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First Republic Bank (NYSE:FRC)

Q4 2012 Results Earnings Call

January 16, 2013 2:00 PM ET

Executives

Dianne Snedaker - Executive Vice President and CMO

Jim Herbert - Chairman and CEO

Katherine August-deWilde - President and COO

Mike Selfridge - Senior Executive Vice President

Willis Newton - Chief Financial Officer

Analysts

Steven Alexopoulos - JPMorgan

Ken Zerbe - Morgan Stanley

Brian Zabora - Stifel Nicolaus

Dave Rochester - Deutsche Bank

Paul Miller - FBR

Casey Haire - Jefferies

John Pancari - Evercore Partners

Matthew Clark - Credit Suisse

Aaron Deer - Sandler O’Neill & Partners

Joe Morford - RBC Capital Markets

Herman Chan - Wells Fargo Securities

Julianna Balicka - KBW

Operator

Welcome to the First Republic Bank Fourth Quarter and Full Year 2012 Earnings Conference Call. During today’s presentation 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.

Dianne Snedaker

Thank you. And welcome to First Republic Bank’s fourth quarter and full year 2012 conference call. Speaking today will be the Bank’s Chairman and Chief Executive Officer, Jim Herbert; President and Chief Operating Officer, Katherine August-deWilde; Mike Selfridge, Senior Executive Vice President; and Chief Financial Officer, Willis Newton.

Before I hand the call over to Jim, please note that any forward-looking statements made during this call are made as of today, are based on management’s current expectations, and are subject to risks, uncertainties and assumptions.

Potential risks and uncertainties that can cause the Bank’s business and financial results to differ materially from these forward-looking statements are described in the Bank’s periodic reports filed with the FDIC, including the Bank’s current report on Form 8-K filed today.

In addition, some of the financial information discussed on this call includes non-GAAP financial measures. The Bank’s earnings release, which was issued this morning and is available on the Bank’s website, presents reconciliations to the appropriate GAAP measures and explains why the Bank believes such measures are useful to investors.

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

Jim Herbert

Thank you, Dianne, and thanks everyone for joining our call today. It was overall a terrific year. Results across the franchise were very strong. I’d like to start by highlighting a few numbers for the fourth quarter and then focus primarily on the full-year.

For the quarter core net income was up 51% and core earnings per share were up 39% versus a year ago. For the full year, core net income was up 38% and core earnings per share were up 28%. Loans, deposits, wealth management and business banking all increased very strongly both during the quarter and the full year.

In addition to operating results, one of the key accomplishments of this past year was the continued diversification of our shareholder base and the considerable increase in liquidity of our stock as a result.

In the two year since our IPO, our private equity ownership which helped us buy the Bank back has been reduced from 73% to less than 14% at this year end. In 2012 alone the market quite successfully absorbed 45 million shares, or more than one-third of our total outstanding shares from these initial investors. These shares were sold by our initial private equity group and are now part of our float. This is a very important development.

On the operating front, the most gratifying achievement of the year has been the 28% growth in core earnings per share. This year’s very strong performance is the result primarily of our consistent execution of what is our very simple client focused business model. This model is built on a strong commitment to exceptional client service and exceptional asset quality.

Let me turn to the numbers for the full year for a minute. Tier 1 leverage ratio continues to be very strong at 9.32% and in fact increase a bit over last year. Book value per share was up 13.5% for the year to $22.08. Book value has increased almost 50% since we bought the Bank back only two and half years ago.

Loans and deposits each grew more than 20% for the year. Wealth management assets grew 55% for the year. This includes the $5.9 billion in assets from the Luminous acquisition recently. Even without this acquisition, our wealth management assets grew 27% for the year.

Quite importantly, credit quality remains very strong, nonperforming assets were low 14 basis points at year end and charge-offs for the year totaled only a single basis point.

As we enter 2013 we expect to benefit from the investments we’ve made in people, technology and new offices. However, we would caution that we continue to manage two challenges primarily.

First, we’ll continue experience net interest margin pressure. We are booking new loans at lower rates than current loans on the balance sheet and our loan payout rates are still pretty high.

