First Republic Bank's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.16.14 | About: First Republic (FRC)

First Republic Bank (NYSE:FRC)

Q1 2014 Earnings Conference Call

April 16, 2014 14:00 ET

Executives

Dianne Snedaker - Executive Vice President and Chief Marketing Officer

Jim Herbert - Chairman and Chief Executive Officer

Katherine August-deWilde - President

Mike Selfridge - Chief Operating Officer

Willis Newton - Chief Financial Officer

Mike Roffler - Deputy Chief Financial Officer

Analysts

Steven Alexopoulos - JPMorgan

Erika Najarian - Bank of America

Ken Zerbe - Morgan Stanley

Ryan Nash - Goldman Sachs

Casey Haire - Jefferies

Dave Rochester - Deutsche Bank

Aaron Deer - Sandler O'Neill

John Pancari - Evercore

Joe Morford - RBC Capital Markets

Julianna Balicka - KBW

Matthew Clark - Credit Suisse

Lana Chan - BMO Capital

John Moran - Macquarie Capital

Matthew Keating - Barclays

Operator

Greetings, and welcome to First Republic Bank’s First Quarter 2014 Earnings Conference Call. During today’s call, the lines will be in a listen-only mode. Following the presentation, the conference will be opened 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 - Executive Vice President and Chief Marketing Officer

Thank you, and welcome to First Republic Bank’s first quarter 2014 conference call. Speaking today will be Jim Herbert, the Bank’s Chairman and Chief Executive Officer; Katherine August-deWilde, President; Mike Selfridge, 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 actual results to differ materially from any forward-looking statements and reconciliations of non-GAAP financial measures see the Bank’s FDIC filings, including the Form 8-K filed today, all available on the Bank’s website.

Thank you. And welcome to First Republic Bank’s first quarter 2014 conference call. And now I’d like to turn the call over to Jim Herbert.

Jim Herbert - Chairman and Chief Executive Officer

Thank you, Dianne and thanks to everybody for joining our call today. We are pleased with the first quarter results. Business activity overall was quite good and our credit quality remains very strong. Our core revenues were up 5% over the prior quarter and 8% year-over-year.

I will cover some of the highlights and I will ask others to provide more detail. Quarterly core earnings per share were up about 8% year-over-year. If you exclude the unusually high level of loan sale gains that occurred during last year’s first quarter, you will recall that was our best quarter ever for loan sale gains. During the first quarter last year, loan sale gains contributed fully $0.11 per share and this year they contributed only $0.01 per share. Book value per common was $26.21, up 14% over the year. During the quarter, we successfully raised $240 million in our first primary common stock offering since our IPO. We are quite pleased with having strengthened our capital position with this offering.

Our Tier 1 leverage ratio, thanks to retained earnings in the new common stock equity is a very strong 9.85%. This was up 31% year-over-year, with over 60% of the growth coming from common equity. We are quite pleased to announce today an increase in our quarterly dividend. The common stock cash dividend will go from $0.12 a share to $0.14 a share.

Overall, loan volume did decline in the quarter, but only by 9% compared to a year ago. We are rather pleased with this actually given the much greater decline in single-family refinancings that has generally occurred in the marketplace. Our loan volume is a reflection of the compounding nature of our brand strength, word-of-mouth referrals from satisfied clients who tell their friends, and the superior service provided by all of our people at all levels. Very importantly, asset quality continues to remain excellent, with only 12 basis points of non-performing assets at quarter end. Charge-offs during the quarter remained extremely low as well.

Deposits grew 4.6% during the quarter. We are quite pleased with this. We are also very happy that checking balances averaged 50% of deposits throughout the quarter. Net core interest margin improved to 3.17% versus 3.06% last quarter. Willis will talk more about this in a moment. Private wealth management had another exceptional quarter. Assets under management grew 8.6%. Very significantly, 90% of this asset growth can be attributed to net client inflows. Our expense growth is somewhat related to this and Willis will discuss this in a moment.

Let me speak for just a second about our secondary market activity and its impact from loan sales. We are pleased with the pricing as well as the depth and breadth of demand that we have seen for our high-quality home loans. We did report a modest gain on loan sales in this quarter. We saw loans in the secondary market, primarily to manage interest rate risk. We mostly sell our longer term fixed rate loans. By doing this, we reduce our asset duration while also being able to continue to offer a very full variety of loan choices to our clients. Overall, we are pleased with the quarter.

Let me turn the call over to Katherine.

