Operator: Welcome to the First Republic Bank's Second Quarter 2013 Earnings Conference Call. During today's presentation, the lines will be in a listen-only mode. Following the presentation, the conference will be opened for questions.
I would now like to turn the call over to Dianne Snedaker, Executive Vice President and Chief Marketing Officer. Please go ahead.
Dianne Snedaker - EVP and Chief Marketing Officer: Thank you, and welcome to First Republic Bank's second quarter 2013 conference call. Speaking today will be Jim Herbert, the Bank's Chairman and Chief Executive Officer; Katherine August-deWilde, President and Chief Operating Officer; Mike Selfridge, Deputy Chief Operating Officer; and Willis Newton, Chief Financial Officer.
Before I hand the call over to Jim, please note that any forward-looking statements made during this call are made as of today, are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that can cause the Bank's financial and business results to differ materially from these forward-looking statements are described in the Bank's periodic reports filed with the FDIC, including the Bank's current reports on Form 8-K filed today.
In addition, some of the financial information discussed on this call, includes non-GAAP financial measures. The Bank's earnings release, which was issued this morning and is available on the Bank's website, presents reconciliations to the appropriate GAAP measures and explains why the Bank believes such measures are useful to investors.
Now, I'd like to turn the call over to Jim Herbert.
James H. Herbert, II - Chairman and CEO: Thank you Dianne, and thanks to everyone for joining our call today. This was a very good quarter. Let me start with some highlights. First Republic reported strong earnings, which reflected continued excellent performance across our entire enterprise.
Core net income was up 37% compared to the same quarter last year, and core earnings per share rose 28%. Our loan volume, at $5.3 billion, was the best we've ever had. Deposit growth was quite good. We resumed our momentum in deposit gallery, increasing both liquid deposits and certificates. Wealth management had an outstanding quarter and business banking continued to perform quite well, achieving both strong deposit growth and new loan originations.
Most important of all, our asset quality remained strong as it has throughout the Bank's history. To sum up all this, book value per share has risen 13% year-over-year and is now $23.50.
Our loan portfolio grew by $2.1 billion in the quarter. This growth was funded by deposits of $1.4 billion plus some longer-term fixed-rate FHLB advances and the issuance of perpetual fixed-rate preferred stock. These longer term liabilities are an integral part of our asset liability matching strategy.
We view the recent rise to rates generally as a positive long-term. We will however continue to face some margin pressure in the upcoming quarters, as some of our higher rate loans continue refinance. We are offsetting this a bit and having some success in increasing the composite rate on our newer loans.
Let me briefly touch on the recently finalized Basel III capital rules. The results are generally favorable for First Republic. Specifically, and quite importantly, our single-family home loans, many of which have an interest-only period, will not incur an unfavorable capital risk-weighting after all. This benefits the home loans business. Our initial calculation indicates that our Tier 1 common equity ratio under these final rules would exceed 10.7%.
Let me also bring you up-to-date on our shareholder ownership position. At the end of the second quarter, ownership by the initial private equity investors represented only 4.8%. That's down from 73% at the time of the buyback three years ago. Also earlier this month, another initial investor, not private equity, sold about 5 million shares, approximately half of their holdings. Since the beginning of 2012 fully 62 million shares, almost 47% of our outstanding has been successfully absorbed into the market. During the same time our stock has appreciated more than 30%.
Overall it was a very good quarter and we are quite pleased.
Now let me turn the call over to Katherine.
Katherine August-deWilde - President and COO: Thank you, Jim. Year-over-year loans outstanding were up 20% and deposits were up 17%. We are pleased with this kind of annual growth rate. We are also particularly pleased that wealth management assets are up 61%. Compared to the first quarter the second quarter was very strong. We continue to execute very well and build momentum in all of our markets.
Loans outstanding grew 7%, deposits increased 5% and wealth management assets rose 6%. Loan originations grew 34% compared to the same quarter a year ago. This was our best quarter ever for loan originations. Of our home loan originations 44% were for purchases. Loan demand in our market continues to be good. Our loan pipeline remained strong, as clients anticipate further rising rates and lock-in loans today.
Over the last year many of our clients chose long term fixed rate loans. Now however, with rates rising, we are seeing increasing interest in hybrids or intermediate fixed rate loans. Early in the second quarter we committed to sell long term fixed rate loans. Loan sale volume in the quarter was $945 million. The gain on sale was $8.8 million or 93 basis points. Since the reemergence of the secondary market, our six quarter loan sale average has been approximately $750 million. Given the rise in long-term rates and volatility in the mortgage markets, we are likely to sell fewer loans this quarter.
We are very pleased with the performance of our wealth management business. Wealth management assets grew 6% or $2.1 billion during the quarter and have grown 18% so far this year. Wealth management revenues were up 69% from the second quarter a year-go.
