First Republic Bank
Q3 2015 Earnings Call Transcript

Published: 15 Oct 2015

[Operator:]

Greetings, and welcome to the First Republic Bank's Third Quarter 2015 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 and Chief Marketing Officer. Please go ahead.

[Dianne Snedaker:]

Thank you. And welcome to First Republic Bank's Third Quarter 2015 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; and Mike Roffler, 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 Web site. And now, I’d like to turn the call over to Jim Herbert.

[Jim Herbert:]

Thank you, Dianne. It was a very good quarter, which was marked by continuing excellent credit, and steady across-the-board growth. Let me summarize. Core revenues were up 15% from the third quarter of last year. Core earnings per share were up 11% from last year. Tier 1 leverage capital is up 16% from last year. And book value per share increased more than 12% year-over-year. Very importantly, our credit quality remains excellent. In fact, we had credit recoveries during the quarter, while simultaneously adding 14.5 million to our loan loss reserve to support continued loan growth. I note that the actual credit losses year-to-date have totaled only 327,000, compared to over 43 million of reserves which have been established during the same time period. In terms of business activity levels; lending, deposit gathering, private wealth management, and business banking have all performed quite nicely, and in accordance with our plans. The team will run through the quarter's results in greater detail in a moment, but let me first provide a quick update on our regulatory initiatives and our regulatory status. As expected, our fourth quarter average of ending total assets surpassed the threshold of 50 billion this quarter. Our fourth quarter average was in fact 52 billion. As you know, over the past year and a half we've made very substantial investments in infrastructure, and staffing levels, focused primarily on various regulatory enhancement areas in anticipation of reaching 50 billion in assets. I want to take a moment to clarify what having crossed this 50 billion actually means for First Republic, incrementally at this point. The short answer is that the incremental impact is minimal. This is primarily because we have been addressing several items early. It is also due to our non-bank holding company status, and our simple structure and operating model. Because First Republic has always tried to operate in the simplest possible manner, we have not had a bank holding company. We also have only four bank subsidiaries. This very simple structure fully supports all of our bread and butter banking activities, and our very straightforward wealth management platform. Even, however, without a bank holding company, we're highly regulated by the FDIC, the California Department of Business Oversight, Consumer Financial Protection Bureau, FINRA, and the SEC. There are only three new or incremental requirements applicable to First Republic, which is triggered by moving above this asset size. The first is an enhanced Volcker compliance program, which we already have in place. The second is the submission of a Living Will [ph] within the next year, which we are working on already. And the third is an enhanced annual DFAST stress testing program, calling for somewhat more rapid submissions and more detailed analysis, which we are gearing up for this year. We currently don’t see any problem in fully complying with each of these items, and estimate the incremental costs of these additional items in the order of $5 million annually. Other than that, there are no new regulations or designations which now apply to First Republic. Turning to the franchise activity for a moment, business is strong on all fronts. Our urban coastal markets, where we are operating are very active. We remain completely focused on delivering steady and consistent results by executing well on our simple banking and wealth management models, and continuing to deliver the highest possible level of client service. Overall, it was a good quarter. Let me turn the call over to Katherine.

[Katherine August-deWilde:]