Second, while we had a very profitable year on mortgage banking, its unclear how long we can generate such elevated loan sale gains. Overall, it’s been a terrific quarter and a terrific year for the Bank.

Let me turn the call over to Katherine.

Katherine August-deWilde

Thank you, Jim. Let me focus on some key numbers for the fourth quarter and then share a few noteworthy achievements for 2012. Compared to the prior quarter, Bank assets and loans outstanding grew 6%, deposits increased 5%. Loan originations were up 6% from the prior quarter and set record for both the fourth quarter and for the year. Wealth management assets grew 28% for the quarter, including the assets from Luminous. Business banking also had a breakout year.

I’d like to spend a moment on our wealth management strategy beginning with a historical perspective. Over the past several years, we’ve been building out our wealth management business adding capabilities in all of our markets.

Our growth has been driven by three initiatives, effective cross-selling of Bank client, the success of existing wealth managers growing their book-to-business and the hiring of extremely experience and talented wealth managers in all of our markets. This approach has worked very well.

In December, we accelerated growth of wealth management to the Luminous acquisition, which we believe will be a terrific fit. This was a strategic opportunity in terms of clients, geography and market segments. Luminous team has very talented people with a proven record of growth and this growth has continued since the transaction was announced.

As we mentioned, deposit growth was very strong. We are particularly pleased with the growth in our checking balances which rose 11% for the quarter and 43% for the year. In fact, checking now exceeds half of total deposits.

Loan growth was another bright spot for both the quarter and the year. Loan growth was driven by our reputation in the marketplace, the quality of our relationship managers, the efficiency of our loan closing process and the strength of our market.

As Jim mentioned, our credit record remains very strong. I would note that our loans have always been fully underwritten and fully documented. Needless to say, based on our historical credit record our client’s ability to pay speaks for itself.

Loan sales were also very strong for the quarter and for the year. Loan sales in the fourth quarter were $671 million. For the year, loan sales were $2.4 billion, both volume and price were significantly higher than in recent years.

We continue to be pleased with the demand for our high quality loans in the secondary market, but it is hard to predict pricing and volume going forward. Overall, we are very pleased with the quarter and with the year.

Now, I’d like to turn the call over to Mike.

Mike Selfridge

Thanks, Katherine. Let me provide some perspective on our geographic markets and then talk about the growth of loan originations and business banking. Economic conditions in our markets remained quite solid. First Republic continues to benefit from the very strong knowledge based business sectors concentrated in our urban coastal markets.

Technology, financial and professional services in these regions continued to perform very well, particularly in the San Francisco Bay Area, which represents just over half of our loan outstandings.

The strength of these carefully chosen markets combined with our differentiated service model are driving loan originations, as well as business banking activities. Loan originations for the year were a record $15.5 billion.

Home loans accounted for 63% of total originations of which 37% were for purchases. Commercial real estate and multifamily originations were also strong for the year, which led to 20% growth in loan outstandings for these categories.

Business lending was also up sharply as were business deposits. Business deposits were up 29% for the year and now account for 42% of total deposits. The growth in business loans and deposits produced the best year on record for business banking.

A key reason for this is our continued focus on very attractive business segments such as private equity venture capital, non-profits and professional services. These sectors are doing well and are providing First Republic with many high quality referrals.

Business banking is also benefiting from First Republic’s success in following satisfied personal banking clients to the businesses or the non-profits they lead and influence.

Now, let me turn the call over to Willis Newton our CFO.

Willis Newton

Thank you, Mike. I would like to focus on core earnings, core net interest margin and a couple of other key items. We are pleased with the growth in our core revenues and the 28% growth in core earnings per share for the year.

As you may recall, we calculate our core revenue and expenses by simply excluding the positive impact of purchase accounting, which originated when we bought back the Bank in 2010.

There are two items, which contribute to the purchase accounting adjustment. The largest is loan discounts, which were amortized into interest income. Today, 43% of the original amount remains on the balance sheet.

Also, we have CD premiums which lower our interest expense and are down to 14% of their original amount. As these two items come into income over the next several years, they will add approximately $1.50 per share to our book value.

Our core net interest income last year grew 20% due to larger average assets on the balance sheet and an improvement in our funding mix towards lower cost checking balances.

