First Republic Bank's CEO Discusses Q2 2012 Results - Earnings Call Transcripts

First Republic Bank (FRC)

Q2 2012 Earnings Call

July 18, 2012 02:00 pm ET


James H. Herbert, II – Chairman, Chief Executive Officer

Katherine August-deWilde – President and Chief Operating Officer

Willis H. Newton, Jr. – Executive Vice President and Chief Financial Officer

Michael D. Selfridge – Senior Executive Vice President

Dianne Snedaker – Executive Vice President and Chief Marketing Officer


Dave Rochester – Deutsche Bank

Ken Zerbe – Morgan Stanley

Erika Penala – Bank of America Merrill Lynch

Joe Morford – RBC Capital Markets

Aaron Deer – Sandler O'Neill & Partners

Casey Haire – Jefferies & Company

Brian Zabora – Stifel Nicolaus

Tim Coffey – FIG Partners

Steven Alexopoulos – JPMorgan

Herman Chan – Wells Fargo Securities

Julianna Balicka - KBW



Ladies and gentlemen, thank you for standing by. Welcome to the First Republic Bank’s Second Quarter 2012 Earnings Conference Call. Following the presentation the conference will be open for questions. (Operator instructions) I would now like to turn the call over to Dianne Snedaker, Executive Vice President and Chief Marketing Officer. Please go ahead.

Dianne Snedaker

Thank you, and welcome to First Republic Bank's Second Quarter 2012 Conference Call. Speaking today will be the Bank's Chairman and Chief Executive Officer, Jim Herbert; President and Chief Operating Officer, Katherine August-deWilde; Senior Executive Vice President Mike Selfridge; and Chief Financial Officer, Willis Newton.

Before I hand the call over to Jim, please note that any forward-looking statements made during this call are made as of today, are based on management's current expectations, and are subject to risks, 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 including the bank's current report on Form 8-K filed today.

In addition, some of the financial information discussed on this call includes non-GAAP financial measures. The bank's earnings release, which was issued this morning and is available on the bank's website, presents reconciliations to the appropriate GAAP measures and explains why the bank believes such measures are useful to investors.

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

Jim Herbert

Thank you, Diane, and thanks to everybody for joining our call today. We are very pleased with our second quarter results. Loans, deposits and wealth management assets all grew very strongly. Credit quality remains excellent. Importantly, book value per share has increased 15% from a year ago. We are very pleased to declare an initial quarterly cash dividend of $0.10 per share. This payout rate represents approximately 15% and we would like to operate in a payout range of 15% to 20% over time.

First Republic continues to perform well across all of our businesses in each of our carefully chosen urban coastal markets. Second quarter results highlight the strength of our business model, even under the currently challenging yield conditions facing the banking industry.

Let me quickly summarize our quarterly numbers. Core net income was up 31% year over year. Core earnings per share, excluding all purchase accounting adjustments, were up 22% year over year to $0.50 per share. GAAP EPS was $0.60 per share after a $0.10 per share one-time charge, which was in connection with the redemption of our REIT preferred. Quarterly loan volume totaled $4 billion, our highest ever, and it was 62% higher than the same quarter last year. Loans outstanding increased 7% in the quarter and 10% for the first half of the year.

Deposits rose by 4% during the quarter and 8% for the first half of the year, and total wealth management assets grew by 6% in the quarter and 14% so far this year. Our asset quality remains very strong. Nonperforming assets at quarter end were at a very low 10 basis points of total assets, or 1/10 of 1%.

On the capital front, our Tier 1Leverage Ratio was 9.55% including the issuance of our new noncumulative perpetual Series B preferred. We raised, net of all redemptions, $85 million of Tier 1 capital in the quarter and through the first half of 2012 we have raised, net of redemptions, $250 million of new Tier 1 capital through two preferred stock offerings. This increase in capital is intended to support the further development of our business and its franchise.

The current low interest rate environment and flatter yield curve present both challenges and opportunities for us. The average yield on our loan portfolio does continue to decline while the average cost of funds cannot decline much further, however, the low interest rates have resulted in a significant amount of home loan refinance and home purchase activity in all of our markets.

This activity level has led to a meaningful increase in new client opportunities for First Republic. We are and we intend to continue to take advantage of this opportunity aggressively.

Now let me turn the call over to Kathy.

Katherine August-deWilde

Thank you, Jim. As Jim indicated, growth was strong across all areas of our business—deposits, loans and wealth management. Quarterly loan originations and wealth management revenues were the highest ever. Home loans were 66% of total loan originations. Of these, 42% were for home purchases. On average, loan balances were 5% higher in the second quarter than in the first quarter of the year.

I’d like to note that First Republic has not altered its credit standards. We continue to lend very conservatively. Each loan is fully documented and fully underwritten. In the second quarter our weighted average loan to value on home originations was 60%.

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