Let me talk for a moment about the drivers of our wealth management business. In December 2013, we purchased Luminous, and that integration is going very well. Additionally, all of our wealth management professionals continue to bring new clients to First Republic. And our bankers are successfully cross-selling wealth management services to our banking clients. Our brand in wealth management model is resonating well with clients in all of our geographies.
Wealth management fees were 10% of second quarter core revenues, up from 7% a year ago. Total revenue including wealth management was 19% of core revenues, up from 13% a year ago. Overall, we're pleased with our performance and our position in the marketplace. And now I'd like to turn the call over to Mike.
Michael D. Selfridge - SEVP and Deputy COO: Thank you, Katherine. Let me comment about conditions in our markets, loan and deposit growth, as well as business banking. Our markets continue to outperform the broader U.S. economy. While the San Francisco Bay Area market is particularly strong, market conditions in Boston, New York, and Southern California are also very good.
Loan originations for the quarter were a record $5.3 billion. Our business banking and income property originations were strong, and these categories made up about half of all balance sheet loan growth. This reflects greater diversification in our originations.
Led by multifamily loans, our income property loans were up 8% for the quarter and 26% year-over-year. Our business loans outstanding grew 17% this quarter and were up 50% year-over-year. Our pipeline, in our income property and business banking categories remains strong.
Moving to deposits, our total deposits grew 5%. This is a nice turnaround after a slight decline last quarter. We've put a sharper emphasis on deposit growth through our four channels which include our preferred banking offices, business bankers, relationship managers and our wealth advisors. Of the channels, the vast majority of growth this quarter came from business banking.
At the same time, we increased rate slightly, and this also helped our growth. Our office system is working well in generating new deposit accounts, however, our higher net worth clients are continuing to invest in equities and real estate, which has reduced the average account balances. Offsetting this, we're having success attracting new deposit clients overall.
As noted, a substantial portion of deposit growth was in business banking. Business banking deposits increased $12.8 billion, and now account for 45% of total deposits. As we've said before, business banking lending generates just over $4 in deposits for every $1 of loan balances outstanding.
I'd now like to turn the call over to Willis Newton, our Chief Financial Officer.
Willis H. Newton, Jr. - EVP and CFO: Thank you, Mike, and good morning, everyone. Since this quarter marks the end of our first three years of independence, I would like to review the status of our purchase accounting adjustments which were made on July 1, 2010 when we were required to fair value our entire balance sheet. Generally this accounting is working out as expected. It has added to our earnings and to our capital and its impact is declining over time.
Let me talk about the major components. We started with $760 million of loan discounts and have accreted two-thirds of this amount into income. We had about $140 million of liability premiums and 90% of these have been added to income. As an offset we had $125 million of intangible assets to be amortized and we have expensed half of this amount. In three years, the after-tax effect of these items has been an addition of approximately $320 million to our net income and to our capital base. This is approximately $2.50 of book value per share and we have nearly $1 of book value per share to go.
As a management team we continue to focus on core EPS, core earnings, core efficiency ratio and our contractual loan yields. We expect the purchase accounting adjustments will continue to have a positive but reduced impact on future results.
For the second quarter, the dollar amount of core net interest income continued to increase and was 2% compared to the prior quarter and 13% year-over-year. Core net interest margin was 3.37%, down 5 basis points from the prior quarter. Our NIM will continue to be under pressure due to the repayment of higher yielding loans and deposit rates that were increased beginning in May.
Importantly, during the quarter, we added $900 million of fixed rate FHLB advances. These borrowings had an average term of four years and an average rate just under 1%. Our position of fixed rate borrowings at June 30 was $4.4 billion at an average rate of 1.58% at an average remaining term of 3.5 years.
We were very pleased to raise $190 million of perpetual preferred stock in April at a coupon of 5.5%. This is Tier 1 capital that helped increase our leverage ratio to a very strong 9.8%. Our run rate for total preferred stock dividends for future quarters will be $10.4 million.
Our core efficiency ratio was 58.9% compared to 57.3% for the prior quarter, and was within the previously disclosed range of 58% to 62%. Our projected tax rate for the full year of 2013 declined slightly during the quarter to 26.0%.
Now, I'll turn the call back over to Jim.
James H. Herbert, II - Chairman and CEO: Thank you. As Willis mentioned, it's been three years since we bought back the Bank. And I thought it might be interesting to highlight quickly our progress since then. Deposits have grown by 16% per annum, loans have grown by 19% per annum, equity has grown by 25% per annum, wealth management assets have grown by 37% per annum, and our core EPS has grown by 25% per annum. Book value per share has increased 16% per annum.
