First Republic Bank

Thank you and welcome to First Republic Bank’s third quarter 2011 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 stepping in for, Willis Newton today, our Deputy Chief Financial Officer, Mike Roffler.

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 could 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 informations discussed in 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 present 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.

Thank you, Dianne and thanks everybody for joining our call today. First Republic had a very successful third quarter.

We continue to build our franchise and attract new households even in these rather uncertain times. We are at or ahead of our expectations in most aspects of our business.

It was, for instance, an extremely strong loan origination quarter, in fact, our second best that we’ve ever had. And our deposits continue to grow quite strongly from all sources.

The credit quality of the loan portfolio remains very good. Non-performing assets are less than 1/8th of 1%.

We also took advantage of the lower rates during the quarter and drew some FHLB fixed rate term advances. We will speak more about this in a moment.

For earnings, the key measure that we pay attention to, this is excluding all purchase accounting and other one-time items was $0.42, up 20% year-over-year. Let me take the second to summarize the last 12 months very briefly.

Our loans have increased by 16%. Deposits have increased by 15%.

On the Private Wealth Management side, total assets have increased by 14%. Quite importantly, the book value of the enterprise has grown by 20%.

So far this year, our loan originations have totaled $6.9 billion. We are particularly pleased with the progress we are making in business banking which Katherine will speak more to in a moment.

The model for First Republic remains quite simple and quite differentiated. We offer very customized personal service, private banking, private business banking, private wealth management.

We have a single point-of-contact for all banking and wealth management. We are focused on a limited number of urban, coastal, supply constraint markets.

Our earnings come from extremely well-established balance sheet and ongoing business representing a strong client base. We have always and we continue to run a very matchbook, assets and liabilities.

Importantly, we are quite pleased with our consistent core efficiency ratio with this quarter around 58.8%. Importantly, on the deposit side for instance, checking and savings increased $2 billion during this last quarter while we continue to strength our CDs.

CDs now represent just 22% of total deposits. This is down from 32% a year ago.

This overall mix change is lowering our cost to funds. In a more macro sense, we have a very unusual opportunity at this time to track both individual and business clients as the result of some of the dislocations happening in the banking market in general.

In short, First Republic represents unique almost one of a kind private bank operating bicoastally. Now, let me turn this call over to Katherine August-deWilde, our President and Chief Operating Officer.

Thank you, Jim. We are quite pleased with our third quarter.

Loans are now $21.5 billion, up 16% in the last 12 months. Loans outstanding increased 6% this quarter or $1.1 billion.

Significantly, loan originations year-to-date were $6.9 billion and for this quarter it were $2.6 billion, which was our second best quarter ever. The origination volume reflects the strong pipeline that I mentioned on last quarter’s earnings call.

Currently, our loan pipeline is at its highest level ever. Deposit trends are positive across all three of our deposit gathering channels.

Preferred banking deposits have grown 26% year-over-year, wealth management deposits including our sweep accounts have increased more than 70% year-over-year to $2 billion. Checking and savings deposits in our preferred banking offices are up 27% year-over-year and total deposits in those offices are up in spite of the intentional reduction of CDs.

Our markets are doing relatively well economically thorough its considerable strength in particular, in San Francisco and the Silicon Valley, which represent about 35% of our business. As always, we continue to underwrite loans to our high credit standards.

This quarter more than 62% of our loan originations were loan homes and interestingly 37% of these loans were for home purchases. During the quarter, we were particularly pleased with our continued growth in business banking.

Our strategy continues to be following our clients to their businesses and non profit. Business loans and lines outstanding were up 12% for the quarter and we should note that business related deposits are now $8.1 billion and they represent 37% of total deposit.

First of all with private wealth management, asset managed or administered were $18.5 billion at September 30th, up 14% year-over-year. In addition to the growth in assets, sleeper accounts are up 70% year-over-year.

As a result, third quarter revenues increased 52% year-over-year. We continue to hire experienced relationship managers, business bankers and wealth management professionals.

They are attracted to our highly desirable private banking platform. Our lending, deposit and wealth management business is strong and they continue to benefit from our single point of contact model, client satisfaction remains high.

And now, I’d like to turn the call over to Mike Roffler.

Thank you, Katherine. I’m pleased to report that third quarter generated strong core earnings reflecting growth in our loans, investments and deposits.

Third quarter core revenue growth of 5% represents another consecutive quarter of core revenue growth. These revenues totaled $236.7 million for the quarter up 20% year-over-year.

Core net interest income is up 16% year-over-year and 4% compared to the prior quarter. This has been driven by our average balance of earning assets increasing 19% year-over-year and 9% compared to the prior quarter.