For the year, our non-interest income increased $56 million on higher loan sales gains, increases in wealth management fees and more Bank-owned life insurance, collectively our total core revenues were up 23% for the year.

For the fourth quarter our core net interest margin was 3.46%, declining only 1 basis point from the prior quarter. On average, lower rates on new loans contributed to a decline in the yield on earning assets by 6 basis points.

Most of this was offset by a reduction in deposit costs of 5 basis points. However, I would note that core deposit costs for the quarter were down to 24 basis points and really can’t go much lower.

During 2012, we sold $2.4 billion of loans, including almost $1 billion to the agencies. Selling fixed rate loans has always been part of our historical strategy to actively manage our asset liability matching.

Pricing was particularly strong in the fourth quarter as the average gain was 2.6% of the loan sold. For the last 10 quarters, the average amount of gain has been $5 million. The fourth quarter gain was $0.05 per share above this 10 quarter average.

Our core efficiency ratio was reported as 56.2% for the quarter. The efficiency calculation benefited from the larger than average gain on loan sales. Without these elevated revenues, the efficiency ratio would have been at the lower end of our expected range of 56% -- of 58%, excuse me, to 62%.

Importantly, our capital ratios remain strong. In addition to our good retained earnings we raised a total of $500 million in 2012 through three perpetual preferred stock offerings. Our Tier 1 leverage ratio is 9.32% up from 8.8% a year ago. It was a very positive quarter and year. Jim?

Jim Herbert

Thank you very much, Katherine, Mike and Willis. In closing, I want to reiterate that we’re very pleased with the recent quarter and the entire year. The increase in core earnings per share, the substantial diversification of our shareholder base, excuse me, and the strong growth of our franchise on every front made it quite a year.

The environment in the financial markets however is still quite challenging and we will continue to be under NIM pressure just as is everyone else.

Our markets remain strong. Our employees are doing a superb job of serving existing clients and acquiring new ones. We look forward to continuing to build the franchise, one relationship as a -- at a time as we have for many years.

Thank you for your time today. Let me turn the call over for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Steven Alexopoulos with JPMorgan. Your line is open.

Steven Alexopoulos - JPMorgan

Hi, everyone.

Jim Herbert

Hi, Steve.

Steven Alexopoulos - JPMorgan

Maybe I’ll start, Jim, looking at the tax law changes that went through impacting higher income individuals. I know it’s early. But have you notice any change in behavior so far of your clients in terms of pulling away from real estate investing or any less demand for credit, anything notable at this point?

Jim Herbert

Actually no, not so far, although those couple people moving to Florida, because of California tax law change. But, not really, no. I think there will be some. We saw a lot of activity at the end of the year, as I’m sure every bank and certainly, in private banking did, but no pattern yet.

Steven Alexopoulos - JPMorgan

No pattern yet. Okay. And then, looking at the qualified mortgage rules that came out last week, did you see anything in there that could impact either the way you run the business or make jumbo less desirable that asset class to hold?

Jim Herbert

Well, I don’t think they’re going to necessarily impact jumbos as an asset class. The one thing in there, of course, is the interest-only issue and we have a lot of interest-only loans, and have done them as you know for a number of years.

But, obviously, our clients are very well qualified. Excuse me, in terms of their ability to pay requirements under the rule. But we’re still studying to make sure that that -- that’s the extent of the impact. It’s complicated and we’re trying to think it through. Right at this moment, I don’t think it’s too much of an impact but we are cautious.

Steven Alexopoulos - JPMorgan

Okay. And then maybe for one final one, Jim. If you look at the $4.3 billion of gross originations in the quarter, that’s up around $1 billion, right, from the year ago period. What would explain why loan growth continues to accelerate, particularly into year end, is this just what you were saying that high net worth people were more active in the quarter, is this New York coming online? Just any color that you can help us think about why the origination volumes have reached this level?

Katherine August-deWilde

There are several reasons. The markets we’re in are very strong. There was a bit of year end activity but actually there always is extra activity at the end of the year. In the last 18 months we also hired additional business bankers and relationship managers who after six to 12 months become much more productive and those are the reasons.

Jim Herbert

And low rates continue to impact it, refinancing still quite high and purchase finance is actually pretty strong.

