First Republic Bank (FRC) 2015 Q4 法說會逐字稿

Greetings and welcome to the First Republic Bank's fourth-quarter and full-year 2015 earnings conference call.

(Operator Instructions).

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 fourth-quarter and full-year 2015 conference call.

Speaking today will be Jim Herbert, the Bank's Chairman and Chief Executive Officer; Katherine August-deWilde, Vice Chair; Mike Selfridge, Chief Banking Officer; Gaye Erkan, Chief Investment and Deposit 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.

And thanks, everyone, for joining our call today.

We are very pleased with the results for both the fourth quarter and the year.

Let me reflect on the year for a moment and then others will talk more about the quarter.

2015 was our best year ever, earnings, loans, deposits and Wealth Management assets all grew quite nicely.

Our credit quality remains exceptional.

Capital levels are very strong.

We were pleased to be able to access the capital markets three times during the year to support our continued growth.

We also very much welcomed Constellation Wealth Advisors and several wealth management teams to the Company.

Katherine will speak more about this in a moment.

During the year we continued to make significant investments in the franchise supported by strong earnings growth.

These investments include the continuing build-out of our regulatory risk management infrastructure, and the introduction of a much enhanced online banking system which we are beginning to roll off as we speak.

We also made a series of executive promotions which strengthen our already very deep bench.

These appointments are the continuation of careful succession planning.

Let me highlight some numbers for the year.

Core revenues were up 15%.

Core earnings per share were up 10%.

Tangible book value per share was up 13.6%.

Total capital increased by 19%.

And our loan volume totaled $19.7 billion, our best year ever.

Loan growth was 16%, consistent with our plan.

It is worth noting that this growth was entirely funded by deposits.

To support loan growth we added $55 million in loan-loss reserve.

However, net charge-offs for the year totaled only $1.7 million or less than a single basis point.

Significantly, checking balances represented 63% of total deposits at the end of this year.

Wealth management assets grew 35% during the year; Katherine and Mike will speak about this shortly.

Let me take a quick moment to summarize the performance since we bought back the Bank from Bank of America 5.5 years ago.

Core earnings per share have grown 16% per annum since then.

Tangible book value per share has also grown 16% per annum.

We continue to succeed because we remain completely focused on delivering exceptional client service through a very simple business model that offers stability and predictability.

Overall we are delighted with the fourth quarter and the full year.

Now let me turn the call over to Katherine.

Thank you, Jim.

It was indeed a very good year and a very good quarter.

First Republic Private Wealth Management had a strong 2015.

During the fourth quarter wealth management assets were up $13 billion.

For the full year wealth management assets were up 35% to $72 billion.

On an annual basis wealth management revenues were up over 20%.

I would like to note that this reflects only a single quarter of Constellation's revenues and only partial quarter revenues from our newest advisor teams.

The strong growth in wealth management assets during the year was due to a number of factors.

First, continued asset inflow from both existing and new clients was very strong.

Our full service open architectural wealth management platform continues to resonate exceptionally well with our clients.

Next we completed the Constellation acquisition on October 1. It is a perfect fit with our culture and client base and we are very pleased with the ongoing integration.

Finally, our growth was enhanced by a particularly good opportunity in the fourth quarter to bring on several well established advisor teams.

In fact, we hired five wealth management teams during the quarter.

At December 31 these teams had brought over only approximately 35% of what we expect them to bring in total.

We expect the remaining assets from these teams will come over in the first half of the year.

Because of our integrated model we benefit additionally from inexpensive deposits from our wealth management business.

Wealth management professionals are choosing First Republic because they like our ability to deliver exceptional personalized service, objective advice and a full range of client solutions including great banking.

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

Thank you, Katherine.

Let me summarize some of the highlights in lending, credit quality and business banking for the quarter.

Loan originations totaled $4.7 billion, up 10% from the fourth quarter of the prior year.

Loan growth for the quarter was 16% on an annualized basis.

Credit quality continues to be very strong; nonperforming assets remain extremely low at just 12 basis points and net charge-offs for the entire year were less than 1 basis point.

Loan volume was driven by robust economic activity in our markets and our focus on relationship banking.

As usual the majority of our business was with existing clients.

Though loan pricing remains competitive, we do not and will not lower our credit standards to win new business.

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

Business banking had another great quarter; both business loans outstanding and business deposits were up nicely.

At year end business loans outstanding represented 14% of total loans while business deposits represented 51% of total deposits at a cost of 2 basis points.

The strong economic activity in all of our urban coastal markets continues to be supported by healthy job creation.

This is especially true of the strong economy in the San Francisco Bay area, which accounts for approximately 45% of the Bank.

Overall the franchise is performing well across every line of business and now I'd like to turn the call over to Gaye Erkan.

Thank you, Mike.

I would like to talk about the growth of our investment portfolio on which we have made considerable progress in our deposit gathering franchise.

Our total investment portfolio at year end was $10.5 billion, up 57% from a year ago.

Investments now represent 18% of total assets.

HQLA holdings including eligible cash totaled $5.8 billion at year end, or 10% of total assets, compared to 7% a year ago.

As we have indicated, we plan to grow HQLA to 12% of total assets by year end 2016.

Turning to deposits, it was a terrific year.

Deposits were up 29% in 2015.

Checking accounted for more than 80% of such deposit growth.

