First Republic Bank (FRC) 2016 Q4 法說會逐字稿

Greetings and welcome to First Republic Bank's fourth-quarter and full-year 2016 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 2016 conference call.

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

Before I hand the call over to Jim, please note that we may make forward-looking statements during today's call that are subject to risks, uncertainties, and assumptions.

In addition, some of our discussion may include non-GAAP financial measures.

For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and reconciliations of non-GAAP financial measures, see the Bank's FDIC filings, including the Form 8-K filed today, all available on the Bank's website.

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

Thank you, Dianne, and thank you, everyone, for joining our call today.

It was a strong fourth quarter and a great year overall.

In fact, 2016 was a record in many respects: revenues were up 20%, earnings per share were up 24%.

We successfully accessed the capital market four different times, raising over $1 billion in new capital.

Our total capital will have increased 24% for the year post the upcoming redemption of our Series A 6.7% preferred shares on January 30.

In addition, tangible book value per share was up 17%, total deposits grew 22% for the year, and total loan growth was 18% for the year, while net charge-offs for the year totaled only $1.9 million, or less than a single basis point.

And our wealth management business continues to grow very nicely; total assets were up 16% during the year.

Such consistent results are driven by continued focus on strong capital position at all times, excellent credit, and most importantly, continued exceptional client service.

We continue to invest in initiatives that improve the client experience, information security, and data analytic capabilities.

You will hear more about these in a moment.

Our high-touch service model is the key to our success.

We regularly measure our client service levels through our net promoter score.

We were recently delighted to see that our already high scores have further increased in 2016.

More about this in a moment, but it is our key competitive advantage.

During the year the Bank significantly enhanced its on-balance-sheet liquidity, a process begun over two years ago.

High (technical difficulty) liquid assets were over 12% of total average assets during the fourth quarter and this was our target.

Let me speak for a moment about the Gradifi acquisition, which we closed near the (technical difficulty) 2016.

Gradifi is the leading provider of student debt repayment benefit plans, serving companies across the country.

While this acquisition is not currently meaningful to earnings, Gradifi is a long-term strategic opportunity to help address the student debt challenge overall.

It also offers First Republic a much (technical difficulty) opportunity to acquire new clients through our Eagle Gold All-in-One lending program.

You will hear more about this shortly.

Before I turn to the team, let me first put into context our performance over the long term.

We follow three particular metrics that are important from our point of view to the safety, stability, and consistency (technical difficulty).

Since our second initial public offering at the end of 2010, our total capital has grown 23% per annum.

Tangible book value per share has grown over 15% per annum and credit has remained consistently strong.

Net charge-offs have equaled 1 basis point per annum.

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

Thanks, Jim.

I would like to run through some fourth-quarter numbers and then focus on net interest margin, the efficiency ratio, income taxes, and our capital structure.

In the fourth quarter earnings per share were $1.03, up 22.6% compared to the fourth quarter a year ago.

Revenues grew 21.1% compared to the fourth quarter last year.

Turning to core net interest margin, it decreased slightly to 3.08% from the third quarter.

Importantly, net interest income, which represents more than 80% of our revenues, has grown 21% year over year.

Turning to expenses, the efficiency ratio for the quarter was 60.1%.

As we discussed on our last earnings call, we continue to expect our efficiency ratio to be in the low 60%s.

With regard to income taxes, our effective tax rate was 21.7%, up from 15% in the third quarter of 2016.

We can expect to expand some variability from quarter to quarter in our effective tax rate, due to employee stock option exercise activity which was lower in the fourth quarter than prior quarter.

For all of 2016 our effective tax rate was 18.6%, which is within our previously anticipated range of 17% to 20%.

As Jim mentioned, we opportunistically raised over $1 billion in total new capital during the year at very attractive terms.

In the fourth quarter we were pleased to have issued $325 million in a common stock offering.

Earlier in the year we completed a $400 million, 30-year, 4 3/8% subordinated notes offering which qualifies as Tier 2 capital.

The proceeds from this offering in part will be used to redeem our Series A preferred shares at the end of January.

This further optimization of our capital structure will result in a net savings of approximately $2 million per quarter.

Now I'd like to turn the call over to Chief Banking Officer, Mike Selfridge.

Thank you, Mike.

I will cover economic conditions in our markets, business banking, and our multifamily and commercial real estate portfolios.

Economic conditions in our geographic markets are very good and our clients are active.