Katherine August-deWilde - President

Thank you, Jim. It was a very good quarter. Let me add some comments about loan volumes and the success of private wealth management. Loan volume in the first quarter returned to a more normalized level after record originations last year. It is worth noting that last quarter’s loan volume was our second highest first quarter ever. It would appear to us that we are withstanding the declines in single-family loan originations better than some of our competitors.

Purchases accounted for 60% of this quarter’s single-family loan volume. The dollar amount of our home purchase originations was up 32% this quarter compared to the same quarter a year ago. That’s quite meaningful. Purchase demand remained strong, although for-sale home inventory is a bit limited. Our longstanding relationships with realtors and our high level of personal service are particularly effective in purchase market. Our pipeline is good although lower than at this time last year. We have continued to pre-qualify many clients who are actively looking to purchase homes.

Another big story this quarter was wealth management. Wealth management assets have continued to grow nicely over the past few years. Assets under management were up 8.6% during the first quarter. As Jim noted, 90% of this asset growth was from net client inflows. Total wealth management assets are now over $45 billion. Importantly, our wealth management revenues are up 31% year-over-year.

In terms of expenses, private wealth management typically operates at a higher efficiency ratio. And as we grow, there were some frontloading of compensation for both wealth managers and the bankers who cross-sell wealth management. We are succeeding and growing wealth management for several reasons. We are fulfilling our clients’ needs with a comprehensive range of investment management, brokerage and trust services. We have hired excellent portfolio managers, wealth advisors, brokers and financial planners who are delivering our brand of exceptional client service. And we have been increasingly effective in cross-selling wealth management services to our personal and business banking clients. The growth of wealth management highlights the coordinated nature and strength of the First Republic model.

I would now like to turn the call over to Mike Selfridge.

Mike Selfridge - Chief Operating Officer

Thanks, Katherine. Let me discuss our geographic markets, business banking and our cross-selling throughout the enterprise. A shortage of housing inventory is affecting virtually all of our markets. Our bankers and local real estate professionals report that housing demand is strong. In our markets, it’s entirely common to have multiple offers on single-family loan originations. Given this activity, we remain focused more than ever on credit quality. We are not loosening the underwriting for home loans. I would note that at the end of the first quarter, we had only one REO which has since been sold. Total net charge-offs were only 1 basis point for the quarter.

Turning to business banking, this area continues to be an important contributor to the franchise of our overall deposit mix. We are successfully adding new business banking relationships and expanding existing ones within our footprint. Business deposits were 46% of total deposits in the quarter, which is consistent with prior quarters. The growth of our business deposits has contributed significantly to checking account balances and improved our deposit mix over the past few years.

Loans to businesses continue to represent 10% of total loans. As with all loan originations we are not changing any of our underwriting standards for new business loans. Multi-family and commercial real estate loans were up 25% year-over-year. New originations for multi-family and commercial real estate loans are all within our core markets and in many cases made to our existing very experienced clients. As with the rest of our portfolio these loans are very carefully underwritten. The average size of our multi-family and commercial real estate loans during the first quarter was approximately $3.4 million and the average loan to value ratios were 51%. As we have noted many times, the markets in which we operate tend to outperform the rest of the country. This can be seen in the home purchase activity this quarter. While loan volume is down, our teams are focused even more on cross selling and there continues to be significant opportunity to deepen and broaden our relationships with existing clients.

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

Willis Newton - Chief Financial Officer

Thanks Mike. First some color on core net interest margin, which increased 11 basis points to 3.17%. About 10 basis points of this increase was due to having lower average cash balances during the quarter. Looking at other elements of our core NIM, our average loan yield for the quarter declined about four basis points compared to last quarter. At the same time, we were pleased to achieve a four basis points reduction in average deposit costs, so this effectively offset our lower loan yield.

There was virtually no change in Federal Home Loan Bank borrowing costs for the quarter. I would like to remind everyone that our $5.5 billion of advances were all fixed rates with an average remaining duration of three years. We used these borrowings to lengthen our liabilities. We believe modest NIM pressure will continue for several more quarters as new loans are still coming on to the balance sheet at somewhat lower rates than our current average loan yield. Also we may have higher average cash balances in the second quarter due to the current cash position as well as planned loan sales.