This momentum is the result of our core business model operating quite successfully. This model is built on extraordinary service delivery, the continuing strength of our coastal markets, and carefully targeted client segmentation and very clean credit.
Thank you for joining us. We'll be happy to take questions.
Operator: Ryan Nash, Goldman Sachs.
Ryan Nash - Goldman Sachs: As we think about the trajectory of growth from here, you are running at something like a 20% year-over-year clip. You talked about clients looking to redeploy capital back into equities and real estate. So, can you just help us understand what that means for both loan and deposit growth from here? Can we continue to see growth – continue at the current levels given the backup we've seen in rates of should we expect deceleration from here.
James H. Herbert, II - Chairman and CEO: Well Ryan, obviously, we don't actually project forward. And it is a harder moment as your question implies to be accurate on anticipating what's going to happen. There is kind of a conflicting thing that happens as rates begin to move up in the single-family business, a lot of people there have been thinking about doing something kind of jump out to do it. That's sort of occurred this last quarter and it probably will continue to occur a bit. We don’t think the moving rates thus far, is much of an inhibitor to activity on the purchase side, in fact it maybe none. On the refinance side it hasn't yet slowed down very much but it probably will. So let them – as Mike pointed out, a lot of our growth this last quarter in fact was not from single-family home lending but from business banking and from multifamily and commercial real estate income property lending and those markets continue to be quite strong. Business banking is harder to call because it's a little lumpier and comes a lot from new clients, which is an ongoing solicitation process. The deposit growth side is seemingly back on track rather well. A lot of it did come from business banking this past quarter and it’s a little harder to predict again. So I think that if you look at our long-term growth rate in sort of the mid to high teens that has been sustainable for a while and with a bend in the road here and there that seems to be what we are able to do.
Ryan Nash - Goldman Sachs: Just a follow-up on the capital, you said somewhere around 10.7. Given the higher capital that you will now have, does this at all change the way you think about capital allocation and do you think that the easing of the risk weightings could ease the competitive dynamic in your market?
Willis H. Newton, Jr. - EVP and CFO: Let me talk first about the capital calculation. That was a capital calculation as if it was fully phased in today with today's balance sheet, and while we believe we will be complying easily with the new rules as we understand them today, we will remind you that we have a Tier 1 leverage ratio requirement of 8% that would continue through the middle of 2017 or four more years.
Ryan Nash - Goldman Sachs: Then just one other question, given where we've seen margins move to on gain on sale, I think we are back down below 1%. How should we think about the sales from here? I know you mentioned they could be coming in – should we think about below that 750 average that you've had over the last six quarters?
Katherine August-deWilde - President and COO: This quarter could be a bit lower if the market continues to stay as it is. The move-up in rates and some volatility in the secondary market has made secondary market sales very quiet for now. As soon as that changes, we'll be back, but this quarter looks to be a bit more modest.
Operator: Erika Penala, Bank of America Merrill Lynch.
Erika Penala - Bank of America Merrill Lynch: My first question has to do with how to think about the core margin going forward. Your deposits as you mentioned during your prepared remarks, deposit costs did tick up and it seems like we should expect it to tick up again next quarter. Is there a loan to deposit ratio target that you are shooting for in terms of how we think about how much the deposit costs will go up going forward, and you are (107) this quarter, I am just wondering, what kind of uptick we should be modeling in and what should – our benchmark should be that we are looking to? If you are loan-to-deposit ratio for example is at 100%, does that mean that you can flat-line your deposit costs absent an increase in the short-end?
James H. Herbert, II - Chairman and CEO: Erika, it's mostly driven in fact by the need for deposit growth a little bit. It has an impact on it. Also the loan-to-deposit ratio, the gap remember on that is filled in our case primarily by fixed-rate term FHLB advances which we use as a core asset liability matching tool. And so, one of that's one of the reasons that Willis spelled out carefully the cost of such funds at this point for you. I think the move up in rates this last quarter, which probably reflected composite sort of 2 to 4 basis points on deposits as a composite is reflective of what we would have to do if the rates continue to move. We were pleased with the results. The results of our deposit growth though – what drove the deposit growth really was redirecting the organization and the efforts of everybody towards deposit growth which we had looked away from by mistake, quite frankly I the first quarter a little bit. It's a reminder for us at least favorably that we've got a pretty powerful machine when we get people focused.
Erika Penala - Bank of America Merrill Lynch: On the core loan yield side, we're getting a core loan yield for the quarter of about ($3.58). I guess I was wondering, if you could give us a little bit of color as you are looking at your pipeline of new originations that are coming on for the second half of the year? How much of a core decline in loan yield can we expect?
