First Republic Bank's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: First Republic (FRC)

First Republic Bank (NYSE:FRC)

Q4 2013 Earnings Call

January 16, 2014 2:00 PM ET

Executives

Dianne Snedaker - EVP and CMO

Jim Herbert - Chairman and CEO

Katherine August-deWilde - President and COO

Mike Selfridge - Senior EVP and Deputy COO

Willis Newton - EVP and CFO

Mike Roffler - SVP and Deputy CFO

Analyst

Steven Alexopoulos - JPMorgan

Ken Zerbe - Morgan Stanley

Herman Chan - Wells Fargo Securities

Ryan Nash - Goldman Sachs

Casey Haire - Jefferies

Dave Rochester - Deutsche Bank

Aaron Deer - Sandler O’Neill & Partners

John Pancari - Evercore

Joe Morford - RBC Capital Markets

Matthew Clark - Credit Suisse

Tim Coffey - FIG Partners

Julianna Balicka - KBW

Matthew Keating - Barclays

Operator

Greetings and welcome to First Republic Bank’s Fourth Quarter and Full Year 2013 Earnings Conference Call. During today’s call the lines will be in a listen-only mode. Following the presentation, the conference will be open for questions. I would now like to turn the call over to Dianne Snedaker, Executive Vice President. Please go ahead.

Dianne Snedaker

Thank you. And welcome to First Republic Bank’s fourth quarter and full 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; Mike Selfridge, Senior Executive Vice President and Deputy 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 we may make forward-looking statements during today’s call that are subject to risks, uncertainties and assumptions. In addition some of our discussion may include non-GAAP financial measures. For a more complete discussion of the risks and uncertainties that could cause actually results to differ materially from any forward-looking statements and reconciliations of non-GAAP financial measures see the Bank’s FDIC filings, including the Form 8-K filed today, all available on the Bank’s website.

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

Jim Herbert

Thank you, Dianne, and thanks to everyone for joining our call today. 2013 was a terrific year, I will cover the highlights for the full year and Katherine and Mike Selfridge will review the fourth quarter in more detail. It was a good year by almost all measures. We had a number of accomplishments. Core earnings per share grew 24%. Loan volume set a record 17.8 billion, up 15% from the prior year. Almost 50% of this volume was not single-family home lending.

Quite importantly asset quality remains excellent with only 14 basis points of non-performing assets. Our loans outstanding were up 20% for the year, both as a result of strong loan volume plus a slowdown in repayment rates, particularly in our real estate loan portfolio.

Deposits grew 18% year-over-year. We are particularly pleased that our checking balances throughout the year were on the average 49% of total deposits, up from 47% on the average during the prior year. Private wealth management grew exceptionally well with assets under management up 33% year-over-year. This growth was all organic. Business banking had a strong year also; loans outstanding grew nearly $1 billion with strong activity taking place in each of our markets. Business banking deposits grew $3 billion. We also continue to build our capital and added 400 million of perpetual preferred stock during the year.

Our total equity for the year grew 22% commensurate with our asset growth. Tier 1 leverage ratio at the end of the year was 9.2% a very strong level. In terms of asset and liability matching we took a number of important steps during the year. We sold fixed rate loans to drive moment early in the year, you will recall we made considerable gains on these mortgage banking sales, approximately $0.11 per share during the first quarter of 2013. We raised permanent preferred capital at very favorable terms and we locked in a fair amount of fixed rate FHLB term borrowing at attractive rates.

For the entire year book value per share increased 11.4%. The Bank’s common stock had a good year, outperformed the Regional Bank Index and the S&P 500, while at the same time our private equity investor backers who helped us buy the Bank back sold their remaining 25 million shares into the market.

Importantly during the year we continued to strengthen our risk management process, as well as our technology infrastructure. We will continue as we go forward into ’14 to actively invest and emphasize compliance BSA/AML, technology and risk management. Overall we are very pleased with the year and encouraged by the opportunities in front of us for 2014.

Let me turn the call over to Katherine.

Katherine August-deWilde

Thank you, Jim. An exceptional year was capped off by a very strong quarter. Let me summarize the highlights. Loan volume was over $4 billion for the quarter, a bit better than we had expected. Core EPS was 8% compared to a year ago. This is in spite of the fact that the fourth quarter of 2013 did not have the same level of alleviated loan sale gains as the fourth quarter of 2012.

Non-performing assets continue to be extremely low, charge-offs for the year were only 5 basis points of average loans. As Jim mentioned wealth management assets grew nicely and wealth management revenues were up 10% compared to the third quarter.