We continue to have significant liquidity in these uncertain times, as cash balances were 8% of total assets at September 30. As Jim mentioned earlier, we added $1 billion longer-term fixed rate FHLB advances during the quarter.

That’s part of our continued asset liability matching. This additional liquidity which was the result of strong deposit growth and new FHLB advances has an impact to our net interest margin.

As our average cash balances increased $600 million during the quarter. This cash earns only 25 basis points and the additional liquidity in the third quarter reduced our net interest margin by 9 basis points from the prior quarter.

As a result our contractual net interest margin was 3.41% down 13 basis points compared to the prior quarter. This quarter our expenses grew in line with the growth in our revenues.

As a result our core efficiency ratio remains stable at 58.8%. We have maintained this efficiency ratio within a tight range of 58.7% to 59.4% during the past five quarters.

Over the past year, our salary and benefit expense is growing, as we have hired producers, client service and support team members to support our ongoing growth. In addition, last year our technology cost, an increase as a result of initiatives to expand and enhance the customer experience in our ongoing investment to improve efficiency.

The current relative growth for the technology cost should moderate in the future. Finally, to follow-on Jim’s initial comments about our business model, it’s helpful to remember that it is a straight forward private bank.

We are not involved nor have we ever been involved in the business of investment banking, proprietary trading, or sub-prime lending. And we do not have any exposure to sovereign debt or outstanding repurchased demand on the mortgage servicing portfolio.

Now, I’d like to turn the call back over to Jim.

Thank you very much Mike and Katherine. To summarize, we are quite happy with the banks performance this quarter.

We have very good loan growth this quarter and year-to-date. We’ve improved our deposit mix substantially throughout the year.

Our credit continues to be quite strong and clean and our capital levels are very strong. We like to note that this quarter represents 26 years of continually profitably operation.

With that quick summary of the progress for the quarter, we thank you very much and we like to turn this over for questions. Operator?

Thank you sir. Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions) Our first question comes from the line of Steven Alexopoulos with JPMorgan. Please go ahead.

Hey good afternoon everyone.

Hi, Steve.

Jim, maybe I’ll start given the rate environment do you think you have enough offsets to keep the margin, of the core margin 340ish relatively flat over the next few quarters?

We think so Steve. We think we can outrun the compression that came as you saw about 70% from excess cash.

The real issue is can we control the flow of deposits coming in and contain the excess cash number. And it’s a nice problem as you can imagine on the deposit side, but it looks like we should be able to maintain at more or less in the range we’re operating in.

I would take you to net interest income obviously, the growth and the earning assets of the enterprise have driven net interest income very strongly and that’s an offset as well.

Okay. And then Jim on the loan growth, given the very strong refi activity during the third quarter, can you give us some color on why loan growth picked up, because I would have thought the higher refis would have hurt growth, I am talking about loans held in portfolio.

There are no good reasons for that Steve. First, we have a number of purchases.

Loans are going through all of our business lines, multi-family and small commercial real estate as well as business banking, and in spite of refinances of our own balance sheet, we capture most of them with new loans and we also win business that is at other banks and we’ve been quite successful in that area as clients recommend us and as new producers bring in their existing book of business.

Okay. Katherine just one follow-up and then I will turn the call over.

Any early signs of pickup in the pipeline from the conforming limits coming down. I know it’s really, but so its.

We would expect that to be a benefit to us because as the 30 year fix is not available through the agency, who would expect more people to choose our balance sheet loans and we are pleased about that. It’s too early to tell, but I will tell you that our pipeline is at the highest level as ever been.

Okay, great. Thanks.

Good morning.

Good morning Erika.

My first question is a follow-up to Steve’s question. It sounds like from both a cyclical perspective and assuming that you are going to continue to deepen your market share in the east coast.

The deposit flows will continue to be generous. I guess with that premise in mind is there sort of a level of deposit growth that would cause you to be more aggressive in terms of the deploying your cash into your securities portfolio?

Generally speaking, we invest in loan only at a pace that we are very comfortable with. We have historically refused to be driven by excess cash into action that was different than we felt was extremely conservative and we will probably going to maintain that stance.

Okay. And this is the very technical question, but in terms of for the prepayment penalty as some of your current customers refi, how much does that typically support if the core NIM and does that number fluctuate materially depending on the refi flows?

Erika this is Mike. It’s been pretty consistent at about 5 to 6 basis points of the NIM for the last two to three quarters.

So, it hasn’t fluctuated a lot.

Okay and my last question before turning the call over is, Katherine you mentioned that you have both purchase and refi origination volume as well as growth in other loan categories. From a geographic standpoint it most of this coming from your relatively newer marketplace or is this mostly still sort of in California?

The business is coming from the same geographies that our balance sheet that as a loan on our balance sheet. With one exception because of the very strong economy in the bay area, we are slightly up few percentage points in loan originations in that market, but citing that across the board.

