First Republic Bank (FRC) 2016 Q1 法說會逐字稿

Greetings and welcome to First Republic Bank's first-quarter 2016 earnings conference call.

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

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

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

Please go ahead.

Thank you and welcome to First Republic Bank's first-quarter 2016 conference call.

This quarter we are going to do something different and have our expanded executive team provide some color about both the business and the geographies each one oversees.

Speaking today will be Jim Herbert, the Bank's Chairman and Chief [Operating] Officer; Mike Roffler, Chief Financial Officer; Mike Selfridge, Chief Banking Officer; Jason Bender, Chief Operating Officer; Gaye Erkan, Chief Investment and Deposit Officer; and Bob Thornton, President of Wealth Management.

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 and reports, including the Form 8-K furnished today, all available on the Bank's website.

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

Thank you, Diane.

And thanks, everyone, for joining our call today.

We are very pleased with the first-quarter results as well as the increase in dividend by $0.01 to $0.16 per share per quarter.

Revenues, earnings, loans, deposits and wealth management all grew very nicely during the quarter.

Quite importantly, we remain fully committed to our high credit standards, and credit quality remains exceptional.

Capital levels were quite strong and we are pleased to have successfully raised an additional $150 million of perpetual preferred stock, further strengthening our tier 1 capital during the quarter.

In fact, over the past 12 months we raised a total of approximately $670 million of new tier 1 leverage capital through four offerings.

We continue to invest heavily in successfully enhancing our regulatory and compliance infrastructure and systems and would expect to continue to do so.

In terms of a few key performance metrics, let me focus on two in particular.

Revenues grew 23% year over year.

And GAAP earnings per share were up 24% year over year.

This strong performance in earnings was the result of several items: loan volume of $4.8 billion, a record first quarter.

Loans grew outstanding 2.9% for the quarter and 16.2% from a year ago.

Deposits grew 6.4% for the quarter and 27.5% year over year.

Quite importantly, net interest margin was up nicely to 3.14%.

Mike Roffler will provide further details on this in a moment.

Wealth management revenues increased 31% year over year.

Our tier 1 leverage capital continues to be quite strong at 9.38%.

And finally and very importantly, nonperforming assets were only 10 basis points of total assets.

Overall, First Republic's franchise is doing very well.

We continue to succeed by remaining completely focused on exceptional client service, the execution of a very simple business model that offers stability and predictability, the maintaining of the highest possible credit standards and the retaining of a strong capital position at all times.

Now let me turn the call over to the Mike Roffler, our Chief Financial Officer.

Thanks, Jim.

I will cover purchase accounting, core net interest margin, the efficiency ratio, loan-loss provision and income taxes.

Let me start with purchase accounting and its diminishing impact on earnings.

The earnings contribution during the first quarter from the remaining unamortized purchase accounting from our divestiture from Bank of America is a de minimus $0.01 per share.

As you saw in this morning's press release, we will no longer report core metrics, with the exception of core net interest margin.

The core net interest margin continues to benefit favorably from the amortization of the remaining loan discounts from divestiture.

With respect to our core net interest margin, we are pleased with the 12 basis point increase during the quarter to 3.14%.

A little more than half of this increase was due to lower average cash balances, which were drawn down to fund our lending and investment activities.

We're also pleased that contractual loan yields increased 3 basis points from the prior quarter.

This was partly due to the rise in the Fed funds rate in mid-December and the resulting impact on floating-rate loans.

We would note that market lending rates have trended a bit lower since about mid-February.

Regarding expenses, the efficiency ratio for the first quarter was 61.4%.

As expected, we incurred approximately $12 million in incremental seasonal payroll taxes and benefit costs during the quarter compared to the prior quarter.

Without such first-quarter elevated payroll taxes and benefits, our efficiency ratio would have been 59.1%.

For the full-year 2016 we expect the efficiency ratio to be 57% to 61%.

Turning to our loan-loss provision, we added $4.5 million to our reserves during the quarter due to continued loan growth.

