First Republic Bank (FRC) 2003 Q2 法說會逐字稿

Good day, everyone, and welcome to the First Republic Bank second-quarter 2003 earning results conference call. As a reminder, today's call is being recorded. Now I'd like to turn the conference over to Ms. Diane Seniker (ph), Chief Marketing Officer. Please go ahead.

Thank you and welcome to the First Republic Bank's second-quarter earnings conference call. Speaking today will be President and CEO Jim Herbert, Chief Operating Officer Katherine August-de Wilde and Chief Financial Officer Willis Newton. A webcast replay of this call will be available at www.FirstRepublic.com for 30 days, an audio replay is available for two weeks. Domestic and international participants can dial 719-457-0820. The reservation number is 684548. Before we begin I'm required to inform you that some of the statements made on this call may be forward-looking which involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. You should rely only on our forms 10-Q, 10-K and other regulatory filings. Now I'd like to introduce Mr. Jim Herbert.

Thanks, Diane. I'll give a brief overview of the Bank's second-quarter results and then focus on our continued progress under our business plan. Earlier today First Republic announced that net income for the second quarter of 2003 was 10.8 million, a significant increase compared to 5.6 million in 2002. Fully diluted EPS was 71 cents for the quarter compared to 36 cents for the same quarter last year. Net income for the first six months was 22.5 million or $1.48 per share in '03, up from 13 million or 86 cents per share last year. As noted in our press release, our six month '03 net income includes larger than usual gains on the sale of loans in this quarter and a onetime branch sale deposit gain in the first quarter.

During the second quarter the bank continued to make very steady progress on its business plan. We were also opportunistic. Recognizing favorable market conditions and combining this with our high quality of highly liquid assets, we achieved a strong execution of a second quarter loan sale as well as the placement of a $60 million round of perpetual fixed-rate preferred capital. At the core of our strategy is the acquisition of new clients, and the cross sell of multiple products by our experienced service-oriented bankers. By opening up several new locations, hiring new personnel and delivering a full menu of banking, lending and investment wealth management products along with exceptional service, we've been able to take considerable advantage of the current refinance wave. Our loan volume hit a new record, our total deposits are growing ahead of plan, and our checking accounts have reached 24 percent of total deposits.

Importantly, our New York expansion is quite successful. Much of our branch development has now been completed. Our product development is substantially completed as well. We've been managing and growing the bank through a difficult economic and interest rate environment, and we are adhering closely to our high underwriting standards. We currently do not have any significant credit problems, Katherine will go into those in more detail in a moment the two non accruals that we do have. During the quarterly we completed the timely issuance of a $60 million noncumulative perpetual preferred stock which was underwritten by Morgan Stanley, and was placed at an attractive cost of capital to ourselves. While we do not need the capital right away, it does provide us with the flexibility to retire more expensive outstanding capital issues and to be prepared for future asset growth.

During the quarter we have obtained unusually good execution on one loan sale in particular, a $363 million package, which we sold as whole loans. Our reputation for originating loans of a very high-quality contributed considerably to this success as well as it has to other loan sale successes. We're currently preparing for a rise in interest rates which ultimately will reduce refinance volume, probably lower our loan sales and related gains, and place some pressure on margins as the rates increase a bit. However, an increase in rates should eventually lead to higher margins due to earnings on a low-cost of core deposits -- the cost of the low deposits in an improved economy which it should reflect. This in turn should lead to an increase in wealth management assets as well.

During the quarter we completed the opening of planned branches in the Embarcadale (ph) Center here in San Francisco and Santa Rosa north of San Francisco. We have one more branch scheduled to open shortly in La Jolla, California. Deposits increased $113 million for the quarter. At quarter end checking accounts were 905 million, or 56 percent higher than a year ago. On June 30, checking accounts were 24 percent of our total deposits while our CDs decreased to 23 percent of total deposits from 30 at year-end. Checking accounts now exceed CDs which represents quite a C change in the liability funding of the enterprise. Favorable trends in our deposit mix continue as a result of a focused cross sell effort and an increasing number of highly skilled relationship managers who are coming up to speed as they bring their clients over.

In the second-quarter Froley Revy expanded its relationship with Nuveen Investments, which selected Froley as the sub adviser for the convertible portion of yet a second new closed-end preferred and convertible mutual fund. This relationship has increased from 375 million of assets under management at March 31, to 946 million under management at June 30, 2003, a figure which will grow further in the third quarter as the proceeds from the second fund are fully received and invested. I'm also very pleased to report that the Board of Directors has elected two new outside directors, George Parker is a distinguished professor at Stanford Graduate School of Business and serves on the Board of several other public companies. Jody Lindell has worked for KPMG as a partner until three years ago. She has more than 25 years of corporate auditing and accounting experience. Both Mr. Parker and Ms. Lindell will further strengthen our corporate governance.