In our largest market, the San Francisco Bay Area, as we stated last quarter, residential real estate prices have moderated and current loan demand is strong.

Turning to lending, we continue to focus on the same types of lending in the same geographic markets with the same consistent credit standards.

Loan origination volume was $7.9 billion during the fourth quarter, our best quarter ever.

Heading into the fourth quarter we had a very strong pipeline, and while our pipeline is currently up compared to this time last year, we do not anticipate the same year-over-year percentage increase in total loan volume in the first quarter.

During the fourth quarter, single-family residential lending volume was 37% purchased and 63% refinanced.

As interest rates rose in the fourth quarter, there was an acceleration of refinance activity.

Once refinance activity subsides, mortgage volume will be driven more by home purchases, and in a purchase market, First Republic's client-focused service model is a competitive advantage.

Very importantly, credit quality continues to be excellent.

Nonperforming assets remain low at just 7 basis points.

During the quarter and for the full year, net charge-offs were less than 1 basis point of average loans.

We added $10.5 million to our loan-loss reserves in the fourth quarter and $47.2 million during the year to support loan growth.

Now turning to business banking, it was another strong year.

Business banking continued to make a meaningful contribution to First Republic, particularly to the deposit franchise.

Business deposits were up 27% compared to a year ago and represent 53% of total deposits.

Year over year business loan commitments were up 21% and business loans outstanding were up 11%.

Business banking continues to grow because of our ability to offer a comprehensive platform of lending, deposit, and wealth management services delivered with exceptional client care.

Turning to multi-family and commercial real estate lending, it was a strong quarter and we continue to apply the same disciplined underwriting standards to multifamily and commercial real estate lending as we always have.

Our multifamily and commercial real estate loans make up less than 25% of our total loan portfolio and are less than 200% of total capital.

Overall, we are very pleased with activity across the enterprise and the continued strength of our geographic markets.

Now I'd like to turn the call over to Gaye Erkan, Chief Investment Officer and Chief Deposit Officer.

Thank you, Mike.

I would like to talk about the growth in our investment portfolio and our deposit franchise, as well as provide an update on our preferred banking office network.

In terms of investments, our total portfolio grew to $15.2 billion.

This increase was a strong driver of total asset growth in 2016.

High-quality liquid assets, including eligible cash, totaled $9 billion at December 31, or 12.7% of average total assets in the fourth quarter.

We are very pleased to have achieved our long-term objective of growing our HQLA portfolio to over 12% of average total assets.

We accomplished this goal with modest impact to our overall yield and we expect to maintain HQLA at around this level of average total assets moving forward.

Turning to deposits, growth was diversified by client type and strong across all channels.

Deposits sourced through our business banking, wealth management, and private banking activity were all up over 20% from a year ago.

Total deposits were $58.6 billion, up 6% from the last quarter and 22% from one year ago.

Checking deposits represented 64% of our total deposits.

The average rate paid on total deposits during the quarter was 15 basis points, consistent with the last quarter.

Let me take a moment to talk about our preferred banking offices, another key channel through which we delivered the fully-integrated extraordinary client service experience at First Republic.

Our preferred banking office network consists of 69 offices in our geographic footprint.

On average, our retail offices each hold more than $275 million in deposits.

Our focus on extraordinary client service in our office network results in yet another very effective means of deposit gathering.

And now I would like to turn the call over to Bob Thornton, President of Private Wealth Management.

Thank you, Gaye, and good morning, all.

Wealth Management had a strong quarter and a good year.

Compared to the fourth quarter a year ago, Wealth Management fee revenues were up 18.8%, while assets under management grew 15.6% to $83.6 billion.

We would note that these comparisons include the full benefit of the acquisition of Constellation Wealth Advisors, which we closed on October 1 of 2015.

Revenue growth in the quarter and year exceeded growth in assets under management, principally due to larger -- to greater client brokerage activity.

During the fourth quarter Wealth Management assets were up 4.2%.

81% of this growth was from net inflows of client assets and at year-end Wealth Management's sweep accounts represented 8% of the Bank's total deposits.

During the year private wealth management continued to recruit highly experienced client-facing professionals.

In 2016 we brought on seven new portfolio managers and we focused on the integration of our new hires, including the team from Constellation.

At the same time, we devoted significant attention and resources to operational and client-facing enhancements.

For example, we further improved our paperless account opening process, resulting in a more streamlined client experience.

We also strengthened our performance reporting capabilities to be able to deliver a more comprehensive view to clients.

