First Republic Bank (FRC) 2004 Q4 法說會逐字稿

Good day, and welcome to the First Republic Bank Fourth Quarter 2004 Earnings Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Dianne Snedaker, Chief Marketing Officer.

Thank you, and welcome to First Republic Bank's Fourth Quarter and Year-End 2004 Conference Call. Speaking today will be President and CEO Jim Herbert, COO Katherine August-deWilde, and CFO 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 9094097.

Before we begin, I am 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 10Q, 10K, and other regulatory filings. And now, I'd like to introduce Mr. Jim Herbert.

Thank you very much, Diane. Welcome to First Republic Bank's Fourth Quarter and Year-End Conference Call. We had a very good year, and I'd like to say that we're very pleased with the results of the quarter and the year. Net income for the year was $42.5m, or $2.58 per share, compared to $37m, or $2.41 per share last year. Without the 2003 gain on sale of deposits, which was $4.4m or 29 cents per share, our net income in '04 increased 30% over the prior year, and our earnings per share increased 22%.

Net income for the fourth quarter of 2004 was $12.1m, compared with $6.7m for the fourth quarter of '03. Diluted EPS for the fourth quarter of '04 was 71 cents a share. We're very pleased to announce also the payment of a quarterly cash dividend of 15 cents per share. This dividend rate, which we raised in mid '04, reflects our satisfaction with the bank's business.

Let me take a moment to highlight the results for the year, and then comment briefly on First Republic's direction. In 2004, we completed the shift to a full-fledged wealth management organization, with an array of products and services which now is as good as anyone's in the industry. We largely completed our product and geographic buildout and we continued to attract very high-quality new bankers and new clients.

Bank net revenue rose strongly, reflecting stable net margins and a larger balance sheet, while expenses remained in line, as they have for the past four or five quarters now. The improvement in our efficiency ratio was a key to our strong results in '04, and reflects the successful maturity of several of our initiatives. Loan originations were robust, interest rates rising did not dampen our overall loan demand. Importantly, our asset quality remains very strong. Assets under management grew in each of our wealth management entities, for a total of approximately 25%. Fee income from banking, loan servicing, and wealth management, was up 41% for the year. Importantly, our total regulatory capital increased a strong 22%, due to retained earnings, the issuance of common stock, and the sale of perpetual preferred stock. This higher level of capital well supported our balance sheet growth. In short, the year was a very strong one. By a number of measures, the bank continues to enjoy consistent and positive results.

Over the past 10 years, we've achieved a compound annual growth rate of 16% for bank assets and 19% for deposits. We note that this growth is without any bank acquisitions, and is, in fact, organic.

As we look ahead, we will grow by expanding all of the businesses we have built and in maintaining or improving our efficiency. We have an unwavering focus on attracting high-quality bankers and clients, deepening our client relationships, and increasing our fee-based businesses. Exceptional client service is and will continue to be the basis for our franchise.

We're very pleased with the efficiency gains and our ratio, which reflects it, which have brought us in line with the reported efficiency ratios of our peer group institutions, operating in the trust, custody, and wealth management sectors. We note, for instance, that our bank assets per full-time bank employee are climbing nicely again, and now equal almost $11m per person.

We'd like to thank those investors and others who supported us through this period of unusually extensive change. Our goal is to continue to build our foundation and to consistently deliver good results for clients and investors. Now let me turn it over to Katherine August-deWilde, our COO.

Thank you. As Jim mentioned, the fourth quarter and the year 2004 were strong. In fact, we can make the following statements for the fifth consecutive year. Loans, investments, deposits, and assets under management were up, as were loan originations. And for the fifth consecutive year, asset quality remained very high.

During 2004, deposits grew 22%, and importantly, almost half of that growth was in checking account balances. New client acquisition and our continued cross-sell success accounted for the strong increase. Checking account balances, which now represent 31% of total deposits, increased 41%. This reflects our continued success in providing exceptional private banking and private business banking services. Balances in business checking accounts are nearly half of total checking accounts. Wealth management assets rose $2.8b, to $13.8b, up 25% from a year ago. Of this growth, approximately 22%, or $620m, was attributable to the acquisition of Bay Isle Private Client Asset Management. Fee income from wealth management assets rose 33% from last year.

We're pleased that our loan originations were up over originations in 2003. The reasons appear to be the following -- first, a larger than average share of our mortgage lending is purchase finance, which is motivated by factors other than just interest rates. Purchase loans represented 58% of our home loan originations in 2004 versus 29% a year ago. Second, both our seasoned and newer private bankers did a good job of originating all categories of loans. And noteworthy is the level of economic activity and the prosperity of the clients in our selected markets, which has exceeded the national growth rate.