Finally, we were delighted that the Board of Directors has (indiscernible) an initial quarterly dividend. This dividend is 12.5 cents per outstanding share of common stock. The dividend program is a long-term commitment to shareholders and we hope to be able to increase the amount over time. This program reflects the underlying strength of our business while taking into account a continued level of investment, which we will continue to do in our franchise expansion. By the end of '03 we expect to establish a dividend reinvestment plan as well. In summary, we remain confident that our growth strategy and business model are correct, and we are very focused on growing our loan deposit and wealth management franchises. I'd like to now ask our Chief Operating Officer, Katherine August-de Wilde, to speak about specifics of our operations.

Thanks, Jim. Our continuing strategic objective is to be the premier private bank in our markets. This is a long-term commitment. The way we execute this objective is one client at a time, one branch, one relationship manager and one product at a time. We're making excellent progress towards that objective. As a result our assets, loan volume, deposits and fee income have increased. We've maintained our capital strength and the risk profile of our assets remain strong. We are very pleased with the increase in both business and personal checking accounts. We continue to emphasize growth in checking balances as we regard these as a key driver of future profitability and a very good measure of our relationship based deposit franchise.

As of the end of this quarter, checking balances were $906 million, 56 percent above the level a year ago and now representing 24 percent of total deposits. The bank's total deposits reached $3.8 billion at the end of June, a growth rate over the past year of 20 percent which excludes the deposits that we sold in January. Loan originations for the second-quarter were nearly $1.1 billion, a record for quarterly volume. A large part of this volume is related to historically low interest rates. During the quarter short-term rates dipped to a 45 year low. Recently, however, treasury rates have begun to increase and the curve has steepened. This is likely to slow weak finance volume. Home purchase activity in our markets continued to be driven by low interest rates. 26 percent of our originations were purchase transactions. On average loan to value on those home loans for purchases with 65 percent and on refinancings was less than 50 percent.

In our markets home inventory and sales time have lengthened at the very high end, however, up to approximately $1.5 or $2 million homes are moving quickly, many with multiple offers. Asset quality remains strong as it has throughout the downturn in the economy as a result of our underwriting discipline. Nonaccruing loans were .35 percent of total assets, and there are no REO properties. We have two nonaccruing loans, one is a construction loan with a book value of $117 million, and the other is a $7 million apartment loan which was placed on nonaccrual during the second-quarter. This latter loan is now in the process of being brought current including a reduction in principal balance. Through the continuous loan review process, there have been no adverse trends in the overall average risk grading of our loans over the past year.

During the second quarter we added $2 million to our allowance for loan losses in light of strong loan growth. Selling loans is part of our core business. During the second-quarter we sold $490 million of loans into the secondary market, including the one $363 million transaction Jim mentioned earlier. These sales represent 46 percent of the quarter's loan volume. This compares to sales equal to 50 percent of all the loan volume for 2002 and 41 percent for 2001. The level of gains are subject to market conditions. To put this in perspective, the pretax gain of $8.2 million on the $490 million of loans sold represents 1.67 percent of the principal of that balance. By comparison, this is higher than our most recent 10 quarter pretax average of .76 percent for the average for the calendar year 2000 which was .80 percent.

We continue to manage noncritical costs, we have begun to see the results of trim travel and entertainment as well as marketing and advertising. Occupancy costs are now stabilized as the company's expenses in both the first and second quarter include the ongoing cost of our expanded facility. We are continuing to hire highly skilled experienced relationship managers in all of our markets as part of achieving our long-term strategic objective. Our investment advisers are benefiting from the improvement in the equity market. Assets managed by our three investment advisers, our trust company and our investment division average $9.5 billion. That's up $1.6 billion in the past year and almost $1 billion since March of 2003. Fee income from wealth management assets was $7.5 million for the quarter and total fee income represented 29 percent of net revenue.

We are continuing to add clients now at an historically rapid rate. Our cross sell ratio for loan clients in this second-quarter was over 6.5 products and services to each client. We are pleased with the level of loan volume, new assets under management and deposit growth. Now I'd like to turn this call over to Willis Newton, our Chief Financial Officer.

Thank you, Katherine. I'll have a couple of comments on our margin and our costs. Compared to the first quarter of the year, our average interest-earning assets were up 7 percent. Our net interest income increased 3.7 million or 10 percent above the prior quarter. Our average loan yield declined 26 basis points with the low rates, but we also had an increase in low-cost checking balances and aggressive downward pricing in our deposit rates. We did this after the latest Fed cut and, as a result, we were able to have an increase in our margin of 7 basis points for the quarter. While our borrowing costs also declined, the bank has taken advantage of the relatively low rates to begin to lengthen our liabilities. Our efficiency ratio was comparable to last quarter as the increase in our net interest income offset our expense increases. Several of our expense categories have begun to level out or grow more slowly, particularly occupancy costs flatten when we compare the second quarter with the first quarter.