Now let me take a moment to speak about the collaborative approach we take at First Republic as we look to fully serve our clients' financial needs across both wealth management and banking services.

Private Wealth Management continues to be a strong contributor to total deposits through not only wealth management sweep accounts but also as a source of new deposit clients for the Bank.

For example, in 2016 more than 1,100 wealth management clients became new deposit relationships due to our team-based approach across the entire enterprise.

Overall, we are very pleased with the growth in wealth management as well as the continued opportunities ahead to bring in both new clients and talent to First Republic.

And now it is my pleasure to turn the call over to Jason Bender, Chief Operating Officer.

Thank you, Bob.

Let me take a moment to provide an update on our operations and infrastructure.

Our ongoing investments in infrastructure and operational enhancements are designed to deliver excellent client service and support sound risk management.

We had a number of operational accomplishments and milestones in 2016.

Leveraging our investments in operations and regulatory and compliance infrastructure, we successfully managed higher banking transaction volume.

This included both a record number of wires processed and residential loans funded in 2016, up 17% and 20%, respectively, from the prior year.

We also managed higher volumes in our wealth management business.

First Republic Securities Company trades, for example, were up 30% year over year.

During 2016 First Republic piloted its first online lending hub, enabling clients to safely and securely provide their mortgage-related information and upload required materials while connecting with us digitally in a seamless and integrated experience.

And we reengineered our closing process for Eagle Gold All-in-One loans, which can now be processed paperlessly and online from application through funding.

Looking to 2017, we continue to invest in the operations of the franchise moving forward.

This includes the continued roll out of our new market loan origination system following a successful initial pilot.

This upgraded technology reduces manual data entry, eliminates paper files, and incorporates more automated checks and controls.

We also continued to make significant progress in redesigning our deposit client on-boarding process.

This will create significant time savings for our bankers and ensure even better integration with our compliance and risk management activity.

And we look to continually leverage data analytics to provide our bankers with greater insight into client activity and opportunities.

Our continued investment in operational enhancements both enable safety and scalability and, ultimately, drive our ability to continue to deliver extraordinary service.

We measure our client service through net promoter score, commonly used measurement of client satisfaction and loyalty and one of the most important metrics we follow here at First Republic.

In 2016 our new net promoter score, which was just released, increased more than 15% to 72.

This is up from an already high level of 62 and more than double the US banking industry average.

Our ongoing operational enhancements enabled us in 2016 to support record production and to increase our net promoter score and client satisfaction at the same time.

And now let me turn the call to Mollie Richardson, Chief Administrative Officer and Chief People Officer.

Thank you, Jason.

I will cover our community and employee engagement, as well as efforts to develop our next generation of clients through the Eagle Gold All-in-One student debt refinance loan.

In terms of community engagement, in 2016 we closed over 600 Eagle Community home loans.

This program, which was launched just over a year ago, is focused on expanding home ownership opportunities for borrowers in underserved minority neighborhoods.

We also launched our community advisory board, comprised of nationally-recognized and highly-respected experts to help us better serve our communities.

These efforts were recognized in 2016 by the National Asian-American Coalition for addressing income and wealth inequality and we were also recognized by NASDAQ with an Innovation in Financial Education award.

Attracting and retaining great talent is key to delivering exceptional client service, and employee engagement remains an important priority for First Republic.

In 2016 we implemented an increase in the Bank's minimum wage to $20 per hour in all of our markets and became one of the first large companies in the nation to do so.

We also initiated a companywide student debt repayment benefit for our employees with Gradifi, the leading provider in this space.

Within the first day of making this benefit available more than 300 employees enrolled.

Based on that overwhelmingly positive experience, it was clear that Gradifi shares the same commitment to exceptional client service as First Republic.

Student debt affects not only our employees, but our clients as well.

Our Eagle Gold All-in-One loan provides qualified borrowers with the opportunity to refinance student debt at a lower rate and more favorable terms.

In 2016 we originated $728 million in loans through this channel, while applying our same disciplined credit standards.

Though a small percentage of our total loan origination, this program is very strong driver of the next generation of clients.

In 2016 Eagle Gold All-in-One accounted for more than half of the growth in total lending relationships.

Let me now turn to Gaye to speak about Gradifi and the opportunities with our Eagle Gold All-in-One program.

Thank you, Mollie.

We are very pleased with our recent acquisition of Gradifi, the leading provider of student debt repayment benefit plans.

Through Gradifi's secure and easy-to-use platform, companies can make direct regular contributions toward the repayment of their employees' student debts.