The strong fee growth was driven by new assets, good market conditions, new client acquisition and effective cross-sell. This higher year end asset level provides us with a very good base going forward, since most wealth management fees are calculated in arrears. Of this AUM growth during the quarter about 60% was attributable to net client inflows and 40% was due to market appreciation.

Let me discuss loan volume for the quarter, robust economic activity in our regions and our focus on relationship banking continue to drive loan volume during the quarter. Single-family and home equity lines represented just over half of our total loan volume in the fourth quarter. Importantly over 58% of the single-family home loans were for purchases, we believe the trend toward purchases should continue and we’re very well positioned to capture this business, the pricing for high quality jumbo home loans in our markets continues to be quite competitive. Our pipeline is a bit lower than it was at the same time last year primarily from the slowdown in refinance volume.

Although pricing is competitive our relationship-based model continues to power our growth as demonstrated by our cross-sell success. Last quarter due to higher interest rates and client demand, we originated fewer long-term fixed rate loans and more hybrid arm loans which we generally retain in our portfolio. In the fourth quarter the annualized repayment rates on our home loans slowed to 13%, this compares to an average of 20% for the first three quarters of 2013. This is a fairly meaningful decline and if it continues it will have a generally favorable impact on future results.

We’re very pleased with the quarter and I would now like to turn the call over to Mike Selfridge.

Mike Selfridge

Thanks, Katherine. Let me provide some perspective on the strength of our relationship-based model, geographic markets and business banking. Our relationship model with a single point of contact and client-focused service culture continues to perform well. We’re able to deliver banking and wealth management services through a team-based approach which leads to satisfied clients and their word of mouth referrals. We have also seen our brand recognition grow as a result of our franchise investments over the past few years.

As the national economy continued to strengthen conditions in First Republic’s geographic markets have improved at an even faster rate. In particular, the very strong technology sector is positively impacting all of our core markets, the San Francisco Bay area, New York, Boston and Los Angeles. This economic strength is reflected in the stronger employment in these regions which leads to improved housing conditions and rising personal liquidity. The improved national economy is also having a positive effect on business banking which is reflected in both loan and deposit growth.

In terms of deposits there is some seasonality, we would note that based on average balances deposits in the fourth quarter were up 8% as compared to the third quarter. So far this year cash balances are back up well over $1 billion. Our non-single-family lending business, multi-family and commercial real-estate loans accounted for 43% of balance sheet growth during the year.

Multi-family and commercial real-estate loans were up nicely year-over-year. The average size of our multi-family and commercial real-estate loans is about $2.2 million and the average loan to value in each case is under 60%. The ongoing diversification of the franchise from private banking of individuals to the businesses and non-profits they lead and the resulting wealth management opportunities is working very well.

During 2013 we opened five offices, upgraded our online banking and launched very successful mobile banking and social media initiatives. Each of these enables us to better serve our clients across all channels. During 2014 we don’t expect to enter any new markets. We’re pleased to note that our new downtown San Diageo office opened last week and only two more office openings in our existing markets are scheduled during 2014.

We look forward to optimizing the investments in our existing footprint and continuing to focus on cross-selling and new client acquisition. Overall we’re quite pleased with our performance across all lines of business.

Now let me turn the call over to Willis.

Willis Newton

Thanks Mike. We’re pleased with the growth in our core EPS which was $0.66 per share, by way of comparison the fourth quarter of 2012 had unusually high gains from the sale of loans about $0.07 per share. Without such mortgage banking gains core EPS last year in the same quarter would have been $0.54. Given current market conditions loan sale gains in the first quarter of 2014 will likely have a minimal contribution to core EPS.

For the year core EPS was up 24%. We continue to focus on growing core earnings recognizing that deposit impact to purchase accounting is diminishing, and it was only $0.09 per share last quarter.

Future purchase accounting will only add about $0.75 to our book value per share. So the quarterly difference between GAAP and core EPS will decline to a very small number over the next couple of years. This is why we focus operationally on core earnings, core EPS and core net interest income.

We are pleased that our core net interest income continues to grow nicely, up 11.5% for 2013. This is in spite of pressure on our net interest margin. Our NIM has been declining due to the low interest rates, lower prepayment penalties and in the past two quarters considerable liquidity in the form of higher average cash balances.

Our core loan yield for the quarter was 3.46%, down 6 basis points from the prior quarter. This decline resulted from a slightly lower contractual loan coupon and also from lower prepayment penalties on slower loan repayments.

