Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

First Republic Bank (NYSE:FRC)

Q3 2013 Results Earnings Call

October 15, 2013 2:00 PM ET

Executives

Dianne Snedaker - EVP and CMO

Jim Herbert - Chairman and CEO

Katherine August-deWilde - President and COO

Willis Newton – EVP and CFO

Mike Roffler – SVP and Deputy CFO

Analysts

Erika Najarian - Bank of America

Steven Alexopoulos - JPMorgan

Ken Zerbe - Morgan Stanley

Ryan Nash - Goldman Sachs

Herman Chan - Wells Fargo Securities

Casey Haire - Jefferies

Dave Rochester - Deutsche Bank

Aaron Deer - Sandler O’Neill & Partners

John Pancari - Evercore

Lana Chan - BMO Capital Markets

Joe Morford - RBC Capital Markets

Paul Miller - FBR

Julianna Balicka - KBW

Michael Rosado - Credit Suisse

Matthew Keating - Barclays

Operator

Greetings. And welcome to First Republic Bank’s Third Quarter 2013 Earnings Conference Call. During today’s call the lines will be in 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 third quarter 2013 conference call. Speaking today will be Jim Herbert, the Bank’s Chairman and Chief Executive Officer; Katherine August-deWilde, President and Chief Operating Officer; Willis Newton, Chief Financial Officer; and Mike Roffler, Deputy Chief Financial Officer.

Before I hand the call over to Jim, please note that any forward-looking statements made during this call or 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 reports 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 earning 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 to everybody for joining our call today. This was a very good quarter in many respects. Growth across the entire franchise was unusually strong even for us. Let me summarize the quarter from our perspective.

Strong client acquisition led to increased wealth management assets and loan growth, which was more than funded by very strong deposit growth. New clients and continued growth in both loans and wealth management will lead to even better things in the near future.

Core EPS was the same as the second quarter, in spite of $0.03 per share less of mortgage banking income and a decline in net interest margin.

We are quite pleased that our growth continues to be entirely organic, including quite importantly, many new clients. Core net interest income for the quarter was up 3% and 10% year-over-year.

Deposit growth for the quarter was particularly strong. This resulted in fact in $1.5 billion higher average cash balances than during the prior quarter. Three quarters of this cash growth originated from deposit gain and a quarter of it came from FHLB term advances, which we took down to match fund our assets and our liabilities.

For perspective, the strong loan volume that we experienced these past two quarters of $5.3 billion and $4.9 billion has been in fact quite unusual, about 50% above our prior eight quarters which averaged $3.4 billion.

Let me turn to some highlight -- other highlights for the quarter. Core net income was up 23% compared to the same quarter last year and core earnings per share were up fully 19% year-over-year.

Wealth management had a very good quarter, assets were up 5%. Business banking which is one of the most important components of First Republic performed extremely well. Business lending along with multi-family, commercial real estate and other non-single family-related lending was in fact 47% of our loan volumes during the quarter.

We continue to open new offices in our existing markets. We opened a new office in New York at 30th in Park Avenue South and in Sunnyvale, in the heart of the Silicon Valley. Between now and the end of the year we’ll open two additional offices, one in Downtown/San Diego and the other one in Cupertino, also in Silicon Valley.

Asset quality for the quarter remained excellent, non-performing assets were 13 basis points. We did have one unique loan loss during the quarter which we referred to you before and which we charged-off fully. Book value per share continues to rise nicely and is up 12% year-over-year at $24.13.

As a side note, but very importantly, our private equity ownership has been declining steadily and it’s actually now zero. The last sale by our private equity investors took place in late July.

Let me take a moment to quite sincerely thank all of the private bankers that we had in buying the Bank back. Their support, their guidance and their consul had been enviable. We simply could not have had better partners. To our great benefit both Bill Ford from General Atlantic and Tom Barrack from Colony have agreed to remain all in the Board of First Republic.

Let me talk for a minute about net interest margin, as we expected and have indicated on prior calls, we did continue to incur margin pressure this quarter. At first glance, a 22 basis point drop in core net interest margin looks quite significant.

However, 14 basis points of this decline is due to excess cash from the deposit growth and FHLB advances. Without this extra cash impact so to speak, core net interest margin would have been down only about 8 basis points for the quarter or 3.29.

We do expect margin pressure to continue next year. Quite importantly, the growth in our net interest income, thanks to asset and earning asset growth continues to offset net interest margin compression.

As most of you know, the culture at First Republic is intensely focused on delivering extraordinary service. Overtime, the financial needs and complexities of our clients grow and they do more with us.

Additionally, these very satisfied clients recommend us to their friends and colleagues. They also take us along with them to their businesses and the non-profits which they influence. As a client base continues to grow, this positive word of mouth spreads. This very simple approach is the foundation of our cross-sell and core of our relationship banking model.

The very strong growth of new clients directly related to our ability to deliver an overall client experience that is very unusual in today’s banking world is the essence of First Republic.

Now let me turn the call over to Katherine.