In a competitive labor market, this employee benefit is becoming increasingly popular among employers to attract and retain talent.

We purchased Gradifi for a couple of key strategic reasons.

First, we completely support Gradifi's mission to help the 44 million borrowers with $1.3 trillion in student debt in the United States.

Second, there is a great synergy leading to new client acquisition through offering our Eagle Gold All-in-One student debt refinancing service alongside Gradifi's repayment solution.

In addition, our partnership with Gradifi presents a great opportunity to introduce these valuable services to our business banking clients.

Offering such innovative solutions to the student debt challenge with Gradifi is good business and the right thing to do.

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

Thank you, everyone.

And let me say we are really delighted to welcome the Gradifi team to First Republic.

In short, 2016 was a great year.

It was the result of continued success in executing our unique business model, which is predicated on delivering exceptional (technical difficulty) service at every level (technical difficulty).

(technical difficulty) to 2017 for a moment, the franchise is well positioned.

(technical difficulty) pleased to have maintained stability in our net interest margin, business activity and backlogs remain strong with our clients quite active and optimistic.

We (technical difficulty) focus on serving our clients very well, which is the key driver of organic growth.

And as always, we look forward to delivering consistent (technical difficulty) results through all macro environments.

We are pleased with the result (technical difficulty) and the year.

Thank you very much (technical difficulty) to open the line for questions.

(Operator Instructions) Lana Chan, BMO Capital Markets.

Wanted to first off ask about deposit betas in a rising rate environment.

What do you assume in terms of the next one or two rate hikes in terms of how -- your ability to lag deposit rates?

This is Gaye; over the last six quarters, which span two Fed rate hikes, our average deposit rate has increased by less than a bp.

And also I would like to note that over the same time period our checking, as a percentage of total deposits, has increased from 61% to 64% now.

We expect to lag.

Okay.

And then in terms of any color on expense growth guidance for 2017, I know you, Mike Roffler, gave guidance in terms of the efficiency ratio being in the low 60% range.

But could you talk about, relative to the expense growth that you had in 2016, what are the puts and takes in terms of some of this investment spending that you are talking about?

Sure.

So 2016 we do think about this as a low 60% efficiency ratio, because that does also take in the revenue side of the equation which is also really just as important.

One of the big developments I think in 2016 that was important is you saw a reduction in some of our professional fee spending as we completed many of our regulatory initiatives.

Some of those dollars were then reinvested back into the business, as Jason and Jim both talked about the importance of net promoter score and then client service.

And so we are really excited to be investing in client service initiatives, which is why we think a low 60%s efficiency makes sense.

And if revenues are growing nicely, expenses, on a pure dollar basis, are going to grow commensurate.

Okay, thank you, Mike.

Steven Alexopoulos, JPMorgan.

I have two questions on originations.

First, you had record business originations in the quarter, but if we looked at business lines outstanding they actually declined.

Was this just a function of very short duration loans being originated, maybe capital calls, or did you actually sell any loans in the quarter?

We sold some single-family loans, Steve.

On the business banking side there was a decrease in the utilization rate, particularly with the capital call lines of credit.

So typically we would see about 33% to 35% utilization on those lines of credit and that dipped down to below 30%.

And if you look at the third quarter, it was unusually high at about 41% usage on those capital call lines of credits.

So I think the important thing to look at is we are increasing the number of clients in business banking and we are increasing the commitment, so overall we feel good about the opportunities.

Okay, that is helpful.

And then maybe for you, Mike, looking at the very strong refi originations in the quarter; the industry overall is reporting refi activity as being flat or down in 4Q.

Why are refis up so much for you guys and is this essentially all share gains?

I think, Steve -- I would expect going forward that refi, if rates continue to rise, will subside, as I said in my remarks.

And with the backup in rates in Q4 there was a bit of a rush to refi that we saw, so that increased the activity.

And as I said, we wouldn't expect origination volume to have the percentage increase year over year that we indicated in Q4.

But going into the first quarter the pipeline is strong and we still think that mid-teens loan growth is right for 2017.

Okay, that is helpful.

And maybe for Mike Roffler.

The core margin declined a few basis points in the quarter, but given what we have seen in the yield curve, how do you think about the trajectory of the core margin here?

We are pleased actually the fourth quarter to be stable.

As Gaye talked about, we completed our build out of HQLA and so we are happy in this sort of [3.08] to [3.12] range that we have been.