Importantly, checking is now 63% of total deposits at a cost of 1 basis point, with total deposit costs at 14 basis points during the fourth quarter.

It was a very good year across all channels, private banking, business banking and wealth management.

Deposits at our 68 preferred banking offices also grew nicely.

I would like to note that these banking offices have on average $224 million in deposits.

Now I would like to turn the call over to Mike Roffler.

Thank you, Gaye.

let me discuss our quarterly earnings, net interest margin, the efficiency ratio, our diluted share count and income taxes.

Core earnings per share was up 22% for the quarter compared to a year ago driven largely by core revenue growth which was up 21% from the fourth quarter last year.

I would also note that in the fourth quarter the net contribution of purchase accounting continued to decline and now represents just 2.9% of net income, or only $0.02 per share.

Turning to core net interest margin, the decline during the quarter of 7 basis points was due entirely to increased cash balances resulting from deposit gathering activities.

We are pleased that during the quarter contractual loan yields increased 2 basis points.

Regarding expenses, we are very pleased with the investments we've made in the franchise, particularly in wealth management.

During the fourth quarter we incurred increased expenses due to the addition of Constellation Wealth Advisors along with the robust hiring of portfolio managers and associated support personnel.

Let me take a moment to discuss how our investment and wealth management has affected the efficiency ratio.

Our core efficiency ratio was 61.4% for the quarter, slightly above the upper end of range of 57% to 61%.

The core efficiency ratio in our wealth management business over the first three quarters of 2015 was approximately 85%.

This increased to 94% in the fourth quarter due to expenses incurred in advance of fully realizing the associated revenues.

We expect to see the full benefit of these revenues starting in the first and second quarters of 2016.

Just as a point of comparison, the Bank's core efficiency ratio, excluding private wealth management, was 56.2% in the fourth quarter compared to 55.7% in the prior quarter.

We also want to remind everyone that the first-quarter expenses are higher due to the seasonal impact of elevated payroll taxes.

In the first quarter of 2016 we expect that additional expense to be $12 million to $13 million.

Also I would note that for the first quarter of 2016 our diluted share count is expected to be approximately 149.5 million shares based on yesterday's closing stock price.

With regard to income taxes, our effective tax rate for the fourth quarter was 23% due to an increase in tax benefits from our tax credit investments.

For the full year 2016 we anticipate that our effective tax rate will be in the range of 25% to 26%.

We are very pleased with our overall performance this quarter and with our full-year results.

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

Thank you, Mike, and thank everybody.

2015 was a terrific year for First Republic.

We reported record earnings while continuing to make significant investments in the strength and growth of the enterprise.

Credit quality remains very strong.

We successfully accessed the capital markets three times and we are particularly pleased to have grown tangible book value per share during the year by 13.6%.

Looking ahead for a minute -- while there is clearly considerable global uncertainty we remain committed to executing our simple, resilient business model has performed well in all environments.

The model is focused on gathering deposits, making very high quality loans, providing wealth management in our core domestic markets which continue to have strong economies.

The bottom line is that we are focused as ever on the key pillars of our model: strong capital and liquidity, excellent credit quality and exceptional client service.

It's been both a good quarter and a good year for First Republic and we look forward to 2016.

Now we would like to open the line for questions.

Operator, do we have questions?

(Operator Instructions).

Jared Shaw, Wells Fargo.

Hi, good morning, this is actually [Timar Brazilar] filling in for Jared.

Just one follow-up on the expenses; appreciate the color that you provided.

Maybe what was the portion of the incremental expense this quarter from the sign-on bonuses of the new teams hired that won't be repeated next quarter?

So the one time sign-on not very large, I would call sort of one-time cost between the integration of Constellation and sign-on/recruiters at around $2 million to $3 million.

Okay, so the guidance you provided of $12 million to $13 million higher in Q1, that is pretty much all going to be in that number, it is not going to be offset by too much of one-time expenses in the fourth quarter?

Is that correct?

No, not -- that is an ad for the payroll taxes that seasonally are always up in the first quarter.

Right, okay.

And then just more broadly looking at the potential to bring on additional teams.

Have we seen much of that run its course or is there additional opportunity in 2016 to add new teams?

There is additional opportunity.

We are talking to a number of teams right now.

Okay, great.

And maybe just switching over to the HQLA build during the quarter.

It certainly ramped up.

Did you see something in the yields earlier in the quarter maybe that drove that increase?

And kind of how should we look at that progression in 2016?

As we have indicated, we had been opportunistic in our HQLA purchases and the fourth quarter was a good year so we took advantage of that.

As indicated, we are still in the same guidance of 12% of total assets.

Okay.

And what was the yield on (multiple speakers) sorry, go ahead.

By end of 2016.

Okay and what was the yield on the HQLA loan data this quarter?

Yields are not much different this quarter than last for HQLA, around mid 2s.

And we are not going out on duration.

So we are keeping the portfolio duration profile the same.

Okay, great.

And I guess just lastly, given recent commentary by regulators surrounding commercial real estate concentration, are you seeing any change in the competitive landscape within the New York multi-family space?

And does that maybe provide you a competitive advantage over some of the other players that are bumping up against thresholds?

I wouldn't call it competitive advantage, but we are not seeing much change actually.

Our multi-family lending is about a 58% loan-to-value ratio, 55% overall.