Willis H. Newton, Jr. - EVP and CFO: Erika let me first talk about the decline in the loan yield for the quarter versus the prior quarter, that was about 3 basis points. As you probably noticed, the core loan yield did benefit from slightly higher prepayment penalties which were collected during the quarter that added about 8 basis points to the core loan yield which is up a bit from the 5 basis points to 6 basis points range that we have been experiencing the last couple of quarters. The other half of the NIM pressure was primarily in the deposit. Let me turn it back to Katherine maybe to talk about what we are seeing as go forward.
Katherine August-deWilde - President and COO: Well new loan locks are coming in at a higher rate and although they are a small percentage of our total balance sheet over time that will cease the increase – the pressure on margin but it will take a while for that to fully come into play. So each new loan that we lock, we like the rate, each new loan that we lock has a bit higher rate than it had two or three months ago and that's good. When the loan rates of our current balance sheet are no longer refinanceable at such lower rates as they were before we will see refinancings slow and that will also be good for us.
Erika Penala - Bank of America Merrill Lynch: I just wanted to make sure, Katherine that I understood what you are communicating. In terms of the higher rate are you talking about your origination, your new loan locks, are higher than the loan locks last quarter or is it higher than the current yield of the book?
Katherine August-deWilde - President and COO: They are higher than the loan locks last quarter.
Erika Penala - Bank of America Merrill Lynch: I'll follow-up offline. Thank you.
James H. Herbert, II - Chairman and CEO: Erika, that point, though thank you for making and it is exactly the point. The current – the new loan locks although higher than last quarter are not yet above the total book.
Operator: Joe Morford, RBC Capital Markets.
Joe Morford - RBC Capital Markets: Just a follow-up, I guess, first on Erika's question. I mean, do you – on the deposit costs and all, do you plan to run other promotions this quarter and do you have other plans to secure additional longer term funding, additional advances things like that?
James H. Herbert, II - Chairman and CEO: Well, I wouldn't say that we ran the – I wouldn't call them promotions necessarily, Joe, we just adjust it. We got a little behind the curve. So the adjustments probably are in place for now and will stay there. The – we are – CD-wise, we are out advertising a little bit although we made pullback on that a little. But I think in terms of ongoing growth of the deposits, it feels pretty good right now.
Joe Morford - RBC Capital Markets: Then, also just a follow-up on the gain on sale margins. Can you just talk a bit more about the driver to the decline there? Relative to the first quarter, it just seems that the drop was much greater than we've seen at some of the other banks who have reported so far.
Katherine August-deWilde - President and COO: Well, the first quarter gain on sale margin was very, very high, unusually high, and considerably higher than our average over the many years we've been doing this. So we were not surprised to see the decline and it's a function of the demand and the price on the rate and the loans that we sold.
Operator: Steven Alexopoulos, JPMorgan.
Steven Alexopoulos - JPMorgan: I want to start, Jim, in the past you talked about an incremental NIM on new business at around 3%. With the curve steepening, what is this new level move to roughly?
James H. Herbert, II - Chairman and CEO: Well, it's a little higher than that Steve. How much of higher, I would be a little hesitant to say and one of the reasons is that the mix of multifamily commercial and business banking has kind of altered the way we think about that slightly. The percentage of those, the growth in those loan books to our total was higher this quarter as you notice than normal. At the single-family level, I would say that that incremental margin is probably up 10 basis points maybe, maybe 15 basis points, and that's a guess. I don't know the number actually, but that's the magnitude of direction.
Steven Alexopoulos - JPMorgan: Jim, if you look at the ARMs that were held in portfolio, roughly how much higher are they going into the portfolio today?
Katherine August-deWilde - President and COO: About 25% to 40 basis points.
James H. Herbert, II - Chairman and CEO: Now you said ARMs, we answered hybrid, I think.
Katherine August-deWilde - President and COO: We answered hybrid ARMs. That's correct, five and seven years.
Steven Alexopoulos - JPMorgan: Obviously a lot of focus on the deposits. Just two questions. So, this quarter you did make some adjustments to rate, told the buyer the costs were up 3 basis points. Is there a carry through into next quarter from that repricing and maybe could you help us think about how much and then looking forward, do you think you need to keep bumping up deposit rates to continue that growth coming in or are they now at a level where you could continue to drive the growth with the refocusing you've done?
James H. Herbert, II - Chairman and CEO: I think the answer to that is – the first – and the answer to the first part is, we've bumped the rates about mid quarter, so you ought to figure that and we had about a quarter of a quarter on the average, (worse) of the bump. Then number two, it looks like the rates right now are fine.
Steven Alexopoulos - JPMorgan: Just one final one. Just given the steepening of the curve we have seen, have you seen a shift towards more ARM and they are variable rate product (30) or fixed or in the (mid force)?
Katherine August-deWilde - President and COO: Absolutely Steve, we have seen that both in our single-family and our income property loans are coming in for five years versus seven year ARMs, because people are going for the lower rate.