Steven Alexopoulos - JPMorgan

Okay. Thanks for the color.

Jim Herbert

I think since if I could add to that for one thing, Steve, the strength of our particular markets is not to be underestimated.

Operator

Your next question comes from Ken Zerbe with Morgan Stanley. Your line is open.

Ken Zerbe - Morgan Stanley

Great. Thanks. I guess, first question, just in terms of the gain on sale margins, Willis, I think you mentioned it was $0.05 above your 10 quarter average. Have you seen or can you comment on any trends you may have seen so far in January relative to the fourth quarter?

Willis Newton

No, we don’t. We do have a few loans in held-for-sale bucket at the end of the year which are primarily going to the agencies in due course. But we have not put out any packages for consideration in the marketplace this quarter.

Ken Zerbe - Morgan Stanley

Okay. That’s fine. In terms of additional wealth management acquisitions, I think Luminous done or getting done, what is the appetite? I mean, was that just such a unique one-off situation or is there potential that if you find someone similar to Luminous again, you would be willing to do another deal?

Katherine August-deWilde

Well, we’ve done one in 10 years as you probably know.

Ken Zerbe - Morgan Stanley

Yeah.

Katherine August-deWilde

This was particularly a unique situation. And as you know, we prefer to hire wealth managers one at a time or two at a time so that we understand clearly that they want to be part of us and that they have the skills. We look all the time but this is in the first one that was compelling.

Ken Zerbe - Morgan Stanley

Understood. Yeah. I guess, that’s why we’re little surprised that the deal was done, I guess, to start with, I understand. And then just really quick the yield or the average yield that you might be putting on with all the blended rate of new loans put on during the quarter?

Willis Newton

It’s a little over a 3% that’s in the home loan category and a little more higher than that in multifamily and commercial.

Ken Zerbe - Morgan Stanley

Okay. Great. Thank you.

Operator

Your next question comes from Brian Zabora with Stifel Nicolaus. Your line is open.

Jim Herbert

Brian, are you there?

Operator

Brian Zabora?

Brian Zabora - Stifel Nicolaus

Sorry about that. I think I was on mute. Can you hear me now?

Jim Herbert

We can.

Brian Zabora - Stifel Nicolaus

Okay. Good. Sorry about that. The strong deposit growth you had in the quarter, you highlighted that interest bearing was extremely strong. Was there anything you changed as far as the make-up of the -- incentivize people to move to that from other categories or was it just you had a good inflow?

Jim Herbert

We just had a good inflow and the business banking that Mike alluded to is very strong. And of course that brings primarily checking with it. And we have continued to work through our CD book to either cross sell -- to encourage cross sell or to move CD single products CD clients out.

So it’s just a -- it’s really an ongoing process. What we don’t know yet is there may have been a particular strength at the end of the quarter as a result of all the liquidity but so far it looks very stable.

Brian Zabora - Stifel Nicolaus

Okay. And then from the TAG program expiring, have you seen any impact so far in January?

Jim Herbert

No. not really.

Brian Zabora - Stifel Nicolaus

Okay.

Jim Herbert

We’ve had a few movements but not a meaningful amount at all.

Brian Zabora - Stifel Nicolaus

Great. Thanks for taking my questions.

Operator

Your next question comes from Dave Rochester with Deutsche Bank. Your line is open.

Dave Rochester - Deutsche Bank

Hey. Good morning, guys. Nice quarter.

Jim Herbert

Hi Dave. Thanks.

Dave Rochester - Deutsche Bank

Just a quick one on the expense side, you’d given an update last time on how much of that physical build-out expense was on the run rate for 3Q. Was just wondering how far along we are now in 4Q and what the timing is on that growth slowing a bit in 2013 on the expense side?

Jim Herbert

Well, from a branch point of view, an office -- a new office point of view, we have a number of offices that we’re going to open next -- we’re going to open next year because they are in process. And we’d probably open eight or nine new offices yet.

That’s the pipeline being completed basically, that we have put in place over the last 18 months or so. We have not in the last quarter or two -- I’m just hesitating here to be sure, really signed anything else up or completing out the pipeline.