Let me talk about our investment purchase activity, during the first quarter we started to build high quality liquid assets under the proposed LCR rules. We added $200 million of such assets in the quarter and we purchased over $100 million more so far in April. We expect to continue these purchases throughout the year at approximately this pace. These securities have an average yield of a little over 2%. We will continue to sell longer term fixed rate loans in the second quarter. We have approximately $500 million already in the held for sale category at quarter end. We have committed to deliver these loans at slightly higher prices than we achieved in the first quarter. The core efficiency ratio was 58.9% for the first quarter, which is typically higher due to payroll taxes. If seasonally higher payroll taxes of about $5 million are excluded, the core efficiency ratio would have been about 57% or in the middle of our targeted range of 55% to 59%.

Let me drill down a little into the expense trends. Other than payroll taxes compared with the prior quarter, the other increases in our expenses are primarily in the compensation line. In the first quarter, we absorbed the annual increase in healthcare costs and annual employee salary raises, also our producers have been very successful in growing wealth management assets, which have boosted those revenues by over 30% year-over-year. However, compensation for this activity is higher in the first few quarters after these assets first come in. For the remaining quarters of this year, each of these components salaries, healthcare and wealth management compensation should increase at a slower rate and the total compensation line will increase more in line with our headcount than other factors.

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

Mike Roffler - Deputy Chief Financial Officer

Thanks Willis. I would like to talk about loan repayment rates, our effective tax rate and a few items related to our recent capital activities. With lower home loan refinance activity, repayment rates continued to decline on our single-family portfolio. During the quarter, the repayment rate on our single-family loans fell to an annualized rate of 11%, compared to 13% in the prior quarter and 18% for all of last year. The repayment rate on income property loans is declining in a similar fashion.

With regard to income taxes we estimate the effective annual tax rate at the beginning of each year. For 2014 our effective tax rate is expected to be approximately 27%, which is down from 30.4% in 2013. This was primarily driven by the level of tax advantaged investing done over the last few years. Finally, we were quite pleased with our recent capital raising activities. The first quarter of 2014’s earnings reflect the full cost of all of our preferred stock issuances including the recent Series E offering last October, the $13.9 million total is our current run rate.

With respect to our common stock offering in late March, our diluted share count was modestly impacted in the first quarter. For the second quarter, our estimated diluted share count is approximately $142 million assuming a similar average stock price to today.

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

Jim Herbert - Chairman and Chief Executive Officer

Thank you everyone. Let me close by spending a moment on our continued emphasis on high quality underwriting. Our credit discipline remained strong, excuse me, just as it has since our establishment almost three decades ago, irrespective of what competition may do from time-to-time. Most importantly, the credit standards on new lending including this most recent quarter are just as strong as our existing loans. And we noted several of the metrics on our new loans in the press release.

Make a fundamental point it’s worth noting that we operate in form of the largest urban markets in the United States, dominated primarily by the largest banks in the country. These are very target rich environments for new clients. Given the magnitude of the opportunities in these markets, for us to grow our client base does not require lowering our loan quality standards. Our increase in clients over time is not at all a function of lowering credit standards, it is rather the result of our compounding reputation for service and the active acquisition one at a time of new clients by our very talented hard working people and by remaining very product and price competitive in terms of offerings. Overall, we are very pleased with the quarter and the momentum going forward into the year seems to be quite good.

Now, we would be happy to take questions.

Question-and-Answer Session

Operator

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

Steven Alexopoulos - JPMorgan

Hi everyone.

Jim Herbert

Thank you.

Steven Alexopoulos - JPMorgan

Maybe I will start just a follow-up on Mike’s comments that the supply of housing is limited, is there supply restriction enough to dampen the typical seasonal pick-up that we would see in the second quarter in origination volumes on single-family?

Mike Roffler

Steve, as Katherine mentioned, our pipeline is off a little bit. It might restrict somewhat but we are seeing activity increase. So, I think it’s too soon to say.

Steven Alexopoulos - JPMorgan

Okay, okay. On the $700 million or so of originations that were for refi, do you guys think that’s sustainable at this level or is there still a downside to that through the year?

Katherine August-deWilde

I think that’s probably a level that is likely to continue.

Steven Alexopoulos - JPMorgan

Okay. And then just on the expenses maybe for Willis, do you have any actual breakout of how much of the increase was for wealth management incentive comp? And do I understand the guidance correctly you are saying that we will continue to grow off these levels for the rest of the year? Thanks.

Willis Newton

Yes, hi Steve. The way we are looking at the remaining quarters of the year as that, we have established a run rate for wealth management incentive comp for the annual – mostly for the annual salary increases and for the healthcare costs, which started at the beginning of the year. Going forward, the total compensation line will increase more in line with additional headcount as opposed to any other factors. I would say that a fairly significant portion of the net increase in non-payroll tax related costs were related to wealth management, which operates at a higher efficiency ratio than the Bank overall.

