?

There are about 15,000 wealth management clients.

And the crossover number is approximately that 5,000 number you mentioned.

Yes, I'm saying, do you have a -- as you've added more data analytics, et cetera, do you have a timeline or sense of target for how much to kind of grow that 5,000 crossover number right now?

Actually, we don't have a target on that, but it is growing steadily all the time, as our bankers are more comfortable with the cross-sell.

And, as we add more wealth advisors and financial advisors, we have more bankers who find someone they are very comfortable with that is perfect for their client.

In fact, the Constellation acquisition is going to help us a lot in New York.

And we are very pleased about that.

And that should grow our cross-sell of bank clients into wealth management in that area, which we think will be a big plus.

Julianna, it's Jim.

Let me add one thought, because you are kind of getting at something, I think, on the data.

Mike Selfridge alluded to this, although maybe we weren't as clear as we might have been in terms of.

The -- one of the substantial benefits coming out of particularly enterprise risk management is the significant -- and I -- it's almost hard to overstate the value of it -- the significant data improvement that was accompanying that, for the purpose of understanding our client base better, and understanding the cross-sell opportunities in a quantitative manner, and being able to hand to our line-people data -- improved data.

It's really a version of sort of the large data inside the Bank.

And so some of the expenses that have been incurred in putting these initiatives into place have, in fact, come about at our own volition.

Because we've understood the value of them relative to knowing clients better.

AML BSA is in this category too.

And so what we've done -- and the whole Bank has done this -- is embrace these initiatives very aggressively to utilize them to build our data and our cross-sell off of them.

I am actually extremely optimistic of the value in the near future of some of those steps.

In fact, in some cases, leaps forward.

Very good.

Thank you very much for that color.

Aaron Deer, Sandler O'Neill & Partners.

A couple of questions on the commercial side of the business, I guess.

The C&I growth this quarter was again just really impressive.

And I'm just curious to know if there is any particular verticals that helped to drive that?

And just confirm that that's 100% all relationship business, and there weren't any participations or anything that are driving that growth.

Aaron, it's Mike.

It's all relationship base.

You know the strategy -- we follow our clients to businesses they influence.

And the growth was really proportional to the segments.

We have about nine segments we serve, and I'd say it's proportional to those particular segments.

Strong growth in private equity and venture capital, but also, across-the-board, professional services, entertainment, and other areas saw solid growth as well.

Okay.

And --

And we do not participate.

And did most of the DD&A inflows this quarter also come from the business side then?

That's my sense, kind of given some of your earlier comments.

Yes, this quarter, as you saw, business was up to 52% of total deposits.

And we saw strong growth across-the-board -- particularly in New York, we saw some good activity there.

Good stuff.

Thank you very much.

John Moran, Macquarie Capital.

I just wanted to follow-up on the HQLA build.

I think last quarter we were talking about the ultimate build expected to be $6 billion, and now we are saying $8 billion.

Is the additional $2 billion just kind of rolling the calendar forward, and now in expectation of the end of 2016?

Or is it in expectation that the balance sheet itself would be larger?

Or is it just more cushion?

So, actually, it's both things you mentioned.

We are rolling forward to the end of 2016, and also a larger balance sheet at that point with a larger deposit base.

Okay.

And then, Mike, maybe if you could just give us an update on the yields there, where you've been putting them on lately?

And obviously, things have been kind of volatile and I imagine you've been opportunistic.

You are right.

There has been a little volatility.

I think we've been around mid-2's, [2.6] is a pretty good place right now.

Okay, so that's basically unchanged in the quarter then?

Yes.

And it also doesn't hurt to wait.

Got you.

And then I just had a quick follow-up on gain on sale of margin.

And I realize that this is not contributing a ton this quarter, but under 40 basis points seems like a little bit of a disconnect versus what we've seen out of some other folks that have mortgage operation.

And then the expectation that it would stay low for the rest of this year -- could you give us a little bit of color kind of on what's driving that?

Rising rates.

One of the things that happens is, it depends on what rates are and what rate expectations are.

And as you have watched us over the years, we sell loans every quarter kind of a nice average amount.

Sometimes the gain on sale is very high and sometimes it's quite modest.

And that changes over time.

Right now with the thought that rates will be rising, gain on sale is modest.

And because we expect there to continue to be concern that rates will rise, people are being more cautious in their bids.