As Mike Selfridge mentioned, the loans we closed really in the fourth quarter really most of those are locked pre the move in rates and so the move in rates will start to benefit us probably more towards the latter half of the first quarter as those loans make their way through the pipeline.

I think it is too early to say that it is definitely up, but it is trending -- the locks are trending better from a rate perspective than what is on the portfolio today so we are seeing good direction.

On the core NIM, maybe I could just add one technical point.

As we did in the first quarter of this year, we reduced our reporting of core metrics.

Given the declining contribution of purchase accounting, we are just going to report the GAAP NIM starting in the first quarter going forward.

Okay.

Thanks, Mike.

And I have one final one for Gaye.

Can you give color on the strong deposit growth in the quarter?

I am curious if there was an initiative, given you had such a large HQLA build required.

Thanks.

Sure; thanks, Steve.

The second half tends to be always stronger in terms of activity as well as average balance sizes.

It was diversified; we are very pleased with the diversification across the industries that spans professional services, private equity, and other firms.

Okay.

Thanks, guys, appreciate the color.

Dave Rochester, Deutsche Bank.

Good morning, guys.

Nice growth this quarter.

I just wanted to start with the HQLA, if I could.

Now that that build is done what is the investment strategy now with the future growth in the portfolio?

I know you will probably continue to buy HQLA to maintain the concentration; Gaye, I think that is what you had said earlier.

But can you just talk about how that investment strategy could change in light of potential tax policy changes and whatnot?

That would be great.

Sure.

As you mentioned, we will continue to keep our HQLA at least 12% of average total assets at any given quarter and we will continually reevaluate and optimize our investment portfolio purchases in light of any tax or rate movements, while ensuring the 12%.

Are you thinking that your appetite for munis could change depending on the new policies?

It is early to say.

Even a tax rate change of or potential decline, a slight decline would still make municipal bond portfolios look attractive.

Again, it is early to say, but we will look at the changes and optimize accordingly.

The good news is that we also have a lot of opportunity and diversity in our HQLA purchases, so the optimization will give us a lot of alternatives to go as we average (multiple speakers).

I'm curious; if the $50 billion threshold -- $50 billion asset threshold were raised sometime this year, would that change how you think about maintaining HQLA?

And could you possibly shift a decent portion of that portfolio into higher yielding securities?

Yes, 12% is the result of prudent liquidity risk management and stress testing, regardless what the threshold were to be.

We would continue to keep those and to stick to those sound risk management practices.

So even if you weren't subject to the LCR anymore you would most likely be staying at 12%?

Correct.

And let me note that right now the investment portfolio, despite the tremendous build out of HQLA in 2016, we are pleased we ended up close to 4% in yield, which is still attractive compared to the rest of the balance sheet.

And just a clarifying point, Dave; as a reminder, because of our no holding company structure we are not subject to the LCR, the liquidity (multiple speakers), as Gaye mentioned, prudent risk management and having appropriate liquidity.

Right.

Yes, got it; thanks.

And, Mike, one for you just on the big BOLI number this quarter.

I think you guys had mentioned a more normalized run rate for that would be maybe around $10 million or so1.

I was just curious if you guys had made any other investments this quarter or anything like that.

No new investments.

Normalized run rate would be about $10.5 million to $11 million, just once in a while there are one-off items that happened during the quarter.

Yes.

And on your tax rate range for 2017, the 20% for the last year or for 2016, does that hold for 2017?

Yes, it does.

Okay, great.

Thanks, guys, appreciate it.

Paul Miller, FBR.

Good morning, guys; this is actually Kyle Peterson on for Paul today.

Just wanted to touch on the jumbo market a little bit.

With the uptick in rates have you guys noticed much sensitivity in your pipelines with being jumbo kind of versus the more standard conforming mortgages?

No, I would say traditionally, if you look at the median loan side of our single-family mortgage portfolio, that is about right and that is a little bit over conforming.

And I think your question about refi, as I said earlier, the mix -- 37% purchase, the remaining being refi -- was tilted obviously more toward refi, given the back up in rates and the activity that we saw, to get people into the pipeline and locked into some mortgages.

Okay, great.

And then if I just could get a little bit of an update on the student lending business and how Gradifi fits in.

When do you guys -- do you guys have any timeline as to when you expect to start seeing some of those synergies, especially with the Eagle Gold All-in-One product, and when we should start seeing more growth off that from the acquisition?

In the near term we would expect the impact to be material from a financial results perspective.