Steven Alexopoulos - JPMorgan

Okay. And Willis, maybe one follow-up, I saw you hired a new PSA AML chief, is that an area we should also be expecting increased expense build through the year? Thanks.

Willis Newton

Yes. We are continuing to focus on all of the things that we need to do as we develop our franchise. Compliance is one. We are also working on technology and we are also continuing to develop several other areas as well.

Steven Alexopoulos - JPMorgan

Okay, thanks for the color.

Operator

The next question comes from Erika Najarian with Bank of America. Your line is open.

Erika Najarian - Bank of America

Good afternoon.

Jim Herbert

Hi, Erika.

Erika Najarian - Bank of America

Just wanted to get a little bit more color on the remarkable progress in terms of wealth management, could you give us a sense on how much of the increase in AUM came from new or existing clients, just to get us a sense of how successful the cross-sell is being? And also if there is any sort of regional pattern in terms of whether the client acquisition is more successful in the West Coast versus East?

Katherine August-deWilde

The client acquisition is actually quite successful throughout the country. About a third of the wealth management growth comes from cross-selling bank clients and the rest comes from private wealth management professionals either adding to existing accounts or more likely bringing in new accounts.

Erika Najarian - Bank of America

Okay. And to ask the question another way of sort of your target current clients that you think could be cross-sold the product, what – how has your penetration rate progressed?

Katherine August-deWilde

The penetration rate is increasing, but there is still a tremendous amount of clients, who do not have wealth management. And so it is very target rich. I am not sure if that’s responding and is there anything else I can add on that. I don’t know how much is additions to existing account.

Erika Najarian - Bank of America

Okay. And as you become more successful and continue to be successful in wealth management, does that change the natural efficiency ratio of the overall company in that perhaps the more penetration you get and the more AUM you grow, the efficiency ratio moves to the higher end of that 55%, 59% target?

Katherine August-deWilde

To the degree that wealth management assets grow faster than bank assets and wealth management revenues grow faster than bank revenues that would ease the efficiency ratio up towards the higher end definitely. There is no capital requirement in wealth management, but it does run at a higher efficiency ratio.

Erika Najarian - Bank of America

Got it. And just one more follow-up question if I may on another topic, you mentioned that cash balances maybe up from the $1.3 billion that was posted in the first quarter. I guess, could we get a sense as sort of what the puts and takes for the rest of the year would be in terms of cash deployment versus the continued build in HQLA?

Mike Roffler

Well, Erika, we are looking opportunistically to build the HQLA. We have a little over $300 million so far as of this date and we did indicate that we would expect to continue to add that over the rest of the year at a similar pace. We are continuing also to have good franchise development in our deposits. We plan to sell a few loans – few more loans this quarter. So, we might be a little higher on average, because we are starting the quarter at about $1.8 billion in cash and we may not be able to work that down on average for the quarter.

Erika Najarian - Bank of America

Got it. Thank you for taking my questions.

Operator

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

Ken Zerbe - Morgan Stanley

Great, thank you. Willis, just want to follow-up on the comp expenses a little bit more, you guys obviously spent a fair amount of time talking about how the comp is higher when you get assets coming in the door for at least for the first couple of quarters and how it seem to affect the numbers this quarter, which I guess I understand, but at the same time, you have had really strong asset growth for a long time, this quarter it was really high and I get this payroll seasonality aspect of it. But I am just trying to reconcile why that sort of high in the first couple of quarters? Why that doesn’t affect growth going forward? Because I would still expect you guys to grow wealth management assets that are pretty good clip, but you are saying that’s not going to be an issue going forward. Is that – how do we reconcile that?

Katherine August-deWilde

We had significant growth this quarter. We also have when we hire people or – 1.5 year ago, we made an acquisition. We had some targets and bonuses that are paid out over time as targets are reached. The difference is we will continue to grow compensation assets with wealth management, but probably not as at high as a pace as we are growing – as we grew them this quarter.

Willis Newton

And Ken, I think another element is that when we have fewer loan originations, we have more of our producers out doing the cross-selling and they are being rewarded for that. The compensation for bringing in wealth management assets is higher over about the first full year and then it becomes more of a longer term sort of a maintenance level.

Mike Roffler

Let me also add that we had – when we bought Luminous as part of the transaction involved an upside bonus to them after the first year. And we are delighted to say that they are achieving that bonus. And so we will share in some of the unusually good growth that they are achieving with them in terms of bonuses.