Thank you, Jim. It was indeed a strong quarter. Let me talk about lending activity and wealth management. Loan originations for the third quarter were strong, at $4.9 billion. For the first nine months of 2015, we originated $15 billion in loans, up 18% from the same period a year ago. As a result of strong origination volume, year-to-date loan growth is up nicely. Single family home originations were split about 50-50 between purchases and refinances. Home purchase activity at our markets remains robust. The loan pricing remains competitive. We continue to win new business by delivering exceptional client service. We are pleased with our loan pipeline, which going into the fourth quarter is approximately the same as it was both last quarter and at this time a year ago. In the third quarter, we sold $600 million of loans into the secondary market with a gain on sale of 49 basis points. We continue to expect gain on sale margins to be modest. We expect on-balance-sheet growth for the full year 2015, excluding loans held for sale to be in the mid-teens. Turning to private wealth management, we are pleased with the quarter. Wealth management revenues were up 13% from the third quarter a year ago. Despite significant market volatility, wealth management assets supported by net client inflows continue to grow during the quarter. These assets were up 2% for the quarter and 14% from the third quarter a year ago. I would like to note that third quarter results do not include the acquisition of Constellation Wealth Advisors, which closed on October 1st. On September 30th, Constellation had wealth management assets of approximately $5.9 billion. We are very pleased that the Constellation team has joined us, and we want to welcome them to First Republic. Additionally, we continue to be very successful and attracting accomplished wealth advisors who recognize the value of our integrated banking and wealth management platform in serving their clients. Overall, we are quite pleased with this quarter’s performance. And now, I would like to turn call over to Mike Selfridge.

[Mike Selfridge:]

Thank you, Katherine. I would like to cover the deposit gathering, business banking, and credit quality. Deposit balances were up nicely from the third quarter a year ago, and our overall deposit mix continues to strengthen. First Republic’s overall share of deposits in its markets is still less than 2%, and represents a significant future opportunity. We would note that bank is primarily deposit funded with deposits representing over 88% of our total liabilities. We are pleased with our deposit mix. Checking account balances continue to represent over 60% of total deposits. For perspective, checking balances were only 30% of total deposits just five years ago. Business banking had another good quarter. Over the past 15 years, business banking has grown steadily. We’ve succeeded by following our satisfied private banking clients to their businesses or non-profits. Today, we have a very robust platform in a number of business banking segments such as financial and professional services as well as independent schools and other non-profits. Business banking has had a meaningful impact on deposits. For every dollar lent to business banking clients, we have achieved on average approximately $4 in deposits. Overall credit quality remains excellent. Non-performing assets continue to be extremely low at 10 basis points, and we had net recoveries during the quarter. To provide some additional context about credit quality, I would like to share a few key metrics for our entire loan portfolio. Over 83% of our loans are collateralized by real estate. By contrast only 2% of our portfolio was unsecured personal and business loans. Our average loan-to-value ratio on our real estate loans is less than 60% at origination. For 30 years, First Republic has had an intensive focus on disciplined credit underwriting supported by quality collateral, and this is a fundamental strength to the enterprise. Thank you. Now, I would like to turn the call over to Mike Roffler.

[Mike Roffler:]

Thank you, Mike. Overall, the third quarter was characterized by strong revenue growth with a stable core net interest margin and stable core efficiency ratio. As Jim mentioned, core revenues were up 15% from the third quarter a year ago. As a quick reminder, we are moving from GAAP to core metrics. We have excluded items that collectively have a positive impact to earnings. This includes the benefit of purchase accounting, following our divestiture along with certain other one-time items as outlined in our press release. Accordingly, our core comparisons exclude the one-time gain from repositioning of the investment portfolio a year ago, as well as the unusual special dividend from the FHLB received last quarter. Our core net interest margin during the quarter was 3.09% compared to 3.12% for the second quarter. This slight decline in core net interest margin was primarily the result of higher average cash balances in the third quarter. The growth in core revenues was a result of strong growth in core net interest income, which was up 18% compared to a year ago. We are pleased that the core efficiency ratio for the third quarter was 59.4%, down slightly from the prior quarter. As expected, we began to see a modest decline in regulatory-related professional fees, which have been elevated recently due to our substantial infrastructure investments. As planned, a portion of these professional fees has been replaced with increased permanent staffing resulting in somewhat higher compensation expenses. Total expense growth during the third quarter was also driven by continued investment in client-facing initiatives. Looking ahead, we continue to expect the core efficiency ratio to remain within our previously guided range of 57% to 61% through the rest of this year and 2016. And now I'd like to turn the call back to Jim.