Another element affecting our reported NIM is the amount of average liquidity we hold. Last quarter we had on average almost $2.6 billion in cash, or 6% of total assets which earned 25 basis points. As noted in the earnings release, this level of liquidity caused 7 basis points of the 9 basis points decline in core NIM. Finally on NIM, we are pleased that the contractual rate on our deposits declined 3 basis points in the fourth quarter.

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

Mike Roffler

Thanks Willis. I would like to update you on an accounting change for tax credit investments, which adjust how we report our operating expenses and income taxes. This new FASB standard reduces our non-interest expense and increases our tax expense. The Bank has adopted this new presentation in the fourth quarter and retroactively. We’ve included a supplemental schedule in the back of the press release which shows the adjustments made to our non-interest expense and tax expense in the calculation of the core efficiency ratio for all quarterly periods since our divestiture on July 1, 2010.

The impact of this change on our historical net income and diluted earnings per share is minor, and this reporting does not change the amount of taxes we actually pay. As adjusted for this accounting change, which we believe more accurately reflects the results of the enterprise. Our core efficiency ratio was 56.9% for the fourth quarter and 55.8% for the entire year. The efficiency ratio in the fourth quarter remained relatively consistent with the prior quarter. Under this new FASB standard, we expect the range of our core efficiency ratio to be 55% to 59%.

The increase in operating expenses in the fourth quarter was due to several factors; including, the hiring of additional employees commensurate with our growth; continued investments in technology; and some seasonality in advertising and marketing. The core efficiency ratio will also be impacted by expenses associated with heightened oversight as well as new regulations. Finally, as adjusted for the new FASB standard, our effective tax rate declined from 33% in 2012 to 30.4% in 2013. Our effective tax rate in the current year should be slightly lower.

Now I’d like to turn the call back to Jim.

Jim Herbert

Thank you everyone. 2013 was a very good year. During 2014, we expect to optimize the investments we’ve made to acquire a substantial number of new customers in the past year and to deepen our relationships with the existing ones by increasing our cross-sell focus.

We’ll continue to invest in infrastructure to comply with numerous new laws and enhanced regulation affecting the industry. Among these new laws affecting us the most are the qualified mortgage rules, capital stress testing, increased emphasis on BSA/AML and planning for the recently proposed liquidity coverage ratio rules. The liquidity coverage rules are currently only in draft form, and don’t apply to us at this time. However, they are reasonably likely to apply to us in the future and we’re planning accordingly.

In spite of the yield curve steepening we expect some continued net interest margin pressure during the forthcoming year, due primarily to very competitive conditions in the highest quality loan market in general and jumbo home loan pricing in particular. We also expect to slowdown the single-family home refinances which we have already seen. This probably will continue to impact our loan volume in ’14. However, we see good demand for home purchase business in our markets.

The economy continues to improve in our markets and has benefited us disproportionally. And we are very encouraged by the activity level of our client base. It’s good for our business and creates many opportunities.

Applying our service first relationship-based model, we’re uniquely positioned to future cross-sell and the year following large loan volume historically, we typically experience very high cross-sell results. This should benefit both private wealth management and business banking. We’re cautiously optimistic about 2014 and are well positioned to future expand our relationships and our franchise.

Thank you. We’d like to take some questions.

Question-and-Answer Session

Operator

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

Steven Alexopoulos - JPMorgan

Hey, everyone. In the start taking a look at some of the comments you had around margin and Willis your comments around the core loan yield the 346. Can you talk about what’s the blended rate or yield new loans were added in the fourth quarter?

Willis Newton

Sure Steve. The loan rates came in right around 3 in the quarter to 3.15 we had pretty good loan volume this quarter and we kept most of the hybrid arms that were put on, we weren’t making very many longer term loans and that contributed to that level of average loan yield.

Steven Alexopoulos - JPMorgan

Okay. Willis it also looks like you put some of the excess liquidity to work just looking at the growth of the securities book at period end. Can you talk about what you added in terms of securities, as it is all still munis and maybe what yield you’re able to pickup there?

Willis Newton

The average munis were a little higher this quarter, let me look at that number and get right back to you Steve.

Jim Herbert

Steve, while he is doing that I would point out that the average liquidity in the quarter, on the average was in fact up about 600 million or 700 million versus the prior quarter.

Steven Alexopoulos - JPMorgan

Maybe while Willis you are looking at that although I suspect this question is for you. Just on the reserve formula, the reserve to loan ratio is pretty flat, a 45 bps. Are you now at the point where you really only need to provide for loan growth and charge-offs and don’t need to incrementally build the reserve here?

