First Republic Bank (FRC) 2010 Q4 法說會逐字稿

Ladies and Gentlemen, thank you for standing by and welcome to the First Republic Bank fourth quarter 2010 earnings conference call.

During today's presentation all parties will be in a listen only mode.

Following the presentation the conference will be open for questions.

(Operator Instructions)I would now like to turn the conference over to Dianne Snedaker, Chief Marketing Officer.

Please go ahead.

Thank you and welcome to First Republic Bank fourth quarter 2010 conference call.

Speaking today will be the Bank's Chairman and Chief Executive Officer, Jim Herbert; President and Chief Operating Officer, Katherine August-deWilde; and Chief Financial Officer, Willis Newton.

Before I hand the call over to Jim, please note that on this call, certain information presented contains forward-looking statements.

These statements are based on management's current expectations, and are subject to risk, uncertainties, and assumptions.

Potential risks and uncertainties that can cause the Bank's business and financial results to differ materially from these forward-looking statements are described in the Bank's periodic reports filed with the FDIC from time to time.

All information discussed on this call is as of today, January 27, 2011.

And First Republic Bank undertakes no duty to update future events or circumstances.

In addition, certain of these financial information presented in this call represent non-GAAP financial measures.

The Bank's earning release, which was released this morning, and is available on the Bank's website, presents reconciliations to the appropriate GAAP measures, and an explanation of why the Bank believes such non-GAAP financial measures are useful to investors.

And now, I'd like to turn the call over to Jim Herbert, Chairman and Chief Executive Officer.

Thank you, Dianne.

And welcome to our first conference call as a public Company since our successful IPO on December 9th.

The transition to being an independent public Company has gone very well.

For those of you who are new to First Republic, we've operated a Bank with the same management team for 25 years.

We've had steady growth and have been consistently profitable for the entire time.

Our strategy of high-touch, client focused service has not varied.

We also focus constantly on credit quality, and have had consistently very clean balance sheets over these years.

Our current geographic footprint, which covers California, New York, Boston, and the Northwest, continues to work quite well for us.

These markets account for a disproportionately high share of the Company's high net worth households, our primary targets.

In particular, we're growing quite nicely in New York and Boston, where we already have approximately $5 billion in deposits.

During today's call we'll be discussing primarily the results for the fourth quarter, as well as the results since we've re-established our independence on July 1st, 2010.

We're quite pleased with our fourth quarter results.

They are, in fact, a bit ahead of our expectations and reflect continued and consistent growth of our franchise at all levels.

We have expanded loans, deposits, and assets under management.

Additionally, we're well capitalized and net interest margin actually improved in fourth quarter.

Net income for the fourth quarter was $76 million, up from $66 million in the third quarter.

Diluted earnings per share were $0.60 compared to $0.53 in the prior quarter.

We would note that the fourth quarter earnings were reduced by $0.04 per share by a one time expense related to stock options that vested in connection with the IPO.

The accretion of share value adjustments required by purchase accounting will be a significant part of the earnings of First Republic Bank and a viable source of capital for several years to come.

Excluding the impacts of such purchase accounting adjustments and one time costs, our core earnings were approximately $45 million for the fourth quarter.

And our diluted earnings per share were $0.35.

To summarize, total assets increased 12% year-over-year, deposits were up 12% year-over-year, wealth management assets increased 21% year-over-year, and our total originations of loans were up 22% year-over-year.

Credit quality remains extremely strong.

In fact, total non-performing assets were only 8 basis points of total assets.

We're very well positioned for continued growth.

Our tier one leverage capital was 9.24% at year-end, and we continue to exceed all regulatory guidelines to be considered well capitalized.

Deposit growth remains very strong throughout the Bank.

And we have plans to expand our deposit offices within our existing footprint.

We expect to open between four and six new offices during 2011.

The overall economy for one second.

Overall, guided by the experience we have in our bi-coastal urban markets, the economic activity level is steadily improving.