This trend reflects the build out of our planned expansions and the full cost of new facilities in New York, which were opened late last year. Compared to the prior quarter, advertising and technology costs showed only slight increases. We did have some compensation costs, which rose due to continuing hiring of people, the record loan volume, higher checking balances, and increased assets under management. Our RMs, loan origination personnel and preferred bankers are all doing exceptional jobs and we have accrued for their incentive compensation arrangements. As to mortgage loan repayments, they were slightly higher during the quarter and we wrote down our mortgage servicing rights by 1.15 million. Prepayment fees collected, however, were almost -- a little more than half of that at $744,000 for the quarter. For concluding comments I'll turn the call back over to Jim.

Thank you, Willis. Let me say in closing that we remain positive. Our business fundamentals are very sound. We are carefully underwriting lending in all of our markets. Our asset quality remains quite high with only two non accrual loans and no REO. In spite of prolonged economic weakness, the portfolios are holding up very well. We are continuing to gain customers and start new relationships every single day, as Katherine mentioned. Our deposit franchise is building very nicely. Our facilities are in place in our major markets, and we're adding extraordinarily talented people to the bank. We're encouraged by the positive developments in our wealth management entities as well. We'd now be happy to take questions on our business plan or the results.

(CALLER INSTRUCTIONS) Mike McMahon with Sandler O'Neill Partners.

Congratulations on a good quarter. I'm wondering -- what was the fundamental driver for the higher margin on the loan sales in the quarter, especially since it was a bulk sale and not a securitization? There must have been something inherent of -- that caused the increase in the value of the loans. And I ask this especially at a time when banks in general -- I don't know who you sold these to, but banks in general are beginning to -- or certain banks in general that are more commercial and industrial loan oriented are beginning to shrink their loan portfolios. That's my first question.

We were actually teaming up to do a REMIC sale and, as we always do, we check the REMIC pricing versus whole loan pricing, and we got into a competitive situation with a number of bidders and it was really supply/demand. They were very interested in buying the loans because of the quality and they obviously had a use for them, but we had three or four very attractive bidders in that sale.

Is it conceivable that there was a shortage of collateral and that might have contributed to the above trend pricing or bid that you received?

At that moment there wasn't. In fact, we learned that went into a very large REMIC, so perhaps that's why.

And then secondly, I was pleasantly surprised to see the sequential margin expansion, and I heard what you said, Willis. But when did you -- at what point during the quarter, the beginning or the end, did you reduce deposit prices?

I think we reduced deposit prices very rapidly in the first part of the quarter as we had a guarantee on one of our deposit products that ended in April, early April around tax time. We also did benefit from higher average balances with the loans that we built up and sold in early June, and those were positively funded with overnights which, borrowing from the San Francisco Federal Home Loan Bank which were very low after the Fed cut.

I think Jim mentioned it, but the trend in the margin on a sequential quarter basis is probably down a little bit. Did I hear that correctly?

Yes, you did.

Thank you very much.

(CALLER INSTRUCTIONS) Mike McMahon.

I saw the nice increase in assets under management at Froley Revy from the Nuveen relationship you're having. Are you seeing -- certainly not a similar magnitude -- but are you seeing increases in equity securities beginning to come through the pipeline at the asset management subsidiaries?

Yes, we are. Yes, we are in a modest way. There are two things happening. The quarter -- we had some losses of accounts during the quarter reflecting back to the prior quarter. We've overcome those net with new money, and we are having more discussions about new relationships now than we have had for quite a while. People that already have money with us are adding to their funds in some cases, and of course the market itself it up. So all three of those sort of forces are bearing in favorably right now.

Okay. I'll just ask the question. In terms of future loan sales, can you tell us anything about what might happen in the third and fourth quarters in terms of something more than your customary 150 million or so in flow sales? Are you anticipating a REMIC or a bulk sale in the third or fourth quarter?

It's very hard to say, as you know. Our velocity of origination is still holding up quite strongly, but prepayments are also still running strong. We'll have some kind of a loan sale -- we'll have some loan sales in the third quarter for sure. Whether we'll bulk up to a very large one or not right at this moment we don't have one in the pipeline.

Okay, thank you.

At this time there are no further questions in the queue. (CALLER INSTRUCTIONS)

If there are no more we'll think everyone for attending the call.

There are no further questions.

Okay, thank you all very much.

That will conclude today's program. Thank you again for your participation today.

(CONFERENCE CALL CONCLUDED)