Willis Newton

Steve, yes that is correct. The provisioning this year has benefited from strong increases in real-estate values and our markets continued low charge-offs and our asset quality is improving when we filed the K, you can see that the level of substandard assets continues to diminish. All of that affects the level of provisioning. We are at about 52 basis points on the loans that need to build the reserve and the mix stays around the same it will be somewhere in the 50 to less than 60 basis points range on average. The tax affected yield on the muni purchases this quarter was a little above 6.5 almost 6.70.

Steven Alexopoulos - JPMorgan

Okay, thanks for all…

Willis Newton

We also purchased some adjustable rate securities in the available for sale portfolio and those had about a little less than 2% margin.

Steven Alexopoulos - JPMorgan

Okay. Thanks a lot.

Operator

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

Ken Zerbe - Morgan Stanley

Thanks. Question on the wealth management platform, is there anything that you guys need to do from here to continue to build that out or are you largely where you want to be in terms of the infrastructure and the management of that? Thanks.

Katherine August-deWilde

We have a management team with which we’re very pleased, we have the product suite that we need, we will because we have grown so much and see good growth, we will continue to build infrastructure.

Ken Zerbe - Morgan Stanley

But, okay and does that come with higher expenses as you do that or any noticeably higher expenses?

Katherine August-deWilde

A little bit although they are inside of our technology plant.

Ken Zerbe - Morgan Stanley

Okay, alright that helps. And then just back to the excess cash, obviously you were deploying some of it but what is the plan for the rest of it. I mean, just given the loan growth, I mean is there something where you want to just keep it very, very short-term or in cash to support loans or are you thinking about that in a different way or do you expect some of it to flow out? Thanks.

Jim Herbert

The cash position you mean Ken overall?

Ken Zerbe - Morgan Stanley

Correct, yes drove the lower NIM?

Jim Herbert

I would say that the -- we’re in a process of adjusting for the liquidity coverage ratio thinking we’re going to be entering into a very systemic program of establishing high quality liquid asset purchases and that will be ongoing throughout the year. We have recently adopted some policies and guidelines around that and done a lot of thinking and so I think you will see throughout the year a steady buildup of high quality liquid assets that should draw down the cash in addition to loan growth.

Ken Zerbe - Morgan Stanley

Okay, perfect. Alright, thank you.

Operator

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

Herman Chan - Wells Fargo Securities

Hi, thanks. With the refi activity teased out of origination volumes in Q4, is your Q4 performance a good run rate for origination levels going forward?

Katherine August-deWilde

It’s a generally good run rate, but there is some seasonality to our business and the fourth quarter on average tends to be a little better and the first quarter on average tends to generally be a little bit weaker.

Herman Chan - Wells Fargo Securities

Understood, and given the normalization in refi has led opportunity wanes in new client acquisition also wanes. Is there a sharper focus for cross-sell at this time, how do you think about that opportunity going forward?

Katherine August-deWilde

Well there is a sharper focus on cross-sell and in fact as Jim said on the call, in a year where we have particularly high volumes and this was certainly that year. It is difficult for people to spend as much time with each client as they need to cross-sell as successfully as they can. So, we would expect to see much more energy spend on cross-selling some of those clients. We will still be acquiring new clients but we will go back to the existing clients and go back to sell -- cross-sell, business banking more deposits and wealth management.

Jim Herbert

It’s Jim, I assume I would add Herman that ’13 was one of our best new client acquisition years as probably ever and that isn’t going to slowdown too much in ’14 because the purchase market is particularly attractive for that activity.

Herman Chan - Wells Fargo Securities

Got it. Thank you very much.

Operator

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

Ryan Nash - Goldman Sachs

Hi, good afternoon. Just had a first question on the expense base, if I hear what are you saying Jim, you are only adding two new branches this year but yet you are talking about having to actively invest for technology whether it’s once you become a bigger Bank. How do we think about the growth trajectory of expenses relative to the growth in revenues, can we see revenue growth outpace expense growth in 2014?

Jim Herbert

Let me answer that in a general way and I may ask Mike Roffler to weigh in. In general the two areas and I want to correct something the previous question about wealth management. Our margins are improving in wealth management, so although we are still investing in infrastructure generally speaking we are outrunning that investment on the revenue side. The Bank side is mostly driven by NIM more than anything else. So our expense, the absolute expense levels are pretty under control Mike can speak to a couple of specific areas. But cross-selling is generally incrementally more profitable than new client acquisition.