We currently foresee a good 2011 overall environment; possibly a very good one.

Now, I'd like to turn the call over to our President and Chief Operating Officer, Katherine August-deWilde to discuss the business in more detail.

Thank you Jim.

We are very pleased with our operating results since our divestiture.

We are seeing strong momentum in all areas of our business.

Total deposits increased $1.3 billion since July 1st, to $19.2 billion at the end of the year.

Growth in personal and business checking accounts represented almost all of this growth.

Our checking accounts were $5.8 billion at December 31st, and now comprise 30% of our deposits.

Total liquid deposits also increased during this period and they now represent 70% of total deposits.

With the growth in checking and other liquid accounts, as well as the maturation of the existing CDs, our deposit mix has further improved during this six-month period.

As a result, the average contractual rate paid on deposits has decreased by approximately 21 basis points, over the last six months.

We are enjoying strong growth in our three primary deposit gathering channels.

These channels are -- One, preferred banking, which includes deposits gathered primarily by relationship managers; two, preferred banking offices; and three, deposits gathered by wealth management professionals, which include brokers fees accounts.

Those increases were for the year -- from preferred banking, $900 million; from our banking offices, $420 million; and from wealth management professionals, $430 million.

Total Bank assets at December 31st, 2010, were $22.4 billion, a 12% increase year-over-year.

The increase was primarily due to deposit growth and capital raised.

At first glance, loans outstanding would appear to be flat year-over-year, however, excluding loans retained by the Bank of America from our balances a year ago, our loans outstanding actually increased $2 billion, or 12% in 2010.

Loan origination volume was up 22% year-over-year.

Total loan volume was $6.5 billion for 2010.

For the fourth quarter, loan originations were $2.3 billion, up from $1.8 billion in the third quarter.

Housing activity in our key urban coastal markets is improving and prices appear to be stable.

Low mortgage rates are continuing to stimulate home lending, including purchases.

Of our home lending, in the second half of 2010, 32% were for home purchases.

We continue to be pleased with our loan demand for real estate loans, and we are also seeing good growth in business lending.

Assets managed or administered by First Republic private wealth management totaled $17.8 billion at year-end.

These assets grew at an annualized rate at 15% during the fourth quarter.

In addition to new business generated by our existing wealth management advisors and our bankers, this increase resulted from improved market conditions, and from the assets brought to the Bank from our new wealth management hiring.

Total fees from our private wealth management activities increased 19% in the fourth quarter.

We have worked consistently over the past two years to strengthen wealth management.

This includes investments in people, products, and processes.

We offer an objective platform of options, which combines portfolio management with outside managers, along with trust and brokerage services.

We are encouraged by recent progress and expect revenues to continue to increase this year.

Non-interest income for the fourth quarter was $27.4 million, up $8.4 million from the prior quarter.

In addition to the increases in wealth management fees, our income from bank owned life insurance investments was up, as was the gain on sale of loans.

This has been an attractive time to hire bankers and wealth advisors, who very much like our private banking platform.

The hiring of new talented professionals, as well as the opening of new offices, are an important investment in future revenue growth.

In the six months since become independent, we have increased the number of wealth management professionals by 23% and the number of relationship managers by 15%.

These hires will help support the future expansion of our franchise.

In short, First Republic is performing very well.

Our lending, deposits, and wealth management businesses remain strong; client satisfaction remains high.

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

Thanks, Katherine.

Today I plan to discuss a few highlights from our fourth quarter and to analyze several numbers.

But first, I'm pleased to say that our purchase accounting has been finalized, and that there were no surprises in closing our books.

We are providing and will continue to provide disclosures, which quantify our purchase accounting and show their impact on earnings per share, net interest margin, and the efficiency ratio.

Also, we've added a table, which divides our loan portfolio between loans acquired on July 1, 2010, with their related loan discounts and loans originated since that date with their related allowance for loan losses.