Willis Newton

Yeah. But I think we said last quarter that on those eight or nine offices, we are including about $1 million a quarter for the rent of those offices. We’ve kind of slowed down the opening of them, which means we don’t hire the people or begin to incur costs like utilities and depreciation, but those will come on over the course of the year.

Dave Rochester - Deutsche Bank

Okay. Thanks. Just a quick follow-up on the expense side, I noticed the comp expense growth slowed a little bit this quarter. I was just wondering if there were any bonus accrual adjustments in that or if something else drove that this quarter?

Willis Newton

I don’t believe there was anything unusual in the bonus line this quarter. Next year -- next quarter we will have, in our first quarter, payroll tax issues as most people do and we’ll start over with an estimate for the year as a whole.

Dave Rochester - Deutsche Bank

Great. And last one, you guys had some great growth on the loan side and the deposit side. I was just wondering on the loan side, if you could update us on the pipeline there and how that looks and if you expect to see that strong C&I growth continue into 1Q?

Katherine August-deWilde

The pipeline looks as good as it looked as we were going into the year-ago in 2012. While we can’t predict what that’s going to be but we are pleased with the strength of the pipeline.

Dave Rochester - Deutsche Bank

All right. Great. Thanks guys.

Operator

Your next question comes from Paul Miller with FBR. Your line is open.

Paul Miller - FBR

Yeah. Going back to the gain on sale, you gave us some pretty good comparisons on gain on sale over the last 10 quarters. I didn’t get a chance to calculate it yet. But what was the gain on sale up from the third quarter?

Willis Newton

The gain on sale was up about 1.6% in the third quarter and about 2.6% in the fourth quarter. So, it was up about 1%. We put a table in the press release to help everybody with that math.

Paul Miller - FBR

And was that mainly -- that’s a huge jump from quarter-to-quarter, I mean was it -- can you just talk, add some color to that jump?

Jim Herbert

Just conditions in the market really. Thanks to Fed, that’s when they started their mortgage buying.

Paul Miller - FBR

And are you still seeing this and you said you did $1 billion to the agencies, right and you sold about $0.5 billion into the private label?

Willis Newton

Well for the year, we’ve sold a $1.5 billion of non-agency and $922 million of agency paper, page 10 of the press release.

Paul Miller - FBR

Okay. Yeah. Okay. And so going forward, I mean, you have 5.5% growth on the balance sheet. Should we expect that type of growth given if rates stay where they are today? I know, I believe you said it, it all depends on what the deposits are doing, but given your growth, is this something that’s sustainable throughout the year?

Jim Herbert

Well, Paul the truth is there’s no way to know. It obviously depends on demand and on our repayment rates. As Katherine said, the backlog at the beginning of the year is holding up pretty well. The first quarter due to some seasonality to the mortgage business generally the way we do it anyway and the first quarter is often little slower than the fourth quarter and so on.

But that can move around from year-to-year. But it’s -- the year is starting off relatively strong, but this was a stunningly busy year. And it’s hard to do an encore on this year at these levels.

Paul Miller - FBR

And then the efficiency ratio dropped about 52%. I think that’s mainly driven by the fact that you just -- your earnings were very strong this quarter. Should we model -- how should -- looking at on a modeling basis, should we be modeling back up to 55%, because you do have some new branches coming online?

Willis Newton

We would prefer to focus on the core efficiency ratio which was 56.2% for the quarter. And as I indicated, without the elevated gains, it would’ve been within the lower end of our 58% to 62% sort of range. So we are still looking at the 58% to 62% range with a more normal mortgage banking revenue.

Jim Herbert

Encore.

Willis Newton

Encore.

Paul Miller - FBR

Okay. Hey guys, thank you very much. Thank you very much.

Jim Herbert

Thanks Paul.

Operator

Your next question comes from Casey Haire with Jefferies. Your line is open.

Casey Haire - Jefferies

Hey. Good morning, guys.

Jim Herbert

Good morning.

Casey Haire - Jefferies

Just a question on capital, the Tier 1 leverage ratio at 9.3. I know you guys get plenty of room versus that 8% level, but obviously the earning asset growth could be strong enough to erode that further. I was just wondering what is your -- would you like to keep a buffer above that 8% level and would you use more preferred issues like the November 1 as a vehicle to maintain that buffer above that 8% level?