Mike Roffler

And I would just add that we have continued to invest prudently in technology and offices and we try to keep the right balance between revenue growth opportunities and reinvesting in the franchise, which is why we are sort of in that band of efficiency between 55% and 59% and if there is margin pressure it may take a little higher but as margins improve it hopefully ticks a little lower.

Ryan Nash - Goldman Sachs

And if I could just ask a follow-up question, well you guys don’t fall under the LCR provisions at this point in time but given the pace of growth it’s obviously not that far away. Can you just give us some metrics or color, of how you know how much of a build you need to get to become compliant, how do you see the path of adding securities and may be a little bit of color around the duration of the securities within?

Jim Herbert

Well, I can’t actually give you too much color yet on the amount that we need. We are still calculating that and of course the rules are still in the state of flux. And a lot of it is dependent upon individual type of account analysis. And I would note that the primary, certainly one of the primary asset class as it qualifies as cash.

And so we will need to increase our investment portfolio by several billion dollars probably before we are done. But I would expect to keep that and reasonably intermediate to shorter term instruments. But we’re still understanding it -- it’s a couple of years away for us, 1.5 to 2 years away, may be longer even depending on growth rates obviously. And so, we are well ahead of our need here but we want it -- like everything else we try to stay ahead of where we are going to end up and we are working hard to be, to do in a thoughtful and sort of progressive manner.

Ryan Nash - Goldman Sachs

And if I could just squeeze one last one and there is a follow-up to Steve’s question from before. It looks like the end of period cash didn’t come down a lot but I think you referenced in your prepared remarks that maybe it’s coming back up. How do we think about overtime, I know the deposit absent flows tend to be volatile but how should we think about at this point in time given all the new rules and regulation, what is the right level of cash for you to run that over the next year or so?

Jim Herbert

I don’t think we ought to be in the sort of three quarters to $1.5 billion range for cash in that range, but the reason I am hesitating is that very short-term highly liquid, high quality liquid assets are the surrogate for cash that’s what the LCR is really all about. And so as we move in that direction we make sure some of our cash to those quite short-term treasury type instruments.

Ryan Nash - Goldman Sachs

Great, thanks for taking my questions.

Operator

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

Casey Haire - Jefferies

Hey good morning guys, just a follow-up on the LCR stuff, I mean I know you guys historically have sort of I know this is longer term but I have tracked some margin between 3% to 3.3%, under an LCR policy I mean presumably with a larger securities book at a lower yield, would that pressure that long-term historical NIM average?

Jim Herbert

It probably would pressure a little bit, I think it’s going to be the case for anybody this isn’t already there. But the question is that incremental asset or is it utilization of assets that would have been loaned. And there is not -- currently I can’t give an answer to that.

Casey Haire - Jefferies

Got you, okay. And then just switching gears to capital, obviously a big preferred raise in October and a very strong asset growth this quarter you are kind of running in place, do you obviously have some opportunity to self fund from the excess liquidity position. I am just curious as is there an opportunity to self fund or are you still, you are going to be vigilant on your Tier 1 leverage base?

Jim Herbert

Well we are always watching our Tier 1 leverage base, so I mean that’s something we anticipate actively in our business planning and we stay ahead of our needs. We’re pleased with the growth of the enterprise, it’s possible that balance sheet growth would be a little lower in ’14 because of volume but I don’t really know.

And so we’re going into ’14 well capitalized. We did a good job; we took advantage I think of opportunity fairly well in the year. When you look back you would always do something a little differently. But I think we’re in pretty good shape, I would note that we did do that last raise in October, so mostly that was a negative impact on the fourth quarter slightly couple of cents.

Casey Haire - Jefferies

Yeah, okay. And then just last question, how much prepayment penalty impacted the margin this quarter?

Jim Herbert

The prepayment penalties for the quarter was about 4 basis points and in the third quarter it was about 8.

Casey Haire - Jefferies

Okay. And the expectation I would think going is that that would diminish you would lose that 4 bps going forward?

Jim Herbert

It will be a smaller amount going forward, yes.

Casey Haire - Jefferies

Thank you.

Operator

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

Dave Rochester - Deutsche Bank

Hey good morning guys. Jim if I remember correctly your margin guidance generally excludes the impact of liquidity changes, is that right?

Jim Herbert

We try to do that, yeah.

Dave Rochester - Deutsche Bank

So I guess you could see a little bit at least of support in the first half given you will be engaged in that new program to reinvest and securities and that cash balance should drift down?