We hope this information is helpful to both our analysts and our investors.

During the fourth quarter, net interest income was $257 million, up $20 million from the third quarter.

The increase was a function of higher loans and investments, which increased $1 billion on average.

Also, purchase accounting income was $10 million higher, as a result of increased payoffs on the loans that we acquired on July 1.

In the fourth quarter, the annualized loan repayment rate on these purchase loans was approximately 21%.

On a contractual basis, excluding the impact of purchase accounting, our net interest margin increased 19 basis points, to 3.5% for the fourth quarter.

Half of this improvement was from lower deposit costs, as Katherine mentioned, and half was from investing more of our cash into loans and investments.

The Bank is generally well matched, but had a modest liability sensitivity position at December 31, 2010.

We adjust our reported earnings and earnings per share to exclude the effects of purchase accounting and other one time costs on our operating results.

We call this measure our core earnings.

For the fourth quarter, our core earnings per diluted share were $0.35.

During the fourth quarter, we recorded a provision for loan losses of $14.3 million, compared to $4.5 million for the prior quarter.

On a diluted earnings per share basis, these provisions reduced our EPS by $0.06 in the fourth quarter and by $0.02 in the third quarter.

The provision is a function of new loans originated and the increase resulted primarily from a higher level of fourth quarter lending, including business loans.

The ending allowance for loan losses at $18.8 million at December 31st, was 64 basis points on the $3 billion of loans that are on our balance sheet and that have been originated since July 1.

Non-interest expense for the fourth quarter of 2010 was $143 million.

If we back out the one time IPO stock option costs, and the divestiture costs, our normalized interest expense was up $11.6 million compared to the prior quarter.

Some of the increased costs were seasonal and others were elevated due to our re-establishment as an independent Company.

As can be seen on the last page of our release, excluding the impacts of purchase accounting and these one time costs, our efficiency ratio was stable in the third and fourth quarters at 59%.

As to our tax rate, our effective tax rate was down to 39% for the fourth quarter.

This is compared to a marginal tax rate of 42.5%.

The lower tax rate reflects our level of tax exempt income from investments, [bowley], and low income housing tax credits.

With the positions that we have in place today, our effective tax rate should be approximately 38%, or slightly lower in 2011.

Finally, following our IPO, the bank has the outstanding 128.9 million shares of common stock.

Based on the recent price range for FRC, the dilutive effect of outstanding stock options is expected to increase the denominator for our diluted EPS calculation to about 133 million shares for the next several quarters.

And now I'd like to turn the call back over to Jim.

Thank you, Katherine and Willis.

Before we get to your questions, let me summarize.

We're pleased to be a public Company.

Again, the IPO was very successful.

We made a smooth transition on virtually all fronts.

We're very well capitalized and well positioned for continued growth.

The financial results are solid with robust loan volume, sequential growth in all aspects of our franchise, and very strong asset quality.

We appreciate your interest in First Republic and we're excited about the opportunity ahead.

Now, we'd like to open up the call for questions.

Thank you.

We'll now begin the question and answer session.

(Operator Instructions)

And our first question is from the line of Steven Alexopoulos with JPMorgan.

Please go ahead.

Hi, everyone.

Maybe I'll start, looking at the period end loan growth, I guess it was around 17% annualized in the quarter, and if we look at the half year growth, around 13%.

Just wondering, when you look at the pipeline, which of these do you think we should be focusing on?

And is it too early to expect 17% loan growth in 2011?

Our loan growth in the fourth quarter was good; we're very pleased with it.

The fourth quarter is often among our highest quarters and this was actually our third highest quarter we have ever had.

We're hiring good new producers who are bringing clients.

We continue to be able to grow the balance sheet and we will do that in 2011.

Too soon to commit to 17%.

Okay.

That's fair enough.

And maybe just quickly on the margin.How should we think about the core margin heading into the new year without the cash being deployed, one, and then how should we think about additional cash flow into securities over the next few quarters?