Jim Herbert

We do want to keep a buffer above the 8% level always. And we’re aware that we’ve been a growth company for a long time. So, we run our capital activities very, very carefully. And I would like to think thoughtfully. We would if appropriate use additional preferred to support needs if we have them.

Casey Haire - Jefferies

Okay. And then, just sort of clarification on NIM. I just want to make sure I’m thinking about this correctly. If I back out the discount accretion on the loan yields, the core yield -- the contractual yield on the loans is about 380 and your new production is in -- seems like it’s in the low 3s, which basically means there is about 70 bps of repricing risk within the loan portfolio. Does that sound accurate?

Willis Newton

That sounds about right. That’s about right. We’re currently, as we’ve said a couple of times in the past, recording prepayment penalties which add five to seven to our loan yields. So you take that off and then you get to the contractual rate on the loans.

Casey Haire - Jefferies

Okay. Great. Okay. And then is there any -- it doesn’t sound like there is any offset on the funding costs anymore but is there ability to push the cash balances lower from this current level as you did this past quarter?

Willis Newton

We averaged about $1 billion for the year and we could take that down to about half that level but it’s -- with our deposit growth, it’s been difficult to get much lower.

Casey Haire - Jefferies

Got you. Okay. Thank you.

Operator

Your next question comes from John Pancari with Evercore Partners. Your line is open.

John Pancari - Evercore Partners

Good afternoon. On the margin front, can you talk a little bit about the outlook for the margin ex-accretion just given the pressure that you implied. And we are certainly seeing the pressure on new money yields. Is it fair to assume that low to mid-single digits compression on a quarterly basis is likely here over the next several quarters?

Jim Herbert

Without putting a number on it because it is a little hard because prepayments speeds have a lot to do with this. It isn’t just the rate of new bookings, it’s the rate of payoff of old. It’s a compilation of those two items.

Yeah. I would think so. I mean it’s -- we were fortunate this quarter. We had some extenuating circumstances. We’re able to push the deposits down a little more but they are in those mid to low 20s as we said, 20 basis points that is. And it’s a little hard to get much lower than that. We keep working on it. And I think that’s probably an accurate range to think about it.

John Pancari - Evercore Partners

Okay. All right. That’s helpful. And then on the balance sheet side, in terms of loan growth, can you give us a little more color on the drivers of the C&I growth that you saw this quarter? I know it’s been accelerating but it was particularly strong this quarter and also, if outside of that, can you talk a little bit about the drivers around multifamily again particularly strong and just wanted to get your thoughts on the outlook?

Mike Selfridge

Sure, this is Mike. On the business loan front, the majority of the growth came through two areas. The first was schools and non-profits and the second was capital call line activity to private equity and venture capital funds.

Willis Newton

And then in the multifamily and CRE area, why it’s just an ongoing business for us, it’s been there a long time. The demand is good. We’ve hired a couple of folks that are particularly good at it as well but mostly it’s been demand from our client base and activity level.

John Pancari - Evercore Partners

Okay. Great. Thank you.

Jim Herbert

Thank you.

Operator

Your next question comes from Matthew Clark with Credit Suisse.

Matthew Clark - Credit Suisse

Hey. Good morning, guys.

Jim Herbert

Good morning.

Matthew Clark - Credit Suisse

Can you talk just a bit about the resi mortgage portfolio growth? It’s slowed a little bit here at 16% annualized on balance sheet. I’m just curious, if we should as we look out, consider with gain on sale maybe moderating that, the pace of the portfolio growth might pick back up because it has been slowing the last couple of quarters?

Katherine August-deWilde

We manage the growth based on our plans and based on our asset liability metric. So when we make more long-term fixed rate loans we tend to sell more loan. We make more adjustable as we tend to sell fewer loans. And so, it depends on what the mix is.

This is a market where some consumers and clients want the 15 and 30 year fixed, which we tend to sell. So that does mitigate growth. We see good originations continuing and then determining based on the mix and our ALCO matching, we’ll decide what we want to sell.

Matthew Clark - Credit Suisse

Okay.

