First Republic Bank
Q4 2015 Earnings Call Transcript

Published: 14 Jan 2016

[Operator:]

Greetings and welcome to First Republic Bank’s Fourth Quarter and Full Year 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 fourth quarter and full year 2015 conference call. Speaking today will be Jim Herbert, the Bank’s Chairman and Chief Executive Officer; Katherine August-deWilde, Vice Chair; Mike Selfridge, Chief Banking Officer; Gaye Erkan, Chief Investment and Deposit 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 website. Now I’d like to turn the call over to Jim Herbert.

[James Herbert:]

Thank you, Dianne, and thanks everyone for joining our call today. We’re very pleased with the results for both the fourth quarter and the year. Let me reflect on the year for a moment and then others will talk more about the quarter. 2015 was our best year ever. Earnings, loans, deposits and wealth management assets all grew quite nicely. Our credit quality remains exceptional. Capital levels are very strong. We were pleased to be able to access the capital markets three times during the year to support our continued growth. We also very much welcomed Constellation Wealth Advisors and several wealth management teams to the company. Katherine will speak more about this in a moment. During the year, we continued to make significant investments in the franchise, supported by strong earnings growth. These investments include the continuing build-out of our regulatory risk management infrastructure and the introduction of a much enhanced online banking system, which we’re beginning to roll out as we speak. We also made a series of executive promotions which strengthened our already very deep bench. These appointments are the continuation of careful succession planning. Let me highlight some numbers for the year. Core revenues were up 15%. Core earnings per share were up 10%. Tangible book value per share was up 13.6%. Total capital increased by 19%. Our loan volume totaled $19.7 billion, our best year ever. Loan growth was 16%, consistent with our plan. It’s worth noting that this growth was entirely funded by deposits. To support loan growth, we added $55 million in loan loss reserves; however, net charge-offs for the year totaled only $1.7 million, or less than a single basis point. Significantly, checking balances represented 63% of total deposits at the end of this year. Wealth management assets grew 35% during the year. Katherine and Mike will speak about this shortly. Let me take a quick moment to summarize the performance since we bought back the bank from Bank of America 5.5 years ago. Core earnings per share have grown 16% per annum since then. Tangible book value per share has also grown 16% per annum. We continue to succeed because we remain completely focused on delivering exceptional client service through a very simple business model that offers stability and predictability. Overall, we’re delighted with the fourth quarter and the full year. Now, let me turn the call over to Katherine.

[Katherine August-deWilde:]

Thank you, Jim. It was indeed a very good year and a very good quarter. First Republic private wealth management had a strong 2015. During the fourth quarter, wealth management assets were up $13 billion. For the full year, wealth management assets were up 35% to $72 billion. On an annual basis, wealth management revenues were up over 20%. I’d like to note that this reflects only a single quarter of Constellation’s revenues and only partial quarter revenues from our newest advisor teams. The strong growth in wealth management assets during the year was due to a number of factors. First, continued asset inflow from both existing and new clients was very strong. Our full service open architectural wealth management platform continues to resonate exceptionally well with our clients. Next, we completed the Constellation acquisition on October 1. It is a perfect fit with our culture and client base, and we’re very pleased with the ongoing integration. Finally, our growth was enhanced by a particularly good opportunity in the fourth quarter to bring on several well established advisor teams. In fact, we hired five wealth management teams during the quarter. At December 31, these teams have brought over only approximately 35% of what we expect them to bring in total. We expect the remaining assets from these teams will come over in the first half of the year. Because of our integrated model, we benefit additionally from inexpensive deposits from our wealth management business. Wealth management professionals are choosing First Republic because they like our ability to deliver exceptional personalized service, objective advice, and a full range of client solutions, including great banking. Now I’d like to turn the call over to Mike Selfridge.

[Michael Selfridge:]

Thank you, Katherine. Let me summarize some of the highlights in lending, credit quality and business banking for the quarter. Loan originations totaled $4.7 billion, up 10% from the fourth quarter of the prior year. Loan growth for the quarter was 16% on an annualized basis. Credit quality continues to be very strong. Non-performing assets remain extremely low at just 12 basis points, and net charge-offs for the entire year were less than one basis point. Loan volume was driven by robust economic activity in our markets and our focus on relationship banking. As usual, the majority of our business was with existing clients. Though loan pricing remains competitive, we do not and will not lower our credit standards to win new business. Our relationship-based, client-focused service model continues to be very successful. Business banking had another great quarter. Both business loans outstanding and business deposits were up nicely. At year-end, business loans outstanding represented 14% of total loans while business deposits represented 51% of total deposits at a cost of two basis points. The strong economic activity in all of our urban coastal markets continues to be supported by healthy job creation. This is especially true of the strong economy in the San Francisco Bay Area, which accounts for approximately 45% of the bank. Overall, the franchise is performing well across every line of business. Now I’d like to turn the call over to Gaye Erkan.