[Jim Herbert:]

Thank you everyone. In summary, it was a good quarter and we’re pleased. The double-digit year-over-year growth in core revenues, core earnings per share, and book value per share particularly in this continuing interest rate environment has been quite satisfying. Results are good across the enterprise and on target with our plans. Thank you. I would like to open the line for questions.

[Operator:]

[Operator Instructions] Your first question comes from Erika Najarian from Bank of America. Your line is open.

[Erika Najarian:]

Hi, good morning.

[Jim Herbert:]

Hi, Erika.

[Erika Najarian:]

My first question is just on exactly what happened in the quarter with your cash balances. Mike, I noticed a significant discrepancy between the average balance versus the end of period balance. And I am wondering as we are thinking about the starting point for the margin in the fourth quarter, if the exit of some of those deposits would cause us to go back up to the 3.12% [ph] core margin that you reported in the third quarter -- sorry, second quarter.

[Mike Roffler:]

Yes. So during the quarter, liquidity levels, I think we mentioned this in July that we are strong to start the quarter, and then some of that got put to work in investments and loans as we moved through the quarter to end a little bit lower. I will say that the timing of when deposits come in and then when we are putting that money back to work in either investments or lending can cause the margin to move around a little bit in that range, and that’s what you’ve seen in the last couple of quarters to the extent we have strong liquidity right now that could have an impact currently on the margin as we take our time in putting that money to work.

[Erika Najarian:]

Okay. And just a question on the outlook for the efficiency ratio, given that you closed the Constellation deal on October 1st, should we expect that in the fourth quarter you would be at the higher end of the 57% and 61% range?

[Mike Roffler:]

I think that’s right because wealth management does tend to have a little bit of a higher efficiency ratio than the core banking business. So, the likelihood of going much lower than what we are today in the fourth quarter is probably not very likely in the fourth quarter.

[Erika Najarian:]

And if I could just sneak one last one in for Jim. Jim, when the large banks reported earlier this week we did see significant on-balance-sheet growth in residential markets. And I am wondering if you have noticed any sort of shift in competition for your bread and butter jumbo product and whether or not those large banks are getting more aggressive?

[Jim Herbert:]

Yes, Erika, they are getting more aggressive. They are cutting both pricing and to a modest extent, standards. Their loan-to-value advanced ratios up to $2 million or $3 million have climbed into the 80% range. We are not following them. And that's the cause for us losing some business. But as you can see, the volume has held up pretty well in the quarter, we're happy with them. So we'll compete on price, but we will not follow a change in terms or conditions.

[Erika Najarian:]

Got it. Thank you.

[Operator:]

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

[Steven Alexopoulos:]

Hey, good morning everyone. I wanted to start on …

[Jim Herbert:]

Good morning, Steve.

[Steven Alexopoulos:]

Good morning -- on expenses, maybe for Mike Roffler. Mike, how much of the quarterly increase in expenses was directly related to crossing the SIFI line versus just incentive comp overall?

[Mike Roffler:]

So I would say that our regulatory-related spending has really leveled off. So the increase is not tied to that at this point. It's more investment in the franchise, along with the business levels that we are doing from a revenue perspective.

[Steven Alexopoulos:]

Okay. So now that you've crossed the SIFI line, Mike, could you give us an update on the expected cost that should come out of the run rate as you move forward, getting down to what Jim described, I guess around five million per year incremental annual expenses?

[Mike Roffler:]

So those incremental expenses -- relatively modest for the next year in terms of what's new as we cross 50 billion, and just to clarify, that designation is not one that's going to be applicable given the bank's structure as we operate without a holding company. And so, those modest incremental costs are for the things that are new relative to us crossing 50, which are enhancements to things that we've either been doing. And in the case of Living Will [ph] is a modest investment for something that's new.

[Steven Alexopoulos:]

So going forward, when you blend these together, should we expect there to be a net cost savings from what you're spending in the most recent quarter on consultants, and elevated staff levels, or given that you have to comply with these three areas you outlined, more steady-state in terms of the dollars for the regulatory spend?