Okay. Thank you for taking my questions.

Thank you.

Thanks so much. Good morning everyone.

Good morning Joe.

I guess following up a little bit on the question that have been asked. The deposit growth is pretty impressive no matter how you look at it.

I guess wondered if you could talk about some of the drivers behind that that may have cause it to accelerate as much as it did just the past three months and looking at some of the deployment you did do the types of investments that you are making this quarter?

The deposit growth comes from several places. First was the volatility in the market.

The clients and prospects who become clients are going more to cash. Second we had new relationship managers and portfolio managers core bringing their clients to us.

And third our business banking that we’ve increased our focus over the last several years is doing very well. Business banking deposits are more than five times the loans outstanding, and so the more focus we have on business banking particularly with highly qualified clients to get use our lines as much the more deposits grow.

Okay. And then, I guess, just one follow-up would be, given that the volumes are so strong on the deposit side, what other opportunities do you see to further lower deposit rate and/or improve the mix in the sense help control this well?

Well, yes it’s not so much control the flow, although that is part of it, but we still carry a book of well over $4 billion of CDs. They have tend to have a kind of a one-year average life roughly, so they roll quite regularly.

We also have buried in there several $100 million of money desk component, which we used to extend our term, when we first came out BoA. Those are rolling off.

We’re not renewing them. They don’t carry any relationship with them and they’re higher priced at this point.

We have about the CDs rolling in this quarter are in the 1.8% range roughly, and so that’s our biggest opportunity that rollover is in excessive of a billion in the quarter. And so, we’ll continue to focus on that.

We are also focusing on the CDs in another way. Some of the CDs are single product CDs.

We don’t have the normal cross sale and that we achieved in our business and we’re dropping those rates even further and other, and thus capturing either particularly attractive rate or moving the client out of the bank. So, we’re working at fairly aggressively, but very methodically.

Okay, that’s helpful. Thanks Jim.

Hi, good morning everyone.

Good morning.

I guess kind of following up in the same line of questioning, you gave some color on the pricing on the liabilities side. I am wondering if you can also give us a sense of with all the new numbers printed on this past quarter, what kind of pricing can we get on each of the major products areas?

Well, our loan rate are about the same as they were as last quarter, up just ever so slightly and that’s for the entire mix. We have not seen a significant change in the rate on home loans, other kinds of real estate loans for business line.

Okay, and then maybe a couple of questions on the expense side. The comp expenses has been coming up I think it has obviously been higher in the lot of folks, I am curious of the increase that we saw in this quarter, how much of that is result of additional hiring versus may be increased its rules for bonuses and just general competition given the strong performance that we’ve had?

I would say that most of it is really due to new hiring. There is a little bit of increase this quarter in our bonuses as a result of production volumes and growth in assets.

Okay. Was there anything unusual in the other line item that seemed to have been up a little bit?

Other expense?

Yeah.

No, I would say it’s largely driven as a result of couple of factors adding a people, you add some administrative costs and recruiting costs, and also as we have higher loan volumes and deposits volumes there is other operating costs to go along with that.

Okay, great. Thanks for taking my questions.

Thank you.

Hi. Question on deposit growth, give us sense how much is this coming from new clients that you’re collecting or how much is coming just from the existing clients?

It’s more coming from existing clients because in one quarter you don’t bring in that many new clients, but we do have deposits coming from new clients and also as we season a relationship from people, who are doing more with us. They may have been a new client in the first quarter who are over several quarters bringing the rest of their deposits to us.

Okay. And then I’m sorry if I missed this.

Did you give line utilization on the commercial side as far as that changed this quarter versus last?

One moment please.

Commercial real estate you referring to or the commercial lines?

Commercial line?

Commercial line, business line.

Right, yes.

Those are the change in that outstanding is mostly draws on just in timelines under funds.

Okay.

Lines of credit.

Yeah, I would say the utilization rate is up just slightly.

Yeah. But it is still pretty modest.

Great. Thank you for taking my question.

Hi, good afternoon.

Hi Chris.

Mike in the security portfolio, what are you guys buying?

I would say couple of things. We’ve continued to buy, I mean, just full securities as part of our continued tax and investment strategy.

We bought just under $280 million during the quarter. It’s a very diversified portfolio and we look very closely when we invest.

The other thing is we did buy in the available-for-sale portfolio some highly rated commercial maturities that have relatively shorter life around five years or so.

And the average size of our bond portfolio is about $5 million per issue.

Okay. So should I, should we be expecting continued growth in this portfolio going forward as you kind of continue to rebuild it, it’s little over 2 billion?

We are continuing to rebuild the portfolio and as we continue to have excess liquidity we will look strategically at our investment portfolio.