[Gaye Erkan:]

Thank you, Mike. I would like to talk about the growth of our investment portfolio, on which we have made considerable progress, and our deposit gathering franchise. Our total investment portfolio at year-end was $10.5 billion, up 57% from a year ago. Investments now represent 18% of total assets. HQLA holdings, including eligible cash, totaled $5.8 billion at year-end or 10% of total assets, compared to 7% a year ago. As we have indicated, we plan to grow HQLA to 12% of total assets by year-end 2016. Turning to deposits, it was a terrific year. Deposits were up 29% in 2015. Checking accounted for more than 80% of such deposit growth. Importantly, checking is now 63% of total deposits at a cost of one basis point, with total deposit costs at 14 basis points during the fourth quarter. It was a very good year across all channels

[Michael Roffler:]

Thank you, Gaye. Let me discuss our quarterly earnings, net interest margin, the efficiency ratio, our diluted share count, and income taxes. Core earnings per share was up 22% for the quarter compared to a year ago, driven largely by core revenue growth which was up 21% from the fourth quarter last year. I would also note that in the fourth quarter, the net contribution of purchase accounting continued to decline and now represents just 2.9% of net income, or only $0.02 per share. Turning to core net interest margin, the decline during the quarter of seven basis points was due entirely to increased cash balances resulting from deposit gathering activities. We were pleased that during the quarter, contractual loan yields increased two basis points. Regarding expenses, we’re very pleased with the investments we’ve made in the franchise, particularly in wealth management. During the fourth quarter, we incurred increased expenses due to the addition of Constellation Wealth Advisors, along with the robust hiring of portfolio managers and associated support personnel. Let me take a moment to discuss how our investment in wealth management has affected the efficiency ratio. Our core efficiency ratio was 61.4% for the quarter, slightly above the upper end of range of 57 to 61%. The core efficiency ratio in our wealth management business over the first three quarters of 2015 was approximately 85%. This increase to 94% in the fourth quarter was due to expenses incurred in advance of fully realizing the associated revenues. We expect to see the full benefit of these revenues starting in the first and second quarters of 2016. Just as a point of comparison, the bank’s core efficiency ratio, excluding private wealth management, was 56.2% in the fourth quarter compared to 55.7% in the prior quarter. We also want to remind everyone that the first quarter expenses are higher due to the seasonal impact of elevated payroll taxes. In the first quarter of 2016, we expect that additional expense to be $12 million to $13 million. Also, I would note that for the first quarter of 2016, our diluted share count is expected to be approximately 149.5 million shares, based on yesterday’s closing stock price. With regard to income taxes, our effective tax rate for the fourth quarter was 23% due to an increase in tax benefits from our tax credit investments. For the full year 2016, we anticipate that our effective tax rate will be in the range of 25 to 26%. We are very pleased with our overall performance this quarter and with our full-year results. Now I’d like to turn the call back to Jim.

[James Herbert:]

Thank you, Mike, and thank you everybody. 2015 was a terrific year for First Republic. We reported record earnings while continuing to make significant investments in the strength and growth of the enterprise. Credit quality remains very strong. We successfully accessed the capital markets three times, and we’re particularly pleased to have grown tangible book value per share during the year by 13.6%. Looking ahead for a minute, while there is clearly considerable global uncertainty, we remain committed to executing our simple resilient business model has performed well in all environments. The model is focused on gathering deposits, making very high quality loans, and providing wealth management in our core domestic markets, which continue to have strong economies. The bottom line is that we’re focused as ever on the key pillars of our model

[Operator:]

[Operator instructions] Your first question comes from the line of Jared Shaw with Wells Fargo. Your line is open.

[Timur Braziler:]

Hi, good morning. This is actually Timur Braziler filling in for Jared. Just one follow-up on the expenses - appreciate the color that you provided. What was the portion of the incremental expense this quarter from the sign-on bonuses of the new teams hired that won’t be repeated next quarter?

[Michael Roffler:]

So the one-time sign-on, not very large. I would call sort of one-time costs between the integration of Constellation and sign-on/recruiters at around $2 million to $3 million.

[Timur Braziler:]

Okay, so the guidance you provided of $12 million to $13 million higher in Q1, that’s pretty much all going to be in that number. It’s not going to be offset by too much of one-time expenses in fourth quarter. Is that correct?

[Michael Roffler:]

No, that is an add for the payroll taxes that seasonally are always up in the first quarter.

[Timur Braziler:]

Right, okay. Then just more broadly, looking at the potential to bring on additional teams, have we seen much of that run its course, or is there additional opportunity in 2016 to add new teams?

[Katherine August-deWilde:]

There is additional opportunity. We are talking to a number of teams right now.

[Timur Braziler:]

Okay, great. Maybe just switching over to the HQLA build during the quarter, it certainly ramped up. Did you see something in the yields earlier in the quarter, maybe, that drove that increase, and how should we look at that progression in 2016?

[Gaye Erkan:]

As we have indicated, we have been opportunistic in our HQLA purchases, and the fourth quarter was a good year so we took advantage of that. As indicated, we are still in the same guidance of 12% of total assets.

[Timur Braziler:]

Okay, and what was the yield on--sorry, go ahead?

[Gaye Erkan:]

By end of 2016.

[Timur Braziler:]

Okay. What was the yield on the HQLA loan [data] [ph] this quarter?

[Gaye Erkan:]

Yields are not much different this quarter than last for HQLA, around mid-2s, and we are not going out on duration, so we are keeping the portfolio duration profile the same.

[Timur Braziler:]

Okay, great. I guess just lastly, given recent commentary by regulators surrounding commercial real estate concentration, are you seeing any change in the competitive landscape within the New York multifamily space, and does that maybe provide you a competitive advantage over some of the other players that are bumping up against thresholds?

[James Herbert:]

I wouldn’t call it a competitive advantage, but we’re not seeing much change, actually. Our multifamily lending is about a 58% loan to value ratio, 55% overall. We are very conservative.

[Timur Braziler:]

Okay, great. Thank you.

[Operator:]

Your next question comes from the line of Steven Alexopoulos with JP Morgan.

[Steven Alexopoulos:]

Hey, good morning everybody.

[James Herbert:]

Morning, Steve.

[Steven Alexopoulos:]

Maybe first for Mike Selfridge, on the single family loan production this quarter, could you talk about--you know, it’s always pretty weak, even on a year-over-year basis. I would have thought the warmer weather would have helped that a bit. Could you talk about, are you seeing less demand there? Just give some color on what drove that.

