First Republic Bank (FRC) 2004 Q3 法說會逐字稿

Good day and welcome to the First Republic Bank Third Quarter 2004 Earning Results Conference Call. As a reminder, today's call is being recorded.

At this time, I would like to turn the conference over to Ms. Diane Snedegar (ph), Chief Marketing Officer. Please go ahead, ma'am.

Thank you and welcome to First Republic Bank's Third Quarter Conference Call. Speaking today will be President and CEO, Jim Herbert; Chief Operating Officer, Katherine August-deWilde; and Chief Financial Officer, Willis Newton.

The 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 699177.

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 the 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.

And now, I'd like to introduce Mr. Jim Herbert.

Thank you, Diane.

Let me start by saying we're very pleased, both with our quarter and the year-to-date results. Net income for the third quarter of '04 was $11 million, compared with $7.9 million for the third quarter of '03. Diluted EPS for the third quarter was $0.65 per share, compared with $0.51 per share for the third quarter last year; up 27 percent. It's worth noting that our third quarter results were achieved without a major loan sale, reflecting solid fundamentals.

Net income for the 9 months was $30.4 million, or $1.85 per share this year, compared with the same amount last year of $30.4 million, or $1.99 per share. As noted in our press release, last year's 9 months included a $0.31 per share one-time gain on the sale of branches, as well as an increase in the number of diluted shares, which has occurred in the last 12 months, of about 8 percent.

We're very pleased, also, to announce a 20 percent increase in our quarterly cash dividend to $0.15 a share, up from $0.125 (per) quarter. This reflects our satisfaction with improving trends of the bank's underlying business.

Let me highlight briefly some of the overall results for the quarter. In the third quarter, net revenues rose nicely, reflecting stable net margins and a larger balance sheet while expenses remained in line.

The improvement in our efficiency ratio is a key factor in our recent strong results. Loan originations were lower, but acceptable, mostly due to higher interest rates, they went down a bit. Asset quality remains very strong.

Net income from our banking, servicing, brokerage, and trust activities was very solid. Overall, wealth fees are up about 24 percent year-over-year. Assets under management increased due to the previously announced acquisition of Bay Isle Private Client Asset Management, which is now part of Trainer Wortham.

We were also very pleased to raise $14 million in new tier one capital by issuing 344,000 shares of common stock in August.

I'd like to briefly expand on the points I just mentioned, then talk for a minute about our business model and strategy and it's evolution.

Net interest income grew to an all time high in the third quarter, primarily because of loan portfolio growth. We're pleased with the stability of our margins in the quarter. Third quarter loan volume was $890 million, down a bit from last quarter, as I previously indicated as a result primarily of the slow down in refinance activity.

Our costs are beginning to come more into line with our revenues, as seen from the efficiency ratio improvement which has occurred, declining to 65 percent from 72 percent last year.

While fee income in our three money manager groups was more or less flat for the quarter, although up a bit, we continue to be very encouraged by the growth in assets, as well as our brokerage and trust service growth.

Deposit growth was good, particularly in our private business banking group, which continues to build strongly as we continue to succeed in following our private banking clients to their businesses. This is a very important part of the bank, and a rapidly growing one.

Let me take a moment to talk about our business model and strategy.

We're making continued progress in developing our franchise and are at a very important point in time. As mentioned on past calls, we're coming to the end of a period of extraordinary investment spending aimed at transforming First Republic from a high service, jumbo mortgage specialty firm into a world class private bank and wealth management company.

Over the past six years, we've invested very heavily in new offices, new markets, importantly many new products and new personnel. As this transformation phase draws to a successful close, the bank is entering a very new and exciting phase that will be focused on primarily optimizing our superior service capabilities, continuing our successful acquisition of new clients, extending our very strong and successful cross-sell, and improving the delivery of our wealth advisory services.

The key to our future growth will be to continue delivering extraordinary service levels for our existing customers, while continuing to add new clients at the current, very strong run rate. Our ongoing challenge will be to optimize the bank's financial results without sacrificing the extraordinarily high level of client services, become the key to our success.

We also believe that a key objective is to further develop our client base in the markets that we already operate in, to deepen our position in those markets and to do more with those clients. In some instances, for instance New York, the community is just getting to know First Republic. There is significant more market share to be gained in all of our markets, each one of which has very strong and positive demographics.

With that, I'd like to turn it over to Katherine August-deWilde, our Chief Operating Officer.

Thank you. As Jim mentioned, the third quarter of 2004 was a good one. Deposits, loans, and assets were up, loan volume was down from last year's record quarter, income from loan servicing was strong, and fees from wealth management were up slightly.

Net interest income increased to $51.9 million for the third quarter, up 21 percent compared to a year ago, and up 6 percent compared to the prior quarter. This was due primarily to higher average assets and stable net interest margins.

Total deposits grew to $5.1 billion, up 23 percent compared to a year ago. New client acquisition and our continued cross-sell success accounted for the strong increase.

Checking account balances increased to $1.4 billion, up 41 percent from a year ago. Business checking balances grew 64 percent to $713 million, reflecting our continued success in providing exceptional private business banking services. Business banking checking balances are now about half of total checking balances.

Fee income come from our three investment advisors, our trust company, and our brokerage company activity rose 24 percent to $10.4 million compared to a year ago, and are up 4 percent from the prior quarter. Growth management assets also rose to $12.8 billion, up 24 percent compared to a year ago, and up 7 percent from the prior quarter.

Approximately $620 million of new assets in the third quarter were attributable to the acquisition of the Bay Isle Private Client Asset Management Group. These clients are a nice fit with our existing client base, and they will further strengthen Trainer Wortham in California.