While that is the case, there is a great synergy between the student debt refinancing that we have through Eagle Gold All-in-One and Gradifi providing the repayment solution; that's a nice fit together.

Later in this year it will be easier to look at the results and expect those to be monetized on.

Okay, great.

Then I guess just last thing, it does look like the marketing line item had a little bit of an uptick this quarter.

Was there anything unusual in that or is just that how we should be looking at the run rate moving forward?

It is probably pretty good for looking at the run rate moving forward.

I also think that in the fourth quarter we tend to have some seasonality in the marketing spend because we do have events maybe a little bit more loaded towards the end of the year versus the third quarter, which is some of the summertime activity.

Okay, great, thanks.

That is all for me.

Casey Haire, Jefferies.

Just to follow up, Gaye, on the HQLA, what -- I am sorry if I missed this, but what is the new money yield on HQLA today?

The new money yields today, given the recent rate sell off, they are actually up across the board, whether you look at the different securities, 40 to 50 basis points.

So you see securities between 2.5% to 3% and slightly over even 3% within the same terms there.

We have been buying three- to five-year, mostly three- to four-year type of duration.

Okay, great.

And then with the build now done, if you continue to have excess deposits versus loans and your HQLA is okay at 12.7% as it is today, I would imagine excess securities would go into munis?

Again, as we said, we will continually re-optimize depending on the market developments, but in absence of any other changes, yes.

And you brought up a great point, it will be less pressure on the funding side given that maintaining HQLA is much less onerous than building it up that we have done in 2016.

Thank you.

Okay, great.

And then just on the BOLI line this quarter, obviously a little bit higher.

Was there an offset on the expense side at all?

No, there would not have been.

Okay.

So if that line were to normalize lower, there would be no offset on the expenses?

Correct.

Okay, thank you.

Chris McGratty, KBW.

Mike, on the new provision on the new loan growth it dropped considerably quarter on quarter.

Is that just a function of mix that you alluded to less capital call activity in commercial growth?

Or is there -- is this kind of a sustainable growth or a level of provisioning rate for 2017?

So it will be the former of what you said.

Given the decline in the business loans outstanding and that being a little bit less of the total portfolio, the provisioning on that then goes down.

So this is a little bit maybe unusual, whereas last quarter it was almost double at $18 million due to the growth in business loans.

The reserve to total loans sort of ranges at about 59 to 60 or 61 basis points, and that is pretty consistent (technical difficulty) absent any big mix change.

Okay, great.

Then last on wealth management.

You guys continue to have success here.

I am interested if there is any opportunity to grow this business again inorganically with teams or producers or whole fee income acquisition.

This is Bob.

Yes, as I noted in my comments, we made some hires last year but we had a lot of activity at the end of 2015 in the acquisition of Constellation.

But we are still seeing a lot of great hiring activities and I think you will see some attractive hires as we move through the first half of this year.

Great, thanks a lot.

Ken Zerbe, Morgan Stanley.

Just a quick question on the, let's call it, taxes/stock options.

I mean what is the major driver of that?

Is it that as the stock options actually vest then they are obviously exercised?

Or is it that they are already vested and it is just simply a choice among the optionholders whether or not they exercise the options?

Sure.

Ken, the large part of it is the latter part of what you said.

The Bank granted stock options early in our 2010/2011 period, since then we have moved to restricted stock.

So those have all vested and it is a matter of employees making the decision on their own of when to exercise.

They have a life; by 2020 they pretty much are all exercised because they have a 10-year life, so there is some movement that will occur.

The third quarter was much heavier in activity than the fourth quarter and, again, that is an employee choice.

The one thing I would also add: this is obviously different for us right now, but starting in 2017 other companies will also have to adopt this so it will be more normal across the board.

Understood.

I mean just mathematically, if I look at the stock price, I would have expected fourth quarter to be stronger than third quarter, from an option exercise standpoint.

I mean is that logically correct?

I'm just trying to get a sense of how to think about the forward exercise.

I totally understand your question and it is really an employee preference and a decision that one makes individually.

All right, okay.

Thank you very much.

Aaron Deer, Sandler O'Neil.

Mike Roffler, a question on the expenses; you addressed it on the advertising and marketing line.

I am wondering too -- I know you guys have been investing very heavily in technology, but the IT line ticked up quite a bit this quarter.

Just wondering there, too, if this is kind of a run rate going forward or if there was anything nonrecurring in there.

Nothing of significance that would be nonrecurring.