Katherine August-deWilde

Thank you, Jim. Let me provide some additional details about the third quarter. For the quarter, loans outstanding grew 6%, deposits increased 11% and wealth management assets rose 5%.

Loan originations were up 22% compared to the same quarter a year ago. This was the second consecutive quarter of very high loan origination volume. For instance, loan originations for the prior eight quarters averaged $3.4 billion per quarter.

Our current pipeline would indicate that we are returning to a more normalized average. I would note that during these same eight quarters, the compounded average annual growth rate of loans was 21.4%. With the rise in interest rates which have retreated a bit recently, clients have shifted from long-term fixed-rate loans to hybrid ARMS, mostly fixed for five or seven years.

This quarter was the second largest ever of loan origination volume. Importantly, of the loan volume for the quarter, 47% was attributable to business, multifamily, commercial real estate and other non-single family related lending. Of the 53% that was single family related, over 40% was for home purchases.

Business, multifamily and commercial real estate loans accounted for more than a third of balance sheet growth this past quarter. Multifamily and commercial real estate loans were up 30% year-over-year. Business loan commitments rose 28% year-over-year. Business loans outstanding grew 43% year-over-year.

Conditions in our urban coastal markets are strong. San Francisco Bay Area, our largest market, continues to be particularly robust. Loan sale volume in the third quarter was quite low at $284 million, down from $945 million in the second quarter. The gain on sale was only $1.2 million, down from $8.8 million in the second quarter.

We expect very modest loan sales volume to continue in the fourth quarter. Mortgage banking gains tend to be cyclical. We are actually quite pleased with the earnings performance of the franchise without elevated loan sale income.

Regarding deposits, growth was very strong for the second straight quarter. We’re particularly pleased with the growth of personal deposits -- which were up $1 billion. We would note that in the last two quarters, average personal checking account balances appeared to have stabilized.

Business banking deposits were up strongly and accounted for two thirds of our deposit growth. Business banking deposits now represents 48% of total deposits.

Wealth management had another good quarter including market appreciation. Assets grew 5% in the quarter or $1.9 billion. Year-to-date wealth management assets have grown 22%. Of that growth, about three quarters was attributable to net client inflows and one quarter to market appreciation.

The continued diversification of our franchise from personal banking to business banking and wealth management is working very well. We are quite pleased with our performance across all lines of business.

Now, I would like to turn the call over to Willis.

Willis Newton

Thank you, Katherine. Core net income is up 23% and core EPS is up 19% both year-over-year. We continue to focus on growing the core earnings of the bank while recognizing that purchase accounting adjustments will continue to have a positive but diminishing impact on future earnings.

Next, I would like to discuss core net interest income and core net interest margin. We grew our core net interest income through the growth of our loan portfolio and the selective purchase of investment securities. Due to higher earning assets on average, our core net interest income is up 10% year-over-year.

As noted earlier, our net interest margin had average cash balances greater than $1.5 billion compared to the prior quarter. These balances at the Fed earned 25 basis points and do not contribute to our core net interest income.

As Jim mentioned, this excess cash reduced our core net interest margin by 14 basis points. New tables in the back of your earnings release show the trends in core loan yields and core deposit cost which are responsible for most of the remaining 8 basis points decline in core net interest margin.

Our weighted average contractual loan yield declined 6 basis points in the third quarter. The new loans that we added to our loan portfolio in the third quarter had an average rate of around 3.3%. This rate was slightly higher than the rate for new loans last quarter but it was less than the average rate on the overall portfolio.

On the deposit side, our core deposit costs for this quarter were 28 basis points. This compares to 29 basis points a year ago and 24 basis points last quarter. Importantly, our deposit growth of 22% over the past year has come with only a very modest change in the rates we pay.

Also, we continue to add discipline of match funding. During the quarter, we added $800 million of long-term fixed rate Federal Home Loan Bank advances. These advances have average rates of about 1.5% at an average term of 4.3 years.

Our asset quality remains excellent. We had only 13 basis points on non-performing assets at quarter end. I would note that approximately 75% of these non-performing assets are secured by single family homes and only 7% are related to business loans.

During the quarter, the rate of loan repayments declined slightly to 20% and in September, this repayment rate was even lower. Lower repayment rates and limited loan sales will contribute positively towards future loan growth.

A final comment on expenses and our efficiency ratio. For the quarter, our noninterest expenses increased at the rate of 1.8%, well below the growth rate of earning assets. We are continuing to invest in the franchise selectively with people, office and technology while being prudent in our spending.

Our core efficiency ratio was 60.1%. This is up slightly from the prior quarter. However, this core efficiency ratio would have been unchanged from the prior quarter if we exclude the decline in the mortgage banking revenue.

Now, I would like to pass the call to Mike Roffler.

Mike Roffler

Thank you, Willis. Let me talk about tax accounting in anticipation of a change that maybe coming soon. I’ll try to keep it simple. During the quarter, we continue to add tax-advantaged assets. As a result, our projected tax rate for the year decreased from 26% to 25.5%.

A meaningful contributor to our reduced tax rates is our ongoing focus on low income housing tax credit investments. As a reminder, these investments reduce our income taxes but also currently require that we expense a portion of the investment each quarter into our noninterest expense. The amortization expense from these investments was fully $12 million this quarter.