[Michael Selfridge:]

No, not necessarily, Steve. I think the demand is still there. There might be a little bit of caution based on prices and limited inventory, but overall it still appears to be pretty good from our perspective.

[Steven Alexopoulos:]

Can you talk about the pipeline, Mike? I know the first quarter is typically your weakest quarter. But could you talk about the pipeline?

[Michael Selfridge:]

Yes, actually looking into where we sit today, looking into the first quarter, it’s about the same as it was looking into the fourth quarter of 2015.

[Steven Alexopoulos:]

Okay, perfect. I just want to talk about deposits for a second. Can you guys talk about, one, what you attribute the surge in deposits in the quarter; and then two, I know deposits rates were flat. Was there any noticeable change at all in response to the Fed hike in December?

[Gaye Erkan:]

The deposit growth has been very well diversified and has been very nicely growing across all the channels, and we haven’t seen much of an impact with the rise in rates.

[James Herbert:]

I’d add to that, Steve, that the wealth management brings with it the opportunity for deposit growth as well. That’s one of the things that happens in our integrated platform, which is when we grow these wealth managers, we pick up the assets under management in the RIAs or in the accounts, but we also pick up custody, which is modest income but positive, and we pick up deposits and banking with the individuals. So the integrated model makes the wealth management worth more than normal.

[Steven Alexopoulos:]

But Jim, was that a factor this quarter? Did you pick up deposits from Constellation? Is that part of the increase we’re seeing?

[James Herbert:]

The answer is yes, Steve, we did. We also are beginning to pick them up, of course, from the individual teams that we hire as they come onboard.

[Steven Alexopoulos:]

Okay. Just to follow up on that, could you guys help us think better about the revenue opportunity from the new hires? Basically, what’s a reasonable range of assets that could be brought over by the teams you currently have employed?

[James Herbert:]

Well, as Katherine indicated, we’ve had about--we’ve brought over 35 to 40% roughly of what they have under management so far, and part of that is simply the mechanics of people coming in, say in early December. It just takes time to get accounts brought over. We have to do new KYC on them, et cetera, which we do very methodically. Still, there’s a lag time. The nice thing about some of the teams that we hired, the ones coming out of Credit Suisse, which is certainly very public knowledge, there’s nobody fighting to keep the accounts, so it’s a matter of getting it done, so there’s a kind of physicality to the activity. It probably takes on the--we’re learning it takes about two quarters, basically, to get them all over. The availability of additional hires really has to do with the attractiveness of the platform as we have developed it. We’re very careful though, because we looked at a lot more teams than we hired, and mostly the reason we didn’t hire--well, some of them went somewhere else, that’s obvious. But also, we’re very careful about the cultural fit, as you know. If they don’t fit in culturally or they don’t want to fit in with the integrated model, not that they are bad people or anything, but if they don’t want to operate in our model, we pass.

[Steven Alexopoulos:]

Okay. Katherine, you said you brought five teams over so far. Is it unrealistic to assume, I don’t know, $750 million of assets per team or somewhere in that area, on average?

[Katherine August-deWilde:]

We haven’t really given out those numbers, and we’re still tallying what we expect to come over.

[James Herbert:]

They’re also a wide range, Steve. They can be--it can be a one-person team with one support, or it could a three-person team, so there’s really not a meaningful average that we would give out, actually, because it would be strictly that - an average. It wouldn’t be meaningful predictive.

[Steven Alexopoulos:]

Okay, thanks for taking all my questions.

[James Herbert:]

Thanks.

[Operator:]

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

[Erika Najarian:]

Hi, good morning.

[James Herbert:]

Good morning, Erika.

[Erika Najarian:]

My first question is on how to think about 2016 efficiency. I appreciate walking us through the dynamics of the fourth quarter, and as I think about this year, it sounds like, one, there continues to be opportunities to add in wealth; and second, wealth as a percentage of your bank will continue to grow in terms of contribution. As I think about that 57 and 61% guidance for 2016, given those opportunities, should we expect you to fall in the upper end of that range as we think about the full year?

[Michael Roffler:]

Erika, I think that’s right. As wealth management, you’re thinking about it right, is it’s becoming a growing part of the total. That does lead to the efficiency ratio being at the higher end of that range. We think that long term is a very good thing because it’s an efficient use of capital and adding to returns overall without increasing overall balance sheet, so as that grows, it’s 13% of revenue today, and if it grows, that likely keeps the efficiency ratio at the high end of that range.

[Erika Najarian:]

Thank you. The second follow-up question is on a previous bank call today, their CEO noted that the equity market is likely not going to impact a broad swath of the U.S. consumer in terms of their borrowing decisions. Given the spectrum of consumer that you directly address, Jim, I’m wondering how historically a weak equity market has impacted borrowing decisions from your clientele; in other words, should we worry that there could be a slowdown in growth as your clientele becomes more cautious?

[James Herbert:]

It’s always possible. Historically, it’s a little more likely that what you will get is pricing pressure in the segment, as Mike Selfridge alluded to already, but a reasonably good availability of flow of business. Our clientele is less affected to some extent because of the strength of their income, but more importantly the markets we operate in, the supply is so short in terms of availability of homes, that it has not been as dramatic as the overall housing numbers would indicate, pretty much ever. Now, even in ’08, as you may recall, ’08 was one of our largest lending years in the history of the bank. So it’s not that we’re immune, it’s that we have seemingly an ability to take share when that happens, but also the liquidity established in the client base comes to bear. What is happening is that we’re seeing a little bit of a slowdown, or a psychological movement towards caution - that’s definitely happening, and that translates into maybe a little more down, in fact, and a little less robust bidding. But so far, not much impact.