Loan volume was $887 million, down 30 percent from the record set last quarter, as rising interest rates slowed mortgage refinancing. However, in our market, home purchase activity has been steady. For the third quarter, First Republic's home loan volume were 62 percent purchase loans compared to only 30 percent for most of last year. High levels of purchase activity play to our strong delivery strength.

Total assets grew to $7.1 billion, up from $5.7 billion a year ago. This growth includes the significant increase in loans held for sale. We currently have $654 million in loans held for sale, of which $600 million are monthly adjustable LIBOR loans. Loan quality remains very strong. Non-accruing loans consist primarily of one construction loan, representing only .2 percent of total assets. We had no foreclosed properties.

We're quite pleased with our cross-sell success. The average number of products sold to 2004 loan clients continues to be over 7.

Our costs have stayed in line. For the first 9 months, our efficiency ratio is 65 percent, down from 72 percent last year. While we are pleased with our progress in managing expenses, we have not yet absorbed the full impact of our Time Warner expansion in New York.

The ratio of new to seasoned officer -- offices and salespeople continues to improve. For example, the number of new offices open less than two years has declined from 31 percent a year ago to 16 percent today. In the third quarter of 2003, more than half of our salespeople had been with us less than two years. Today, that's 37 percent. These trends contribute directly to our improving efficiency ratio.

Overall, we're making strong progress in all aspects of our franchise. We continue to retain our existing clients and are adding new clients at a good rate. The result is that First Republic is achieving its strategy to provide private banking and wealth management, delivered with exceptional client service.

I'd like now to turn the call over to Willis Newton, our Chief Financial Officer.

Thank you, Katherine. I have just a couple of points this morning.

The bank's capital position is quite strong. Over the past year, we have completed three excellent transactions and raised $90 million of new tier one capital. This capital and our retained earnings have strengthened our ratios, and support our recent growth and provide room for future asset growth.

We are also well positioned for the cash dividend increase, which brings our payout ratio to about 25 percent -- sorry, about 23 percent of this quarter's earnings.

Higher average loan balances for the quarter led to an increase in net interest income. Our net interest income was $51.9 million for the third quarter, up $2.8 million, or 6 percent from the prior quarter, and up $9 million or 21 percent over the last year.

We are pleased with the stability of our net interest margin, along with our asset growth, which was 3.2 percent for the quarter, up 2 basis points from the prior quarter. However, we still expect our margin to remain under pressure as rates have begun their initial rise.

During the third quarter, our deposit re-pricings lagged the fed interest rate increases. We began to raise deposits rates in September, so we will see cost of deposit increases in October.

During the third quarter, we took advantage of the decline in intermediate interest rates to sell some lower yielding, fixed rate, investment positions and to redeploy those proceeds in their higher yielding loans and investments. A total of $100 million were sold, resulting in an aggregate net lost on sale of $646,000.

In summary, the core earnings of the bank are building nicely in 2004. I'll now turn it back to Jim.

Thank you, Willis. In closing, let me say that we're pleased with the great quarter -- with the quarter and our results for the first 9 months of the year. Business is doing well and we're pleased with the transformation of First Republic.

As we enter a new stage in the bank's development, we look forward to further leveraging the platform to retain, as well as add -- and retain current clients and add new clients, deepen our relationships, and further build the franchise.

We're happy to take questions.

Thank you. (OPERATOR INSTRUCTIONS)

Mike McMahon, Sandler O'Neill Partners.

Good morning and congratulations on a fine quarter. I'm sorry for the pause here. What is your position with regard to the securities portfolio? Are your replacing runoff? Are you going to let it run down and replace it with perhaps higher yielding loans or -- can you give us some direction in that -- in that regard, please?

You said the investment portfolio, right, Mike?

Yes.

We're -- it's grow -- we're keeping it in line, generally, with our overall asset size. We sort of like this sort of 9, 10, 11 percent of total position. So we are -- we are replacing runoff, but it is growing. But, in proportion to the balance sheet, it may grow a little bit, but not much. Will -- the shift that Willis referred to was we got out of some of the -- some of the fixed rate -- short to intermediate fixed took a bit of a hit on it, as others of course have and repositioned ourselves a little bit. But, we don't see it as a particularly active portfolio.

Okay. And then, are you largely done with your geographic expansion, or are there other markets that you might be eyeing at some point down the road?

Well, some point down the road is, you know, unfortunate -- truthfully, is just that. Currently, we're happy with where we are. We are -- we are going to be doing some more branches. We're not -- or offices. We're not done with that. We look all of the time, but we're currently looking at offices only in the market that we're in.

Don Worthington, Hoefer & Arnett.

Good morning. Just a couple of things. One, could you provide a little more color in terms of your outlook for originations, say, in the fourth quarter and on into next year? Are you looking for continued reduction in volumes?

The big reduction in volume between the third quarter and -- between the second quarter and the third quarter was as a result of an increase in rates and, quite frankly, many of the people who were going to refinance have done so because they've had so much opportunity. We're not expecting to go back to the levels of that second quarter, but we're not expecting to see significant decline either.

Okay. And then are you looking to continue to acquire wealth management assets going forward?

We don't have any plans to do so.

It appears there are no further questions at this time. Mr. Herbert, I'd like to turn the conference back over to you for any additional or closing remarks.

Fine. Thank you very much. Well, thanks to everyone for taking the time and we appreciate the questions. Bye--bye.

And that does conclude today's teleconference. We thank you for your participation and have a great day.