We are, as Jason talked about, in some operational areas investing quite heavily for the client experience.

And really that is a driver of being able to deliver extraordinary client service, which then really leads to all the results you see so that it is an investment we are making in the franchise and sort of future outlook.

Okay.

And then a follow-up question for Bob.

You had mentioned 1,100 new deposit clients that came over from wealth management during the course of the year.

I am curious how many of those might have been Constellation customers versus customers that had been principally in First Republic's wealth management that then became bank-side customers.

I would say that there were some material Constellation clients that became bank clients, but the vast majority were just the breadth of referrals from our private wealth [professionals] (technical difficulty) their clients to the bank.

Okay, great.

Thanks for taking my questions.

Tim Coffey, FIG Partners.

Question around the income statement on the FDIC assessments.

What was the rationale for those increasing and what is a good run rate?

So the -- largely the FDIC assessment is driven by the Bank's growth in total average assets.

I would remind maybe everybody this happened last quarter for the first time, the $50 billion-plus surcharge from the FDIC went into effect, so our second half of the year expenses have gone up relative to the assessments.

But it is largely a function of average asset growth is why it is growing in any given quarter.

Thanks, Mike.

Then for the other Mike, if we look at the growth in the multifamily loans, a two-part question.

One, what led that opportunity to expand that portfolio this quarter, opportunity and geography?

And then two, what is the outlook for growth in that portfolio if rates continue to rise?

You know I would say in income property, as we characterized by both commercial and multifamily, if we step back we are doing the same things that we have been doing for many, many years, so the median loan size on commercial real estate being $2 million and loan-to-values of 50%.

We are still finding opportunities.

And if you look at where the growth of the franchise comes, a little bit more than half of the growth comes from existing clients and those clients remain active in our market.

Really it's there is opportunity, but it is the business as usual as it relates to both multifamily and commercial.

Are you -- as you look at growing the multifamily piece specifically, do you have an outlook on where NOI goes on those properties?

We don't have an outlook.

We underwrite all these deals very conservatively, again low loan-to-value, high debt service coverage ratio, and following many of our existing clients who are active in our markets.

We also don't set targets.

We really -- the model of the franchise is centered around the client and what the client wants.

I would say, as I mentioned in my remarks, with the moderation of prices and rents, as we have said in prior calls, we have tightened up a little bit in multifamily and commercial real estate lending.

And so if you look at our deck that we just filed and look at the loan-to-values at origination for both of those portfolios, we have pulled those back over the last six years.

Okay.

And then in terms of geography this past quarter was there any specific region where you saw more opportunity for multifamily?

No, I would say it was geographically dispersed from coast to coast for us and the opportunities in all our markets are still quite good.

Okay.

Then on the opportunities to sell mortgage loans going forward and I understand selling mortgage loans is a balance sheet management tool for First Republic.

But if refi activity is less than it has been in the past going forward, is it a reasonable expectation that gain on sale would also decline?

This is Jason.

I think just to remark quickly on the fourth quarter and then talk a little bit about 2017.

Fourth quarter we had kind of an average amount of loan sales: we sold about $800 million at just a little bit over par.

I do think that as rates have risen in the fourth quarter the outlook for early 2017 may be some pressure on secondary loan pricing as we move through that part of the rate move.

But looking forward, a lot of our loan sales are just tied to overall origination amount.

For instance, about a third of our ongoing loan sales comes from ongoing flow sales.

Okay.

All right, thank you.

Those are all my questions.

Jared Shaw, Wells Fargo.

Good morning; this is actually Timur Braziler filling in for Jared.

Most of the questions have already been answered; I guess just a couple follow-ups, the first one maybe for Mike Roffler.

In the communication around the efficiency ratio expectations for 2017, I guess what is the assumption for rate hikes that you are embedding in that low 60%s guidance?

Clearly the Fed has sort of telegraphed a couple of moves this year.

We are not clairvoyant to think much differently than them.

However, I would say that even with the potential for a rate hike or two during the year, we are going to continue to invest in the franchise.

And so we think that low 60%s continues to make sense even in a bit of an environment that is moving up, because we are making investments to provide continued great client service.

Okay, that is helpful.

And then secondly, bigger picture question.

Understand kind of the dynamics, when rates go higher there is a rush to refi.

Maybe just help us conceptualize what origination activity would look like once the refi environment normalizes and we are stuck with just higher interest rates.

This is Mike Selfridge.

I think that is really a difficult question to answer.