[Jim Herbert:]

Steve, let me respond to that. The regulatory spend is probably close to topping out in the last couple of quarters, but is not likely to decline rapidly, because we are still spending money on enhancing enterprise risk management in particular as well as maintaining the new levels of enhancement throughout. On the other hand, as a percentage of revenues, it should stabilize or go down slightly. This last point that Mike made is really important. The bank is not designated SIFI. It is not a SIFI institution. And the only things that have occurred having passed 50 that we have not already worked on quite heavily are the three that we mentioned. And their incremental cost appears to be to us less than five million per year from where we are now.

[Steven Alexopoulos:]

Okay, got you. And maybe just to shift gears for a second. Given the steady plunge in the five years since June, maybe for Katherine, is this enough to see a pick up at refi? And then maybe for Mike, how much is that placing incremental pressure on loan yields? Thank you.

[Katherine August-deWilde:]

Our competitors and we have also reduced rates in keeping with the decline in the treasury. And that could lead to increased refis. We continue to see about 50-50 refi purchases because we are in very active purchase markets.

[Mike Roffler:]

And maybe just to finish on that one, we were pleased that in the quarter our new loan yield was slightly better than the portfolio rate. And the loan yields I think you see in the press release are relatively stable, but that obviously there is a downdraft that's happened in the rates recently which could have an impact as we move forward.

[Steven Alexopoulos:]

Okay, thanks for taking my questions.

[Operator:]

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

[Ken Zerbe:]

Great, thank you. Good morning. Starting off just in terms of loan growth, so fantastic growth this quarter, if we annualized that broadly speaking it puts you sort of on a 20-ish percent sort of go-forward annualized run rate for loan growth. When you think about, now that you are over $50 billion, is 20% the right number that is actually sustainable, or do you feel that that should be something lower on a go-forward basis?

[Jim Herbert:]

Ken, it's going to be -- let me turn to Katherine in a second, but it's going to be lower. 20% is not the number that I would use at all. And I think Katherine mentioned in her text, we would expect to be in the mid-teens at the most.

[Ken Zerbe:]

Got it, understood.

[Katherine August-deWilde:]

We can control obviously loan growth because of secondary market sales.

[Ken Zerbe:]

Understood, okay. And then just really quickly on expenses. I heard what you said on the reg side, but maybe on the business investment side, the incremental spending that you saw this quarter. Does any of that investment in the business come out of expenses at some point or is that just a new stepped-up level for initiatives?

[Mike Roffler:]

So I would say that we are investing in people and technology. And some of that happens ahead of time before revenues will come. Given the opportunities we see within our client base and within our markets, we think those are good investments to make in better serving the clients. So there probably is maybe some future leverage, but there's always a bit of an upfront to it before the revenues necessarily come. But with the opportunities we see, we felt that investment made sense.

[Ken Zerbe:]

Understood. Okay, so the only things [ph] that you invest in it goes away, these are like new people, so you've got salary coming on, and then you expect revenue growth thereafter? Okay.

[Mike Roffler:]

That’s exactly right.

[Ken Zerbe:]

Perfect. Thank you very much.

[Operator:]

Your next question comes from Jared Shaw from Wells Fargo Securities. Your line is open.

[Jared Shaw:]

[Technical difficulty] what your appetite there is going forward?

[Jim Herbert:]

I'm sorry; but for some reason we couldn’t hear the first part of the question. Could you repeat it please?

[Jared Shaw:]

Sure. Just asking about how your views are of the New York multi-family market. Have you continued to increase the exposure there recently, and what your views are going forward there?

[Jim Herbert:]

We have some exposure in the multifamily market in New York. It's pretty stable at this point. We’re very careful; our average loan-to-value ratio of multifamily in New York would be below 60%. It might actually be in the low 50% range. We do very, very conservative lending. Our demand is steady. I think the market is probably a bit heated up. The cap rates are quite tight. And so we’re very cautious, but we continue to do business there.