Jim Herbert

That should be the case, that’s right.

Dave Rochester - Deutsche Bank

Great, and can you talk about where you are hiding hybrid arms in terms of yields in the quarter?

Katherine August-deWilde

Our overall real-estate assets are coming on at about 3.14, and a majority of them are hybrid arms, but that also includes multi-family and some longer term arms.

Dave Rochester - Deutsche Bank

Great, and can you also compare the loan pipeline at the end of 4Q to the pipeline at the end of 3Q as well on year-over-year comparison?

Katherine August-deWilde

One minute let me check that.

Dave Rochester - Deutsche Bank

Great.

Jim Herbert

It was down a bit.

Dave Rochester - Deutsche Bank

Down a little bit, okay.

Jim Herbert

Yeah.

Dave Rochester - Deutsche Bank

Perfect. Alright thanks guys.

Jim Herbert

Thank you.

Operator

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

Aaron Deer - Sandler O’Neill & Partners

Hi good morning everyone. Mike Selfridge not Roffler, in your comments you sounded pretty optimistic about the business banking part of the business. I am wondering, that obviously the C&I book was up very strongly again here in the fourth quarter and more so obviously year-over-year. Can you talk about how much of the growth that you have seen recently has been coming from your private equity customers versus from say more traditional commercial customers and kind of what the outlook is going forward for that part of the book?

Mike Selfridge

I would characterize the growth as fairly broad-based because you know we focused on about nine segments distinctively and while the dollar amounts were more concentrated in private equity in schools and non-profits the overall growth was well balanced. I think for 2014 we’re in a good position looking forward but it’s still too hard to say.

Aaron Deer - Sandler O’Neill & Partners

Okay, great. Thank you.

Operator

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

John Pancari - Evercore

Good morning. Just to clarify a little bit again, I am sorry back to the cash balances, just so I understand is correctly the linked quarter for next quarter, your average balance of 1 billion and change right now or it was up 1 billion, I’m sorry, your average is right around 2.6 billion. That should decline given the reinvestment that you already started this quarter, correct?

Jim Herbert

That is correct.

John Pancari - Evercore

Okay. And then the end of period balance which is closer to 800 million or so, that should -- what should that do on a linked quarter basis?

Jim Herbert

That’s I think subject to some seasonality. I would think with tax payments being made in April we might well have depositors building up some money to make payments in April that is typical last year was a bit of exception due to the tax rate changes.

John Pancari - Evercore

Okay. Okay, that helps, alright and then on the loan side the decline in the loan originations in the fourth quarter versus the third quarter. It looks like half of that did come from the rising portfolio. But can you give us a little bit of color on the declines that you saw in the multi-family originations as well as in CRE?

Jim Herbert

Well, I think they all came down a little bit because of just a slower quarter and general rising rates in general. The rate increases caption implied affected both CRE and multi-family as well as single-family and it’s very competitive in that case we were choosing not to compete.

John Pancari - Evercore

Okay. Alright that’s helpful…

Jim Herbert

We will -- and Casey I’d now like to emphasize something we’re seeing the very leading edges of term diminution of the quality issue. We will not chase that under any circumstance.

John Pancari - Evercore

Okay. And then lastly around the retained residential mortgage portfolio, can you give us just a little bit more color around your expectation for that balance is it do you still see growth but abatement in the pace of growth given the higher rates and the pull back in refi or is it likely that you can see an inflection in that balance?

Katherine August-deWilde

We actually expect to see balances increase nicely for several reasons along with fewer refinances we have much lower repayment rates. So long as that continues we’re going to see a positive impact of increasing of loans on our balance sheet because people are not refinancing aren’t paying them off. That does a lot of good things for us it causes us to have certainly a lower loan related cost keeping the loan as a very valuable thing to do from an income statement point of view it also stabilizes our servicing income.

John Pancari - Evercore

Okay, thank you.

Operator

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

Joe Morford - RBC Capital Markets

Thanks. Good morning everyone. Just following up on John’s questions there just I guess more broadly if you could just talk about your outlook for the pace and mix of loan growth in 2014, particularly given this changing mix of originations with less single-family production just kind of curious what you’re seeing in some of the other bigger growth categories I suspect business banking probably part of that.

Jim Herbert

Actually our growth across the board is pretty good. We were pleased with the quarter as Katherine implied it was a little better than we thought it would be on loan volume. Basically speaking the opportunities obviously flow from an improving economy and the markets we’re in are doing better even than the national improvement that’s occurring. It is competitive but the good news is it’s competitive around increasing loan demand as a result of business improvement conditions improving.