Ken Zerbe - Morgan Stanley

Alright, that helps. And then the other question, just on the tax rate, I guess have you seen anything materially changed or have you added a material amount of tax advantaged investment just in the last quarter or two? And does it relate to the high-quality liquid assets, because I guess I would have expected the tax rate to be a little bit higher given the tax change that brought up tax rates and lower expenses?

Mike Roffler

So, it’s sort of a cumulative effect in the investing done last year. You don’t necessarily get much benefit for whereas if I have invested in a tax credit investment for loan from housing late in the year, you don’t get a lot of benefit and this year we will get a full benefit from it, so it’s sort of a mix of the timing of when we make investments and what the expectation is for those investments through the rest of this year.

Ken Zerbe - Morgan Stanley

Okay and then the 27% is that for lack of better guidance, a decent run rate beyond 2014?

Mike Roffler

It’s probably too early for me to say that at this point, but it’s probably not an unreasonable place to be for now.

Ken Zerbe - Morgan Stanley

Okay, alright. Thank you.

Operator

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

Ryan Nash - Goldman Sachs

Hi, good afternoon guys.

Jim Herbert

Hi Ryan.

Ryan Nash - Goldman Sachs

Just a follow-up on one of the questions from before, if my math is correct it sounds like you are adding about $1.5 billion to somewhere around $2 billion of securities at this pace for the year. I guess my first question is, would that put you at a position where you would actually be LCR compliant at that point. And then in terms of the reinvestment strategy are you just reinvesting all prepayments into HQLA assets or do you actually intend on building the securities book from here?

Jim Herbert

We are going to continue to build the securities book from here Ryan, but remember we do have a fair amount of cash than we have carried it in the past. We have a deposit flow that’s actually quite strong. And so your math is a little high. Willis was implying that year-to-date we have put out about $300 million and that’s an annualizable run rate more or less. Remember the beauty of high quality liquid assets is they are highly available. So I think that we are that doing a – we try to do everything quite methodically around here and we are basically very methodically going up to book of those assets. Their biggest challenge of course is that LCR is not yet final and so none of us really know the details of the full – of the needs. And as it relate just to how much but it has quite a lot to do with the make up of your liability side obviously and that’s – some of that’s still being determined. So we are basically moving towards an orderly position mid late ‘15, early ‘16.

Ryan Nash - Goldman Sachs

Got it. Just to follow-up on the wealth management business. Just thinking about the margin, we have heard some of the bigger players talk about something in the 25% to 30% pretax margin that is I think the point of their businesses look the different strategy and do look in fact like yours, but longer term where do you think should your margin look that similar from a lot of the larger peers in that 25% to 30% range?

Katherine August-deWilde

We are looking to take the margin to about 20% in the intermediate term. The reason that it is not as high as others is part of our assets include custody and trust administration and also we are growing very quickly, which impacts the margin because of the front loaded expenses.

Ryan Nash - Goldman Sachs

Got it. And then if I could just squeeze in one other quick question, I mean it sounds like given the limited amounts of supply, the pipeline is slower, was that specific to just residential mortgage and how the pipelines look outside of that, are you still seeing continued stronger momentum outside of traditional resi mortgage?

Jim Herbert

Let me clarify be – let me clarify something, the pipeline is not lower, the pipeline is higher than it had been going into the first quarter, okay. I think we have had a misunderstanding maybe. It’s not quite as high as it was this time last year, but you will be reminded that this time last year it was the highest in history of the bank. So I don’t want to have a misunderstanding here. We are doing fine. The markets are very alive. The purchase market is actually very alive. The limited supply is the biggest constraint on it being even more so.

Ryan Nash - Goldman Sachs

Got it. Thanks for taking my questions.

Operator

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

Casey Haire - Jefferies

Yes, good morning guys. A question on the loan yields, Willis you mentioned the NIM is under some pressure here, what is the new money yield on new loans?

Jim Herbert

So Casey, it’s a little bit up from where it was at the end of the year. If I looked at our real estate loans, which is about 90% of the portfolio, it’s about 320 which is up just slightly from the end of the year.

Casey Haire - Jefferies

Okay and I mean commercial is coming on, I mean the book is…?

Jim Herbert

I mean, if you think about single-family, it’s been right around 3%, multi-family about 3.5% and CRE a little bit higher than that around 4%. It hasn’t changed a great deal in the last sort of 90 days.