[Erika Najarian:]

Got it. Just my last question, you mentioned, Jim, your ability to tap the capital markets in 2015. We’re about to approach next year, the end of your de novo period, and I’m wondering if given the balance sheet growth that you see for 2016, if you have enough in your capital coffers to take you through the end of your de novo period, or it’s tough to tell, especially given dynamics of deposit growth?

[James Herbert:]

It’s a little tough to tell, Erika. Your last point is a pertinent one - it’s a little tough to tell on the deposit side. Obviously growth in checking deposits, which were 80% of our growth, are only the good news; but on the other hand, we’re sticking quite closely to our business plan that we’ve had in place for quite a while, and we review it every year, I think, as pretty much everybody knows. But we’re quite on plan - in fact, our total assets are slightly behind the plan, and so we’re very, very--we’re cautious. Whether we’ll need--we don’t currently need more capital. We’re strongly capitalized. Our guideline of 8% Tier 1 leverage, we’re above 9, and well above 9; however, we intend it to stay there by virtue of the capital raises so far.

[Erika Najarian:]

Just a follow-up that, what do you think is an appropriate buffer to that 8%, and after the de novo period, are you going to think about the buffer differently?

[James Herbert:]

We probably will think about it slightly differently, but not really very much. You know, we’ve been--if you go back for 30 years, we stay well capitalized. Stuff happens - the world gets nervous, the world blows up, and if you don’t have capital going into that moment, you’re in big trouble. If you do have it, you have a great opportunity.

[Erika Najarian:]

Got it. Thank you.

[Operator:]

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

[Ken Zerbe:]

Great, thank you. Good morning. First question, just in terms of the tax credit investments that you did. Obviously tax rate a little lower than what we were looking for, but how much was there an offset in terms of the tax credit amortization in the expense line?

[Michael Roffler:]

It goes hand-in-hand a little bit with the credits we earn and then how much of the asset is amortized, so the net of that was about $2 million in the quarter, resulting from some benefits that we hadn’t necessarily expected, and also they came in a little bit better than we had anticipated.

[Ken Zerbe:]

Sorry - when you say better, you mean the expenses were lower because of--?

[Michael Roffler:]

Correct. We received more credits than we had anticipated, so the expense results in being lower.

[Ken Zerbe:]

And then going forward, obviously you provide your tax rate guidance. Is that kind of 25 to 26%, basically that assumes that you do a little less in terms of tax credit investing? I’m just trying to get a sense of--because obviously that also affects your efficiency ratio.

[Michael Roffler:]

So it’s a little higher than this year, and there is a multitude of factors that go into it - what’s going to be our growth in tax-exempt income from multiple sources, along with the growth in taxable income. So as we look out, we try to project both of those things and feel that a 25 to 26% rate is reasonable to us at this point.

[Ken Zerbe:]

Got you, okay. Then just a last question on credit - I know it’s a million dollars of charge-offs, nothing, but any comments on where that came from, resi or commercial or--?

[Michael Roffler:]

It would have been in the residential portfolio, but nothing unusual or alarming.

[Ken Zerbe:]

Okay. All right, thank you very much.

[Operator:]

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

[Joe Morford:]

Great, thanks so much. I guess looking at the impressive growth in assets under management this quarter, can you talk a bit about how much came from Constellation versus the new hires, versus the growth from existing clients?

[Michael Roffler:]

Sure, Joe. I’m going to take a moment on this, because I’d like to just walk through it. So we started the quarter at about $59 billion of assets under management. Constellation, as we previously talked about, had managed $5.9 billion at September 30, and Jim talked about this briefly in his comments earlier to one of the questions, that the bank’s strategy has been very much to both manage our portfolios for clients but also keep custody of the assets in brokerage, and also that allows us to better gather deposits from these accounts, which helps the bank from a net interest income perspective. So this really leads to wealth management having two areas - brokerage and investment management, that gained both assets and revenues because we’re managing and administering the assets. So if you think about it, the bank gets paid in three different ways for this managing of these assets. You’ve got the investment advisory fee, the custody benefits which help brokerage, and then importantly deposits in the bank, which are normal, very sticky, stable deposits that we earn roughly our margin on of 3%. It also has the added benefit of making the clients very sticky. It’s a really key point and power of our integrated business model, and as Jim said, it’s one of the reasons it makes wealth management so important to us. So now when you tally that after the background, Constellation adds about $8.6 billion to our count of AUMs through the brokerage and through the investment management area. Katherine talked about the new hires in the quarter, the teams - that added just $1.1 billion. I think you’ll notice in our disclosures, the money market funds where we have clients that will move between the bank and maybe into a government-type fund, that added about a billion dollars, and then existing clients and new clients added about $2.5 billion. So that should all tally to about $72 billion for the quarter.

[Joe Morford:]

Okay, that’s super-helpful. Thank you. I guess just following up on Constellation, if you could give us an update on the status of the integration, but what exactly did it contribute in terms of fees and expenses in the fourth quarter?

[Michael Roffler:]

Sure. So from a fee perspective, about $6 million to fee revenue from the direct management of the assets, and then in terms of compensation, just over $3 million. Then, we also amortized--as you know, part of the purchase price gets put into intangible assets versus goodwill. We amortized about $2.4 million, so there is a modest net benefit that does not include some transition costs that I talked about earlier where we had duplicate facility for a little while, and some retention or costs on payroll. In terms of integration, I think it’s gone very well. We’ll be moving together here shortly. The teams are working well together. You’re already seeing opportunities for banking with their clients, and the team in New York and here in Menlo Park are working very well together, so we couldn’t be more pleased.

[Joe Morford:]

Okay, that’s great. I guess lastly, recognizing the excess cash levels’ weight on the margin in the fourth quarter, just wondering, Mike, if you could give us your updated outlook for the margin for this year and what does that include as far as rate hikes, if any?