We are very conservative.

Okay, great.

Thank you.

Steven Alexopoulos, JPMorgan.

Maybe first -- I don't know, maybe Mike Selfridge.

On the single-family loan production this quarter, could you talk about -- we saw it was pretty weak even on a year-over-year basis.

I would have thought the warmer weather would have helped that a bit.

Can you talk about are you seeing less demand there?

Just give some color on what drove that.

No, not necessarily, Steve.

I think demand is still there.

There might be a little bit of caution based on prices and limited inventory.

But overall it still appears to be pretty good from our perspective.

Can you talk about the pipeline, Mike?

I know the first quarter is typically your weakest quarter.

But can you talk about the pipeline?

Yes, actually -- looking into where we sit today looking into the first quarter, it is about the same as it was looking into the fourth quarter of 2015.

Okay, perfect.

I just want to talk about deposits for a second.

Can you guys talk about, one, what you attribute the surge in deposits in the quarter?

And then two, I know deposit rates were flat.

Was there any noticeable change at all in response to the Fed hike in December?

The deposit growth has been very well diversified and has been very nicely growing across all the channels.

And we haven't seen much of an impact with the rise in rates.

Okay.

I would add to that, Steve, that the wealth management brings with it the opportunity for deposit growth as well.

That is one of the things that happens in our integrated platform, which is when we grow these wealth managers we pick up the assets under management in the RIAs or in the accounts.

But we also pick up custody which is modest income but positive, and we pick up deposits and banking with the end individual.

So the integrated model makes the wealth management worth more than normal.

Okay.

But, Jim, was that a factor this quarter?

Did you pick up deposits from Constellation?

Is that part of the increase we are seeing?

The answer is yes, Steve, we did.

And we also are beginning to pick them up of course from the individual teams that we hire as they come on board.

Okay.

And just to follow up on that, could you guys help us think better about the revenue opportunity from the new hires?

And just basically what is a reasonable range of assets that could be brought over by the teams you currently have employed?

Well, as Katherine indicated, we have had about -- we've brought over 35% to 40% roughly of what they have under management so far.

And part of that is simply the mechanics of people coming in say in early December; it just takes time to get accounts brought over.

We have to do new [KYC] on them, etc., which we do very methodically.

And so there is a lot of -- there is a lag time.

The nice about some of the teams that we hired, the ones coming out of Credit Suisse which is certainly very public knowledge, there is nobody fighting to keep the accounts.

So it is a matter of getting it done.

So there is kind of a physicality to the activity.

Probably takes on the -- we are learning it takes about two quarters basically to get them all over.

The amount of -- the availability of additional hires really has to do with the attractiveness of the platform as we have developed it.

We are very careful though because we looked at a lot more teams then we hired.

And mostly the reason we didn't hire -- well, some of them went somewhere else, that is obvious.

But also we are very careful about the cultural fit, as you know.

If they don't fit in culturally or they don't want to fit in with the integrated model, not that they are bad people or anything, but if they don't want to operate in our model we pass.

Okay.

And Jim, Katherine said you brought five teams over so far.

Is it unrealistic to assume, I don't know, $750 million of assets per team or somewhere in that area -- on average?

We haven't really given out those numbers and we are still tallying what we expect to come over.

They are also a wide range, Steve --.

Yes.

It can be a one-person team with one supporter, or it can be a three person team.

So there is really not a meaningful average that we would give out actually because it would be strictly that, an average, it wouldn't be meaningful or predictive.

Okay.

Okay, thanks for taking all my questions.

Erika Najarian, Bank of America.

My first question is on how to think about 2016 efficiency.

I appreciate walking us through the dynamics of the fourth quarter.

And as I think about this year it sounds like, one, there continues to be opportunities to add in wealth.

And second, wealth as a percentage of your Bank will continue to grow in terms of contribution.

And as I think about that 57% to 61% guidance for 2016, given those opportunities should we expect you to fall on the upper end of that range as we think about the full year?

Erika, I think that is right as the Wealth Management -- you are thinking about it right.

As it is becoming a growing part of the total, that does lead to the efficiency ratio being at the higher end of that range.

We think that long-term is a very good thing because it is an efficient use of capital and adding to returns overall without increasing the overall balance sheet.

And so, as that grows it is 13% of revenue today and if it grows that likely keeps the efficiency ratio at the high end of that range.

Thank you.

And the second follow-up question is, on a previous bank call today their CEO noted that the equity markets is likely not going to impact a broad swath of the US consumer in terms of their borrowing decisions.

Given the spectrum of consumers that you directly address, Jim, I am wondering how historically a weak equity market has impacted borrowing decisions from your clientele?

In other words, should we worry that there could be a slowdown in growth as your clientele becomes more cautious?

It is always possible.

Historically it is a little more likely that what you will get is pricing pressure in the segment as Mike Selfridge alluded to already.

But a reasonably good availability of flow of business.

Our clientele is less affected to some extent because of the strength of their income.

But more importantly, the markets we operate in, the supply is so short in terms of availability of homes that it has not been as dramatic as the overall housing numbers would indicate, pretty much ever.

Even in 2008, as you may recall, 2008 was one of our largest lending years in the history of the Bank.

And so, it is not that we are immune, it is that we have seemingly the ability to take share when that happens.

But also the liquidity established in the client base comes to bear.