Casey Haire - Jefferies

Okay, great. And then Willis, just to follow-up, I am still not following the comp line guidance. If I understand it correctly you have absorbed the annual merit increase, the healthcare and with wealth management doing very well that’s now kind of in the run rate as well, but if we were start – we are still starting from pulling out the $5 million of FICA in the second quarter, meaning so we are at – we are starting at 115.6 and then baking in growth from headcount as well as cross sell success, is that the right way to think about it?

Willis Newton

That’s spot on, Casey, the payroll tax is seasonal, but as you have a bigger base, your ongoing payroll tax and other costs go up. But if we have an X percentage increase in headcount then we should probably have an X percentage increase in comp going forward.

Casey Haire - Jefferies

Okay, thanks very much.

Operator

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

Dave Rochester - Deutsche Bank

Hey, good morning guys. Just quickly back on the loan yield, would you also happen to have the prepayment penalty income figure for the quarter?

Mike Roffler

It was down from last quarter. It’s a pretty modest impact. I think it’s less than $2 million for the quarter.

Dave Rochester - Deutsche Bank

Okay, great. And you talked about building the high quality liquid asset portfolio, I was just wondering what types of securities you are buying there and what the average duration was on those purchases this quarter?

Jim Herbert

All the securities have been level one and the duration is in the sort of three to five year range.

Dave Rochester - Deutsche Bank

Great, thanks. And then I saw multi-family production picked up pretty meaningfully this quarter, was that a function of greater activity in the market or did you have a greater appetite for product this quarter given a little bit of softness on the resi side?

Jim Herbert

No, mostly just more activity in the market.

Dave Rochester - Deutsche Bank

Perfect and you are still doing generally five-ones are you also doing 7s and 10s?

Jim Herbert

We do a few 7s and 10s, but mostly five-one – 5 and 7 on the multi-family.

Dave Rochester - Deutsche Bank

Great. Alright, thanks guys.

Operator

The next question comes from Aaron Deer with Sandler O'Neill. Your line is open.

Aaron Deer - Sandler O'Neill

Hi, good morning everyone. In addition to seeing the very strong growth in assets under management your deposit inflows were very strong, I am wondering, can you delineate how much of that was just from your cross sell efforts or new clients and if there was anything unusual in there that might have been seasonal or other factors that helped to get that such a big boost this quarter?

Jim Herbert

There really wasn’t anything, it was seasonal. It was – it’s really across the board, the officers are doing well, the preferred bankers are doing well. Wealth management is – the sweep accounts are increasing, the wealth banker related accounts are increasing. So it’s really across – and business banking importantly is bringing quite a lot in. But the make up, the blend of the deposits did not really change in the quarter either by source or by type.

Aaron Deer - Sandler O'Neill

Okay and then given the commentary about the low amount of inventory now you guys added a fair bit of construction loans in the quarter, but is that – given the demand for housing and the lack of inventories, I don’t know if you guys might be looking to step on the gas a little bit?

Jim Herbert

Well, we don’t really tend to step on the gas. We tend to respond to demand. And the demand for construction loans as you would imply with your question is in fact increasing a bit. We do very little speculative construction, that’s almost all owner-user construction.

Aaron Deer - Sandler O'Neill

Alright, okay. And one last question on the reserve, I know that with the book that’s covered by purchase accounting continuing to diminish as a percentage of the overall, your reserve levels coming up a little bit, I am just wondering what’s kind of the reserve ratio that you are putting on new C&I or new single-family residential, just trying to gauge how we should anticipate that growing over time as the book continues to grow?

Mike Roffler

I think we have been pretty consistent if we look at our reserves on the “the new loans” at sort of the 50 to 60 basis point range on those loans. And as you know, if it’s a bit more commercial business lending, it will tend towards the higher end of that range and if it’s more single-family, then it will be towards the lower end.

Jim Herbert

We do build an overall general reserve as well.

Aaron Deer - Sandler O'Neill

Right, okay, great. Thanks for taking my questions.

Operator

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

John Pancari - Evercore

Hi, guys. One question on the increase in the held-for-sale, of that $500 million increase, is the gains on that already reflected in this quarter’s gain on sale or is it not yet reflected because of how you are accounting for it?

Katherine August-deWilde

It’s not yet reflected. We record the gain on sale when we sell the loans.

John Pancari - Evercore

Okay, alright. And then separately in terms of your balance sheet retention for the one to four family book, can you just remind us what you are retaining on balance sheet now? I know traditionally you have been retaining the 5-1’s and 7-1’s and were evaluating the 10-year retention, have you decided to retain 10-year product?