This quarter's provision was lower than previous quarters' as a result of the decrease in business lines of credit outstanding.

Mike Selfridge will discuss business banking in a moment.

Looking at the provision, I would note that over the last four quarters, excluding this first quarter, our average provision for loan losses was approximately $14 million.

This is about $9.5 million higher than the current first quarter of 2016 or about $0.04 per share.

We estimate our effective tax rate at the beginning of each year.

And in 2016 our tax rate is expected to be 24%.

This is slightly lower than we expected in January, primarily due to greater levels of tax-advantaged investing.

Overall, we are very pleased with the quarter.

Now let me turn the call back to Jim.

Thanks, Mike.

As previously mentioned, during this quarter's call we will have our broader executive team provide some color about both the business areas and the geographic regions for which there individually responsible.

Let me start by taking New York first, and then I will turn the call to other members of the team.

Overall, business volume in our New York market continues to be robust.

While single-family residential sales and home volumes at the very high end of the New York market have cooled a bit, the overall residential market is quite strong.

There also is continued demand for multifamily and commercial real estate loans, but loan pricing is pretty competitive.

We are very selective in this latter space and extend credit on a very conservative basis.

Overall, the real estate market and general business loan demand in New York is active, and cross-selling into both our business banking and wealth management continues to be very strong.

Now I'd like to turn the call over to Mike Selfridge, our Chief Banking Officer, to cover our San Francisco Bay Area, which represents a meaningful portion of the Bank's lending activity, along with business banking.

Thank you, Jim.

In the San Francisco Bay Area, economic conditions are good and loan demand remains quite strong.

The Bay Area remains a center for innovation, job creation and economic activity.

The real estate market continues to be characterized by limited inventory and strong demand for homes.

Prices are now appreciating at a more sustainable rate, which we believe is positive for the overall market.

Our market position and reputation in home lending continues to lead in to new growth in households and increased cross-sell activity.

The Bay Area pipeline is robust, heading into the spring homebuying season.

Business banking remains a key contributor to the franchise and was a meaningful driver of deposit growth and new client acquisition during the quarter.

We are repeatedly winning new business and deposits due to our reputation for extraordinary service, the success of our cross-selling efforts and our single point of contact model.

Business deposits, mostly in checking, now represent 53% of total deposits.

As Mike mentioned, business loans outstanding declined 5.5% from year end.

This is largely due to a decline in the utilization rate on business lines of credit.

More recently we have seen our private equity and venture capital clients exercise greater caution, which has slowed the pace of their investing and, in turn, has decreased borrowings on capital call lines of credits.

Our overall utilization rate on all types of business lines of credits was 31% at the end of March 31 as compared to 36% at December 31.

However, while the utilization rates have declined, our backlog for business lending is strong.

Now I'd like to turn the call over to Jason Bender, our Chief Operating Officer, to discuss overall loan volume and pipeline, credit quality and our California South Coastal region.

Thank you, Mike.

Bankwide loan volume was a record $4.8 billion in the first quarter, up 13% from the first quarter a year ago.

Single-family lending overall continues to be strong, which is typical as we head into the spring buying season.

Going into the second quarter, our loan pipeline remains very strong and is up from a year ago.

Loan pricing remains competitive in our markets.

And we saw an increase in refinance activity late in the quarter.

Of our single-family lending, home purchases accounted for 46%.

Credit quality continues to be very strong.

Nonperforming assets remain extremely low at just 10 basis points.

During the quarter we actually had a small net amount of recoveries.

The credit quality of the bank reflects a continued focus on disciplined underwriting.

Loan sales totaled $478 million in the first quarter and contributed $0.01 per share to earnings, consistent with recent quarters.

Regarding the South Coastal California region, which encompasses Orange County and San Diego, we continue to acquire new relationships and deepen existing ones.

With business and professional services, biopharmaceuticals, and the medical community, key drivers of activity for the area, home pricing remains stable to up somewhat.

Demand for single-family homes remains strong.

Additionally, we have seen continued opportunities in wealth management.