Operator: Matthew Clark, Credit Suisse.
Matthew Clark - Credit Suisse: Maybe first on the production this quarter. I know if you are holding on just single-family resi any sense for maybe how much of that was attributed to kind of a rush to lock-in? I mean what might a more normal origination quarter – I mean do you – it sounds like there is still – that phenomenon is continuing here into the third quarter but any sense for your expectation on how long that might sustain itself?
Willis H. Newton, Jr. - EVP and CFO: Yes. Matthew, I first wanted to just take a note to say that we did put in a detailed table on Page 10 of the release describing the components of the total loan originations. Previously this had been in our 10-Q but we wanted to be able to provide this information more timely to you this quarter. So now I will turn it back over to Katherine.
Katherine August-deWilde - President and COO: Thank you, Willis. A part of it was not surprisingly a rush to lock-in and that happened in the second quarter significantly. We are – have always focused a lot on the purchase market and purchases don't have quite as much to do with rates as long as they are affordable, and at that these rates, we believe they still are.
Matthew Clark - Credit Suisse: Again on sale margins, I assume they'll continue to normalize but just a little bit lower here, any sense for where longer term those margins might settle out for you guys?
Katherine August-deWilde - President and COO: We would expect them to be more like our average which is a bit less than 93 basis points.
Matthew Clark - Credit Suisse: Then, any update on QM? I guess your – (indiscernible) I assume you'll – you obviously are going to remain committed to the product, there's no reason not to, but just curious on any thoughts there.
Katherine August-deWilde - President and COO: We don't have any plans to change, and in fact, in each of our loan packages that we've sold, we've sold interest-only loans as well.
Matthew Clark - Credit Suisse: Any sense – any change in pricing there or not really?
Katherine August-deWilde - President and COO: The pricing change with rates going up is throughout the loan products.
Operator: Casey Haire, Jefferies.
Casey Haire - Jefferies: I'd like to dig a little deeper on the deposit formation, if I could. One, through the quarter, is it something that got stronger with each month? And then two, was tax season – if you could quantify the drag that tax season was with your client base?
Willis H. Newton, Jr. - EVP and CFO: Well, clearly, our client base ended up paying more taxes particularly as given that were about 70% California. And so they had both federal and state hits. And that, we did not get the normal deposit bump in the tax season that we have historically. We got a bump, but it was lower than normal, and that was one of the things that sort of we misjudged going into, going into the spring, the first quarter of the year. And we may have kind of a new normal. We're not sure. The ongoing nature of the deposit growth seems to be pretty strong. This quarter was quite unusually almost all of the net growth came from business banking. The retail office growth is picking up steam very nicely, and we are booking a large number of private clients. At some point the number who private clients in their initial deposit with us will outrun the continuing decline of the average balance of our existing client base, and that – I don't know when, but those lines will cross and then we'll have a net growth in that category again. It really depends on how strong the economy comes, and how much drawdown our existing client base has for real estate and equity investing. Obviously, such activities on the other hand are very positive, so we don't see it as a problem. Well, it's just a bit of a challenge – (an interim) challenge.
Casey Haire - Jefferies: Then on the switching loans, could you provide a little more color on the commercial categories? CRE and C&I obviously had very strong bounce back quarter's loans growth-wise. Just a little color there would be helpful?
James H. Herbert, II - Chairman and CEO: Well, a couple of things first. Let me remind folks that if you look at our CRE and our multifamily, although we do some larger loans, the average CRE loan is probably about $3 million or less, and the average multifamily is below $3 million too, and the LTVs run in the sort of 60% range. So, these are generally quite conservative loans. They almost all are also loans to private banking clients of their related entities. It just picked up steam. There is a lot of activity and we're well known in this field as we've been doing it since the beginning of the Bank actually. We did hire couple of new loan relationship managers that have a particular focus on commercial real estate, and they are doing a lot of business.
Operator: Ken Zerbe, Morgan Stanley.
Ken Zerbe - Morgan Stanley: Question on deposit growth. Obviously, if you're having a more of a focus on deposit growth, increasing rates a little bit to sort of draw more business. My question is just on the different between commercial deposits versus retail deposits. It seems that retail might be a little more swayed by a couple of extra basis points or a phone call. But do you get the same benefit or can you drive a similar level of commercial deposit growth by changing rate or is that just have different dynamics in terms of what drives the commercial deposit inflows?