[Jared Shaw:]

Okay, great, thanks. And then just a follow-up question on the expenses probably for Mike Roffler, when you look at the growth in salaries and benefits, how much of that came from transitioning employees from temp or transitioning from professional services to permanent employees?

[Mike Roffler:]

So there's definitely a portion of it tied to moving away from consultants and professional fees to people we've hired to staff those regulatory functions. But there's also a good portion of it that’s tied to, like we talked about investments in franchise and investment in revenue-producing opportunities.

[Jared Shaw:]

Great, thank you.

[Operator:]

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

[Joe Morford:]

Thanks, good morning everyone. I guess maybe a question for Mike Selfridge. The commercial business originations were a little lower this quarter. I wondered if some of that is just seasonality, maybe the second quarter being strong, or is there any signs of cautiousness on the part of the commercial borrowers given the environment?

[Mike Selfridge:]

No, I don't think so, Joe. I think the business is still moving along quite nicely. There's growth fairly consistent with -- consistently like last quarter across all the segments. But I wouldn’t read in to the quarter-to-quarter originations. It's going quite well.

[Joe Morford:]

Okay. And then the other question was just I wondered if we could get any more color or insight into what the potential impact on fee income and expenses might be from the Constellation acquisition.

[Mike Roffler:]

Yes, so their assets I think as we said were about 5.9 billion. The revenue rate is, call it roughly 50 basis points on an annualized basis. And then it should be a little bit of net profit dropped to the bottom line in the fourth quarter, and then it should expand as we go forward.

[Joe Morford:]

Perfect. Thanks so much.

[Operator:]

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

[Casey Haire:]

Hi, good morning everyone. Mike, I was wondering if you could give us an update on the HQLA build. I noticed that securities yields, if you back out the FHLB dividend from last quarter, were actually up this quarter. I'm just wondering how that could be given HQLA is an ongoing need. And what is the incremental yield on HQLA today?

[Mike Roffler:]

Sure. So the build continues to go quite well. To reiterate, our outlook hasn’t changed for where we're headed, which is to be at about 8 billion by the end of 2016. And incrementally, we added this quarter, between investments and our cash, we did increase balances. So we’re on the same glide path that we've been. In terms of securities yield, the one thing I’d add is it's not only HQLA overall, but our municipal portfolio which we do continue to add to. So that also helps the yield on the overall portfolio. In terms of what we’re seeing from an add in the third quarter on HQLA, it's not much different than it's been, 2 5 to 2 6, similar types of instruments that we've bought in the past.

[Casey Haire:]

Okay, understood. And then just switching to wealth management -- held in pretty well given some lower market levels this quarter. I was wondering has that -- do those lines operate on a lag. Is it pretty direct in concert with the market levels, is there a lag? And then also could you quantify what you expect Constellation, to be from a revenue impact?

[Katherine August-deWilde:]

I think as Mike just said, it's about 50 basis points on revenues of about $5.9 billion. Wealth management held in well in spite of the volatility, because we had significant net client inflows.

[Casey Haire:]

Okay, thank you.

[Operator:]

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

[Paul Miller:]

Thank you very much. Yes, we have seen an increase in production from the jumbo market overall. I think in the second quarter some of the data had 30% of the market is now jumbo, which is the highest we have ever seen. Are you seeing increased competition across the board on pricing? It doesn't look like you have, but I am just wondering -- you add color to that. It seems like everybody today wants to do a jumbo loan.

[Katherine August-deWilde:]

Well, as you may know, we have always been a significant jumbo lender. We do see increased competition. As Jim mentioned, there's two pieces of that. There's increased pricing competition, and there's increased competition in terms of terms. We have followed, sometimes led our competitors in pricing. We do not follow them when they lend more aggressively than we want to.

[Paul Miller:]

So you say you do compete on pricing but not on terms?

[Katherine August-deWilde:]

That’s absolutely correct.