This has been the result of new hires added over the past few quarters and our team-based approach to cross-selling.

Let me now turn the call to Gaye Erkan, Chief Investment and Deposit Officer, who will talk about our investment portfolio, deposit franchise and our Boston and Portland markets.

Thank you, Jason.

Our total investment portfolio at the end of the first quarter was $11.4 billion, up 9% from year end.

Investments now represent 18% of total assets.

The yield on the portfolio has remained stable from the last quarter.

HQLA holdings including eligible cash totaled $7 billion at March 31 or 11% of total assets.

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

We would note that we have recorded $3.3 million gain upon a modest securities portfolio position in this quarter, approximately $0.01 per share.

Turning to deposits, it was another terrific quarter.

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

Total deposits grew at an annualized rate of 26% in the first quarter to $50.9 billion.

Importantly, checking grew 31% on an annualized basis and is now 64% of total deposits, compared to 60% one year ago.

The average rate paid on total deposits was only 13 basis points, down 1 basis point from the prior quarter.

Deposits continue to be well diversified by both client type and channel.

Let me speak for a moment about our Boston and Portland, Oregon markets.

Boston remains a stable market, driven by a broad range of industries: financial services, including private equity and venture capital, professional services, biotechnology and education.

The single-family residential market is characterized by very tight inventory.

We also see strong trend in demand for multifamily housing and increased demand for commercial space.

Overall in Boston, we have seen robust activity across all of our business areas with increased opportunities ahead as new businesses move to the region.

Turning to Portland, the increasing attractiveness of the area, supported by strong employment growth, has also resulted in significant opportunities.

Demand for real estate is substantial, due to the increasing presence of information services and technology companies.

We have seen demand, in particular, for wealth management services for businesses including nonprofits and foundations as well as customized trust solutions for individuals.

Now I would like to turn the call over to Bob Thornton, President of Wealth Management, who will cover wealth management along with the Los Angeles and Palm Beach regions.

Wealth management had an excellent quarter.

Wealth management assets grew 30% year over year and now stand at $73.4 billion.

Wealth management revenues were up 31% year over year.

The growth and wealth management assets during the quarter was due to a number of factors.

First, the continued asset inflow from of our existing and new clients was very strong.

Next, our full-service open architecture wealth management platform continues to resonate exceptionally well with clients.

And finally, the continued to hire new wealth management teams and brought on four advisory teams during the quarter.

Turning to the Los Angeles market, we continue to see it to be a stable source of business growth and opportunities for First Republic Bank.

The Los Angeles market is driven largely by the entertainment, media, apparel, financial and professional service industries and is doing quite well.

Single-family home values in the Los Angeles market during the quarter were higher than a year ago with continuing demand.

Buyers appear more selective, given the continued appreciation of home values.

Overall, volume in credit quality remains strong.

Similar to our other markets, pricing remains very competitive.

While we will compete on price, we will not compete on underwriting standards.

Turning to Palm Beach, home prices appear to have stabilized after several years of appreciation.

Demand remains strong, given somewhat limited supply.

But buyers have become more selective.

Overall, Palm Beach has complemented our New York and Boston markets in meeting our clients' needs for banking and wealth management.

And now let me turn the call back to Jim.

Thank you all very much.

It was overall a very good quarter, one of our best ever.

We are pleased with the results, which are in close alignment, in fact, with our business plan.

We continue to see strong lending opportunities in our markets for credits that meet our prudent underwriting standards.

We have a robust backlog going into the second quarter.

We also continue to see strong growth in our deposit-gathering activities as well as very active cross-sell within all of our business lines.

First Republic remains focused on the business of the business.

It is very straightforward: make safe loans, gather deposits, follow our clients to the businesses and nonprofits they influence and care about, and serve their wealth management needs.

We would note that we do not engage in investment banking or capital markets trading.

We have no direct exposure to energy.

And we have no international lending or operations.

We stick completely to what we know, what we can do well, the limited geographic footprint in which we operate and the focused segments of business that we service.

Thank you very much.

We would like to open the line for questions.