[Michael Roffler:]

So I’d say this - as you’ve seen probably the last two to three quarters, the cash level on average has bounced around a bit, and that does have an impact to the reported margin. We’ve been running sort of $2 billion to $3 billion, I think, in average cash, which has been a bit higher given the balance sheet size. That probably feels like a good range for us to run in. I think with the recent rate hikes, absent the cash, I think Jim and Gaye mentioned earlier, no real change to our deposit costs. That should have a little bit of expansion to the margin, all things being equal. The next few rate hikes, if they were to occur, probably the next one, not a lot happens and after that, maybe a little bit more. But I think we see a little margin pick-up if we see the cash level normalize in that $2 billion range. Importantly, loans were up two basis points for the quarter, so we did see that decline stop and started to see a little bit of expansion.

[Joe Morford:]

Okay, thanks so much, Mike.

[Operator:]

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

[Lana Chan:]

Thanks. Good morning. A couple questions. First, on the volatility that we’ve been seeing in the technology sector, could you run through for us, particularly on the business banking side, the technology portfolios and how that would potentially affect both the loans and the deposits?

[Michael Selfridge:]

Yes Lana, it’s Mike. On the technology side, we do nothing more than handle cash management and deposits, so there’s no lending exposure there. On the capital call line portion of the business banking portfolio, I would say there is definitely a higher level of caution, given some of the valuations in that world. That could have an impact on activity, although we are picking up new business across all our geographies, and that would be offsetting any slowdown there.

[Lana Chan:]

And how big is that on your portfolio right now, the capital call lines?

[Michael Selfridge:]

That’s about 27% of the total loan portfolio for the quarter in business banking - yes, business banking. Total, it’d be about 14%, and within that the capital call lines would be about 27%.

[Lana Chan:]

Got it, thank you. A follow-up question would be on just this overall flatter yield curve, even with the recent rate hike. Could you talk about what the expectations are if the yield curve does continue to flatten? Where would be the most pressure point? Clearly the mortgage side is one area, I would assume.

[James Herbert:]

Well, the flattening of the yield curve is not a positive event for us, but it’s probably not all that negative, depending on how flat it becomes. But you know, we’ve got--our primary mortgage products are sort of 5-1 and 7-1, that we keep on the books. We sell the longer term fixed. So with a mature portfolio, the duration of that book is probably on the order of three years, three and a half years, something like that remaining duration. We don’t need much of a curve when you start from 14 basis points of deposit costs. Our growth in deposits is very significantly checking, which is costing us at this moment about one basis point, so we’re not too concerned about it. It is the scenario that is probably the most risky in terms of margin for us; on the other hand, if the yield curve flattens, that means that mortgage rates are low relatively, and that will encourage continued mortgage activity, so the volume will be strong.

[Lana Chan:]

Okay, thank you, Jim. Then just one last question, if I could. In terms of loan growth expectations for 2016, mid-teens is still generally a good range to use?

[James Herbert:]

Barring any unforeseen circumstances in the economy, yes.

[Lana Chan:]

Okay, thank you very much.

[Operator:]

Your next question comes from the line of Christopher Wheeler of Atlantic Equities. Your line is open.

[Christopher Wheeler:]

Yes, good morning. A couple of questions, if I may, on wealth management. The first one, really on the--I think Mike gave $2.5 billion of money from new clients in the quarter. Could you perhaps break that down? When you say new clients, I think it was new money. Can you break that down as to what that would have been from existing clients of the business, and how much was brought in through new clients to the business, because that would be a pretty good guide going forward once you absorb the new team members who have joined. So that’s the first question. The second one - on the new team members, you were already asked a question on the signing on bonuses, but I just wondered, were these all charged off in Year 1 or will you be amortizing some of these bonuses or signing on fees, should I say, over a longer period of time? Perhaps third, just--I’m interested, obviously this has been a tremendously opportune moment for you to pick up people as we go through some changes at not just Credit Suisse but probably at Barclays as well. Can you perhaps talk a little bit about with Credit Suisse, do you have any concerns regarding Credit Suisse’s attempts in terms of litigation against UBS for trying to poach people while they’re talking to Wells Fargo? Thanks very much.

[James Herbert:]

Let me just answer the latter one, Christopher. I don’t think we have any concerns there at all. The actions taken by others have been in style and aggressiveness and so on meaningfully different from ours. Let me turn to Mike on the rest of your questions.

[Christopher Wheeler:]

Thank you.

[Michael Roffler:]

Yes, on the $2.5 billion, I would say similar to usual, it is existing clients that end up doing more with us, and also existing portfolio managers that have done more with new clients and referrals from banking clients. That typically has been a pretty decent split amongst those sort of three channels. With respect to sort of longer term amortization of some of the upfront costs, it does add a little bit to each quarter’s results, but because much of it is done over a multiple year basis, it’s not a very big part of the overall expense increase in the quarter. It will add to the future, but if it adds $1 million or $2 million a quarter, that’s probably about it, not much more than that.

[Christopher Wheeler:]

Okay, thanks very much, Mike. Thank you.

[Operator:]

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

[Casey Haire:]

Thanks, good morning guys. Mike Roffler, a question, just a follow-up on the Constellation. You mentioned it was a $6 million revenue benefit this quarter, or fee benefit. Was that split--sorry if I missed this, but was that split equally between investment advisory and brokerage investment?

[Michael Roffler:]

So most of it is in the investment advisory space, and there’s a little part of it, say 10% roughly, that rolls into brokerage.

[Casey Haire:]

Okay, got you. So brokerage just had an excellent quarter by itself, or maybe some of the PMs coming on from Credit Suisse, or just a seasonally strong quarter?