What is happening is that we are seeing a little bit of a slowdown or a psychological movement towards caution, that is definitely happening.

And that translates into maybe a little more down in fact and a little less robust bidding.

But so far not much impact.

Got it.

And just my last question, you mentioned, Jim, your ability to tap the capital markets in 2015.

We are about to approach next year, the end of your de novo period.

And I am wondering if given the balance sheet growth that you see for 2016, if you have enough in your capital coffers to take you through the end of your de novo period.

Or it is tough to tell especially given dynamics of deposit growth.

It is a little tough to tell, Erika, on the last -- your last point is the pertinent one -- it's a little tough to tell on the deposit side.

Obviously growth in checking deposits, which were 80% of our growth, are only the good news.

But on the other hand we are sticking quite closely to our business plan that we have had in place for quite a while and we review it every year I think as pretty much everybody knows.

But we are quite on plan, in fact of total assets are slightly behind the plan.

And so we are very, very cautious.

Whether we will need -- we don't currently need more capital, we are strongly capitalized.

Our guideline of 88% Tier 1 leverage we are at -- we are above 9 and well above 9. However, we intended to stay there by virtue of the capital raises so far.

And just -- sorry, a follow-up to that.

What do you think is an appropriate buffer to that 8%?

And after the de novo period are you going to think about that buffer differently?

We probably will think about it slightly differently, but not really very much.

We have been -- if you go back for 30 years we stay well capitalized.

I mean stuff happens.

The world gets nervous, the world blows up.

And if you don't have capital going into that moment you are in big trouble.

If you do have it you have a great opportunity.

Got it, thank you.

Ken Zerbe, Morgan Stanley.

First question just in terms of the tax credit investments that you did.

Obviously you tax rated a little lower than what we were looking for.

But how much was there in offset in terms of the tax credit amortization in the expense line?

So it goes hand in hand a little bit with the credits we earn and then how much of the asset is amortized.

So the net of that was about $2 million in the quarter resulting from some benefits that we hadn't necessarily expected.

And also they came in a little bit better than we had anticipated.

Sorry, when you say better, you mean the expenses were lower because of (multiple speakers)?

Correct.

We received more credits than we had anticipated.

So the expense results in being lower.

And then going forward, obviously you provide your tax rate guidance.

Is that kind of 25% to 26% -- basically that assumes that you do a little less in terms of tax guide investing?

I'm just trying to get a sense of -- obviously that also affects your efficiency ratio.

So it is a little higher than this year and there is a multitude of factors that go into it -- what is going to be our growth in tax exempt income from multiple sources along with the growth in taxable income.

And so as we look out we try to project both of those things and feel that a 25% to 26% rate is reasonable to us at this point.

Got you, okay.

And then just last question on credit.

I [know there's] $1 million of charge-offs, nothing, but any comments on where that came from, resi or commercial or --?

It would have been in the residential portfolio, but nothing unusual or alarming.

Okay, all right, thank you very much.

Joe Morford, RBC Capital Markets.

I guess looking at the impressive growth in assets under management this quarter, can you talk a bit about how much came from Constellation versus the new hires versus the growth from existing clients?

Sure, Joe.

I'm going to take a moment on this because I would like to just walk through it.

So we started the quarter at about $59 billion of assets under management.

Constellation, as we previously talked about, had managed $5.9 billion at September 30.

And Jim talked about this briefly in his comments earlier to one of the questions, that the Bank's strategy has been very much to both manage our portfolios for clients, but also keep custody of the assets in brokerage.

And also that allows us to better gather deposits from these accounts which helps the Bank from a net interest income perspective.

So this really leads to wealth management having two areas, brokerage and investment management, that gain both assets and revenues because we are managing and administering the assets.

So if you think about it, the Bank gets paid in three different ways for the managing of these assets.

You've got the investment advisory fee, the custody benefits, which help brokerage and then, importantly, deposits in the Bank which are normal, very sticky, stable deposits that we earn roughly our margin on of 3%.

And it also has the added benefit of making the clients very sticky.

It is a really key point and power of our integrated business model and, as Jim said, it is one of the reasons it makes wealth management so important to us.

So now when you tally that after the background, Constellation adds about $8.6 billion to our count of AUMs through the brokerage and through the investment management area.

Katherine talked about the new hires in the quarter, the teams, that added just $1.1 billion.

I think you will notice in our disclosures the money market funds where we have clients that will move between the Bank and maybe into a government type fund, that added about $1 billion.

And then existing clients and new clients added about $2.5 billion.

And so, that should all tally to about $72 billion for the quarter.

Okay, that is super helpful.

Thank you.

I guess just following up on Constellation, I guess then, one -- I guess if you could give us an update on the status of the integration.

But what exactly did it contribute in terms of fees and expenses in the fourth quarter?

Sure.

So from a fee perspective about $6 million to fee revenue from the direct management of the assets.

And then in terms of compensation, just over $3 million.

And then we also amortize, as you know, part of the purchase price gets put into intangible assets versus goodwill.

We amortized about $2.4 million.

So there is a modest net benefit that does not include some transition costs that I talked about earlier where we had duplicate facility for a little while and some retention -- or costs on payroll.

In terms of integration, I think it has gone very well.

We will be moving together here shortly.

The teams are working well together.

You are already seeing opportunities for banking with their clients.