(Operator Instructions) Steven Alexopoulos, JPMorgan.

I wanted to start -- so there's obviously lots of talk about the ripple effects hitting San Fran real estate from what's happening with the late-stage tech revaluations.

You guys still have really great single-family originations.

Can you give us some color of what you are seeing in terms of the ripple effects?

And do you think midteens loan growth is still reasonable this year?

I'll take the first part and hand it over to Mike Roffler.

But as far as the overall market, there has been a bit of compression in certain valuations such as private equity valuations of the companies that are investing in.

And in terms of the ripple effect, I would say that we are not seeing anything yet.

We are seeing a modest compression maybe in certain markets on median home prices.

But outside that, the markets are still active on the residential side.

If you look at the number of transactions being done, it's still coming through at a decent clip every quarter.

As far as loan growth expectations --

I would say for 2016 we are looking at low to mid-teens loan growth is what we feel pretty comfortable with at this point.

Okay, that's helpful.

Thanks, Mike.

Just on wealth management, if we look at the $73 billion of wealth management assets, could you give us a sense of what -- obviously, there were quite a few press releases of lift-outs from Credit Suisse hitting during the quarter.

Was that meaningful in terms of the asset growth this quarter?

And maybe how should we think about what these teams could ultimately bring over this year?

They were a meaningful contribution to our asset growth.

It was a very unique opportunity that we discussed last quarter of bringing over these teams.

They have added to our overall mix.

And we've seen probably about 85% or 90% of what we expect those teams to bring over.

Okay.

So it's basically done at this point, Bob?

Yes.

Okay.

And related to the growth -- this is my final question -- you are having in wealth management -- and I know, Mike Roffler, you talked about the efficiency ratio being in that 57% to 61% range this year.

Is 57% realistic anymore, given the growth you are having in wealth management?

Thanks.

So I think that's a good point.

Given the growth in wealth management, which is now 13% of our revenues and it's got good momentum, I think we're likely operating at the higher end of that range, so 59% to 61% is probably a more normal operating range.

Great, thanks for all the color.

Ken Zerbe, Morgan Stanley.

Just looking at the business loans, I was hoping you can quantify the -- you mentioned the private equity and venture capital call lines, that those have come down.

Were they the sole reason for lower business loans?

Or if you just quantify that versus the non-P/E capital call lines or VC call lines?

We came off a very active fourth quarter.

And yes, the decrease was largely attributable to the lower utilization rate.

A lot of funds that borrowed in the fourth quarter paid off as agreed in the first quarter.

So we expected that, and that's the way those lines of credits work.

I would say, stepping back a little bit, two things: one, if you parse out business banking, loans is one piece, about 13% of our total loan portfolio.

Deposits and client acquisition remain strong.

You saw deposits in terms of the business banking contribution increase to about 53% of our total deposits.

So I wouldn't look at loans as one quarter, as far as the way I see it, in business banking as being indicative of future opportunities.

We feel good about the future opportunities for business banking.

Understood.

Within that capital call line, though, are you seeing any signs of stabilization?

Or as we went through the quarter, are you still seeing declines?

It's hard to predict.

And the number of deals being done by private equity and VC was down in the first quarter.

And so we can't predict the volume or velocity of the deals that are being funded.

So that's tough to predict.

What we feel is more sustainable is the acquisition of new clients in that segment.

Got it, understood.

And then just really quick on wealth management, if I read the way you presented it this quarter, it looks like you may have included foreign-exchange fee income as part of wealth management, whereas you may not have done that before.

Is there any reason for why foreign-exchange is a wealth management product?

I'm just trying to make sure I understand that correctly.

Sure, Ken.

We started to show that in the press release in the fourth quarter, when we quantified wealth management fees.

But in our segment reporting for wealth management it's actually been there since the bank divested in 2010.

And it's managed by our securities company and broker-dealer participants, which is why we consider it a part of wealth management.

Got you.

All right, thank you.

Joe Morford, RBC Capital Markets.

And Mr. Morford has disconnected.