Next month, the FASB has a meeting, at which time the classification of such expense is likely to change and will be reported as part of our income taxes. If this change is adopted, our noninterest expense will be reduced and our income taxes will increase by approximately the same amount.

Had this reporting be in effect today, our effective tax rate would be 30.5% year-to-date and our core efficiency ratio for the third quarter would decline from 60.1% to 56.5%. We support this change because in our opinion, it will more accurately reflect our true operating expenses.

Now, let me turn the call back to Jim.

Jim Herbert

Thank you very much. In closing we are pleased with the quarter. The franchise is performing quite well as was demonstrated by the growth of new clients, deposits, loans, business banking and wealth management.

Our long-term focus remains as always on quality delivery, new client acquisition, a focus on a few limited coastal urban markets and service delivery without peer. This quarter is a particularly good example of client and franchise growth.

With that, let me turn it over to the operator. We’d be happy to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Erika Najarian from Bank of America. Your line is open.

Erika Najarian - Bank of America

Good morning. My first question is on the eventual deployment of the excess liquidity. Your cash balance was $1.7 billion this quarter versus [$178] [ph] million last quarter. And from a timing perspective, I guess, I’m wondering how quickly do you think you will redeploy that, will that be fully dependent on loan growth or will you also increase your securities balance, because based on your comments that this is mostly through a client acquisition, I assume that most of these new deposits are fairly sticky?

Jim Herbert

Hi, Erika. The -- your last assumption is correct. We believe the deposits are pretty sticky. And actually I’d note that the fourth quarter is usually a pretty decent deposit gathering period for us. So it’s possible that the fourth quarter will have in excess of deposit -- in excess of cash, sorry, throughout the quarter as well.

We will not probably alter our investment activities very much to utilize it. We will simply allow the loan to grow in -- loan growth to eat it up. We have further trimmed our deposit rates slightly backwards to try to mitigate it slightly. As they say this is a nice problem, but it will take a quarter or two probably to overcome the excess cash completely.

Erika Najarian - Bank of America

Got it. And Katherine, thank you for the guidance on the mortgage banking run rate of revenues for next quarter. I was just wondering are there any expenses that you could flex down related to mortgage banking that is perhaps delayed in terms of coming out of your operating expense number?

Katherine August-deWilde

Erika, there really aren’t, we run it very tightly and the people who are responsible for this have a lot of other responsibilities as well.

Erika Najarian - Bank of America

Okay. Got it. I’ll step away from the queue. Thank you.

Operator

Your next question comes from the line of Steven Alexopoulos from JPMorgan. Your line is open.

Steven Alexopoulos - JPMorgan

Hey, everyone.

Jim Herbert

Hi, Steve.

Steven Alexopoulos - JPMorgan

Jim, could you start, I was just looking for a little more color on the deposit growth and I heard when you said that you expect to trim rates back a bit. If you look at money markets, looks like they were up around 7 basis points. Is it a case where your raised rates maybe had better than expected deposit flows, trying to understand the motivation to raise rates and gather that much in a way of deposits?

Jim Herbert

Well, you are right, it overran our expectations a bit. The place it probably got ahead of us, however, was in business banking primarily, Steve, which is good. We’ve landed, what’s easy to forget as -- is that with two very powerful loan quarters like we’ve had, the way we operate this model that brings with it a considerable flow of deposits. It actually brought a bit more than we thought.

We did raise rates a little bit also in the second and third quarter, and we provided some marketing and other support for deposit gathering. In response to the first quarter of the year, which was a bit of a dry deposit period if you recall and we probably overshot the market a little bit.

When you are growing, when you are running a company that’s growing at 20% plus it is almost invariable that you get a little out of tweak here and there on assets, loans, capital, et cetera, and you need to keep all the things in balance, it takes a little doing. And with the variable interest rate environment occurring, we actually exacerbated our problem of course by drawing almost $800 million of FHLB borrowings in the quarter.

Steven Alexopoulos - JPMorgan

Great. So, Jim, to follow-up on that…

Jim Herbert

Sorry, go ahead.

Steven Alexopoulos - JPMorgan

No. Just to say to follow-up given how much balance sheet growth you’ve had, the leverage ratio, I guess is now about 120 basis points over your requirement. Can you help us think about capital here moving forward?

Jim Herbert

Well, as you know we don’t have a project forward on capital. But we are at about 9.18, I think at the end of the quarter on leverage. We do need to be at 8 as you said or implied and we like to stay well-capitalized.

Steven Alexopoulos - JPMorgan

Okay. And just the final one for Willis, maybe you could help us think about provision expense, reserve to loans declined a bit, the provision rate to fund the loans declined? Why did this go down and how should we think about what you need to provide relative to say funded loan growth?

Willis Newton

Hi, Steve. The provision for loan losses for both the quarter and the year-to-date reflect the overall improvement in the underlying credit quality of our loans. Our home loans are multifamily and commercial real estate. In our markets, the real estate values have firmed and the debt service coverage ratios have been improving.