Katherine August-deWilde

We generally try to sell 30-year, 15-year and 10-year and try to keep mostly 5-year. Sometimes, we would also sell 7-year. We keep all of our adjustables also.

John Pancari - Evercore

Okay. So, you are not retaining any of the 10-year production?

Katherine August-deWilde

We are retaining some, but when we can we sell it. We also don’t make that many 10 years, more 5s and 7s.

John Pancari - Evercore

Okay, alright. And then separately on the business lending side, your business loan origination volume dropped pretty significantly in the quarter, but is that primarily seasonal, it looks like it was coming off a high level?

Mike Selfridge

It was coming off a high level. The fourth quarter tends to be seasonal with a lot of activity.

John Pancari - Evercore

Okay. Alright, great. That’s it from me. Thanks.

Operator

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

Joe Morford - RBC Capital Markets

I guess, just to follow-up on John’s question there. Just as some of that business banking drop just reflected in capital call line activity or I guess what happened with that kind of loan-type in the quarter?

Mike Selfridge

Joe, as you know, most of the activity we do – at least in terms of loan outstandings is centered in capital call activity as well as schools and non-profits and while it was down for the quarter, based on the seasonal activity I just mentioned, it’s up about 26% year-over-year. And more importantly, note that the deposit taking that we are getting from business baking continues to be quite strong, we are getting just over $1 in deposits where we will only put outstanding, so yes, 4.4.

Joe Morford - RBC Capital Markets

4.4. Okay, that’s great. And then the last question, just a follow-up, you mentioned repayment rates are down to 11%. Just kind of curious how much lower you think that can really go or is it likely just kind of stay around these levels?

Willis Newton

It’s at a pretty low level. I don’t think it’s going to step down much from here, just given the nature of our client base, I would think this range is probably pretty close to a low.

Joe Morford - RBC Capital Markets

Okay, thanks so much.

Operator

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

Julianna Balicka - KBW

Good morning.

Jim Herbert

Good morning, Julianna.

Julianna Balicka - KBW

Good morning. I have a couple of questions to follow-up in terms of the balance sheet and one quick question on the wealth management. Maybe I will start with the wealth management one first. Is there any impact that we should be thinking about from your recent acquisition of Nigro Karlin?

Katherine August-deWilde

I think it will be very modest. We hope to cross-sell more of their clients so that it will be a modest impact.

Julianna Balicka - KBW

Okay, thank you. And then in terms of the average balance sheet, just kind of thinking about your building up the high-quality assets and your cash balances as you said will be a little higher this quarter, since they are starting off at a higher base, higher end of period balance, but kind of thinking prospectively, not just one quarter forward but just kind of in general, what kind of level of cash should we be thinking about that would make sense for your model given that you are building up at HQLA?

Willis Newton

Well, going forward, what we hope to have is good deposit growth to support loans and to put some of the excess cash more productively to work of course within the confines of – at some point, rates may rise which will affect this pace at which we really seek to add these assets. I would say that by the end of the year we hope to have $1 billion or slightly more in the HQLA and that will be – cause a reduction maybe to somewhere in the neighborhood of half their current balance of cash that we have.

Julianna Balicka - KBW

Very good. And in terms of your securities portfolio this quarter in particular, your average balance of $5.3 billion was higher than your end of period at both December and March. So I am kind of wondering what some of the more detailed flows were in there? I know you are adding the $300 million or $200 million in the first quarter of HQLA, but what was your average balance of munis or what were some of the other moving parts?

Willis Newton

We added modestly to our muni portfolio. We did sell about $100 million, $120 million of the CMOs that we had in our available-for-sale category at the end of the quarter. And that’s why you see the average being slightly above the 2 points.

Julianna Balicka - KBW

Okay, that makes sense. And then final question and I will step back. On the held-for-sale portfolio, you have earmarked some for sale this coming quarter, but as you are kind of looking out into 2015 – rest of the year and into 2015 just kind of thinking about raising rates, should we be thinking about that level of loans in your held-for-sale or will it kind of go back to where you used to run at?

Jim Herbert

It will jump around from time-to-time depending on the demand in the market and what we originate.

Willis Newton

Let me comment that the loans that are held-for-sale are not earmarked. They have been committed for deliveries to specific buyers at specific prices and that will vary. We normally deliver the loans in the held-for-sale categories within the next three months or in the second quarter.

Julianna Balicka - KBW

Got it, thank you.

Operator

The next question comes from Matthew Clark with Credit Suisse. Your line is open.