Willis Newton

I’d add that last year we originated 8.4 billion of home loans, not excluding -- not including the HELOCs. We sold 2.4 billion of that, that leaves 6 billion. About half of it went for pay offs, and about half of it went for the net loan growth.

Matthew Clark - Credit Suisse

Got it. Okay. And as the Luminous steel comes into the numbers here, at least on a full run rate basis. Are we going to, I guess, it sounds like you’re going to continue to manage that 58% to 62% core efficiency ratio, is that fair?

And then, can you just remind us the revenue contribution that you anticipate from those assets under management. I would -- I think that number is around 50 basis points but just want to confirm.

Willis Newton

All right. Yeah. The contractual revenues on the $5.9 billion that Luminous had at the end of the year is about approximately $30 million. And so that is around 50 basis points.

Jim Herbert

The efficiency of any wealth management activity is usually not as attractive as the bank’s efficiency ratio. And that’s true with Luminous as well although they are very profitable. But their impact on our efficiency ratio is probably fairly de minimis.

Matthew Clark - Credit Suisse

Okay. Okay. Thank you.

Operator

Your next question comes from Aaron Deer with Sandler O’Neill & Partners. Your line is open.

Aaron Deer - Sandler O’Neill & Partners

Hi. Good morning, everyone.

Jim Herbert

Hi Aaron.

Aaron Deer - Sandler O’Neill & Partners

Just a couple of quick follow-ups on things you’ve kind of already touched on. The big jump in the premium on the mortgages sold, it sounded like you’re attributing that to the change in rates and demands during the quarter. I’m just also wondering if there’s any other factors because of which there’s such a big difference if there’s any difference in the mix type that a loan is sold in terms of the agencies versus privates or anything like that that occur than that?

Katherine August-deWilde

We sold the loans that were 15 and 30-year fixed and what Jim described in terms of the additional buying of mortgages by the Fed helped the price we expect significantly. There’s also a good demand for our mortgages because of the high quality.

Aaron Deer - Sandler O’Neill & Partners

Okay. And then I might have missed it, but what was the split between purchase versus refis in the quarter and also if you can give some color in terms of where the geographic distribution was?

Mike Selfridge

Aaron, it’s Mike. There -- I can’t say there was any geographic dispersion. It seemed to be nicely balanced and the purchase activity was 37% for the quarter.

Aaron Deer - Sandler O’Neill & Partners

Okay. Great. Thanks for taking my questions.

Operator

Your next question comes from Joe Morford with RBC Capital Markets. Your line is open.

Joe Morford - RBC Capital Markets

Thanks. Good morning, everyone. Congratulation on a good year.

Jim Herbert

Thank you, Joe.

Aaron Deer - Sandler O’Neill & Partners

Really pretty much everything has been asked. One follow-up, just curious if you could talk about the risk-adjusted margins in multifamily lending right now. I noticed volumes were up a bit or a bit stronger this quarter. But other competitors talk about the market getting overheated and pricing is pretty aggressive as well. So, just be curious on your perspective?

Jim Herbert

We would agree with the other comments. I don’t know that risk pricing is off. We’re pretty conservative underwriters. So we don’t really price to risk. We decide to take a risk and then the pricing is what it is.

The pricing pressure is considerable and the question -- the theoretical question I think is are properties beginning to be overvalued. And I would say every once in a while, yeah. But we are in a 0.25% world, so which cap rate is right? I don’t mean to be flip. I mean that’s really a -- it’s a serious question. And I think from the point of view of cash flow coverage on our lending. However, we’ve not varied our underwriting standards.

Aaron Deer - Sandler O’Neill & Partners

Okay. That’s helpful. Thanks Jim.

Jim Herbert

Thank you.

Operator

(Operator Instructions) Your next question comes from Herman Chan with Wells Fargo Securities. Your line is open.

Herman Chan - Wells Fargo Securities

Hi. Thanks for taking my questions. There was another press article today about a larger competitor looking to become more aggressive in the residential mortgage business. Have you experienced any sense of renewed competition in your markets?