And the team in New York and here in Menlo Park are working very well together.

So we couldn't be more pleased.

Okay, that is great.

I guess lastly, recognizing the excess cash levels weighed on the margin in the fourth quarter.

Just wondered, Mike, if you could give us kind of your updated outlook for the margin this year and what does that include as far as rate hikes, if any.

So I would say this, as you have seen probably the last two to three quarters, the cash level on average has bounced around a bit and that does have an impact to the reported margin.

We have been running sort of $2 billion to $3 billion I think in average cash which has been a bit higher.

Given the balance sheet size, that probably feels like a good range for us to run in.

I think with the recent rate hikes absent the cash, I think Jim and Gaye mentioned earlier no real change in our deposit cost.

That should have a little bit of expansion to the margin, all things being equal.

The next few rate hikes, if they were to occur, probably the next one not a lot happens and after that maybe a little bit more.

But I think we see a little margin pick up if we see the cash level normalize in that $2 billion range.

Importantly loans were up 2 basis points for the quarter so we did see that decline stop and started to see a little bit of expansion.

Okay, thanks so much, Mike.

Lana Chan, BMO Capital Markets.

First on the volatility that we have been seeing in the technology sector.

Could you run through for us in terms of -- particularly on the business banking side, the technology portfolios and how that would potentially affect both the loans and the deposits?

Yes, Lana, it is Mike.

On the technology side we do nothing more than handle cash management and deposits.

So there is no lending exposure there.

On the capital call line portion of the business banking portfolio, I would say there is definitely a higher level of caution given some of the valuations in that world.

That could have an impact on activity, although we are picking (technical difficulty).

Final question would be on just the overall flatter yield curve even with the recent rate hike.

Could you talk about what the expectations are if the yield curve does continue to flatten?

Where would be the most pressure point?

Clearly on the mortgage side is one area I would assume.

Well, the flattening of the yield curve would -- is not a positive event for us, but it is probably not all that negative depending on how flat it becomes.

But we have got -- our primary mortgage products are sort of 5.1 and 7.1 that we keep on the books; we sell the longer term fixed.

And so, with a mature portfolio the duration of that book is probably on the order of 3 years, 3.5 years, something like that remaining duration.

And we don't need much of a curve when you start from 14 basis points of deposit cost.

And our growth in deposits is varies significantly checking which is costing us at this moment about 1 basis point.

So we are not too concerned about it.

It is the scenario that is probably the most risky in terms of margin for us.

On the other hand, if the yield curve flattens that means that mortgage rates are low, relatively.

And that will encourage continued mortgage activity.

So the volume will be strong.

Okay, thank you, Jim.

And then just one last question if I could.

In terms of loan growth expectations for 2016, mid-teens is still generally a good range to use?

Barring any unforeseen circumstances in the economy, yes.

Okay, thank you very much.

Christopher Wheeler, Atlantic Equities.

A couple of questions if I may on wealth management.

The first one really on the -- I think Mike gave $2.5 billion of money for new clients in the quarter.

Could you perhaps break that down -- I say new clients, I think it was new money.

Can you break that down as to what that would have been from existing clients of the business and how much was brought into new clients to the business?

Because that will be a pretty good guide going forward once you absorb the new team members who have joined.

So that is the first question.

The second one, on the new team members, you already answered the question on the signing on bonuses.

But I just wondered, were these all charged off in year one or will you be amortizing some of these bonuses or signing on fees, should I say, over the longer period of time?

And perhaps third, I am interested -- obviously this has been a tremendously opportune moment for you to pick up people as we go through some changes at not just Credit Suisse but probably at Barclays as well.

But could you perhaps talk a little bit about with Credit Suisse.

Are you, or do you have any concerns regarding Credit Suisse's attempts in terms of litigation against UBS for trying to poach people while they are talking to Wells Fargo?

Thanks very much.

Let me just answer the latter one, Christopher, I don't think we have any concerns there at all.

The actions taken by others have been, in style and aggressiveness and so on, meaningfully different from ours.

But let me turn to Mike on the rest of your questions.

Yes on the --.

Thank you, no, I get it now, thank you.

On the $2.5 billion I would say, similar to usual, it is existing clients that end up doing more with us and also existing portfolio managers that have done more with new clients and referrals from banking clients.

And that typically has been a pretty decent split amongst those sort of three channels.

With respect to sort of longer-term sort of amortization of some of the upfront costs, it does add a little bit to each quarter's results.

But because much of it is done over a multiple year basis, it is not a very big part of the overall expense increase in the quarter, it will add to the future.

But if it adds $1 million or $2 million a quarter that is probably about it, not much more than that.

Okay, thanks so much, Mike.

Thank you.

Casey Haire, Jefferies.

Mike Roffler had a question -- just a follow-up on the Constellation.

You mentioned it was a $6 million revenue benefit this quarter or fee benefit.

Was that split -- sorry if I missed this, but was that split equally between investment advisory and brokerage investment?

So most of that is in the investment advisory space and there is a little part of it, say 10% roughly, that rolls into brokerage.

Okay, got you.

So brokerage resists -- just had an excellent quarter by itself or maybe some of the PMs coming on from Credit Suisse or just a seasonally strong quarter?

So it had a very good quarter by itself.