[Paul Miller:]

Okay. Okay, thank you very much.

[Operator:]

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

[Aaron Deer:]

Hi, good morning everyone.

[Jim Herbert:]

Good morning.

[Aaron Deer:]

Mike, you had mentioned that loan yields during the quarter were actually higher than the portfolio average. I guess notwithstanding the impact of some of the lingering purchase accounting impact there, is it reasonable to think that we could continue to see loan yields come in at that level or better, and bring the average up going forward?

[Mike Roffler:]

So we were clearly pleased with the third quarter performance, but since the last couple of weeks rates have moved lower. And we have to obviously react to that. So I think it's probably too early to declare that it's going to always be that way, though we were pleased with the third quarter.

[Aaron Deer:]

Okay. And then, Katherine, I was wondering if you could talk a little bit about the -- what's driving the decision at this point versus -- hold versus sell on your mortgage production, particularly given that your non-interest-bearing deposits have come up so much. If that is giving you more willingness to put some of those more longer dated kind of product on the book?

[Katherine August-deWilde:]

Actually we tend to sell our longer dated product, particularly our 30-year fixed, and our 10-year fixed. We decide how much to sell based on the kind of growth we want to see on our balance sheet, and we have the ability to sell relatively as much loans as we want each quarter. As you know, this quarter was down a bit. It was $600 million. Part of that was reflective of the cash balances. Part of that was reflected in demand for the kinds of adjustables -- intermediate adjustables we like to keep, and part of that was to hit our targets of how much we wanted to grow balance sheet -- loan part of balance sheet.

[Aaron Deer:]

And has there been much shift in the type of product that customers are demanding given kind of the shifting rate environment?

[Katherine August-deWilde:]

The biggest demand continues to be for loans that are fixed for five or seven years. There are people who want 30-year fix. When we have that opportunity we generally sell that on a flow basis into secondary market.

[Aaron Deer:]

Okay. Thanks for taking my questions.

[Operator:]

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

[Julianna Balicka:]

Good morning or good afternoon.

[Jim Herbert:]

Good morning, Julianna.

[Julianna Balicka:]

I wanted to follow-up on a couple of topics that have already been asked and then maybe some follow-up questions. All right, you talked about the HQLAs, but could you talk about the muni securities volumes that you have been purchasing this quarter and what kind of yields, and what are you seeing into the coming quarter on that?

[Mike Roffler:]

We pretty consistently added a couple of hundred million dollars of munis in the quarter. And obviously depending on the rate environment, they can yield anywhere from 5.5% to 6% on a tax adjusted basis. We’ve been active in that market for many years, and feel it’s a good investment class.

[Julianna Balicka:]

So, in terms of the expectations for interest rates being lower for longer, has that changed any of your investment strategies and portfolio management strategies in regards to your investment securities portfolio?

[Jim Herbert:]

Not really, Julianna. We basically have taken a very steady-as-you-go approach to building our investment portfolio from the very day that we came out of Bank of America. If you look -- if you were to go back quarter-over-quarter, you would see a very steady investment rate. The mix of the securities has of course included HQLA more strongly recently. But the municipal portfolio is a very steady-as-you-go-add. The ratings -- the quality inside the portfolio is pretty much a double A rating level. It’s very high quality, highly diversified. Probably our average holding would probably be between $5 million and $6 million. So it’s highly diversified, and it’s -- our approach to it is it’s a long-term game, it’s a marathon and we go in every month regularly.

[Julianna Balicka:]

Okay, that makes sense. And in regards to your capital, your Tier 1 moved down this quarter, of course with growth. So do you have any views on Tier 1 leverage ratio? Do you have any views about whether or not you would be willing to go below 9% or is there like a line in the sand that we should be thinking about?