Hi Steve, it's Willis.

We will continue to gradually employ our cash, both into loans and into investments over the year.

We believe that our core margin at around 3.5 resulted from the increase in deployment of cash, which resulted in a billion dollars higher of loans and investments, that will help us as we go forward in the next several quarters.

Willis, is the game plan to deploy that cash and keep the margin stable?

Is that the way we should think about it?

Well, the fact is that cash is now earning very little.

It will help us maintain the margin in the 350 range or lower.

The other element is that the contractual rates on our loan portfolio as loans payoff in this environment is drifting downwards.

About 10 basis points per quarter.

Okay.

That's helpful.

Thanks.

Thank you.

Our next question is from the line of Eric Penala with Bank of America.

Please go ahead.

Good morning.

My first question is on the loan yield.

Willis, you mentioned that you're seeing about a 10 basis point drift in loan yields quarter-over-quarter.

Could you give us, is that an overall, is that an overall statement?

I guess I was just wondering, since the business lending records were stronger than we expected, what yields you were commanding in that segment?

The mix of loans was, it varies quarter to quarter.

Our home loan yields are right now in the low 4s, and the average on our portfolio is around 480 at the, for the fourth quarter.

So, the results of the lending, business lending, is mostly prime based, so it's adjustable rate.

And prime is lower than, it's at 3.5, so it's below the average loan yields at the present time.

And just to follow up with, with Steven's question, how much, could you give us a ballpark figure in terms of how small you think your cash balances will be by the end of 2011, and what type of securities you'd be buying over the next 12 months?

I suspect, I think, didn't you say in the past that the, you were looking to buy munis, but the tax code or the tax benefit was going to fall off in 2011?

Hi Erika, it's Jim.

Yes, it's hard to predict where the cash position will be at the end of the year, and there's two elements to that.

One, what will be the lending and investing rate throughout the year, but the other thing is that if to the extent that we chose to put in place some additional asset liability matching through FHLB draws, we could increase our cash position as a result of the draws.

And, of course, the third one really is the growth of deposits.

Sufficed, I think to say, however, that it's currently, approximately $2 billion and it will be less than that by the end of the year.

We would expect.

In terms of investments that we're liking to go into, you're correct in your thinking.

There was a window of opportunity as a result of the stimulus bill that enhanced the ability of banks to invest in bank qualified munis.

They changed the definition of "qualified." They took up the size.

That has now fallen away and so we've used the opportunity and we found some very good opportunities, as you might imagine.

But, I think our investments going forward in this, in this portfolio will grow more slowly.

And the growth, the use of the cash will be more tilted toward loan growth.

Okay.

Thank you for taking my questions.

Thank you.

Thank you.

Our next question is from the line of Aaron Deer with Sandler O'Neill.

Please go ahead.

Hi, good morning everyone.

Good morning.

I guess, we've touched on margin and balance sheets.

Maybe talk about expenses for a minute.

The expenses in the quarter, obviously, I guess starting with comp was out-sized by I think $9 million.

After that, are we at a good run rate here, or are we going to continue to see that growth, given some of the higher end and other initiatives that you have on?

We're always a bit challenged because we're a growth Company, but we're very comfortable with the expense ratio that we're running at.

It's at the lower end of a very tight range, and we expect to be at that range more or less for the year as a whole.

I think we would add to that, that we've taken advantage of the opportunity as we came out independent to put in place as Katherine referred to in her remarks previously a fair amount of hiring on the producer side, both portfolio manager and relationship managers.

That's obviously going to bulk up our expenses a little bit and that will carry on until they cover themselves.

We also are in the process of shooting for opening four to six offices in the '11-year, and that will, that will have some impact on us.

But I think the third one is, we're playing a little bit of catch up.

Not too much, but it will weigh on us a little bit for another few quarters in the infrastructure area, given containment of costs that we were under before we became independent.