I would just go back to what I said earlier: going into the first quarter the pipeline is strong as it relates to the comparison at the same time last year and we still feel comfortable with our 2017 guidance on mid-teens loan growth.

Maybe, Mike, I might add one (multiple speakers).

It is Jim; let me add to that a second.

As long as the economies are strong in our markets, the purchase activity is currently strong and will remain so.

And I [would] just remind everybody we are coming now slowly towards the spring purchase season which usually picks up quite a lot.

So I don't think we are in a rate level that will (technical difficulty) real estate activity very much at all, except the incremental refinance activity.

Okay, that is great.

Then I guess just lastly, looking at the pipeline and some of the production that has taken place early in the year, has that mix of refi and purchase been fairly consistent to what you saw in the fourth quarter or are you already starting to see that shift more towards the purchase side?

So I think late in the year, if we look at activity that happened, it may have started to switch a little bit.

But I would also say, as Mike said, there is a bit of a burst that does happen when a rate rise occurs, but it has started to tick up a little bit to a more purchased market than refi.

Okay, great.

Thank you very much.

John Moran, Macquarie.

I have got one follow up on fees.

Just brokerage was particularly strong this quarter, obviously markets probably helped that and there was presumably some kind of burst of activity.

Is this a new run rate here or should we be thinking things kind of normalize once folks have repositioned?

I think you will see generally a little bit higher brokerage activity, largely because as we have made more hires over the last year and a half that brokerage activity has been sort of a core part of their business.

So I certainly think the fourth quarter uptick in the market added to a lot of activity and probably won't see those levels of increases, but I think you will continue to see strong brokerage activity in our business.

Okay, that is helpful.

Then I have got just a ticky-tack detail one here.

The other interest income was up and I assume that that is the special on the FHLB stock, is that where that was reflected?

Yes, John, that is correct.

Okay, perfect.

Thanks very much.

Geoffrey Elliott, Autonomous Research.

Good morning.

Thank you for taking the question; more of a conceptual one.

In the past you have discussed how many of your customers don't necessarily need a loan, but they are taking a loan to benefit from the tax shield and potentially low interest rates.

So in an environment where tax rates may go down, but tax shield may become less valuable and interest rates may go up, how should we think about the slice of your clients who fall into that category and your ability to continue lending to them for mortgage lending to continue to be attractive?

It is really difficult to say.

In the Company's history we have gone through a couple of changes in both tax rates and the level of deductibility on the size of a mortgage.

It is worth remembering that (technical difficulty) when in the 1980s there were no limits and then there were limits put on and then they were tightened.

We have seen over the years kind of a momentary reaction, but then it kind of goes back to business as usual.

And the fundamental driver for that is that at any given time, the cheapest and most stable consumer credit extension source for the consumer user is, in fact, a home mortgage.

And the type of clients we have, many of them use the proceeds for investments and other purposes.

Thank you.

Matthew Keating, Barclays.

I would like to touch on the Bank's interest rate sensitivity.

I guess in the last 10-Q obviously the Bank talked about a 5% benefit to NII for an immediate 100 basis point increase in interest rates.

Obviously in the fourth quarter we saw about an 85 basis point move in the 10-year.

Understanding that is going to take a while to flow through to your loan yields, obviously loan yields haven't moved that much.

But do you expect by the middle part of 2017, if rates stabilize at these levels, that you will start to see the loan yield gradually move higher?

Is that going to be noticeable?

Thanks.

I think that, Matt, your point is right that in the current quarter you don't get any benefit from that rate move.

And, frankly, the last four weeks in the quarter is when you started to see even new lock activity reflect the rate move up.

And I would say also the three- and five-year part of the curve is probably more important to lending than the 10-year would be.

And so I think if it stays up like this, loan yields may ticked up slightly, but again that is on the new business.

You have still got the portfolio as it exists today.

So we are optimistic that the new locks are coming in a bit higher and we would hope to see the loan yields tick up a little bit as we move into the future.

And just to add on --.

No, go ahead.

Just to add on the market side just to note, because it is only a year ago, but the 10-year Treasury was around the same level at the end of December 2015 and then it dipped around July.

So when you are looking at the shock it is really since the July that we have seen that increase in the rates, not the full year necessarily, has taken place.

Great, thank you.

I will now turn the call back to Jim Herbert, CEO, for closing remarks.

Thank you all very much for attending the call today.

We appreciate it and have a good day.

This concludes today's conference.

You may now disconnect.