Aaron Deer, Sandler O'Neill and Partners.

I'm just curious.

With respect to the reserve ratio, with the balances decline on the commercial lines this quarter, we saw that reflected there.

So I'm just wondering if we can get a sense of what the reserve ratio would be in the individual loan books in terms of if you broke out C&I versus the residential real estate versus the commercial real estate, what the targets are for the reserve in those books.

So I'd probably look at it more on an overall basis, Aaron.

We think 55 to 65 is a pretty good range.

In the previous quarters we have probably been towards the higher end of that, due to business banking.

And we tilted down a little bit.

I think in our quarterly filings with all the details, you can see single-family gets a lower allocation, given the risk in the portfolio, versus business, which will be a bit higher.

And that leads to a little bit lower reserve level in total this quarter on a percentage basis this quarter, given the decline in outstandings.

Okay.

And then with respect to the margin and the liquidity deployment that you had this quarter, as you look out over the course of the year with the plan securities purchases and what you are expecting for loan growth, and your liquidity needs, is it reasonable that the margin can hold up at this current level?

Yes, I think we feel pretty good about the current level.

Loan pricing remains very competitive and has ticked down a little bit.

But overall, this margin and our liquidity levels, where they are at, feels pretty good for us as we look out over the horizon.

That's great.

Thank you for taking my questions.

Casey Haire, Jefferies.

Just wanted to follow up on that, on the liquidity profile.

The deposit growth moderated a little bit but very strong in what was -- is typically a seasonally slow period for you guys.

Just wanted to get some color on what's driving that.

I know that the wealth management piece is a new component for you.

But the drivers and if you are surprised by it, and does your NIM outlook contemplate the liquidity -- the loan-to-deposit ratio holding at this level or improving, going lower from here?

Growth was -- the deposit growth was diverse across the board, both by channel as well as client type.

As Mike Selfridge mentioned, business banking has been a strong contributor to deposits.

In addition, our wealth management sweep accounts also have seen strong growth, driven in part by the new hires over the past few quarters.

And lastly, we have also seen growth in the consumer areas while especially existing clients and their direct referrals remain to be a stable, strong driver of increasing deposits.

I'll turn to Mike Roffler on the loan-to-deposit ratio.

Yes.

Relative to that, we are operating in the low 90s.

That feels like a pretty good place for us to be and think we will remain in the low 90s from a loan-to-deposit ratio.

Okay, great.

And just switching to commercial real estate, another nice quarter of growth for you guys, even though you guys have been cautious and tightening underwriting standards.

Obviously, a lot of headlines about what's going on in some of the innovation companies with their occupancy rates there.

Just curious what are you seeing in the Bay Area there and how can you -- should we expect to see this growth with that kind of backdrop?

Well, to specifically the Bay Area, the demand is still pretty strong.

But we do have a lot of new buildings coming on the line over the next 24 months.

So I think the jury is out a little bit on commercial real estate demand forward 12 to 24 months in the Bay Area.

I don't know if the new buildings will be fully absorbed.

If they are fully absorbed, it could ripple backwards into the older buildings.

So we are a little -- we are very cautious on that.

We are very cautious on that.

And our loan-to-value ratios in both multifamily and commercial over the last couple of years have, in fact, declined slightly, which is a reflection of our thinking that the values may be inflated, more than pulling back our loan amounts in the absolute sense.

The other thing about commercial real estate is that we are pretty active in all of our markets, but very cautiously so.

And we draw a clear distinction between multifamily and CRE.

The drivers of revenues, the drivers of demand, the drivers of supply are quite different.

And they are not peas in a pod.

And so we pay a lot of attention and we are much more cautious on CRE than we are in housing, in most of our markets.

San Francisco being the home market, one of the things that's overlooked in San Francisco proper is it's a rent-controlled city.

And in fact, so is Oakland.

And so we have a nice floor under the housing rates, a stability factor, if you will.

But basically our LTVs are a little more cautious now than they were a couple years ago.

Okay, great.