Having said all that, we're fairly pleased with the current expense ratio, or the efficiency range, and we think that we can be more or less in this range in addition to growth.

Importantly, as I mentioned, we hired about 23% new wealth management producers and about 15% new relationship managers in the six months.

It's a little bit unusual for us to hire so many people toward the end of the year.

Generally there's more hiring opportunities early in the year, but it was particularly attractive to, we were a particularly attractive place to work as we became independent.

We continue to see that.

So, there is a bit of a time lag, but it's a tremendous opportunity to plant seeds for future growth, and it does not take that long for the revenues to come on stream.

Okay.

And then, with respect to loan growth that you had in the quarter, can you talk a little bit about what industries that might have come from; if there was any concentrations, because it was very impressive.

And then, any kind of metrics you can put on the pipeline where it stood at year-end versus where it was at September 30?

Yes.

The pipeline is slightly down from where it was at the end of September.

There was a tremendous, a bit of uptick because mortgage rates were so low.

We had seen loan growth in a couple of important areas.

We continue to do lending to the private equity, invest in capital community, which is a good source of business.

We have continued to grow real estate loans, and we had the opportunities to make loans to some of our non-profits.

And that bulked up in November and December.

Okay.

Great.

Thank you very much.

Thank you.

Our next question is from the line of Brian Zabora a with Stifel Nicolaus.

Please go ahead.

Thanks.

Most of my questions have been answered.

But, just a question on gain on sale of loans.

You were pretty strong this quarter.

Was there anything outside there?Are you seeing some good opportunities?

We saw opportunities to sell loans at higher prices and to be able to sell a bit more of them.

We tended, tend primarily to sell loans that are longer duration, 30 or fixed and loans that are fixed for the first 10 years.

Okay.

Thanks for answering my question.

Thank you.

The next question is from the line of Chris McGratty, with KBW.

Please go ahead.

Good afternoon.

On the efficiency guidance, you guys were at 59% the intangible, the next the (inaudible) yield.

Can you remind me, when you guys were doing the road show you were talking about the low 60s.

So, can you remind me what the range was, that you were seeing, it's going on the lower end of the range.

Can you remind me of what that range is?

We would think of the range, excuse me Chris, we would think of the range as the low 60s, as we indicated on the road show, high 50s.

And, as you know, we're a high-touch service model and we're a growth Company, both of those have cost components to them.

And we're, in addition to that, we have kind of a little bit of a one time thing going on for a while, which is coming out independent, and getting all, doing a little catch up and absorbing the costs of being public and independent all at once.

And then, on the new offices, what, which markets?

We're actually pretty well evenly spread.

We have activity in almost every market, particularly if you think 18 months, which is about the true office planning cycle.

We're not, we're focusing slightly earlier on, we'll probably on a little more in the East, but over 12 to 18 month period, we'll have new locations in, in virtually every market.

Thanks a lot.

Thank you.

Thank you.

(Operator Instructions)

Our next question is from the line of Casey Haire with Jefferies & Co.

Please go ahead.

Good morning.

Good morning.

Just a question on, on the loan growth, actually.

The C&I was up pretty good, 40%.

I was a little surprised by that.

Was that just a couple of big clients or can you just speak to what's going on with the C&I pipeline?

As I'd mentioned earlier, we're doing a very good job growing our investment management client business, or private equity real estate funds, and venture capital funds, as well as our non-profits.

There also is growth in our professional service sector, and we have hired additional business bankers who are bringing us good business across the board.

Okay.

And then of the 2.3 originated, you sold $400 billion.

Can you speak to the $1.1 billion that didn't stick?

Either do due to refi-away or roll-off; can you just speak to what that mix was?

Primarily re-repayments were home loans.

Got you.

So it was more, it was more just roll-off than refi-away.

Very little refi-away.

We capture a very high percentage of our client, and they refinance with us or modify their loans with us.