[Michael Roffler:]

It had a very good quarter by itself, but maybe just to go back, when I talked about the benefits we get in multiple ways from Constellation, one of those places you’ll see that will be broadly for the bank overall in the brokerage line from a custody perspective, where there is some fees reimbursed to us as assets grow, and so you reflect some of that there also. So it’s sort of a--it’s not Constellation driven revenue, but it’s a benefit overall to the bank because of the growth in brokerage accounts.

[Casey Haire:]

Got you, okay. Great. Just following up on the revenue opportunity for Credit Suisse, the PMs coming on board, it sounds like we’re going to have to ballpark, make our own assumptions around the AUM opportunity. But in terms of fee capture, is that a similar rate to what First Republic has been doing in terms of that 35 BP fee capture rate?

[Michael Roffler:]

Yes, that would be a pretty good assessment, because on FRM managed assets, it will be a little bit higher, but then when you add it into brokerage and average it in, it averages a bit lower. So FRM is average around 60 basis points on average. This will be, I think, 55 around, but then when we--when you add in the overall brokerage and trust, it brings sort of overall down into that mid-30s.

[Casey Haire:]

Got you, okay. Then just switching to asset quality, at 12 BPs of loans non-accruals, there’s not a lot of risk here, but there was an uptick in the non-accruals. Can you just provide a little color? I’m assuming that was commercial. Just a little color on the uptick in NPAs.

[Michael Roffler:]

So I’d say it’s nothing unusual. Periodically, we work with clients who may run into a difficulty, but it’s nothing unusual. We feel that the portfolio continues to obviously remain very strong, and at this point those loans are very active in discussion with the clients, but nothing unusual.

[Casey Haire:]

Okay, I mean, is that coming from the commercial side of the house?

[Michael Roffler:]

Not really. It’s pretty spread.

[Casey Haire:]

All right, great. Thank you.

[Operator:]

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

[Dave Rochester:]

Hey, good morning guys. Maybe if we could just go back to the deposit growth, it sounds like this wasn’t a huge impact this quarter, but was any of that growth driven by a shift in risk tolerance amongst high net worth customers? It sounds like you think this growth will stick and you’ll continue to see growth on top of that in 1Q. Is that right?

[Gaye Erkan:]

To answer your first question, no, it’s not shifted by any of the shifts in risk--it’s not driven by any shift in the risk profile. I’d like to note in addition to what Jim mentioned about the deposit growth, we have also done--the bank has done a great job cross-selling to the principals and the individuals within our business banking deposits, and not only our business banking in the deposit franchise has grown but also the power of cross-sell has shown itself very nicely in the fourth quarter.

[Dave Rochester:]

Okay, great. Maybe switching to expenses, just on the regulatory build, can you just update us on how much expense you expect from investments in that area going forward on a quarterly run rate basis? And then, at what point are you expecting to cross below the upper end of that efficiency guidance range? Are we thinking more 2Q-ish or maybe do we need to wait until the second half?

[Michael Roffler:]

So on the latter, I’d say probably towards the second half of 2016 on the efficiency ratio guidance to hopefully come down a little bit, and then the regulatory spend, I’d say has really leveled off and it’s sort of in our run rate. I think you’ll note on professional fees, which was the place it was most visible in the past, it has been pretty consistent the last couple of quarters, but if you compare it to the first quarter of this year, it’s down about $3 million or $4 million. I think we’ve added people into the staffing of the organization and we have a few people to add in different areas, but the large part of the build-out is done and we are continuing to add a little bit. But the total spend has sort of leveled off at this point.

[Dave Rochester:]

Okay, great. Then just going back to the loan pipeline comments that Mike, I think you made earlier, you said it was in line with last quarter. Was that specifically related to the residential portfolio, or was that the total loan portfolio pipeline?

[Michael Selfridge:]

No, that was the total loan portfolio pipeline.

[Dave Rochester:]

Okay, great. Then just one last one on loan production yields - I was just wondering where those are post-rate hike across your major loan categories.

[James Herbert:]

They’re about the same, really. They’re holding pretty steady, slightly up, obviously prime rate adjusted and that helps.

[Dave Rochester:]

Okay, so on the commercial side, you maybe saw a little bit of a bump-up there, 25 BPs?

[James Herbert:]

A little bit, maybe not the whole 25, but a bit.

[Dave Rochester:]

Okay, great. All right, thanks guys.

[Operator:]

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

[Aaron Deer:]

Most of my questions have been asked and answered. I was hoping to get a little bit more color, though, on the deposit growth in the quarter. It sounds like it was fairly broad-based, but was there any outsized on either the consumer side or the commercial, or from private equity that helped drive that higher in the quarter?

[Gaye Erkan:]

Not necessarily. To summarize again, the sources of the deposit growth, most of 80% of the growth has been coming from checking accounts, and it’s a nice split between business and consumer checking. As Jim mentioned, we have also the benefit of the wealth management sweep deposits, which is nice and stable. At the same time, we have been cross-selling to a lot of the personal relationships within our business banking deposits. Other than that, we don’t see that as a surge necessarily. We see that as a continuation of the business.

[Aaron Deer:]

Okay, so typically, I guess, the early part of the year tends to be a little slower in terms of deposit growth. Are some of these trends likely to offset that, so that we continue to see a pretty high level of growth? And then, I guess correlated to that, Mike Roffler, when you’re thinking about the impact on the margin as some of that excess liquidity comes off, any sense of what the pacing is as you get closer to that $2 billion in cash that you’re kind of targeting longer term?