Just one last one, Mike Roffler, on the efficiency ratio.

Last quarter you broke it out in the wealth management; I think it was in the mid-90s.

And core is running at 85%, once you digest some of these new teams.

Are we still on track to hit that 85% in the back half of the year?

And where was it in the first quarter?

Yes; when you look at it on the fee-only basis, that's right.

We think we will get to the 85% and maybe a little bit lower.

It's probably in the high 80s when you look at it on a first-quarter basis.

Wealth management, just like the bank, is impacted by the seasonality of payroll taxes and benefit costs.

But it's trending in the right direction because it is improved from the fourth quarter.

Okay, thank you.

Paul Miller, FBR & Co.

Jared Shaw, Wells Fargo.

Just on the asset management side, is there a continued or is there any more opportunity for significant team liftouts, or do you think that, looking at what you've done, that's pretty much the whole opportunity at this point?

I would say, from the standpoint of Credit Suisse, we've hired the people that we plan to higher.

We will obviously continue, and you've seen, to hire other teams as we find them and they are attractive and good fits with the organization.

And I think you will continue to see that on a selective basis.

Okay, thanks.

And then on the multifamily growth, can you break out what was New York versus other markets?

And how do you look at the growth going forward there?

Should we expect to see similar breakout from geography?

One thing on multifamily -- I think the growth is -- we are having success in New York and in San Francisco too, as Jim mentioned.

And that's largely been the two big areas where we have had multifamily lending activity over the years.

And I'd say it's pretty diverse amongst those regions.

One thing I'd like to point out - we didn't speak about -- during the quarter we periodically review our commercial real estate/multifamily loans.

And you see a bit of a bigger jump in commercial real estate this quarter, about $350 million.

Over half of that, call it 60% of that, was actually a movement of loans from multifamily down to commercial real estate as part of our review of the actual loans and data.

We look at some of the mixed-use buildings and concluded they were better characterized as commercial real estate, given their profiles.

So we did do that reclassification here in the first quarter.

Okay.

So when you look at the actual growth in multifamily from 4Q to 1Q, it's actually bigger than --

Yes, it was actually a bit stronger, which is reflective of some opportunities we had in our core markets.

Okay.

And then just shifting a little to the securities portfolio, what was the duration for the quarter?

And then as you look at fully deploying the excess liquidity, what do you target for the duration for the overall portfolio?

As part of the repositioning, we made sure that the yield and the duration remained stable.

So it is stable from the prior quarter.

And we do not intend to extend duration going forward.

Okay, thank you.

Dave Rochester, Deutsche Bank.

Just following on that multifamily growth commentary, it sounded like it was a lot stronger than it has been recently.

What would you attribute that strength to?

Was it just more purchase/sale activity this quarter, more refi activity you guys were able to capitalize on?

Just any additional color there would be great.

Our multifamily lending was, in fact, pretty strong this quarter, David.

I would say it was mostly driven by, as Mike implied, San Francisco and New York.

I don't see it as a particular change in direction or market strength of any kind.

It's just circumstantial.

Obviously, some of the multifamily deals are a little bigger.

They are not giant, but they are a little larger than the home lending.

So if you get two or three of the modest-sized deals closing in the same quarter, you get a little blip up.

But I don't -- the demand is there.

But the pricing is intensely competitive.

And so we pass on a fair number of deals.

And the advance rates by other banks are climbing, and we are not going there.

Yes.

Just as an add to that, you will see in our investor deck this morning our average LTV on multifamily business in the first quarter was actually less than 50%, to Jim's point.

Great.

Thanks for that color.

And then how are you thinking about -- you guys talked about HQLA being 12%, and that has been your target for a while.

How do you think about the rest of the securities portfolio or total securities to assets and how that should trend over the longer term?

The HQLA target that Gaye referred to is a firm target.

We will be at 12% or more by the end of the year.

The rest of the securities portfolio is somewhat opportunistically driven.

So that could fluctuate above and below 20% over time?

Exactly, Dave.

And it will.

Great.

