First Republic Bank Earnings Call Nuggets: Efficiency Ratio, Expense Line

On Wednesday, First Republic Bank (San Francisco, CA) (NYSE:FRC) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Efficiency Ratio

Erika Penala – Bank of America Merrill Lynch: My first question is on the efficiency ratio. I appreciate the comments that Willis made, if you exclude the mortgage banking activity this quarter that the efficiency ratio will be closer to 60%, but you also mentioned that you are pausing your hiring. I guess, as we look at the efficiency ratio for 2013 and assuming – I mean it feels like this refi tailwind will continue at least through the first half of next year. Should we look for a 58% efficiency ratio or is 60% a better assumption on a go-forward basis?

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Willis H. Newton, Jr. – EVP and CFO: We are continuing to invest in our franchise in many areas. So, our expenses will continue to grow. The range for our efficiency ratio we think will still be in the 58% to 60% level on pretty much a normalized basis and we will expect to continue to sell loans and to have mortgage banking results.

Erika Penala – Bank of America Merrill Lynch: In terms of we’re thinking about the split between what you retain and what you end up selling, so if we’re making – let’s say we assume something like 20% to 25% loan growth next year, is there sort of a certain level of growth where you say we should originate some of our production because there is so much more demand for it or is it really fluctuate from quarter-to-quarter?

James H. Herbert, II – CEO: It’s Jim, Erika. It will fluctuate from quarter-to-quarter. As Katherine said in her comments, the mix of what we sell is driven to some extent by selling the longer term fixed. The market currently wants that obviously. So, we are generating quite a lot of that. But it’s a little bit reactionary to what the mix is and also to our balance sheet considerations in terms of growth.

Expense Line

Aaron Deer – Sandler O’Neill & Partners: If I may, just a follow-up on Erika’s question, trying to get at the expense line and how might be correlated with the gains in the quarter. Is the compensation of what we saw this quarter, is that something to build off of that or was there any sort of accelerated comp expense that would have been tied to the mortgage sales in the quarter.

Willis H. Newton, Jr. – EVP and CFO: Aaron, the compensation is driven from the mortgage origination side as well as the growth in deposits and assets under management. It does not relate to the sale of loans. You will see that solely in the gain on sale line.

James H. Herbert, II – CEO: This is Jim. We are, as Katherine said, slowing down the hiring of new relationship managers and integrating in those that we have hired. We have hired quite a number as you probably know and we want to take the time to integrate them in properly. They traditionally turned to profit between one and two years with us, and so we’re going through that process right now, and our focus is also on the support functions in the enterprise of back-office and making sure that they are in line with the volume and productivity of all the new hires on the on the relationship managers side.

Aaron Deer – Sandler O’Neill & Partners: Then Willis on the margin, obviously the core margin held up very well this quarter. I’m just wondering with declining level of excess liquidity that you put into the work and given the yield pressures, what kind of margin pressure might we’d be looking for in a core basis going forward?

Willis H. Newton, Jr. – EVP and CFO: Well, I think the trends with the announcement of an expectations that rates will stay low for quite a while, I think we will continue to see pressure on our loan yields and there is really a not a lot more we can do on the deposit side, we benefited from an improvement in the mix as well as some pretty tight pricing, but that’s almost all we can do on that side. The deposit growth continues to be good, so putting our liquidity to work when we sell loans is still a challenge. Our focus is to continue to grow our net interest income line through the increase in the average balance of interest earnings assets earning a strong – perhaps slightly lower margin.