James H. Herbert, II - Chairman and CEO: Ken, it's interesting, it's a good question. Actually, the effectiveness of a proactive call program and a modestly competitive rate moves more commercial deposits than it does retail. And of course, they – if you stop and think about the obvious reason for that is that our commercial customers have a lot more deposits to move around. We stop – we didn't stop calling, but we let our guard down in the first quarter. When we asked everybody to help us basically and we set out some sort of group goals, it worked very, very well. So, it also is reflective of the fact that most of our clients, it goes back to the thing that I think Mike said. Overall, our business banking provides us $4 of deposits for every dollar of outstanding. The clients, our business clients to whom we lend money are in fact very cash-rich as a group. And so with a bit of emphasis and a little bit sort of reason to move called rate tweaking or opportunity, we have actually a pretty big pond in which we can fish.
Ken Zerbe - Morgan Stanley: I guess in terms of average balances, I don't know if that's the best way of looking at it, but if you think about average balances versus the number of customers that you have, are we at a sort of more of a stable position in terms of the existing customers with their given balances are likely to keep those balances with the bank or do you still expect to see some volatility in the amount of cash they have with you depending on how you change your pricing?
James H. Herbert, II - Chairman and CEO: The truth of matter is we don't know. We are not – pricing – modest pricing changes will not stop somebody from buying the extra piece of real estate or going into equity since that's where they want to move their cash. I wouldn't call the decline in average personal account balances in the category of lack of fear in the economy and then shifting over towards the green side. And that's just what happens. And there was an unusual blip-up over the last three years or so in average personal account balance size with us anyway, and that we're reverting back a bit more to a higher but norm number. That's still going on, so I wouldn't call it over yet.
Operator: Aaron Deer, Sandler O'Neill & Partners.
Aaron Deer - Sandler O'Neill & Partners: Just going back to the mortgage originations in the quarter. Katherine, you suggested that there was something of a rush to refi here as rates have come back up, but I also thought I heard you say that the purchase volumes accounted for about 44% of the total during the quarter. And if I'm not mistaken, I think that's up from where it's been running closer to 30%. So, I'm just trying to reconcile those two factors.
Katherine August-deWilde - President and COO: It is up from 30% in the last quarter. There is seasonality to purchases and the spring quarter tends to be relatively high. We have always built very strong relationship with realtors, ran our markets in the purchase market, and so we are the beneficiary of increasing purchases, and we're seeing in our markets.
Willis H. Newton, Jr. - EVP and CFO: Aaron the purchases were 42% in the second quarter of 2012 of single-family and the year prior 2011, they were 50% of single-family home loan volume. That is in fact the highest quarter for a percentage in each of those years.
Aaron Deer - Sandler O'Neill & Partners: Then Willis, also you had mentioned the duration on your terms, on your average terms on your borrowing. Can you provide those again, I missed those?
Willis H. Newton, Jr. - EVP and CFO: At the end of June, we had about 3.5 years remaining on average of our FHLB borrowings and the cost was about 1.58%. For the quarter, we added $900 million, at little less than 1% and that had a four year average term.
James H. Herbert, II - Chairman and CEO: Hey Aaron, it's Jim. Let me just go back for a moment to your mortgage question. Just on kind of a macro level, you hear a lot about mortgage volume slowing down on refinance and so on, which should probably – well sort is and it probably will continue as rates go up. The purchase market seems to us to be quite strong. But, when you think about those macro sort of events and you think about First Republic, it's probably worth remembering that the four largest banks in the country JPMorgan, Citi, Wells, BofA have about $7 trillion in assets and like that. I mean it’s a lot. If even only 10% of their asset base is a similar type and geography of our client base which I think is probably a conservative number that's $700 billion, we are trying to find $3 billion of that most roughly, clearly 0.5% of their business. I think our service model can probably do that.
Operator: Paul Miller, FBR Capital Markets.
Paul Miller, Jr. - FBR Capital Markets: Going back to the loan sales, I mean right now the securitization market is pretty much shut down and I think a lot of your loan sales went to those entities that were securitizing them. Do you sell to other entities that just portfolio them or is it just to those entities that securitizes them?
Katherine August-deWilde - President and COO: We sell to Fannie Mae. We sell to a couple of flow basis purchasers. In the last two quarters a lot of our loans have gone into securitization but historically that hasn't been true necessarily. So we have sold to whomever in the market wants to buy and whomever needs the balance sheet growth.
Paul Miller, Jr. - FBR Capital Markets: Then we also know that Wells and following in their footsteps JPMorgan and BAC are pricing some of their jumbos below their conforming product. Are you finding a lot of price competition out there or is it just your customer base is not their customer base?
Katherine August-deWilde - President and COO: There is considerable price competition as we have said over the last 12 months for sure. We are now finding the competition as easing just a little bit I think as peoples channels are getting perhaps filled up or some people may have underpriced if they wanted to sell. So price competition is easing just a tad, but it's a very competitive market.
Operator: Dave Rochester, Deutsche Bank.