And then just switching to the margin, you mentioned the loan production rate has trended lower from mid-February.

Can you just talk about what the differential was and the shift that you saw lower and then maybe what it was in March, if it's easier just to talk about the total average loan production rate for March?

Yes.

It's probably best to look at it on the quarter, I would say.

So last quarter it was about 3.30% on our real estate portfolio.

And we are roughly 10 basis points lower, so not a big drop.

And again, that's only on the new.

So the current portfolio is locked in at the rates it's at.

Okay, great.

Thanks, guys.

Let me use that last question, if I could, Dave, for a second, to comment on rates in general.

The challenge in the home loan marketplace is -- demand is stable, I would say.

It's strong but it's stable.

In the number of players and the larger home loan marketplace has increased recently, as we pretty much all know.

That has led to a pricing pressure which is okay, really.

We would prefer it wasn't there, but it's just the way it is.

The one thing that it has also led to, the other thing it has led to, is a decline in standards.

And by that I don't mean necessarily credit underwriting standards, but I do mean loan-to-value ratios.

And as a result, we are holding to our standards, as we always do.

We are not raising our LTVs.

And so it's getting a little harder for us to maintain our volume.

On the other hand, the spring quarter, where there are purchases rather than refinance as a predominant share of the market, is one of our better quarters always because our service delivery on purchases is increasingly differentiated versus refis.

Are you seeing the diminution on the LTV side more from larger banks, or is it coming from smaller banks or a mix?

Big banks, the biggest.

Great.

Good color there.

Thank you very much.

Matthew Clark, Piper Jaffray.

Maybe just the first question on the wealth management side -- can you give us a sense whether or you fully captured those portfolios of business that you brought over with those teams you've hired?

Or should we see another decent step up here in the second quarter?

I'd say two things.

I think, for the hires we talked about in the fourth quarter, I think by now we've seen most of what we will see from those hires.

I think for the hires we have announced in this quarter, the teams -- we haven't seen much of that yet.

I don't -- I think that the teams vary in terms of the amount of assets an revenues, but I do think you will see some additional benefit of assets and revenues from the people we hire, just recently announced this quarter.

Okay.

And then, Mike, given the seasonality this quarter, is it fair to assume we should see that comp expense remain fairly steady second quarter, similar to last year?

Yes, I think that's right.

You will have a drop off or a decline in payroll tax and benefit but then you also have the full impact of merit increases that take, in our case, mid-quarter in the first quarter.

And also we are continuing to add people both from a frontline perspective and also assisting in regulatory, compliance and infrastructure of the bank.

And we will continue to do that as we grow.

Okay, thanks.

John Moran, Macquarie Capital.

Just another one on OpEx.

And I hear you on the seasonal payroll but then kind of flattish.

The professional fees were down a bunch, linked quarter.

I'm wondering if that's sustainable or would you expect that to ramp as we go through the year?

We are pleased that the continued I'll call it transition of professional fee costs that peaked early last year has continued to trend down.

I do think there's probably a natural floor because you're going to have audit and legal fees.

And we are investing in the franchise.

So we are happy that some of our professional fees are not dedicated to more impacting client-facing initiatives and improving our systems and technologies versus we are still spending modest amounts related to regulatory.

But we've mostly transitioned that cost from professional fees into personnel as we've added staffing to the various areas.

Got you.

Thanks.

And then one, just another follow-up on the wealth management business -- something like 40% of AUM is in money market mutual funds.

I'm wondering if you guys were waiving fees and how much of that may have been recovered in 1Q or if you could quantify a dollar amount that might come back in as some of those waivers stop and sort of abate?

Yes, so we don't have any large waivers at this point.

With the rise in the Fed funds rate there has been a little bit of a pickup in money market mutual fund fees, which were really about zero, frankly, when rates were there.

So it's still a pretty de minimis amount but we have seen a little bit of a pickup in those fees.

And as rates normalize, you should get more of the benefit in the future.

Got it.

Thanks very much for taking the questions.

Chris McGratty, KBW.