Okay, great.

Thank you.

Our next question is from the line of Joe Morford with RBC Capital Markets much please go ahead.

Thanks.

Good morning, everyone.

Good morning, Joe.

Just to follow-up on the commercial business lending.

Was the growth mostly coming from new customers then, with these additional lenders you're bringing in, and do you have any color on what line utilization rates have trended to?

Our business was primarily new clients within our sectors, and utilization was approximately the same as it has been on the line.

There were also some business loans done, which are, of course, 100% utilized at origination.

And any color on geographic trends, Katherine?

Your comments said, "seen some strong growth in New York and Boston." Is that mostly on the single family side, and in what markets are you doing most of your commercial business lending.

The commercial business lending is a bit more heavily focused in San Francisco, but it is throughout our markets.

And we are seeing very good volume across our markets in all segments.

There's not much difference between the percent of real estate and business lending, or home loans and other lending, in our markets.

We generally lead with home loans, as you know, throughout the Company.

Right.

And then, lastly, how big would you say is that private equity venture capital portfolio within the overall commercial business portfolio?

It's very little outstanding, because there are lines that are used to generally to bridge capital calls, so the outstandings are very modest.

Okay.

Great.

Thanks so much.

Thank you.

Our next question is a follow-up from the line of Erika Penala, Bank of America.

Please go ahead.

Thanks for taking my questions again.

My, my first question is to the comment on drawing upon the FHLB borrowings.

How much, would you suspect, or would you like to increase your exposure to this to extend out your liabilities in 2011?

Well, the real, that's a little harder to answer because it shifts.

It depends on our, sort of view of the rates at this time and the mix of the portfolio we book.

But right now, as Willis said, we're slightly liability sensitive, so we need to extend it out a little bit.

We've also put in a certain amount of swaps against deposits to turn, to turn them to fixed.

But I would, we're at $600 million roughly, borrowed; $700 million roughly borrowed, now six to seven, and we have availability of considerably more than that.

It's hard to call Erika.

I would, I hate to estimate, really.

But the order of magnitude is going to be that kind of additional draws throughout the year at the most probably.

Okay.

And your, your comment on your balance sheet position at the end of the quarter, that does include the swaps that you did mention on the deposit side?

It does, it does.

And we're actually quite neutral.

You saw the September 30 numbers, and you'll, and we'll have of course new ones in the 10-K, but we're, we're pretty neutral.

Much more so than most, I would think.

Are you looking to put on or explore further hedging strategies given where the rate environment is today?

We are, and we spend a lot of time on asset liability matching as we indicated.

This is a continual ongoing conversation here.

Right this moment we're reasonably comfortable with our position.

But we watch it every, literately, every week actually.

And as we feel there is an increasing risk of rising rates, we'll act.

Okay.

Thank you.

Thank you.

Our next question is also a follow-up from the line of Steven Alexopoulos with JPMorgan.

Please go ahead.

Yes, I just have one follow-up for Willis.

Looking at the purchase accounting accretion and amortization.

It looked a bit high at the $68 million.

I would assume this is loan pre-paids.

Do you have a number of what we should be looking for following this quarter and the first quarter?

So we're all on the same page.

Well, the, the two lines of the borrowings and the deposits are much more predictable than the loan rate.

And we have adopted a methodology to specifically assign loan discounts to each and every loan.

And in the fourth quarter we had a relatively high prepayment over 20% on that portfolio, and that, that drove the accretion from our, our third quarter of 36 to the fourth quarter of 48.

I would expect that we would be somewhere between those two numbers for the next few quarters.

The 48 did seem a little high to us.

But it was what resulted from the detailed analysis and tracking that we do.

Yes.

Okay.

Thanks.

I show that there are no further questions at this time.

Ladies and gentlemen, this concludes the First Republic Bank fourth quarter 2010 earnings conference call.

Thank you for your participation.

You may now disconnect.