Jim Herbert

Well, I must say we never experienced a decline of competition but it would be naive not to think that as BofA comes back into the market. We won’t have some renewed competition. We’ve managed to fair fairly well in the face of pretty heavy competition already. But we would have preferred they were pulling out rather than coming in.

Herman Chan - Wells Fargo Securities

Great. Thanks. Also, the bank has signaled -- sort of muted hiring in recent quarters. Meanwhile, the bank was able to demonstrate a slower core expense growth in Q4. Excluding Luminous, should we expect a slower expense growth trajectory in 2013 with hiring less robust?

Jim Herbert

Herman, it’s hard to say. We would like to think so. And we’re staying in that muted hiring mode as you put it, at least as of now. We take advantage of opportunities as they come up if we’re particularly interested, otherwise we are basically, as Katherine implied, spending time absorbing people that are new to the company, not new to the business necessarily, but new to the company. And they are becoming effective and efficient quite rapidly and that’s very positive.

Herman Chan - Wells Fargo Securities

Great. Thanks for taking my questions.

Jim Herbert

Thank you.

Operator

Your next question comes from Julianna Balicka with KBW. Your line is open.

Julianna Balicka - KBW

Good morning.

Jim Herbert

Good morning.

Julianna Balicka - KBW

I just wanted to follow-up on a couple of topics that have been discussed. On the gain on sale margin, the 2.6%, do you have a breakdown of that one and I’m sorry if I missed it between the margin on the non-agency loans that you sold and the margin on the agency loans that you sold?

Willis Newton

No, we don’t, Julianna. We had good execution this quarter on all of the loans that we sold.

Julianna Balicka - KBW

So, if we think into 2013 and you had alluded to the gain on sale income line kind of trending back down to your historical levels, is it because you’ll likely sell lower amount of balances or is it because the particular gain on sale, the 2.6%, will kind of drop back down to 1.5%, 1% range, what have you?

Jim Herbert

First, let me just be clear, we don’t know where the gain on sale is going. What we were doing was providing you with some historical perspective to try to put into context the magnitude of the unusual nature of the game. Our volume of sale as Katherine implied is more driven by the mix of the product we originate. We do not want to hold 30 and 15 fixed.

The gain on sale was driven by the Fed’s activity, primarily actually and the quality of our product. But more the former than the latter although the latter matters a lot. So but I -- we would necessarily anticipate at any particular quarter, whether it’s going to be better or worse than the last quarter, we just don’t know. The volume we have a slightly better handle on them than price. Prices -- market price and it’s hard to call.

Julianna Balicka - KBW

Okay. That make sense. And then, just to follow up on the margin, you had discussed declining outlook for the core margin, as some of your levers have gone up or even pulled. In thinking about your margin decreasing as you kind of managed next year, to the extent that your net interest income, it starts to decline, all things being equal, would you then push up growth in order to maintaining and growing that interest income with the declining margin or how do you think about that trade off?

Jim Herbert

Well, the net interest income versus the NIM might not decline. The question is can net interest income growth with good quality loans offset our makeup for the NIM compression on the total balance sheet. We don’t drive growth however ever, to accomplish any particular objective. We only do good business when we see it.

And so the volume of our business is almost always a result of the amount of good business we’ve been able to attract as opposed to a target earned objective which we do not operate with.

Julianna Balicka - KBW

Okay. Very good. And then final question, I will step back. As you think about the momentum behind the refi market which of course is an important part of your business line as well. How do you think about how you will be reacting once that starts to peak whether it peaks in the third quarter of this year or at the beginning of next year, I mean, what’s your thoughts about the top down versus bottom ups of managing for that trend in the market?

Willis Newton

Well, this is Willis. As the refi market dissipates, what we would expect to see is not only lower volumes but lower prepayments within our balance sheet as well. So our goal would be to continue to originate sufficient amount of loans to achieve our growth targets. And if we we’re able to have extra loans, we will then sell them into the marketplace.

Julianna Balicka - KBW

Okay. Very good. Thank you very much.

Operator

There are no further questions at this time. I will now turn the conference over to Jim Herbert for closing remarks.

Jim Herbert

Thank you all very much for today. Obviously, the year and the quarter were good and we are pleased with it. And 2013 is starting off with some challenges but with a lot of activity. Thanks very much.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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