[James Herbert:]

The early part of the year is a little--always a little more challenging on deposits. It doesn’t necessarily turn into a negative, but it does turn into a slower growth rate. We run at a positive index, which we’ve run for many, many years, and it clearly shows that. It comes intuitively from two areas

[Aaron Deer:]

Okay. Mike, can I have you comment on the pace at which some of that excess liquidity might be put to work or flow elsewhere?

[Michael Roffler:]

Well, we always like to be opportunistic and also think of averaging over time, so I think--we talked about this last quarter, where if the deposits have outpaced our lending activity or our investing strategy, we’re happy to maintain it in cash, and you saw that with an average cash balance of just over $3 billion. It does impact the margin, but it does add to net interest income and will go at the pace that we feel appropriate to invest and lend out.

[James Herbert:]

That last point, I’d like to re-emphasize. Cash is not going to burn a hole in our pocket. We operate at the pace we operate at - that’s it.

[Aaron Deer:]

Sure. Okay, thank you very much.

[Operator:]

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

[John Pancari:]

Good morning. Wanted to see if I could get a little bit more granularity around the business, the commercial business loan growth, up solidly again obviously, up 7% linked quarter. Can you just give us a little bit more color on what industries are driving that and what type of business loan growth are you seeing the solid production?

[Michael Selfridge:]

I would say there’s nothing new. It was just general activity and a little bit of seasonality, but not much. It was across all geographies.

[John Pancari:]

Okay. The capital call portfolio, how much did that grow in the quarter? Do you have that?

[Michael Selfridge:]

I don’t have the numbers off the top of my head. I know of the 14% of total business loans, it’s about 27%. I think that’s up about 2%, as a percentage of the total loan portfolio from the third quarter.

[John Pancari:]

Okay, and the outlook for the business loan growth, is it likely to remain in this mid-20s annualized growth rate?

[Michael Selfridge:]

You know, that’s hard to project at this stage. Again, I said the pipeline overall looks good from where we sit today, and that’s about as far out as I can go. Business bankers are doing a great job building relationships and bringing in new business.

[John Pancari:]

Okay, and what is the yield that you’re putting on your business loan generation?

[Michael Selfridge:]

I’d call it in sort of the mid-3s in total.

[John Pancari:]

Okay, all right. On the credit front, I heard what you said around the increase in the non-accruals and everything. Is there any part of your portfolio that you’re increasingly worried? I mean, we’re seeing some non-energy cracks out there, and just wondering if there’s anything that you’re seeing that you’re worried about, or if you had to pick a portfolio that you’re keeping a closer eye on, what would that be?

[James Herbert:]

The answer is we’re not really at this point--well, we’re not worried, but we worry all the time because of our sort of intrinsic conservatism. We re-review two areas in particular, business banking generally, although our largest segment is non-profits - they tend to be quite stable, and then our next largest segment is the one Mike has been talking about in terms of credit to funds, very stable as well, actually. But commercial real estate, we’re paying particular attention to. We’re not immune to the concerns that everybody has about it. I think we have mitigated that quite dramatically by our very conservative loan to value ratios. On CRE, not multifamily but non-multifamily commercial real estate, we operate in the mid-50% LTV range roughly, and so we’re comfortable there, but that doesn’t mean we wouldn’t have a problem or two. We don’t see that yet. The demand for office space and the demand for commercial space actually remains strong in all of our markets.

[John Pancari:]

Okay, thank you. That’s helpful. Lastly, the efficiency ratio commentary you gave for the wealth management business, you indicated that it’s elevated right now around the 95% range, and you mentioned a core efficiency ratio of 85. Does it get back there in the first half, or do you think it’s still--even though it comes down, it remains above that 85 level?

[Michael Roffler:]

I think for the first half of 2016, it probably remains a little bit above. The assets that we hope to bring over still need to come over, so we’re going to be a little bit elevated for a period of time, but if you get to a point where you’re not adding as many at one time like we did, along with also the client service and the operational support, we should be able to trend back towards that 85% range.

[John Pancari:]

Okay, great. Thanks for taking my questions.

[Operator:]

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

[Paul Miller:]

Yes, thanks a lot for taking the question. You know, we’ve seen with TRIN that--we’ve heard that some of the disruption in the TRIN is the non-QM jumbo markets. Are you seeing better pricing opportunities out there, given that there are some correspondent lenders that are struggling in those products?

[James Herbert:]

No, I wouldn’t say we are. The quality of product that we do, being very high quality, is intensely competitive, and our primary competitors are the very large players - JP Morgan, Wells Fargo, et cetera.

[Paul Miller:]

So you’re not seeing any really market disruptions with other players in that market at this point?

[James Herbert:]

No, not really.

[Paul Miller:]

Then the other question is we’re starting to see--I don’t know, oil is at $30. We might never see another rate hike again, but with the current rate hike we got in December, has there been any thought about maybe keeping fixed rate loans in the portfolio, if they start to meet your IRR returns, or is it still too early to tell?

[James Herbert:]

It’s too early to tell. I mean, a quarter point wouldn’t move how we operate. There might be at some point, but generally speaking we’ve been very risk-averse on asset liability matching, and so I can’t remember a time we actually consciously kept 30 or 15-year fixed rate mortgages.

[Paul Miller:]

Okay. Thank you very much, guys.

[Operator:]

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

[Julianna Balicka:]

Good morning. I have a question, and I know it’s been asked a few times on the deposit growth, but of that roughly $3 billion of checking linked quarter growth that you’ve had, could you break that down a little bit more between business banking versus how much of that came from the wealth management assets from Constellation/Credit Suisse, and then what’s the implication for expected growth for the first half of the year in deposits from this new wealth management client base?