We took that into account as we looked at the rate of provision and the adequacy of our allowance. In spite of the one-off loss, much of which -- some of which was reserved and the rest of which was charged against our unallocated reserve.

Steven Alexopoulos - JPMorgan

Thanks for that color, Willis. Appreciate it.

Operator

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

Ken Zerbe - Morgan Stanley

Okay. Thanks. First question, just in terms of mortgage banking, I’m looking at the loan servicing fees line, is that where you may have some, I guess MSR write-ups. Is that in that line and if so how much?

Mike Roffler

Ken, this is Mike. That’s right. Because of the slowdown in repayment on the servicing portfolio with the rise in rates, we had about a $1.7 million reversal of a prior established valuation allowance in the quarter and there is not much that remains that would be reversed in the future.

Ken Zerbe - Morgan Stanley

Got it. Okay. So, if you take the $1.7 million out of the $3.4 million and that’s probably a decent stable…

Mike Roffler

Yeah.

Ken Zerbe - Morgan Stanley

…or normalized run rate, okay. Great.

Mike Roffler

I think that’s about right.

Ken Zerbe - Morgan Stanley

Okay. And then just second question. In terms of loan growth, I guess, with the -- I’m going to say the 10 year of mortgage rates having pulled back a little bit, does that change how you think about growth. Seem that your comments on the loan pipeline, returning more to sort of a normalized average may be indicative that the 6% is probably unsustainable but was there anything fundamental that you were trying to imply by your outlooks or comments on the loan pipeline?

Katherine August-deWilde

I was reflecting that our loan pipeline is where it has been on average for a long time except these last few very strong quarters. And we are still looking towards good growth, very good growth but we wanted to reflect that the last two quarters were very high. And the consumer is not very predictable. And so we can’t predict beyond that except to tell you what our pipeline says. We have a good team of people who will find lots of purchase loan but we can’t predict beyond what the pipeline would say.

Ken Zerbe - Morgan Stanley

All right. Great. Thank you.

Operator

Your next question comes from the line of Ryan Nash from Goldman Sachs. Your line is open.

Ryan Nash - Goldman Sachs

Hey good afternoon everyone. Just a follow-up on the net interest margin questions, Jim, when you said margin to continue to decline, are you referring to the core or the reported margin. And then just in terms of Willis’ comment around the 3.3% average yield, assuming that you’ve now taken funding costs write-down. Should we assume that it implies a slightly above 3% new money margins which -- where new assets are coming on the books now?

Jim Herbert

Let me take that. The new loan booking rate is 3.23% and our incremental cost and deposits is probably stable or possibly down little bit from the 28 is what we’re implying. The -- your first part of your question on core margin, my comments were operating relative to that what I would think of as adjusted core in the sense of pulling out the impact from just extra cash.

That will continue to decline, I think a bit, in the foreseeable quarters. Just because of Willis’ comment that the new booking rates although up from the prior quarter of loans are still below the average on the balance sheet as it exists now.

Ryan Nash - Goldman Sachs

Got it. Just trying to get a sense of where the margin may bottom out. And then just in terms of the origination so, of the $2.3 billion of resi originations, what was the mix this quarter between refi and purchase. I know that 2Q historically has been seasonally strong. And then I guess the follow-up to comment that Katherine had made, given the move around we’ve had in rates. Are we still seeing a more of a migration towards the adjustment rate products relative to FX rate?

Katherine August-deWilde

It was about 42% of the resi business was purchase. And we are saying a move away from the fixed rate -- long term fixed rate loans to 5 and 7 and some amount of adjustable.

Ryan Nash - Goldman Sachs

Got it. Thanks for taking my question.

Operator

Your next question comes from the line of Herman Chan from Wells Fargo Securities. Your line is open.

Herman Chan - Wells Fargo Securities

I just want to ask about new office opening -- you had articulated to additional openings in the forth quarter. How you think about office openings for the New Year?

Jim Herbert

For ‘14, you mean Herman.

Herman Chan - Wells Fargo Securities

Correct.

Jim Herbert

We have about three to three more in the works, but it’s not really a very large backlog at this point. We’re doing some -- we have a Canal Street location in New York. And then we have a location on Market Street in San Francisco in the Twitter building, that we’ll open. And we are basically looking at new sights beyond that but we don’t have anything else contemplated although there is some renovation and upgrading.

Herman Chan - Wells Fargo Securities

Understood. And how should we think about charge-off levels from here. Should we expect any sort of lumpier performance given more diversified loan portfolio for the bank these days?

Jim Herbert

You know we would hope not of course but we don’t think so. The charge-off we have this year was very much a one-off in several credit respects. I would like to not go into further detail because we are working on recovery actively but although we don’t expect full recovery, but we might get a partial. But its pretty unusual but you never know because business spanking is a more broadly spread activity than obviously home lending is.

Herman Chan - Wells Fargo Securities

Correct.