Turning to the bank's balance sheet, total assets in 2004 grew 24%, to $7.4b. These include a significant increase in one-month LIBOR loans, which are held for sale. We sold $100m of these loans in the fourth quarter of 2004, and currently expect to sell additional loans throughout 2005. We're also quite pleased with our cross-sell success. The average number of products to 2004 loan clients was 7.5. Once we've established a relationship with a client and have won their trust, clients tend to choose us for an increasingly wide array of products and services.

We're also pleased that our revenues have grown faster than our expenses, which stayed in line with expectations. As a result, our efficiency ratio declined to 65.8% from 70.5% a year ago. The ratio of new to seasoned banking offices and sales people also continues to improve. We track the percentage of offices and sales people who have been with us less than two years versus those who've been with us more than two years. The number of offices open less than two years has declined from 28% a year ago to 16% today. In the fourth quarter of 2003, more than half of our sales people had been with us less than two years, compared to 38% today. Those trends contribute directly to our improved efficiency ratio. As we proceed in executing our business plans, we remain focused on continuing to deliver exceptional client service, by focusing on training, communications, and process improvements. By continuing to focus on improving the organization and hiring excellent bankers, we fulfill our strategic business objectives while maintaining high levels of client service. I'd now like to turn the call over to Willis Newton, our CFO.

Thank you, Katherine. The bank's capital position is quite strong, with total regulatory capital exceeding $700m at year-end. New capital and retained earnings have strengthened our ratios, supporting our recent growth, and providing room for future asset growth. In 2004 we added $145m to our tier one capital. This allowed our tier one capital to grow 41%, while assets, excluding the growth in loans held for sale, grew 21%. Our leverage ratio increased to 6.9%, at December 31, 2004, from 6.1% a year ago. As noted in the release, we have experienced a decline in the pre-payment of loans in our loan portfolio as well as loans sold and serviced for investors. This is advantageous, because loans with a longer life are more profitable. At December 31, 2004, the book value of our mortgage servicing rights was $19.2m, or 55 basis points, of the total $3.5b of loans serviced. In 2004, our servicing was more profitable, as a result of slower repayments and a higher average balance of loans serviced.

We are pleased with the stability of our net interest margin, which was 3.23% for the quarter and 3.4% for the year. This was up three basis points compared to the prior quarter, and also up three basis points year over year. Our interest rate risk models indicate that we are prepared for a continued gradual rise in interest rates, which most expect. This is due primarily to the increase in our core checking account balances, which averaged $1.5b in the fourth quarter, up 44% over a year ago.

As with all public companies, our employees, our internal auditors, and our external auditors have devoted a tremendous amount of energy to meeting the new financial reporting and documentation standards of Sarbanes-Oxley. We believe we have successfully met this challenge, albeit not without significant cost. Our cost to comply with these regulations has been about four cents per share, and unfortunately, I do not foresee a decline in the annual level of these costs for at least a year.

Now I'll turn it back to Jim for closing remarks.

Thank you, Willis. In closing, let me say that we're very pleased with our results for the quarter and the year. We've built a solid foundation for future growth, based on our business plan, which is working well. Our goal in '05 is to continue to execute the plan. We will be adding high-quality clients, high-quality new bankers, and deepening our relationships with current clients. We continue to expect to offer an exceptional level of service. Now we'd be happy to take any questions.

[Operator Instructions] Mike McMahon, Sandler O'Neill.

You're spoken in the past about, as you complete the transformation of your franchise, that the growth of expenses would slow and market conditions accommodating, that you would expect, then, that the revenues would perhaps ramp up faster than the expenses and have the big payoff, which is my terminology, not yours. I assume that's still your-- I assume the buildout is largely complete now and you will not be adding any significant number of branches and that we could see that event unfold in 2005?

Well, you know, Mike, first of all, thanks for your comments. But without-- and I know it's a ``big payoff'' is your comment, but without reflecting specifically on 2005 in a projection we are, as Katherine carefully indicated, the percentage of new to old, which is, as you know, is how we think about this, is declining. It isn't declining because we have ceased entirely doing new things, it is declining for a little bit of that reason, of course. Trust company, broker-dealer, and so on are built out. But it's also declining because it's a numerator and a denominator issue. The base of established pieces of the business is growing rather nicely. And so the amount of new to old declines in that manner also. But what we'll probably- well, we're never going to cease improving products, obviously, but we are pretty much in the businesses we want to be in and we are in the geographic areas and markets we want to be in. We're not done branching, and I would expect that we probably never would be. We're not done hiring new bankers, and a couple of times a year, we add a new bell or whistle. But the percentage of total is diminishing considerably.

OK, and Willis, a couple of questions for you, if I may. Can you provide us either now or offline the total amount of our your non-taxable income, so that we can get back to- tie back into what I think is a fully taxable equivalent margin?

We have tax advantaged income in two sources. The first of that would be low-- interest income from bank-qualified munis. And the second would be income on the bank investments in life insurance. The income from investments in life insurance is set out clearly in the face of our income statement and for 2004, was about $3.9m.

The bank's muni portfolio was roughly $300m at the end of the year. That grew from, say, $100m at the end of last year, and it is earning about 4.8% to 5.0%, for the year, and that's-- so the run rate of that income, going forward, is about $15m.

OK. And I'm wondering if you can, as a final question, if you can provide us with some high-level comments, to the extent you can, on what you expect in terms of repricing of loans and funding in the first quarter or in the foreseeable future?

Well, we have about-- repricing of loans, we have 75% of our portfolio, which is one year or less, adjustable overall. And the funding costs, we have so far been able to lag our deposit funding cost behind the increase in market rates a bit, which, of course, is favorable, and part of that is because we have such a large volume of new clients coming into the bank, that allows you to do that, and of course the growth in checking is very helpful. And we note that the Fed have evidently gone up a quarter, here, and that continues to be a measured rise, and in that environment, we're in pretty good shape.

OK, thank you very much.

Thank you very much, Mike.

[Operator Instructions] James O'Brien, Standard & Poor's.

On the SOX legislation, and Willis touched on this, going through '05, probably, there's going to be more expenses. Is that a pretty good run rate, perhaps maybe a penny a quarter, or a little over $1m for '05?

I think that to believe that this is going to go down next year is wishful thinking. It was a little back-end loaded, as we didn't know ahead of time what was going to be answered, but that's a penny a quarter on a more consistent basis is probably- is a good estimate for next year.

OK, great. And as long as we're talking about expenses, the efficiency ratio finishing just a shade under 66, I think- is there like a target you're looking to manage to, in this year, or not really? I'm just trying to get a sense of maybe where you'd like to be with that number, by the end of, say, this year?

We're happy with the progress we've made. We're happy being in line with the peers that we're comparing ourselves to. It may improve over time, but we're happy with where we're sitting at this moment.

OK. And then just one final quick question -- I noticed FHLBB borrowings were up about 240-- or about $239m, year over year. This year, will we see more FHLBB borrowings, or will there be a, you know, a concentration to raise deposits in other ways? You mentioned checking has been very strong, and you have a torrent of a lot of new customers coming in. So I was wondering if maybe the concentration would be there, and can you speak to the pricing on deposits? I know it's always a competitive situation, but are you seeing any competitors, say, doing anything irrational or it was, like I said, just wondering, your overall thoughts on that side of the balance sheet, please?

I think, first of all, the FHLBB borrowings are up almost directly related to the increase in loans held for sale carried, so you know, you look at it that way. If you take out the increase in loans held for sale, that FHLBB borrowing is about flat on the year versus the growth in assets. So it's actually, as a percentage, probably down a bit.

The deposits are-- you know, they'll get a little more competitive. It'll depend on the loan demand from the competitors. As the market, as the home loan market, if it slows down, which it has, certainly, for others, a bit for ourselves, but seemingly more for others, why, their demand for funds goes down as well. But there's a catch-up going on in some cases, I think, because certain institutions -- World Savings, for instance, grew $30b, almost, last year, and they borrowed about $20b of that, so in due course, they'll try to replace it, presumably with deposits. So-- but we haven't see irrationality on the deposit side yet, not that we're anticipating it, necessarily, but when rates rise, sometimes you do see it.

OK, great. Thank you, and another good quarter.

Thank you.

[Operator Instructions] Mike McMahon, Sandler O'Neill.

Willis, can you comment on what you think the tax rate will be, going forward? I know it declined year over year, but the-- it came down substantially in the fourth quarter from the average. Is 32% a good run rate for the year?

It was about 36% this year, and you know, if we can continue to add to our munis, it might be a little bit lower than that next year.

OK, thank you.

Mr. Herbert, I'll hand the conference back to you.

Thank you very much. Thanks, everyone, for your time. We appreciate the support, and have a good day.

[Operator Instructions]