The home piece is the hardest to call the refinance craze is clearly over. But purchases are pretty active in our markets the biggest problem in most of our markets is lack of inventory. We have many 100s of preapproved clients that cannot find the house they want at the price they think it ought to be sold at mind you. And that’s slowing the whole, that slowing it down a bit. But generally speaking historically the spring tends to bring out some inventory and that may happen again.

So we’re cautiously optimistic and we have plenty of demand to handle and our ability to cross-sell and what our people are doing is in fact going back to clients that they were too busy to really spend quite enough time with in terms of cross-sell not getting their transaction done. And talking to them about opportunity and it’s actually a pretty good, it's a pretty good -- usually the year after this kind of the loan volume is quite a good year.

Joe Morford - RBC Capital Markets

Okay, that’s helpful. The other question was just on the deposit side relative to the past couple of quarters you saw a bit slower growth. I was wondering are you seeing your customers put more money into the stock market and did you do much as far as changing any rates paid on any of the accounts this quarter?

Jim Herbert

We tightened our rates slightly and people are much more active both in the markets and in real-estate and the businesses are drawing down cash position to invest. So, it’s the best of what you would like in an economic recovery.

Joe Morford - RBC Capital Markets

Great and thanks Jim.

Jim Herbert

Thank you.

Operator

Your next question comes from the line of Matthew Clark of Credit Suisse. Your line is open.

Matthew Clark - Credit Suisse

Hey, good morning guys.

Jim Herbert

Good morning.

Matthew Clark - Credit Suisse

Maybe just on QM, I know it’s very, very early since it’s been formally implemented. But just any commentary or any color around QM and what you might be hearing or seeing?

Katherine August-deWilde

We expect it to continue to originate the kinds of loans that our clients want us to so long if the credit quality is very strong and as you know we have had a very long history of originating loans where the borrowers are well able to repay. So, we don’t expect that to change. We will make the kinds of loans that our clients are looking for.

Matthew Clark - Credit Suisse

In the secondary market any commentary there, any change?

Katherine August-deWilde

The secondary market is a bit slow at the moment, we are distanced, we’ve talk through, they are investigating and deciding what they’ll do with QM but at the moment it’s slow for other reasons which has to do with pricing, pricing demands on the part of the buyers.

Matthew Clark - Credit Suisse

Right. And then back to capital, just quickly, you guys absorbed the preferred pretty quickly here and I think we are now at preferreds are 23% at Tier 1, I think you guys tend to prefer, preferred in common just given that you guys were quick to come to market after you felt at this level, just curious as to any changes in your appetite for the types of capital and just thinking about the capital stack and any other related comments?

Jim Herbert

Well, the mix is pretty good as you point out and it’s where it ought to be we have a guideline of 25% maximum preferred in the capital stack. And so, and we’re pretty close to that. But we’re going into the year well capitalized and if it’s a somewhat slower growth here on balance sheet, I am not sure how much it ought to be but might be, why, we’re in good shape we think.

Willis Newton

Yes. Hi, this is Willis, I’d also point out that the average assets for the quarter were above the ending assets, so we can raise that cash back, put it to work and still be at the current level of leverage ratio that we reported at the end of the quarter.

Matthew Clark - Credit Suisse

Got it, okay. Thank you.

Operator

Your next question comes from the line of Tim Coffey of FIG Partners. Your line is open.

Tim Coffey - FIG Partners

Great thank you, morning.

Jim Herbert

Good morning.

Tim Coffey - FIG Partners

Jim I am wondering how long do you think it will take you to grow into the investment that you have made in the Company in the last year?

Jim Herbert

Probably a year or so.

Tim Coffey - FIG Partners

And then I was wondering if you could give me any kind of commentary on what you are seen in the general San Francisco market. Are you a little -- co-question that you mentioned you’re trying to see some indications of quality issues, early indications. I’m wondering that was specific to the Bay area or not?

Jim Herbert

Well the Bay area is having considerably a strong run around the technology and of course a disproportionate share of the IPOs and the market activity are hitting here. But there is just a strong surge of innovation going on. In our super core market which is the City of San Francisco and immediate surrounds and the Country, San Mateo, Santa Clara about 33% of the Bank. The demand for housing the liquidity opportunities, the innovation or formation of new companies is quite extraordinary actually. I’ve been doing this here since 1980 and this is as strong as I’ve ever seen it.