Willis Newton

Yes, Herman. One comment is that we would expect our net charge-offs for the year to be in the range of 5 basis points. This is below our 10-year long term charge-off rate of 9 basis points. So while this was unfortunate situation, we need to just keep it in perspective and the nonperforming assets that we -- nonaccrual assets and loans that we have on the books are largely single family home loans now which would generally have a lower loss content than certain other kinds of loans.

Herman Chan - Wells Fargo Securities

Understood. And lastly we did see a security yield pickup. Can you give us some color on what occurred there?

Jim Herbert

Nothing very unusual. Really it was a normal portfolio. As you know, we do by municipals and municipals backed up a bit. That gave us an opportunity for some pretty good purchases actually.

Willis Newton

And you are probably looking at a tax adjusted yield, Herman, so that is part of the situation here.

Herman Chan - Wells Fargo Securities

Understood. Thank you for your time.

Operator

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

Casey Haire - Jefferies

Yeah. Thanks. Good morning. So, big picture question for you Jim in terms of $41 billion in assets today, albeit sounds like growth is going to normalize a little bit here but its not crazy to think that you guys could be at $50 billion in assets at some point in the next couple of years.

What sort of implications does that have for you guys in terms of -- obviously be a tougher regulatory backdrop, more expenses, hiring more people to deal with increased contract with regulators and/or running with our capital ratios.

Jim Herbert

Well, the interestingly enough from the latter point, we’ve been running with capital ratios because of our de novo status that exceed the larger -- the higher capital raises that you are referring to anyway, so that actually isn’t an impact. One of the biggest impacts of getting to $50 billion, which just to confirm your comments, we will definitely be at in the next 24 months, subject to something quite unusual happening.

The stress test analysis and the pressure of stress test analysis is one of the larger items there. And we have been doing that, as you may recall, voluntarily for two years already. We anticipated the value of that. Actually -- we do actually see a lot of value in the stress testing and we use it as a management tool quite actively. And then enterprise risk management is an area that needs to be stepped up a lot.

We actually are very active in enterprise risk management already and again it’s a very powerful management tool. And so, we have -- so most of the areas are already delve within the bank. So we don’t see a significant increase in expense. We will see some but we’ve geared ourselves to be this large well in anticipation of arriving there.

Willis Newton

I would also add that, if you cross $50 billion in one call report period, you are not a covered institution until that has occurred before for four periods as a whole. So it might not be quite as immediate as you would think.

Casey Haire - Jefferies

Got you. Thanks. And then just one quick on the expense side. Professional services and others stepped up? I was just wondering if there is any noise -- one-time noise in those run rates on the expense side?

Jim Herbert

I don’t think there is anything unusual, there were some ups and downs in other categories and we felt comfortable overall that there could be increase is only 2%.

Casey Haire - Jefferies

Okay. Thank you.

Operator

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

Dave Rochester - Deutsche Bank

Hey. Good morning, guys.

Jim Herbert

Hi, Dave.

Dave Rochester - Deutsche Bank

Jim, you mentioned that you think you may have more NIM pressure next year. But just given your commentary on deposit cost maybe stabilizing or potentially going down a little bit here and then you’ve got that 14% basis point impact from the excess liquidity, a lot of which may unwind at some point next year? Are you just trying to be little conservative here, because it seems like you only have that much additional pressure to deal with on the loan yield side going forward?

Jim Herbert

Well, of course, Dave, it depends on rates, let me obviously, state the obvious, let me state the obvious. But I actually wasn’t referring to the net interest margin as adjusted for the ‘14. I was actually referring to it prior to the ‘14.

It’s really just a case of loans rolling off on our balance sheet that are still little higher than the loan, than the incremental loan volume we are booking and that just a kind of an ongoing process. And at the core margin level, the GAAP margin level, of course, has a different element in it from the GAAP purchase accounting.

And so, I just think that if rates, if you steady state everything right now, presume rates don’t change much for about 12 months, we are continue to incur some additional margin pressure.

I think, so far we have done a very good job of sort of overcoming it with net interest income and asset growth, without changing the standards. Our standards are still as equally high on credit as they’ve always been. So I don’t know that we’re being conservative. We are just trying to be very realistic.

Dave Rochester - Deutsche Bank

Got you. Can you talk about how much prepayment penalty income you had this quarter versus last quarter, was there any delta there?

Willis Newton

Dave, it’s about the same as it was last quarter and I think that contribute about 8 basis points in both the second and third quarter to the margin.

Dave Rochester - Deutsche Bank

Yeah. Great. And just one last one, I saw that the C&I origination were up nicely this quarter, but the growth in our portfolio slowed a little bit. We are just wondering what you guys are seeing there, do you see that growth rebounding a little on 4Q?

Katherine August-deWilde

Business banking has that in it where commitments may not result in outstandings because of usage and in particular since we do a lot of just in timeline to venture in private equity firm that is -- that can be up and down. We are continuing to grow the originations very nicely, the degree to which the commitments turn into outstandings is each person’s business.

Dave Rochester - Deutsche Bank

Great. All right. Thank you very much.

Operator

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

Aaron Deer - Sandler O’Neill & Partners

Hi. Good morning, everyone.

Jim Herbert

Good morning, Aaron.