So we would expect the same kind of modest gains in the future -- in the near future.

And then I think you guys have said in the long-term, kind of over the course of a year or whatever, that you would expect that to trend closer to kind of 60 basis points; or if we just kind of looked back at a long-term average, that's sort of what it's been.

Is that still a fair expectation?

And I know that nobody has a crystal ball on this kind of stuff, but if we were to kind of plug a number in for 2016, is 60 basis points something that's better than 40?

At a long-term average, that might be fine.

We are looking at between 40 and 60 basis points as being good.

In some quarters, it will be more, and some quarters, it will be less.

Got it.

Thanks very much.

Matthew Clark, Piper Jaffray.

First question just on the HQLA's, just one more follow-up there.

I guess what's there, [what] 7.7% of assets, including cash.

Can you just give us a sense to where your comfort level is relative to total assets, where you think that percentage should be?

Is it 12%?

Is it 14%, 15%?

Yes.

You hit it pretty close there.

By the end of 2016, roughly 12% feels about right to us.

Okay, great.

Thanks.

And then just with the strength in deposits and even on the business loan side, any opportunities or fallout from City National yet, whether it's new bankers or new business and wealth management and so forth?

No, I wouldn't say so.

They're -- everybody is staying pretty close to the place in terms of seeing the deal through.

And we are kind of just watching.

We are starting to get some calls but not too many.

Okay.

And then just on expenses.

In your efficiency ratio guidance, I think it previously talked about maybe being at the lower end of that range in the second half of this year.

Is that still fair?

On a core basis?

You know I think we were just under [60%] this quarter.

You know we are hopeful that it might be slightly lower.

But also there is obviously the revenue side of that, which does help drive it.

So we are hopeful.

But we feel comfortable in this overall range for the rest of the year.

Okay.

And then just on reserve coverage, up a couple of basis points, obviously providing for growth.

But when you think about kind of a normalized coverage ratio that you might be working toward, and given your expectations on how that mix might change over time, can you just give us a sense for where you think that coverage ratio might shake out over the next, say, year-and-a-half?

Yes, so we've been trending towards around 60 basis points.

Given the growth in business, C&I lending that we talked about, that does tend to tilt it a little bit higher.

And if that mix continues, it would probably be a little bit above 60, but it is largely dependent on the mix of the loans.

But we feel very comfortable sort of in this range where we are at.

Okay, thank you.

Joe Morford, RBC Capital.

I just wondered if you could talk a little bit about how you see kind of the repricing playing out on the asset side of the balance sheet when rates start to rise?

Kind of --.

Well, we've got our sort of table in the 10-Q's.

And our assets reprice fairly nicely, actually.

You know, we have a duration on our home mortgage portfolio of about 3.5 to 3.9 years.

We have the business -- the increase in business banking is some fix, but quite -- but a fair amount of it is adjustable rate lines.

Our HELOC portfolio is almost entirely adjustable.

And so we have about half the balance sheet that adjusts relatively quickly on the loan side.

The other thing that happens is that we have a CPR -- a payoff rate that's a little higher than normal, even for mortgages of similar maturity duration, because of the active nature of our client base.

We are running about 12% or 13% CPR right now.

That's higher than probably similar loans would appear to be running in more conventional pools.

And that's generally been true.

The other thing is that growth of the balance sheet at a somewhat -- you know, at our rate of growth -- which is not all that high, but it's higher maybe than average -- reprices those new loans, of course, immediately with market at all times.

Okay, great.

That's very helpful, Jim.

I guess the other is -- thinking about the investment portfolio, do you see much risk to book value at all from rising rates?

Well, yes.

There could be some risk to it.

We have a fair amount in health and maturity.

But right now, we are at a profit.

So we are ahead of the game.

And we have room for upward rates.

On the loan side for a minute, Joe, to go back to that for a second, this goes back to -- I think it was Julianna earlier -- when you look at us in terms of a rising rate environment, you really have to look hard at the liability side as well.

It is not just an asset question.

It's very much a liability question.

Yes.

No, I understand.

On the liability side, we are very strong in a rising rate environment.

Okay.

Thanks so much.

Thank you.

This concludes today's question-and-answer session.

I'll now turn the call back over to Jim Herbert for closing remarks.

Great.

Thank you very much.

Thank everyone for joining us today.

And this concludes today's conference call.

You may now disconnect.