I don’t think it’s really over heated but that’s probably a more of the risk than a slowdown. And it’s not all, it’s not, well it’s all technology at one time for another but the medical area, the biotech area is also extremely strong. But, so the San Francisco Bay area is really experiencing an unusual growth rate.

Tim Coffey - FIG Partners

Those are my questions. Thank you.

Jim Herbert

Thank you.

Operator

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

Julianna Balicka - KBW

Good afternoon.

Jim Herbert

Hi.

Julianna Balicka - KBW

Hi, a couple of questions. One, you talked a little bit about the range of the reserve given your current little mix as you continue to grow your commercial loan and business banking, how you’re thinking about what kind of longer term reserve implications that would have?

Jim Herbert

Well we tend to establish higher level of reserves for a number -- for several categories of business C&I loans or non-profit loans but that’s why we gave you a range of 50 to 60 basis points on average, we don’t see the mix changing that much, that dramatically.

Julianna Balicka - KBW

Got it. And then in terms of the cross-sell that you were talking about as having a higher volume of cross-sell next year, could you give us a little more details about that I mean are you thinking like your retail mortgage customers transitioning on to wealth management and therefore what kind of incremental fee income would you see from that, are you talking about taking your mortgage customers or let’s say lawyers or whatever and trying to develop business banking out of that?

Katherine August-deWilde

Both of those things happened, so for particularly when someone purchases a house the last thing they want to talk about is all the other things they might do with us in the future. So, we need to give them a reprieve and come back to them after they have moved in. But when our bankers are very, very busy making loans and taking the next phone call, they don’t have quite the time to do the in-depth job they do and that is in all product categories. It’s in fee-based wealth management which could be investment management, and could be brokerage or could be trust and it’s also in other loans they might have or deposit needs.

We also focus a lot of attention on following them to their businesses but that too takes little bit of time, you may meet the person who runs a business and then you get introduced to the CFO and that does not happen as quickly as buying the house and doing a mortgage on it does. So, we see all of the cylinders experiencing more cross-sell as our bankers have a bit more time.

Julianna Balicka - KBW

But are you able to put any quantitative parameters around that yet this time, I mean historically you have not been doing as much commercial banking, so is this a slightly different situation?

Katherine August-deWilde

We are not able to put parameters around it because we respond and help our clients with what they need, we act as their advisor. We are eager to work with them to meet all of their needs and you will see it over the course of the year.

Julianna Balicka - KBW

Got it. Thank you very much.

Operator

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

Matthew Keating - Barclays

Yes, thank you. I was hoping you could define the annualized home loan repayment rate, so is that just if it’s dropping from 20% last quarter to 13% in Q4 or is that essentially assuming that 13% of those loans will be repaid throughout the year now vis-à-vis 20% in the prior quarter? Thanks.

Jim Herbert

Yes, Matthew, what we said is that in the first three quarters of 2013, the annualized average repayment rate was at 20%. So that if you had a $1 million worth of loans 20% on an annual rate would pay-off basically 5% a quarter. Now in the fourth quarter that have slowed to a 13% annualized rate, it’s been cut by a third and it’s approaching single-digits which is something that we haven’t seen for a number of years.

Matthew Keating - Barclays

Got you. Thank you, that’s helpful. And you talked about sort of the markets where technology is big obviously having a helpful impact on loan growth or it’s until a Q is filed that this seem from your slide deck today that your Boston market had a pretty strong quarter, I was just hoping that you could comment maybe on some of the drivers of that loan growth trends in that market? Thanks.

Katherine August-deWilde

We have a increasingly experienced team in Boston under very good leadership, they had a lot of opportunities, they had a tremendous amount of client referrals. The non-profit business and the venture capital private equity business is particularly strong in that market.

Matthew Keating - Barclays

Okay. And my final question would be I guess according to your latest Capgemini study, you banked about 43,000 high net worth households in your footprint, where, I know you haven’t done this study in a while or maybe it’s coming out fairly soon but where would that number be at the end of 2013 now in terms of the number of high net worth households that First Republic is banking? Thanks.

Jim Herbert

Well, we don’t really know of course but, and the study will be coming out in the next six or seven months roughly but it’s up, may be up quite a lot actually.

Matthew Keating - Barclays

Fair enough. Okay, thank you.

Operator

There are no further questions in queue. I turn the call back to Jim Herbert for any closing comments.

Jim Herbert

Great, thank you very much. Thank you all very much for your time and attention. We are pleased with the quarter, we are pleased with the year and we are in great shape going into 2014. So, we look forward to staying in touch with everyone. Thank you. Bye-bye.

Operator

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

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