But maybe just to go back -- when I talked about the benefits we get in multiple ways from Constellation, one of those places you will see that will be broadly for the Bank overall in the brokerage line from a custody perspective where there are some fees reimbursed to us as assets grow and so you reflect some of that there also.

So it is sort of a -- it is a not Constellation driven revenue, but it is a benefit overall to the Bank because of the growth in brokerage accounts.

Got you, okay.

Great.

And then just following up on the revenue opportunity for Credit Suisse, the PMs coming on board.

It sounds like we are going to have to ballpark -- make our own assumptions around the AUM opportunity.

But in terms of fee capture, is that a similar rate to what First Republic has been doing in terms of like that 35 bp fee capture rate?

Yes, that would be a pretty good assessment because on FRIM managed assets it will be a little bit higher, but then when you add it into brokerage and average it in it averages out a bit lower.

So FRIM is averaged around 60 basis points on average, this will be I think 55 around.

But then when you add in the overall brokerage and trust it brings sort of the overall down into that mid-30s.

Got you, okay.

So all right, got you, all right.

And then just switching to asset quality.

I mean at 12 bps of loans non-accruals -- I mean there is not a lot of risk here but there was an uptick in the non-accruals.

Can you just provide a little color?

I am assuming that was commercial, just a little color on the uptick in the NPAs.

So I would say it is nothing unusual.

Periodically we work with clients who may run into a difficulty, but it is nothing unusual.

And we feel that the portfolio continues to obviously remain very strong.

And at this point those loans are very active in discussion with the clients but nothing unusual.

Okay, I mean is that coming from the commercial side of the house?

Not really, it is pretty spread.

All right, great, thank you.

Dave Rochester, Deutsche Bank.

Maybe if we just go back to the deposit growth.

It sounds like this wasn't a huge impact this, quarter, but was any of that growth driven by a shift in risk tolerance amongst high net worth customers?

And it sounds like you think this growth will stick and you'll continue to see growth on top of that in 1Q, is that right?

So to answer your first question, no, it is not shifted by any of the shifts in risk -- it is not driven by any shift in the risk profile.

I would like note in addition what Jim mentioned about the deposit growth, we have also done -- the Bank has done a great job cross-selling to the principles and the individuals within our business banking deposits.

And not only our business banking in the deposit franchise has grown but also the power of cross sell has shown itself very nicely in the fourth quarter.

Okay, great.

And then just maybe switching to expenses.

Just on the regulatory build out, can you just update us on how much expense you expect from investments in that area going forward on a quarterly run rate basis?

And then at what point are you expecting to cross below the upper end of that efficiency guidance range?

Are we thinking more 2Q-ish or maybe do we need to wait until the second half?

So, on the latter I would say probably towards the second half of 2016 on the efficiency ratio guidance to hopefully come down a little bit.

And then the regulatory spend I would say has really leveled off and it is sort of in our run rate.

I think you will note on professional fees, which is the place it was most visible in the past, has been pretty consistent the last couple of quarters.

But if you compare it to the first quarter of this year it is down about $3 million or $4 million.

And I think -- and then we have added people into the staffing of the organization.

And we have a few people to add in different areas but the large part of the build-out is done and we are continuing to add a little bit, but the total spend has sort of leveled off at this point.

Okay, great.

And then just going back to the loan pipeline comment that, Mike, I think you made earlier, you said it was in line with last quarter.

Was that specifically related to the residential portfolio or was that the total loan portfolio pipeline?

No, that was the total loan portfolio pipeline.

Okay, great.

And then just one last one on one production yields.

I was just wondering where those are post rate hike across your major loan categories?

They are about the same, really.

They are holding pretty steady, slightly up, obviously prime rate adjusted and that helps.

Okay, so on the commercial side you maybe saw a little bit of a bump up there, 25 bps (multiple speakers).

A little bit, maybe not the whole 25, but a bit.

Okay, great.

All right, thanks, guys.

(Technical difficulty) of Sandler O'Neill.

Most of my questions have been asked and answered.

I was hoping to get a little bit more color though on the deposit growth in the quarter.

It sounds like it was fairly broad-based.

But was there any outsized on either the consumer side or the commercial or from private equity that helped drive that higher in the quarter?

Not necessarily.

It's -- just to summarize again the sources of the deposit growth -- and most of 80% of the growth has been coming from checking accounts.

And it is a nice split between business and consumer checking.

And as Jim mentioned, we have also the benefit of developed management [sweep] deposits which is nice and stable.

At the same time we have been cross-selling to a lot of the personal relationships within our business banking deposits.

Other than that, we don't see that as a surge necessarily, we see that as a continuation of the business.

Okay, so typically I guess the early part of the year tends to be a little slower in terms of deposit growth.

Are some of these trends are likely to offset that so that we continue to see a pretty high level of growth?

And then I guess correlated to that, Mike Roffler, when you are thinking about the impact on the margin as some of that excess liquidity comes off, any sense of what the pacing is as you get closer to that $2 billion in cash that you are kind of targeting longer-term?

The early part of the year is a little -- always a little more challenging on deposits.

It doesn't necessarily turn into a negative, but it does turn into a slower growth rate.

But we run at a positive index, which we have run for many, many years and it clearly shows that.

It comes intuitively from two areas.

One, bonuses tend to go out and get invested or used or spent or whatever.

And taxes of course need to be paid and a lot of our clients pay in April substantial amounts.