Okay. And then Jim maybe a comment on capital, I assumed your anniversary, how you’re thinking about the dividend, potentially implementing one?

Well, as you know we’ve paid a dividend previously, but we really have been working closely with the regulators on reestablishing the entity on every respect prior to discussing the dividend. The earnings would clearly support it, but we are very cautious about that at this stage.

Okay, great. Thanks a lot.

Great, thanks. In terms of the NIM, how much of the stability in NIM that you are thinking about actually comes from excess liquidity coming down versus other items?

Well some of it comes from that Ken for sure, but the main driver is that our liability and asset pricing at the incremental level appears to have stabilized. Now, it might change, but as of now it’s stable as Katherine commented the new loan book this quarter was approximately the same price, slightly higher in fact as last quarter.

On the deposit side, we’re gaining a bit, but of course we’re also getting down to a level where it’s going to be harder to gain. So, it’s kind of – so, it’s a combination and any upside at this point is you properly implied probably lies in the proper utilization of cash and earning assets as opposed to just Federal Reserve deposit.

Now, I understood. And then can you just give an update on wealth management and we haven’t discussed that too much right now, but, I mean, is this obviously you are growing earnings there.

It still remains a very small percentage of your total portfolio – your total revenues, what needs to happen for that to materially increase as a percentage of revenues over time?

Well, there are two different issues. One is we are focused on growing the revenues and then in time increasing the profitability as well, but the bank grows it’s assets and liabilities very quickly and we don’t plan to stop that, we do have a plan to continue as the new hires and the referral programs we have within the bank and we expect revenues to continue nicely and we would love to see it outgrow the bank and we are working towards that.

It also depends on market.

And would you consider an acquisition of teams or the bigger acquisition of wealth?

We tend to hire people and sometimes people come in twos and threes. We are less likely to do an acquisition.

Okay, thank you.

Hi, thanks for taking for my call. Another angle on the capital question your tier 1 leverage ratios came down from 9.38 to 8.95 and my understanding is because you are technically a de novo bank you have a floor of 8% leverage.

That’s correct.

Yeah, so given everything I am hearing sounds like here the business is just going very well, continued growth seems strong. Should we start factoring in the capital raise sometimes in the next couple of quarters or so?

No, we part of the decline has to do with cash, which if we have to we can control it and we will. We don’t see a capital need in the enterprise for actually indeed several years.

Remember that we have the gap driver. We have the purchase accounting drivers so our return on equity from the gap point of view is approximately 14% to 15% and the growth rate in the balance sheets.

The total assets are little above that with the earning assets running at 14%to 15% as our deposits. So, the only imbalance of all is the excess cash.

Okay.So,as you put that more to work your margins, excuse me your returns will increase and be able to support the growth better exactly?

Exactly, either we slow it down or we put it to work one or the other.

Okay, but the intention is to avoid doing a capital raise.

We don’t foresee a capital raise in the future.

Okay. Thank you very much for the clarification.

Thanks.

Hi good morning. My question is on the FHLB draws, I think you said that it was up a $1 billion this quarter and $600 million of which was in the run rate.

So obviously is that bleeds through the next quarter. What rate are these FHLB draws coming on?

And secondly doesn’t the strong deposit flow sort of mitigate the need for more draws going forward.

The answer to your first part of the question, these are long-term draws close to five year life and it’s part of our continued asset liability matching to maintain a relatively neutral balance sheet. The cost is about 163, we continue to match and look weekly at our position to make sure we are neutral going forward.

And you mentioned that the CD roll off IA it’s what is the new rate on the new CDs?

Probably in the 40 basis point range.

Okay. Okay, then just lastly on the tax rate that ticked up a little bit this quarter.

Is that because of less muni placements in the securities book? Is that a good run rate going forward?

It is a little high than last quarter. In the second quarter we had to get our annual tax rate to 36%.

So it’s a little lower in the second and the first. We continue to expect the 36% tax rate for the rest of this year, which is why we are at that level this quarter.

Okay, great. Thank you.

Thank you very much and thanks everyone for being with us today. Yes, I’d just like to sum up very quickly.

We have for more than a quarter of a century run a very long-term focused enterprise. We focus on client growth and acquisition and good service.

This is one of the best quarters in our history for client acquisition. The backlog would indicate the coming quarter will be the same.

I would focus everyone on the growth of average earnings assets, which have been 23% over the last year, 7% in the last quarter. And the deposit trends are very strong and importantly the mix is at an inflection point for us, particularly the business banking piece that Katherine referred to.

Credit remains extremely strong, we have less than 1/8th of 1% delinquency. So we see the current macro environment of dislocation as a extraordinary opportunity to acquire good new clients, and we intend to take advantage of it.

Thank you all very much for listening in on the call.