[Jim Herbert:]

Well, as I think we said probably a lot over the years, pursuant to our continuing de novo status, we need to be at least at 8% Tier 1 leverage capital through the middle of ‘17, and we expect to obviously stay above that with a cushion. So -- but have been below nine in the last couple of years, and that might happen again, but we went into the capital markets a couple of times this year both with a common and with a preferred offering in anticipation of what seemed to be a fairly strong lending market that in retrospect proved to be accurate.

[Julianna Balicka:]

Very good, that makes sense. And final question, in regards to the inflows of new assets in wealth management, you said there was a strong new inflows, but in light of the volatility we see in the quarter, could you give us a little bit more specifics around how much came from new client inflows versus market appreciation or depreciation? I mean should we be looking at even negative or zero market depreciation in those?

[Jim Herbert:]

So during the quarter, we did have -- given the volatility, there was some small amount of market depreciation. So, client inflows more than captured that depreciation plus the growth.

[Katherine August-deWilde:]

And the growth comes from our existing clients as well as the fact that we continue to hire new advisors.

[Julianna Balicka:]

And do you have the breakdown between existing clients versus new advisors?

[Katherine August-deWilde:]

No, we don’t.

[Julianna Balicka:]

Okay. Very good, thank you very much.

[Operator:]

Your next question comes from Matthew Clark from Piper Jaffray. Your line is open.

[Matthew Clark:]

Hey, good morning all.

[Jim Herbert:]

Good morning.

[Matthew Clark:]

Maybe first just on the rate outlook, if you assume that rates don't increase through -- maybe even through next year and maybe even beyond, can you just talk about whether or not you might change the way you manage the balance sheet or not?

[Jim Herbert:]

Well, I think we are quite happy with the way we’ve been able to manage. I mean rates have been at these levels for the entire existence of the bank as an independent entity against since we came out of BoA. So I think the only thing that seems to have moved around a little bit is the pricing from sort of month-to-month on jumbo home lending, but it stays in a fairly tight range. So I don’t know that we would do much differently than we are now. The real issue is how do you maintain a hedge against the possibility of rising rates, but we run a pretty tight matchbook on the asset liability. And we stay on top of that carefully. So I think the enterprise that you are looking at, take the last 12 months as a good example is actually pretty well designed for the current rate environment.

[Matthew Clark:]

Okay, great. And then with the City National merger ongoing and the dislocation there, can you tell us whether or not that dislocation from that deal impacted your third quarter results from a loan deposit or wealth management perspective? And whether or not you might be seeing business from them yet or not?

[Jim Herbert:]

The answer is it didn’t impact our business in the third quarter at all. We are not seeing really much business coming out of that. I don’t know that we will. It will depend entirely on how it’s handled, of course. From our perspective, it’s not a overwhelmingly important transaction actually, because our main competitors and our main source of new business are the three or four biggest banks.

[Matthew Clark:]

Okay. Thank you.

[Jim Herbert:]

Thank you.

[Operator:]

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

[Lana Chan:]

Hi, good morning. I'd just like to follow up on that last one in terms of the competition coming from the big banks. Is that driving any of your deposit growth? We have seen some of the big banks exit some of the non-operational deposits that are accounted favorably under LCR. Are you benefiting from that?

[Jim Herbert:]

We were benefiting slightly from that, but not overwhelmingly. We have probably picked up a couple of billion dollars, I would say, throughout the year mostly in some of the hedge funds as you know we have a large fund business. We have on board some of the hedge funds, but not any of the really large ones. That’s a new piece of business for us, and we are doing it in conjunction with banking the management companies and also the principals that are running the funds. And so, we are doing in a much more holistic or coordinated manner than it was done previously. So I think it is benefiting us, but it’s not a driver, it’s an add-on.

[Lana Chan:]

Okay. Thanks, Jim.

[Jim Herbert:]

Thank you.

[Operator:]

This brings us to the end organic today's question-and-answer session. I'll turn the call back over to Mr. Jim Herbert for closing remarks.

[Jim Herbert:]

Thank you all very much for taking the time. We appreciate it. Bye-bye.

[Operator:]

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