Dave Rochester - Deutsche Bank: Katherine, on the loan side, you mentioned that pipeline remains strong this quarter. How does it compare to last quarter's pipeline and the year-ago pipeline?
Katherine August-deWilde - President and COO: Compared to last quarter, it's about the same. Compared to a year ago, it's higher.
Dave Rochester - Deutsche Bank: Switching to the margin, you guys talked about a number of items that will end up impacting that next quarter, and I'm just wondering when you combine all those from that reduced pressure on loan yields with the higher rate long-term borrowings you've added and then the carry forward from the deposit cost adjustment, are we looking at something of a similar progression in the margin for 3Q?
James H. Herbert, II - Chairman and CEO: I think we should anticipate that, yes. It's going to take a while to turn that directionality of the refinancing activities going on, and business lending, albeit very profitable, does not tend to raise that.
Dave Rochester - Deutsche Bank: Then one last one. I guess given your comment that you think your deposit rates are probably good here to maintain the deposit growth you are looking for. I would imagine you are looking a lot less pressure going forward beyond Q3?
James H. Herbert, II - Chairman and CEO: Well, it's hard to call because it will depend on market and Fed.
Dave Rochester - Deutsche Bank: But assuming the current industry environment persists?
James H. Herbert, II - Chairman and CEO: I think if exactly this situation persists, we probably – we appear to be landed okay.
Operator: John Pancari, Evercore Partners.
John Pancari - Evercore Partners: Back to the business loan side, can you talk a little more about the outlook there, what you are seeing in terms of the pipeline and could this pace of growth that you're seeing continue for a little while?
Katherine August-deWilde - President and COO: Our business banking pipeline for lending is quite strong. Some of it, our loans that come on the balance sheet and stay, for example, our non-profit loans. Some of the capital call lines are good at origination, but they have volatility in how much outstandings they have. But we have hired more business bankers and more relationship managers who bring us business loans. So, we have a good pipeline and we expect to see good volume into the next quarter for sure.
John Pancari - Evercore Partners: How much of the growth was to capital call lines?
Willis H. Newton, Jr. - EVP and CFO: The capital call lines probably added about $75 million out of the $345 million.
John Pancari - Evercore Partners: Then on the wealth side, the increase in the AUM on the wealth management assets, can you give us the split about how much of that was driven by the market versus our new assets?
Katherine August-deWilde - President and COO: Almost all of it was new assets. And the reason is, at the end of the quarter, they were marked on fixed income and the equity markets were a bit volatile towards at the end of the quarter.
John Pancari - Evercore Partners: Then lastly on the FX income, took a good jump this quarter, can you give us a little bit color on the drivers and then also how that should look in coming quarters?
Katherine August-deWilde - President and COO: Well, I think you should look at the average of the last four quarters as being representative from time-to-time, because we do a lot of private equity FX. We have some particularly high volumes that we can necessarily predict. We have hired several more FX professionals, and so we have more coverage. So overall, we would expect that to grow a bit, but this quarter was particularly strong and I'm not sure we can count on that every quarter except for the new people we have hired who will add to volume.
Operator: Lana Chan, BMO Capital Markets.
Lana Chan - BMO Capital Markets: Could you talk about expenses a little bit? I think that if we look at the year so far the operating leverage has been negative and the thoughts were with some of the investment spending slowing coming into this year, when do you think we will see more positive operating leverage?
Willis H. Newton, Jr. - EVP and CFO: Lana its Willis. We have continued to invest in our franchise and we will expect particularly that the investment systems – information systems spending, is kind of a higher run rate. We talked a little bit last quarter that the tax credit investments have grown as an expense line item. It's really unrelated to the efficiency ratio and that really is and we hope that the gap will come around and make that part of the net tax provision. So stripping that out we were really rather pleased with how our expense management has been going.
Lana Chan - BMO Capital Markets: On a related matter – I don’t know if it's actually related but it's my understanding for all the California some of the tax credits related to California Enterprise Zones are going to expire or go away at the beginning of next year. Does that impact you guys at all?
Willis H. Newton, Jr. - EVP and CFO: I believe you're correct on that, but we are not a participant in the Enterprise Zone tax credits in a major way. We have been purchasing low-income housing tax credits that are primarily a federal benefit and there has been no change that we are aware of in and the prospects for those.
Operator: Julianna Balicka, KBW.
Julianna Balicka - KBW: I have a couple of follow-up questions. One, on the investment property multifamily loan growth, you had said during your remarks that – or during one of the answers that most of those clients are coming from your existing private client base. So, what is the outlook for continuing origination growth in those business lines? Is your existing client base fairly tapped out on that or is this something that we can see several more quarters worth? And/or are you getting new clients in this particular business line of originations?