Aaron Deer - Sandler O’Neill & Partners

Just quick follow-up on the margin discussion? I just want to clarify, you mentioned the 14 basis points from excess liquidity which I think is related to the $1.5 million delta between average cash equivalence this quarter versus last quarter? If that’s all excess, I guess, that means, that you are comfortable running with an average balance, of course, for the $200 million that we had last quarter? Is that correct?

Willis Newton

Yeah. Hi, Aaron. If we look at the average balance sheet in the back of the press release you would see that we had about $200 million of what I am going to call core working capital for our activities, in the end we had about $200 million of interest earning cash, $178 million last quarter and $1.7 billion on average this quarter. That’s the delta that we are talking about. Our overall cash position seems that need -- minimum needs to about $400 million of which $200 million to $250 million is non-earning.

Aaron Deer - Sandler O’Neill & Partners

Okay. Perfect. And then, Willis, just following up on the kind of thought with respect to provision and reserves? Given the mix kind of shift in efforts to do more in the commercial side and some of the slowdown in mortgage? What kind of level of provision do you expect going forward, is it going to be something north of the 44 to 50 basis points per for new loans coming on or can it remain at this level?

Jim Herbert

Well, rather then quote our rate of provision as a percentage of origination, I would direct you to the table that presents the loans that have been originated since our divestiture and there about 80% of our total portfolio, $25.8 million has in allowance on it, that allowance averages about 52 basis points right now, depending on the mix of those loans, we would expect it continue to be in the 50 to 55, 58 basis points sort of range.

Aaron Deer - Sandler O’Neill & Partners

Okay. Terrific. That’s all I got. Thank you.

Operator

Your next question comes from the line of John Pancari of Evercore. Your line is open.

John Pancari - Evercore

Good morning.

Jim Herbert

Good morning.

John Pancari - Evercore

Go back to the margins, factoring in the excess liquidity, the 14 bps, considering that in terms of your margin outlook. So you could see a snapback in the margin when you take that into consideration, I know, you said excluding that you consider, you would still expect some margin pressure, but factoring in, so is it better assume we should see some upside?

Jim Herbert

Well, yeah, if the cash came down on the overall core margin, you would see it rise or you would see it improve. The thing we are trying to do and we are not trying to make it complicate, we were actually trying to make it simpler. But we distinguish between the impact on margin from the fluctuations in excess cash versus the core earning margin on assets and the core earning margin we would adjust so to speak to about 3.28, 3.29, something like that, that probably will continue to decline slightly. The amount of cash will drive the 14 basis points either up or down.

The, I only go back to something kind of spinning off a Steve’s comment earlier. This is a 20% -- this is an 18% to 20% company that grows in terms of assets and liabilities. It’s not our target. It just what happens. The clients like us. They bring their friends. We do business. If we don’t see good business, we don’t do it. So it’s not really what we said out in the morning to do, we just take care of what’s in front of us.

But when we have something moving that fast, it’s a little challenging and little as it gets bigger, a little challenging to get things keep them perfectly and proportion at all time, particularly the fudge factor so to speak call cash. And so that’s really what happened this quarter and as we get larger it get slightly more challenging.

John Pancari - Evercore

Okay. That’s helpful. I am just trying to get idea if we can see a snapback there in the margin. Then in terms of the deposit flows in the quarter. Could you just give me little bit of colors that why push CDs here, I know, they were up almost $500 million and also was any of that brokered?

Jim Herbert

None of it was brokered. We weren’t really pushing it as much as responding to the client requests for. We have a core banking client base for home CDs are in fact part of their world. And we don’t really want to, so to speak, chase them away to other banks, just over CD rates if we can avoid it. Our rates are generally competitive or below other rates. The possible exception maybe two or three very largest banks and our CDs are meaningfully in our office system.

So -- but we did respond with an increase in CD rates after the first quarter of last year -- first quarter of this year which we didn’t really have the deposit growth we were looking for. We probably did -- we probably over corrected it slightly and we fixed that.

Willis Newton

Also it’s possible to take some CDs at the two and three year points which we think maybe valuable hedges for rise in rates. And that’s below sort of the window that we have been using the Federal Home Loan Bank Advantages which has typically been for four to six years.

John Pancari - Evercore

Okay. That’s helpful. Then lastly on the loan growth outlook, I just wanted to see we can get little bit more color there. What areas do you think could moderate in terms of the pace of growth just given your pipeline commentary?

Katherine August-deWilde

The area where we see moderation is in single family refinances. And just a smaller degree other real estate refinances and the point is if someone has already refinanced, are not going to refinance again. Now we are seeing more purchase activity and there has been issue in our markets of not enough supply as price has increased.

There is more supply coming into the market. So we would expect to see a pretty good purchase volume. But it’s the refinances where you wind up, which created the extra volume in last couple of quarters and which will be mitigated in this next quarter.

Jim Herbert

Just to add there for a second, we operate primarily in San Francisco, Los Angeles, Manhattan, really New York, Greater New York than Manhattan and Boston. And if you stop and think about it, it’s hard to think of four cities, four markets in the United States that are doing better economically and real estate wise at multifamily, commercial and single family levels.