And businesses kind of resettle and grow more in the second half of the year generally in terms of liquidity as they build up earnings from the year, particularly the private firms that we tend to bank.

I don't think there will be anything unusual; however, in the coming year at this point, I don't see that.

We do have also a fair amount of liquidity off-balance-sheet, as Mike alluded, in the money market funds and brokerage.

And so, our deposits meaningfully outran our loan growth this year and that provides the Bank with an enormous amount of flexibility.

Okay and, Mike, maybe comment on just the pace at with some of that excess liquidity might be put to work or flow elsewhere.

Well, we always like to be opportunistic and also think of averaging over time.

And so, I think we talked about this last quarter where if the deposits have outpaced our lending activity or our investing strategy, we are happy to maintain it in cash, and you saw that, with an average cash balance of just over $3 billion.

It does impact the margin, but it does add to net interest income and we will go at the pace that we feel appropriate to invest and lend out.

That last point I would like to reemphasize -- cash is not going to burn a hole in our pocket.

We operate at the pace we operate at, that is it.

Sure.

Okay, thank you very much.

John Pancari, Evercore ISI.

Wanted to see if I could get a little bit more granularity around the business, the commercial business loan growth, up solidly again -- obviously up 7% linked quarter.

So can you just give us a little bit more color on what industries are driving that and what type of business loan growth are you seeing the solid production?

No, I would say there is nothing new; it was just general activity and a little bit of seasonality but not much.

And it was across all geographies.

Okay.

And the capital call portfolio, how much did that grow in the quarter, do you have that?

I don't have the numbers off the top of my head.

I know of the 14% of total business loans it is about 27%.

I think that is up about 2% as a percentage of the total loan portfolio from the third quarter.

Okay.

And the outlook for the business loan growth, I mean is it likely to remain in this mid-20s annualized growth rate?

That is hard to project at this stage.

Again, I said the pipeline overall looks good from where we sit today and that is about as far out as I can go.

Business bankers are doing a great job building relationships and bringing in new business.

Okay and what is the yield that you are putting on your business loan generation?

I would call it in sort of the mid-3s in total.

Okay, all right.

And then on the credit front, Herbert, you said around the increase in the nonaccruals and everything.

Are there any -- is there any part of your portfolio that you are increasingly worried?

I mean we are seeing some non-energy cracks out there.

And just wondering if there is anything that you are seeing that you are worried about?

Or if you had to pick a portfolio that you are keeping a closer eye on what would that be?

The answer is we are not really at this point -- well, we are not worried but we worry all the time because of our sort of intrinsic conservatism.

We re-review two areas in particular, business banking generally.

Although our largest segment is nonprofits, they tend to be quite stable.

And then our next largest segment is one Mike has been talking about in terms of credit to funds, very stable as well, actually.

But commercial real estate we are paying particular attention to.

We are not immune to the concerns that everybody has about it.

I think we have mitigated that quite dramatically by our very conservative loan-to-value ratios.

On CRE, not multi-family, but non-multi-family commercial real estate we operate in the mid-50% LTV range roughly.

And so, we are comfortable there, but that doesn't mean we wouldn't have a problem or two.

We don't see that yet.

The demand for office space and the demand for commercial space remains strong in all of our markets.

Okay, thank you.

That is helpful.

Then lastly, is the efficiency ratio commentary you gave for the wealth management business, you indicated that it is elevated right now around the 95% range and you mentioned a core efficiency ratio of 85%.

Does it get back there in the first half or do you think it is still -- even though it comes down it remains above that 85% level?

So I think for the first half of 2016 it probably remains a little bit above -- the assets that we hope to bring over still need to come over.

So we are going to be a little bit elevated for a period of time.

But if you get to a point where you are not adding as many at one time like we did, along with also the client service and the operational support, we should be able to trend back towards that 85% range.

Okay, great.

Thanks for taking my questions.

Paul Miller, FDR.

We have seen with [trade] that -- we have heard that some of the disruption in the trade is the non-QM jumbo markets.

Are you seeing better pricing opportunities out there given that there are some correspondent lenders that are struggling in those products?

No, I wouldn't say we are.

The quality of product that we do, being very high quality, is intensely competitive.

And our primary competitors are the very large players, JPMorgan, Wells Fargo, etc.

So you are not seeing any really market disruptions with other players in that market at this point?

No, not really.

And then the other question is on we are starting to see, I don't know, oil is at $30, we may never see another rate hike again.

But with the current rate hike we got in December has there been any thought about maybe keeping fixed-rate loans in the portfolio if they start to meet your IRR returns or is it still too early to tell?

It's too early to tell.

I mean a quarter point wouldn't move our -- how we operate.

There might be some point, but generally speaking we have been very risk averse on asset liability matching.

And so, I can't remember a time we actually consciously kept 30- or 15-year fixed-rate mortgages.

Okay, hey, thank you very much, guys.

Julianna Balicka, KBW.

I have a question on -- and I know it has been asked a few times on the deposit growth.

But of the 3 -- roughly $3 billion of checking linked quarter growth that you have had, could you break that down a little bit more between business banking versus how much of that came from the wealth management assets from Constellation/Credit Suisse?

And then what is the implication for expected growth for the first half of the year in deposits from this new wealth management client basis?

We really don't have a breakdown that way and we haven't given it out.