[James Herbert:]

We really don’t have the breakdown that way, and we haven’t given it out. We could get to it, but we don’t have it here, Julianna - I’m sorry. Both sides though, as Gaye has indicated, we really, if you think about it, have three legs of deposit growth. We have the office systems, we have our preferred banking which deals primarily with our private clients, and then we have the business banking. Then we have a fourth - we have the wealth-related. Fourth is wealth related. I’ll give you one number, for instance. Constellation, which we acquired, brought in approximately $400 million of wealth-related checking accounts, $300 million to $400 million range, to give you a sense of magnitude. The largest growing segment of checking, which I think was the focus of your question, is still business. Business deposits are now 53% roughly of the total deposits at the bank, and they are almost entirely checking. That’s growing very nicely, but the consumer checking is growing very nicely too, and our offices are doing very, very well. I mean, I have an office system where the average size of the office is $224 million. There’s a lot of checking in those offices as well, so it’s actually across the board, which we like very much.

[Julianna Balicka:]

Was there anything particularly strong in the business banking this quarter versus previous quarters, because $3 billion is a lot of growth linked quarter. It’s great, but is it that you won some big business client relationships, was there something unusual this quarter, or--?

[James Herbert:]

No, I would say no and then a very small yes. Generally, no. We did bring in a little more new fund deposits in the quarter than might be normal, but not very much. We actually--a lot of those funds moved into money market mutual funds - you know, treasury type funds and so on, so that was one of the main reasons for the growth of the brokerage business, which Mike Roffler alluded to earlier. We have had considerable success, as Mike Selfridge alluded to briefly, in the technology deposit area, and I emphasize deposits. We’re not lending to high tech companies - that’s Silicon Valley bank’s business. But we are becoming a depository for a lot of the venture capital-funded companies and the individuals behind those companies, and that’s actually a very--that’s an increasingly important and strong piece of our deposit growth.

[Julianna Balicka:]

So on that, and I’ll step back, it’s very interesting - on the growth from the technology piece, two questions. One, what are your thoughts as we look into 2016 on the pipeline for potential technology-driven deposit growth; and two, year-over-year, if you had as strong a year in dollars of deposits grown next year as this year, would that surprise you?

[James Herbert:]

Yes, it would. I wouldn’t expect 29% growth again, I just wouldn’t. I think we’re going to be quite strong, but I don’t think that’s going to happen again. The other thing is that it’s hard to predict, the growth in tech deposits as we think of them, because that business has some ebb and flow of activity level. It’s slowing down a little bit right now because of valuations and so on, but not much. And then we win--we have such a modest share of it, that it won’t really--we win from others, basically. It’s not that we’re a major of the activity level in that business, because we have a very small share.

[Michael Selfridge:]

And Julianna, there is no budget that we set for that, to your first question. We win clients one at a time and then word of mouth sets in, and that’s consistent with our strategy across the enterprise.

[Julianna Balicka:]

Got it, that makes sense. Final question and I’m stepping back - and thank you for letting me ask these questions. You’ve mentioned several times in your remarks about the success of cross-sell that you’ve had this quarter. In the past, you’ve mentioned how many thousands of households that you bank at the bank and how many of those are also your wealth management clients. Do you have any statistics you can provide to us, updated statistics on cross-sell success?

[James Herbert:]

We don’t at this time, Julianna. We’re working at that as the year end settles down.

[Julianna Balicka:]

Very good. Thank you.

[Operator:]

Your next question comes from the line of Geoffrey Elliott of Autonomous Research. Your line is open.

[Geoffrey Elliott:]

Hi, Geoff Elliott from Autonomous Research. Just one question. Where do you think we are in the cycle for the San Francisco real estate market, both on resi and on commercial? Are you starting to see signs of things calming down, or not really yet?

[James Herbert:]

It’s a very good question. We’re obviously intensely focused on it. I would say our best call would be that in the commercial area, it’s calming. The supply is beginning to meet the demand, possibly exceed it a little bit, but I wouldn’t be worried yet, although we are cautious. There is a lot of new space coming online in the next 24 months, commercial in San Francisco, much more than has historically been the case, so the rents appear to have topped a bit. Now, they’ve topped at a very nice level, I will say, historically. Some say it’s almost New York-like - that’s a little exaggerated, but not much. And then the housing, the number one characteristic of the housing market in the San Francisco Bay Area is short supply. That’s the thing that’s most overlooked. It is very, very difficult to build new housing in the Bay Area for environmental reasons, zoning reasons, land availability - it goes on. And it’s expensive, and so there is by historical standards a fair amount of new housing that’s come online, but by comparison to demand, it isn’t 50% of demand.

[Geoffrey Elliott:]

Thank you.

[Operator:]

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

[Matthew Clark:]

Good morning, guys. Just a couple left for me. First, in terms of the new hires coming over from Credit Suisse, can you give us a sense for what inning we’re in? Do you think that this is still very early, or do you think you’re pretty much done in picking off teams there?

[Katherine August-deWilde:]

We’re continuing to talk to teams both there and at other places, and we expect to hire several teams in the next several quarters. With Credit Suisse, after the next few weeks, we’d be close to done.

[Matthew Clark:]

Okay, great. Then if you could just clarify on the expense guidance, the $12 million to $13 million increase, was that just tied to the seasonal increase in comp, or is that the increase that you expect in the--is that all-in? Is that the all-in increase in expenses that you expect in 1Q?

[Michael Roffler:]

It’s the former, so it’s just related to the payroll taxes, so it’s not a total comp increase. It’s just the payroll tax portion of it.

[Matthew Clark:]

Okay, got it. Thank you.

[Operator:]

I will now turn the call back over to Jim Herbert for closing thoughts and comments.

[James Herbert:]

Great, well thank you very much everyone for your time and attention and thoughtful questions. Have a good day.

[Operator:]

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