So what’s fallen out of those markets is the refinanced-driven volume but two things are relevant to First Republic. And when we get up in the morning, we respond to current client needs and those needs have shifted now from refinanced to purchase. The purchase is actually quite strong. Katherine has commented about inventory shortage as the key point. That’s really very low inventory in the Bay Area -- in the San Francisco Bay Area, which is 48% of our business.

And then number two, we get up in the morning and take clients away from other banks. And the clients are less inclined to be moving around if the refinance is down a little bit. So it’s a little harder to get their attention.

John Pancari - Evercore

Okay. Great. Thank you.

Operator

Your next question comes from the line of Lana Chan from BMO Capital Markets. Your line is open.

Lana Chan - BMO Capital Markets

Hi. Good morning. Most of my questions have been answered but could you give us any color on in terms of your client acquisition this quarter. How much of it came from West Coast, San Francisco versus the newer markets?

Jim Herbert

The client acquisition in the last couple of quarters has been nothing short of extraordinary. Both in numbers and quality, we have actually not experienced this previously. We’ve been successful for long time. It’s coming generally across the board consistent with the mix we now have with the possible exception that we’re picking up slightly more proportionally in the San Francisco Bay Area and in Manhattan than we are elsewhere for a couple reasons. But mostly, it’s proportionate to what we now have.

And the reason for that is it comes primarily -- it is primarily driven by positive word of mouth from current clients. But of course, the San Francisco, Silicon Valley, Bay Area is experiencing an unusually powerful economic resurgence.

Lana Chan - BMO Capital Markets

Okay. And I know it’s not been part of your MO in the past but in terms of bank acquisitions, do you see any opportunities since we’ve seen a sort of a pickup in tier activity and smaller insight in the last couple of months?

Jim Herbert

We’ve only bought one bank in 29 years. So we’re not really acquirers in the bank sector.

Lana Chan - BMO Capital Markets

Okay. Thanks Jim.

Jim Herbert

Thank you.

Operator

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

Joe Morford - RBC Capital Markets

Thanks. Good morning everyone.

Jim Herbert

Good morning, Joe.

Joe Morford - RBC Capital Markets

Maybe just following up on this loan topic just one last time, if they shifted, the product is moving more towards the adjustable product which are willing to portfolio and there is less churn from refi activity. Why wouldn’t the loan growth in the sense be strengthening going forward?

Katherine August-deWilde

I’m sure you’re on a very good point to the degree that there is less loan that we sell and to the degree that the repayment rates are down which happens if people have refinanced, they are not going to do it again. You would see that incremental loan growth on our balance sheet. And we don’t want to predict it but we would expect certainly to have some of that?

Joe Morford - RBC Capital Markets

Okay. And then just lastly the clarification on those lines, can you just -- what was the percentage of the residential origination this quarter that was fixed rate and how did that compare with last quarter’s percentage?

Willis Newton

Hi Joe. The fixed rate loans that we closed this quarter that were not locked at the beginning of the quarter are definitely down. Most of the lock activity this quarter was hybrid or adjustable rate loans.

Joe Morford - RBC Capital Markets

Okay. Thanks Willis. Thanks everyone.

Operator

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

Paul Miller - FBR

Yeah. Thank you very much. There has been a lot of things in the press about how the jumbos, especially the 30-year fixed rate jumbos are traded below confirming -- we’ve heard that pricing has kind of corrected itself since coming from the bigger boys. Can you talk really about the competition you’re seeing with the big jumbo lenders out there for some of these products?

Katherine August-deWilde

As we have said on a number of prior calls, the competition is intense. The people realize it’s a very good asset and they are eager to acquire that client as we are. In some cases, we do a pretty good job of winning that business and our job is to go out and win some of it everyday from our competitors. But it is definitely a competitive marketplace particularly in terms of pricing.

Paul Miller - FBR

And you talked about -- I know this has been asked like three or four different times. I just want to get it down straight that your portfolio, in mainly, there are 51. Is that product of choice right now for the jumbo world?

Katherine August-deWilde

[51] [ph] and [71] [ph] is a primary product, sort of, the single family, well yes. And that’s happened with 30 or fixed kicked up a bit about six months ago.

Paul Miller - FBR

Okay. And then the loan that you did sell was roughly about $287 million. Were they all fixed rate?

Katherine August-deWilde

They were primarily fixed rate.

Paul Miller - FBR

So going forward, if rates stay here and if [51] and [71s] continue to be the product of choice. And you said this in the past, I just want to make sure I get it straight that we would expect to see a lot more portfolio product than we would see product that you would sell off?

Katherine August-deWilde

For a single family loans, we would definitely expect to see in the next quarter or so many fewer loan sales?

Paul Miller - FBR

Okay. Thank you very much.

Operator

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

Julianna Balicka - KBW

Good morning.

Jim Herbert

Good morning. How are you?