Matthew Clark - Credit Suisse

Hey, good afternoon guys. On the core efficiency ratio, ex-purchase accounting, now that wealth management has become a bigger piece of the business and based on what you have seen this quarter, have you thought about recasting your expected range? Where that number should be over time? And is it also fair to assume that, that ratio should be higher on average say this year and next relative to last year?

Jim Herbert

I think we are just going to watch it for a year and see. Really, as Katherine said, it depends on the relative growth rates of the two. The good news is if the efficiency ratio moves up on us as a result of the growth in wealth management, that’s success not failure if you know what I mean. So, it’s a nice problem.

Matthew Clark - Credit Suisse

Okay. That’s it from me. Rest of my questions have been asked. Thanks.

Operator

The next question comes from Lana Chan with BMO Capital. Your line is open.

Lana Chan - BMO Capital

Hi, thank you. It was nice to see your deposit cost come down a bit linked quarter especially on the money market side, do you feel like you still have room to move that down a bit?

Jim Herbert

Lana, I don’t know, I don’t think so. I mean, we are getting pretty close to where I think we can operate in the current environment. I know that Chairperson Yellen has extended her – the concept of how long rates might stay down today, that may help a little but I think well, it’s hard to go much lower.

Lana Chan - BMO Capital

Okay. On the expense side again, the comments about going forward that growth will be more in line with headcount growth, could you I guess give us sort of budgets or expectations on how much personnel or headcount you are expected to add on for the remainder of the year?

Katherine August-deWilde

We don’t give that kind of information out. We add as we need. We will add to continue to grow infrastructure, technology and compliance, but we don’t have a particularly large budget for adding new headcount compared to prior year.

Lana Chan - BMO Capital

Okay, thank you.

Mike Selfridge

We also had a modest level of new branch openings this quarter. We have only two for the rest of the year. So, we won’t be needing to expand our headcount to fill those locations. We have been at more along the 6 office openings in the prior couple of years.

Operator

The next question comes from John Moran with Macquarie Capital. Your line is open.

John Moran - Macquarie Capital

Hey, thanks. Willis, just wanted to make sure I understood the commentary around gain on sale and loans held-for-sale properly. It sounds like there is $500 million sitting there, but that might grow a little bit and then gain on sale margin, it sounded like you're indicating could be a little bit better than the 82 basis points that we saw this quarter. Is that correct?

Willis Newton

The $500 million that is in held-for-sale, we have committed to deliver it at prices that are a little bit better than we averaged in the first quarter. So, you are correct with respect to that. We will also deliver as we originate flow loans and the demand had been reasonably good at points in time for our loans, but we're going to happy to be deliver what we guided in the held for sale column.

John Moran - Macquarie Capital

Got it, thanks. And then second one from me, just given success in wealth management and the success for the Luminous transaction, I know you guys have not historically been particularly acquisitive, but is there opportunity or do you think a need to bolt on there and any kind of possibility you have around that?

Katherine August-deWilde

Most of our acquisitions in wealth management are the acquisition of individual producers. We have continued to look at that and we'll do that all the time when we find the right fit. We look at acquisitions from time to time and then it has to be a particularly excellent fit for us to decide to do that. As you say we have done very well.

John Moran - Macquarie Capital

Got it. Thanks very much for taking the questions.

Operator

The next question comes from Matthew Keating with Barclays. Your line is open.

Matthew Keating - Barclays

Yes, thank you. I was hoping you could reconcile something for me on fee income. It looks the brokerage and investment fees were down this quarter despite a pretty big pick up in assets under management and brokerage accounts about 12% linked quarter, similar to the wealth management growth, insurance really driven by investment advisory fees. So, maybe you can just talk about sort of what drives that brokerage and investment fees line item?

Willis Newton

So brokerage and investment is driven a little bit more by transaction volume than it is a relative amount of under management. So it’s more a function of activity in the quarter just being down a bit from the fourth quarter of trading volumes.

Matthew Keating - Barclays

I understood. That makes sense. And I guess following the recent primary common equity issuance, can you just talk about your preference as it relates to future capital residential, I know you have a self-imposed limitation of about 25% on the preferred – Tier 1 capital? I mean, if you could just at a high level talk about what your preferences are looking out?

Willis Newton

Well, we are very comfortable right now with the 9.8% plus leverage ratio and we are going to probably ride with that for a while.

Matthew Keating - Barclays

Fair enough. Thank you.

Operator

There are no additional questions at this time. I’d like to turn the call back to Mr. Herbert.

Jim Herbert - Chairman and Chief Executive Officer

Thank you all very much. We appreciate the time.

Operator

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

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