Just one on capital -- you guys are growing consistently and you are opportunistically going between raising common and preferred.

Can you talk to us a bit about how we should be thinking about common equity, potential of common equity raise over the next 12 months?

Well, we think we are pretty well-capitalized right now, Chris.

The last 12 months were a good opportunity for us, and we took it.

We are watching the growth rate as we go forward.

We do run the bank very carefully on a five-year plan.

We always have.

We revise it every year through a very thorough and complete process and then take it to the Board, discuss it with them and get it approved.

So that process is usually a fall process.

And one of the most important aspects of that, of course, is capital planning.

And so we pay attention to capital.

Having said that, we are also somewhat opportunistic but in very modest amounts, as you've seen over the years, so as not to rock the boat.

I think the fundamental tenet of First Republic is: strong at all times and anticipatory of less good times at all times.

And so we will stay heavily capitalized.

That's good color.

Thanks, Jim.

One more on the balance sheet growth for you, Mike -- if I combine the comments on mid- , say low to mid-single-digit loan growth and additions to the securities book, is there more remixing going on?

I guess the question is, will earning assets grow at a slower rate than loan growth?

So I would say low to mid-teens on loan growth and then the securities growth has actually trended a little bit higher as we've been building towards at least 12% of HQLA targets.

So, the earning assets might actually grow slightly more than loan growth as we get through that process this year.

And then, looking out, it's probably more lockstep as HQLA and the investments will grow as the balance sheet does, sort of consistently.

All right, thanks a lot.

Jeff Elliott, Autonomous Research.

You've clearly been going through a big investment phase.

If I look at the salaries and benefits line, it's up 33% year on year.

So could you talk about where you think you are in that investment cycle, how long this sort of growth continues and when you begin to consolidate a bit on that?

Let me respond to that initially and then ask Mike Roffler to add further comments.

But it's a good question.

The investment phase of the Bank for the last, say, 36 months or so has been heavily oriented toward regulatory requirements as we pass the $50 billion threshold.

We have put a lot of money and a lot of time and a lot of effort into that, well over $100 million at least.

And it's ongoing, and we are still building a bit.

We have a few areas of building.

For instance, we have things that have not yet fully completed but almost completed.

Most of them are done but not entirely.

And then, of course, they need to be maintained and upgraded continuously.

And the standards are being raised all the time, and that's just the way it is, and it's fine.

However, as Mike indicated previously, we are also being able now to shift some of that investment stream over to the business of the business.

We have been doing a fair amount underneath the regulatory but not enough, quite frankly.

And so, we are now focused on -- I think we have announced this, but we have our new online system that's being rolled out this year, Q2.

That's a very big deal.

We have dramatic enhancements happening on online application, online reporting, mobile applications throughout the bank.

And there are a tremendous amount of in-house processes that are being improved.

So, our investment, our ongoing investment in both people and technology is about the same level it has been.

But it has been about 50% shifted to business of business versus regulatory.

And we see that, actually, as very positive.

When will the rewards come from that?

Quite frankly, you never can fully tell.

And they are ongoing, and there is a combination of offense and defense being played in there.

And it's always that way, and it just never changes.

But we are more on the offense side now than the defense side.

And I think it's going to show very, very nicely in the next year or year and a half.

And maybe just to follow up on those comments around tech, is there anything that you are not doing on the tech side at the moment that you see competitors doing and that you'd like to get involved with as well?

Let me ask Mike Selfridge to comment on that better than I.

I think there are things.

I wouldn't consider us bleeding edge of technology, so you would not see as into some of the new payments technologies like Bitcoin, for example.

But we are competitive as it relates to solutions for our clients and processes with regard to technology.

So we feel good about our position as it relates to not only the high touch model that we deliver but also the ability to deliver high tech to our clients as well.

So no glaring holes in our offerings.

Thank you.

That was our last question.

I will turn the call back over to Jim Herbert, CEO, for closing comments.

Thank you all very much for taking the time today.

We appreciate your attention and support.

Thank you.

This concludes today's conference call.

You may now disconnect.