Julianna Balicka - KBW

I was hoping to get a little bit more color on some of the loan pricing. You talked about the blended loan portfolio rate on new loans of 3.33% and I was hoping you would be able to give us more color in terms of the pricing that you’re seeing and originating out for new multi-family loans, new commercial real estate loans and new C&I loans to kind of separate out the resi impact?

Katherine August-deWilde

In terms of originations for the third quarter, multi-family and commercial, multi-family are about closer to 3.50% and commercial are about 4% and single family is lower than that.

Julianna Balicka - KBW

Okay. Very good. And then on the deposits, with the business deposits now making up, you said 48% of your deposits. Could you give us a sense of what the sizes of your 10 or 15 largest deposit relationships or whatever is the relevant number there, just so we can kind of get how many relationships make up the loan growth that you have had this quarter?

Jim Herbert

Our loan growth is -- our deposit growth was very diversified across all markets in a variety of industries and we will have tables for you in our 10-Q that show by geography and preferred banking versus our office growth.

Julianna Balicka - KBW

Was that like an average deposit relationship size of here like most important relationships?

Katherine August-deWilde

Actually, we don’t have that number.

Julianna Balicka - KBW

Okay. Very good.

Jim Herbert

We don’t break.

Julianna Balicka - KBW

And then final question, I will step back. The gain on sale margin this quarter was, and I’m sorry if I missed it from your earlier remarks. The gain on sale margin was significantly below your historical run rate, was there anything unusual in that and should it trend back up to normalized or was just kind of the current status quo for the foreseeable future?

Katherine August-deWilde

That’s the current status quo certainly for the fourth quarter, maybe even a little lower.

Julianna Balicka - KBW

Okay. Very good. Thank you very much.

Operator

Your next question comes from the line of Michael Rosado from Credit Suisse. Your line is open.

Michael Rosado - Credit Suisse

Hi, guys. Can you talk about what you are seeing in terms of commercial business demand? You have had some nice growth in this business line over the last 12 months, do you anticipate demand to hold firm as we look forward?

Katherine August-deWilde

We continue to see business demand growing, yeah...

Michael Rosado - Credit Suisse

Okay. Even with the backdrop of the political landscape, the debt ceiling, you haven’t had, I guess too much impact from what you are seeing from your client base or feedback from your client base?

Katherine August-deWilde

We have not had impact so far from our client base. Obviously, we can’t speak about what would happen if it continues. But so far we have very good deposit -- business banking growth.

Michael Rosado - Credit Suisse

Okay. Great. Thank you.

Operator

Your next question comes from the line of Matthew Keating from Barclays. Your line is open.

Matthew Keating - Barclays

Yeah. Thank you. I guess along those lines, obviously, your clientele tends to be kind of first mover or so we saw in the first quarter where they moved deposits into real estate and the stock market, given the turbulence we are seeing in D.C. I know that you mentioned that your average client deposits had been -- had stabilized. Can you talk about what you’re seeing early in the fourth quarter in terms of deposit trends at your customers? Thanks.

Jim Herbert

Actually, it’s a good question, but we are watching pretty carefully for all kinds of reasons including that. But so far there is no clear indicator from their actions. Stable is the word that applies. They have been stable for two quarters now, which tells us that there kind of I would -- this is strictly an interpretation, people kind of watching and waiting.

Matthew Keating - Barclays

Understood. And then, I guess, you kind of mentioned that you may have overshot in terms of deposit growth this quarter. But with the loan to deposit ratio still above 100%, can you just, I think you said in the past that you are kind of comfortable around 100% level, but maybe just categorize why you thought you overshot given kind of where the ratio still is at the moment? Thanks.

Jim Herbert

Really just a case of taking in more cash than we needed, it’s -- we are not driven by that ratio, we do pay attention to it, but it’s not our driver by any means. And we do use the FHLB for term matching, and when you use that, it naturally drives your loan to deposit ratio up a little bit.

Willis Newton

Yeah. And Matthew, we have such a strong residential real estate origination capacity and credit record that we don’t really have any resi mortgages in our investment portfolio. If we had the same percentage of resi mortgages and we moved them from our loan portfolio to our investment portfolio, our implied loan to deposit ratio would be in the low-90s.

Matthew Keating - Barclays

Got it. That’s helpful. And I guess my final question, obviously, we’ll get in the 10-Q your kind of loan mix by geography. But I think in the second quarter at least, in the New York Metro area actually outgrew San Francisco Bay Area in terms of net period end loan growth despite being a smaller overall mix of your business. Can you just talk about trends in the third quarter broadly between New York in particular sort of how loan growth has been trending in that marketplace? Thanks.

Jim Herbert

Actually what happened in there, you are right, very observant, in the second quarter, the New York market had quite strong CRE lending and that’s really what happened there.

Matthew Keating - Barclays

Got it. All right. Thanks very much.

Jim Herbert

Okay.

Operator

There are no further questions. I’ll turn the call back over to Jim Herbert.

Jim Herbert

Okay. Well, thank you all very much for you time today. We appreciate it and we will speak with you next quarter. Bye-bye.

Operator

Ladies and gentlemen, this concludes today’s conference call and you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: First Republic Bank's CEO Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts