First Republic Bank (FRC) 2006 Q4 法說會逐字稿

Welcome to the First Republic Bank results conference call. A reminder that today's call is being recorded.

At this time, I'll turn things over to Dianne Snedaker.

Thank you, and welcome. Yesterday we announced that we entered into a definitive agreement with Merrill Lynch. In connection with the proposed transaction Merrill Lynch intends to file a registration statement and other materials with the SEC and First Republic Bank intends to file a proxy statement and other materials with the FDIC. You are urged to read the registration statement, the definitive proxy statement, and other materials when they become available, which they will contain important information. You can obtain copies of all relevant documents filed by Merrill Lynch at the SECs Internet site www.sec.gov and documents filed by First Republic Bank www.firstrepublic.com. Merrill Lynch and First Republic and their respective directors and Executive Officers and other employees may be deemed to be participants in the solicitation of proxies from First Republic's stockholders with respect to the proposed transaction. Information about these individuals is available in the annual proxy statement filed by each of Merrill Lynch and First Republic. Additional information regarding the interests of such potential participants will be included in the definitive proxy statement and the other relevant documents filed with the SEC or the FDIC. Information contained in this presentation may contain forward-looking statements including, for example, statements about management expectations, growth opportunities, business prospects, regulatory proceedings, benefits of the merger, and other similar matters.

These forward-looking statements are not statements of historical fact and represent only management's beliefs regarding future performance which is inherently uncertain. There are variety of factors that could cause actual results and experience to differ materially from the expectations expressed in any forward-looking statements. These factors include, but are not limited to, those factors set forth in Merrill Lynch's filings with the SEC, those factors set forth in First Republic's filings with the FDIC, and certain factors specific to the proposed merger that are contained in First Republic's Form 8-K filed with the FDIC on January 29. We refer you to the information about forward-looking statements in our earnings release which is available on our website and which will be filed on Form 8-K with the FDIC today. Speaking today will be First Republic's President and CEO Jim Herbert; and Chief Operating Officer, Katherine August-deWilde; also speaking will be Bob McCann, Executive Vice President, Vice Chairman, and President of Merrill Lynch's global private client group. A webcast replay of this call will be available at www.firstrepublic.com for 30 days. An audio replay is also available for 30 days. Domestic callers can dial in at 888-203-1112 and international callers can dial in at 719-457-0820. The passcode number is 4187508. And now I'd like to introduce Mr. Jim Herbert.

Thank you, Dianne. I'm going to take a moment to reflect on the very good and eventful year that First Republic had in 2006. We'll then briefly discuss the announcement we made yesterday involving Merrill Lynch and I'd like to invite Bob McCann of Merrill Lynch to say a few words about our pending partnership. Also let me apologize for not taking questions today because of where we are in the process, it's simply not possible to do so.

I'd like to begin by saying that 2006 was a good year for First Republic. Net income was $62 million, a 14% increase over '05, diluted earnings per share were $2.21, a 6% increase over -- year-over-year, we issued a number of new shares as everyone knows for the Bank of Walnut Creek acquisition in the third quarter -- in the fourth quarter, I'm sorry. For the quarter, net income was $15.4 million, a 7% increase over the fourth quarter last year. Diluted earnings per share were $0.51 a 6% decrease compared to a year ago. I'd like to highlight two unusual items in the fourth quarter.

A one-time expense charge of $4.2 million, approximately $0.10 a share, related to the acquisition of the Bank of Walnut Creek, and an unusual gain of 2 million, approximately $0.04 a share from the sale of FDIC assessment credits. We're also very pleased to declare a cash dividend of $0.15 a share. During the year First Republic significantly expanded our franchise. We completed the purchase of Bank of Walnut Creek, opened banking offices in Boston, Greenwich, Palm Desert, and Los Altos. We opened trust offices in Portland, and Seattle. We significantly expanded our wealth management capabilities, we opportunistically hired a number of first rate bankers and wealth advisors, subsequent to year-end we initiated foreign exchange capabilities.

Once again, the bank had very good growth -- organic growth in 2006. Even excluding the positive impact of the Bank of Walnut Creek, our loan portfolio grew 17%, our total assets grew 19%, our deposits increased by 21%, and our wealth management assets increased by 26%. Also, despite a rising rate environment and an inverted yield curve a difficult environment at best for us, we added 330 million or 19% to our average checking balances in 2006.

In spite of mortgage market conditions, loan volume exceeded our record level loan volume of '05 by 4%. Fee revenue was up across the board. It was also a good year for loan sales. And, as always, we're delighted to report that our asset quality remains very strong, nonaccrual loans at the end of the year were just 10 basis points of total assets.

Let me take a moment to offer some perspective on our pending partnership with Merrill Lynch. This agreement creates an absolutely unique opportunity for First Republic to achieve its objective of being the best nationwide private bank. Equally important, this partnership also provides Merrill Lynch with the unique opportunity to expand as private client business by leveraging First Republic's proven client acquisition model and our high penetration among high network clients, and the tremendous sales culture of the organization.

The key details of the agreements are as follow--First Republic will remain as a stand-alone brand within Merrill Lynch. First Republic will retain its name, its San Francisco headquarters, and its same focus on exceptional client service. As we always have, we will remain very active in our communities. Katherine and I, along with the rest of our management team will continue to lead the bank. The First Republic Board of Directors will continue to seven as an advisory Board and will be Chaired by Roger Walther, our founding Chairman. Importantly, this is not a bank merger based on cost-cutting and consolidation. There will be no system conversions and there should be virtually no job losses.

This is a strategic partnership that enables Merrill Lynch to expand its private client business. It will also mean greater opportunities for financial reward and advancement for our employees. Very importantly, for clients, this partnership will enable First Republic to provide access to world class investment products and a greater ability for expanding our lending and our resources overall. For our shareholders, the transaction price of $55 per common share represents a significant payment for First Republic shares.

Before I turnpike the call over to Katherine, I want to reiterate that nothing in this partnership will jeopardize the quality of our client service or our reputation for excellence. For these reasons, joining Merrill Lynch will create a better bank both for clients and employees. We're very much looking forward to this new chapter in our history. I'd like to turn it over to our Chief Operating Officer, Katherine August-deWilde.

Thank you, Jim. Before I comment on fourth quarter results, let me echo what Jim has just said. Joining forces with Merrill Lynch is simply a wonderful opportunity to become even a better institution. With Merrill's broader set of products, financial strength, and ratings we can offer some of our clients many more choices and increased convenience. For our dedicated employees who have built First Republic with us, this partnership offers them greater opportunity to grow personally and to serve clients even better.

Let me go now to fourth quarter results with which we are very pleased. Growth in assets, deposits, and loan originations were all strong. Wealth management assets and fees both grew nicely. And asset quality remains excellent. Our deposit focus strategy for more than a decade continues to pay off very well. Total deposits grew by over $1 billion during the fourth quarter, including $414 million in the Bank of Walnut Creek. Growth in average checking account balances year-over-year not including the Bank of Walnut Creek was 19%, growth in average total deposits year-over-year, again, not including the Bank of Walnut Creek, was 23%. The fourth quarter is typically a very strong quarter for growth in checking balances, and this year was no exception.

Loan originations continued to be very strong. Total loan volume increased at about 4% year-over-year, despite a modest softening in prices and rising inventory, our housing markets are active. Unemployment is low, and economic conditions remain relatively strong in our markets. As always we continue to apply our rigorous underwriting standards to all of our originations. Wealth management fees were up 8% in the fourth quarter and 9% year-over-year, due to client acquisition, a rising market, and better coordination among our wealth advisors and bankers. Assets referred to wealth management during 2006 totaled $1.2 billion, this is an increase from $783 million of referrals in 2005, a 48% increase.

As you may recall, First Republic wealth advisors accident investment consulting capacity with our clients, our wealth advisors identify client needs and develop solutions. Client solutions include our open architecture platform, our portfolio managers, brokerage, and trust. The process is working very well. Asset quality continues to be excellent, there was one foreclosed loan at the end of the fourth quarter, nonaccruing assets consisted primarily of two real estate loans totaling $11 million or just 10 basis points of total assets.

In the fourth quarter we closed the acquisition of the Bank of Walnut Creek and have successfully completed the systems conversion. We have retained all bankers and other key personnel who support client acquisition and client service. We remain thoroughly pleased with this partnership and look forward to further expanding our presence in the San Francisco Bay area. Business loans were up 26% in the fourth quarter and commercial real estate loans increased 18%. Overall, our private business banking franchise continues to grow strongly and we continue to invest to meet the evolving needs of our business clients.

We're very pleased with our cross sell success. In the fourth quarter our loan clients were using on average over nine products or services, an all-time high. 25% of our loan clients were also wealth management clients, this is up from 22% a year ago. In 2006, our preferred banking offices were also very strong. Offices open more than two years grew deposit balances 19%.

In short, our business plan is on track, new client acquisition remains strong, and the high level of client services leading to many new referrals with our pending partnership with Merrill Lynch, all of the things that clients employ and employees like about First Republic will remain the same, and we will have greater resources to succeed and offer our clients even more. At this time, I'd like to introduce Bob McCann, Executive Vice President, Vice Chairman, and President of the private client -- of the global private group for Merrill Lynch.

Thank you, Katherine, I appreciate the opportunity to be able to say a few words about our proposed partnership with First Republic Bank. We have watched and admired this bank for some time now. Merrill Lynch very much wants First Republic to continue operating as it has. We have no intention of changing this successful formula, rather only expanding it. To that end, First Republic will operate as a distinct and stand-alone brand within Merrill Lynch, and continue focusing on delivering exceptional client service. The bank will retain its name, its San Francisco headquarters, and most importantly, its management team. The Bank's Board of Directors will become the Bank's advisory Board and will be Chaired by Roger Walther.

For our part, we believe First Republic clients will benefit from Merrill's global reach and resources. We have a whole universe of investment products and our AA credit rating will make First Republic even more attractive to depositors. Because of Merrill Lynch's financial strength, First Republic can offer a wider selection of loan products and size, and the bank will have greater opportunity for expansion.

For First Republic employees, I'd like to welcome them, Merrill Lynch is an institution that while global has always put its employees, and is quite active in its communities as well. The partnership will mean new opportunities, financial reward, and the potential of career growth. We are interested in First Republic specifically because of the team that is in place. As Jim mentioned, this is not a bank merger based on cost-cuts and consolidation, this is a growth store. We are delighted that First Republic will join us. This is a unique opportunity to bring together two complementary businesses and client bases that will greatly benefit clients, employees, communities, and shareholders. Jim, thank you very much.

Fine, thank you, Bob, very much. We appreciate everyone joining us today and that's the end of our year-end report. Thank you very much.

Once again, everyone, this will conclude this conference call. We thank you all for joining us, have a great day.