James H. Herbert, II - Chairman and CEO: Julianna, we are actually doing both. The majority is still from existing clients, but we are bringing a fair number of new clients in this area as a result of a couple of hires that we made. We are pretty comfortable with the demand. It's really – it's a competitive market as well particularly at the quality that we look at. We are looking for kind of 60% LTVs, maybe even lower. And so – but I think the demand is pretty strong and the way we win the business is by being very decisive and quick, closing carefully but giving a fairly direct quick straightforward yes or no at this level. And that usually brings first call, what do you think kind of enquires as opposed to grinding out a fourth month or four week rather process, and then coming back with a different deal than you thought, which is happening in the market in a lot of places.
Julianna Balicka - KBW: Then in terms of the loan origination growth in the commercial side, which includes, I guess the business banking as well to (the issuance of some) properties. Do you have a – can you give us more color on the geographic growth behind?
Katherine August-deWilde - President and COO: Yes. Business banking is doing well in all of our geographies, obviously in the bigger markets, San Francisco, New York, LA, is where the majority comes from. But we're seeing it across our geographies and across our different verticals.
Julianna Balicka - KBW: I guess what I was trying to understand is, if the strong growth were to continue, is there going to be a point where we shall see an incrementally stronger growth coming out of your East Coast franchises, that kind of ramps up against traction?
Katherine August-deWilde - President and COO: I think we'll see stronger growth, continue to see stronger growth coming out of our East Coast franchise, but there is also strong growth coming out of our West Coast franchise. So there both or all markets are growing very nicely.
Julianna Balicka - KBW: Then a quick follow-up on the tax rate, if I may, for the low income tax credits that you have coming online that will reducing your effective tax rate. What is the dollar amount of the tax credit that we should be thinking about in each quarter's tax expense or at least rate? I don't know which way is easier to present the information.
Willis H. Newton, Jr. - EVP and CFO: Well what we do is every year estimate what our effective tax rate will be for entire year, and our estimate in the first quarter was 26.5%. So, we've revised that down to 26.0%. So, that meant the provision for the second quarter had to be about 25.5%. So we are continuing to add to not only low income housing tax credits but also to our muni portfolio, our bank loan life insurance and loans to tax exempt organizations which are the four legs of creation of tax preference items. But we will take a fresh look at where those are for 2014 next year. But right now, our best estimate is an effective tax rate of 26% for the third and fourth quarters and 26% for the year as a whole.
Operator: Matthew Keating, Barclays.
Matthew Keating - Barclays: I had a question about your interest rate asset sensitivity. I appreciate the disclosure in your Qs and Ks for the kind of impact of a parallel shift in rates. I was hoping you could talk about what the benefit might be on a yield per (indiscernible) and like we have currently seen only the long rate increasing? So if you could talk to that it would be appreciated.
Michael D. Selfridge - SEVP and Deputy COO: Well the benefit is favorable and how long it is favorable depends on the length of the steep curve. Listening to Bernanke this morning, he emphasized rather strongly that they expect short rates to stay down for an extended period of time even if he decelerates his asset purchasing program. What we do when we extend out our liabilities via FHLB borrowing quite frankly is take some of that steep yield curve and spend it on insurance policy costs in order to stay matched. We've tried hard to stay carefully matched. The risk of mismatching right now is probably lower given the Fed's focus on keeping the short and low. But nonetheless, we're not prepared to bet the Bank on that.
Operator: Herman Chan, Wells Fargo Securities.
Herman Chan - Wells Fargo Securities: Just a quick question on credit. The Bank continues to build its reserve despite continued low charge-offs. Just wondering how you think the reserve coverage of loan shakes out over time considering the momentum the Bank has on the commercial real estate and business banking side?
Willis H. Newton, Jr. - EVP and CFO: Herman, it's Willis. We continue to be required under GAAP to provide an allowance against the loans that we've originated since our independence. And as you can see on a table that we have there in Page 10, that today about 75% of the loan portfolio has been originated over the last three years. The allowance relates to those loans at about 58 basis points, and that's probably there or a little lower depending upon the credit quality, and the mix of loans is probably where we will be as we go forward, provided that our charge-off rate continues to be as it is, very, very low, at 1 basis point for the first half of this year. We will continue to provide reserves as we build those loans. The left-hand column in that page has the $7.5 billion of loans and as those loans pay off, most of that net un-accreted discount of $270 million that we talked about on the call will come into income. That is more on a percentage basis than the allowance that we are providing through our income statement.
Operator: With now further questions, I will turn the call back over to Mr. Jim Herbert, CEO.
James H. Herbert, II - Chairman and CEO: Great. Thank you all very much for listening in today. We appreciate your questions and look forward to following up further. Thank you.
Operator: This concludes today's conference call. You may now disconnect.