We could get to it but we don't have it here, Julianna.

I am sorry.

Both sides though, as Gaye has indicated, we really, if you think about it, have three legs of deposit growth.

We have the office systems, we have our preferred banking which deals primarily with our private clients, and then we have the business banking.

And then we have a fourth.

We have the wealth-related -- fourth is wealth-related.

To give you one number for instance, Constellation, which we acquired, brought in approximately $400 million of wealth-related checking accounts, $300 million to $400 million range, to give you a sense of magnitude.

The largest growing segment of checking, which I think was your -- focus of your question -- is still business.

Business checking -- business deposits are now 53% roughly of the total deposits in the Bank.

And they are almost entirely checking.

The -- and that is growing very nicely.

But the consumer checking is growing very nicely too and our offices are doing very, very well.

I mean, I have an office system where the average size of the office is $224 million; there is a lot of checking in those offices as well.

So it is actually across the board, which we like very much.

But was there anything particularly strong in the business banking this quarter versus previous quarters?

Because I mean $3 billion is a lot of growth linked quarter.

It is great, but is it that you won some big business client relationships?

Was there something unusual this quarter or (multiple speakers)?

No, I would say, yes -- no and then a very small yes.

Generally, no.

We did bring in a little more new fund deposits in the quarter than might be normal, but not very much.

We actually -- a lot of those funds moved into money market mutual funds, treasury type funds and so on.

So that was one of the main reasons for the growth of the brokerage business, which Mike Roffler alluded to earlier.

We have had considerable success, as Mike Selfridge alluded to, briefly in the technology deposit area.

And I emphasize deposits.

We are not lending to high-tech companies, that is Silicon Valley Bank's business.

But we are becoming a depository for a lot of the venture capital funded companies.

And the individuals behind those companies.

And that is actually a very -- that is an increasingly important and strong piece of our deposit growth.

So on that, and I will step like -- actually it is very interesting.

On the growth from the technology piece, two questions.

One, what are your thoughts as we look into 2016 on the pipeline for potential technology driven deposit growth?

And two, year over year if you had [actually] a strong year in dollars of deposits grown next year as this year would that surprise you?

Yes, it would.

I wouldn't expect a 29% growth again.

I just wouldn't.

I think we are going to be quite strong, but I don't think that is going to happen again.

The other thing is that it is hard to predict because the growth in sort of tech deposits as we think of them, because the business is -- it has some ebb and flow of activity level.

It is slowing down a little bit right now because of valuations and so on, but not much.

And then we win -- we have such a modest share of it that wouldn't -- that it won't really -- we went from others basically.

It is not that we are a measure of the activity level in that business because we have a very small share.

And, Julianna, there is no budget we set for that, to your first question.

We win clients one at a time and then word-of-mouth sets in and that is consistent with our strategy across the enterprise.

Got it, that makes sense.

And then final question and (inaudible) so thank you for letting me ask these questions.

You have mentioned several times in your remarks about the success of cross-selling you have had this quarter.

And in the past you have mentioned how many thousands of households that you bank at the Bank and how many of those are also your wealth management clients.

So do you have any statistics you can provide to us on updated statistics on cross sell success?

We don't at this time, Julianna.

We are working at that as the year end settles down.

Very good, thank you.

Geoffrey Elliott, Autonomous Research.

Just one question.

Where do you think we are in the cycle for the San Francisco real estate market both on resi and on commercial?

Are you starting to see signs of things cooling down or not really yet?

It's a very good question.

We are obviously intensely focused on it.

I would say our best call would be that in the commercial area it is calming.

The demand -- the supply is beginning to meet the demand, possibly exceed it a little bit, but I wouldn't be worried yet, although we are cautious.

There is a lot of new space coming on the line in the next 24 months, commercial in San Francisco, much more than has historically been the case.

And so, the rents appear to have topped a bit.

Now they have topped at a very nice level I will say historically.

They are -- some say it is almost New York like, that is a little exaggerated but not much.

And then the housing, the number one characteristic of the housing market in the San Francisco Bay area is short supply, that is the thing that is most overlooked.

It is very, very difficult to build new housing and the bay area -- environmental reasons, zoning reasons, land availability, just it goes on.

It is expensive.

So there is, by historical standards a fair amount of new housing that has come online, but by comparison to demand it isn't 50% of demand.

Thank you.

Matthew Clark, Piper Jaffray.

Just a couple left for me.

First in terms of the new hires coming over from Credit Suisse, can you give us a sense for what inning we are in?

Do you think that this is still very early or do you think you are pretty much done in picking off teams there?

We are continuing to talk to teams both there and at other places.

And we expect to hire several teams in the next several quarters.

With Credit Suisse after the next few weeks we would be close to done.

Okay, great.

And then if you could just clarify on the expense guidance, the $12 million to $13 million increase.

Was that just tied to the seasonal increase in comp or is that the increase that you expect -- is it all in?

Is it the all in increase in expenses that you expect in 1Q?

It is the former, so it is just related to the payroll taxes.

So it is not a total comp increase, it is just the payroll tax portion of it.

Okay got it, thank you.

I will now turn the call back over to Jim Herbert for closing thoughts and comments.

Great.

Well, thank you very much, everyone, for your time and attention and thoughtful questions.

Have a good day.

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

You may now disconnect.