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First Republic Bank (NYSE:FRC)

Q4 2011 Earnings Call

January 17, 2012 2:00 p.m. ET

Executives

Dianne Snedaker - Executive Vice President and Chief Marketing Officer

Jim Herbert - Chairman and Chief Executive Officer

Katherine August-deWilde - President and Chief Operating Officer

Willis Newton - Chief Financial Officer

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the First Republic Bank Fourth Quarter 2011 Earnings Conference Call. During today's presentation all participants will be in a listen-only mode. (Operator Instructions) As a result of the press release earlier this morning regarding the proposed offering, there will not be a question-and-answer session on today's call.

And now, I would like to turn the call over to Dianne Snedaker, Executive Vice President, Chief Marketing Officer. Please go ahead, ma'am.

Dianne Snedaker

Thank you, and welcome to First Republic Bank’s fourth 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 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 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, 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, Dianne, and thanks to everyone for joining our call today. We are very pleased with our results for the fourth quarter and for the year. These numbers will be good as anytime, but we are particularly pleased given the difficult environment facing the economy in general and financial institutions specifically. First Republic’s positive performance is the result primarily of a focused execution, a very client centric business model that continues to deliver steady growth. Additionally, our intensive credit culture continues to be quite successful.

These focuses are the main reason our book value per share increased 17% during the year. I’d like to briefly summarize our results for the entire year and for the fourth quarter. Core earnings excluding all purchase accounting and other one-time items, were $0.44 per share for the quarter, up 26% year-over-year. This is the measure we pay the most attention to. These core earnings for the entire year of 2011 were $1.68 per share. GAAP net income for the fourth quarter was $91 million. Up from $76 million for the fourth quarter a year ago.

Diluted earnings per share were $0.68, up 13% from the fourth quarter of 2010. GAAP net income for all of 2011 was a record $352 million. Diluted earnings per share for the full year were $2.65. Looking for a moment at some key operational indicators for the year. Loan volume totaled a record 10.2 billion. Loans outstand increased year-over-year by 20%. Deposits rose by 17%. Total wealth management assets grew by 21%. Quite importantly, our non-performing assets remained at a very low 11 basis points of total assets. This is less than 1/8th of 1% of total assets.

Quite importantly, also, the bank exceeds all regulatory guidelines to be well capitalized at year-end. Fourth quarter results were strong. Loans outstanding grew by 8%, deposits rose by 3% and total wealth management assets increased by 10% during the quarter. Let me highlight a few points that demonstrate how unique and differentiated the First Republic story is.

We have a client centric business model. We offer a single point of contact for all banking and wealth management services. Clients really appreciate this approach. We maintain a closely matched book of assets and liabilities. Overall, our earnings come from a very solid business model. We are in well-established lines of businesses and operate in a limited number of urban coastal markets which we understand and know very well. In short, First Republic is a simple, almost one of a kind entity. A traditional bank focused intently on a few core businesses but with very modern delivery. Most importantly, we continue to benefit from tremendous client satisfaction and the resultant referral business which such satisfaction brings us.

Now, I will turn over to Katherine.

Katherine August-deWilde

Thank you, Jim. We are very pleased with our results for the quarter and for the year 2011. For the full year growth was strong across all of our businesses, deposits, loans and wealth management. We are particularly pleased with the success of our deposit taking initiative. In 2011 we grew deposits significantly, 17%, while dramatically improving our deposit mix. Checking balances increased almost $4 billion, which is an increase of 68%. Checking balances now represent more than 40% of total deposits. This growth comes from both the expansion in the average account size and a significant number of new accounts.

We have reduced our certificates of deposits during the year. They are now only 18% of total deposits, down from 30% a year ago. Deposits grew across all of our channels. In our banking offices, the channel that includes most of our CDs, deposits were up modestly, while the mix of deposits improved substantially. In this channel, checking and savings deposits were up 35% for the year. Deposits in the preferred banking channel were up 29%, and deposits from our wealth management channel which are primarily sweep accounts, grew significantly. These are now a meaningful part of our deposit base at 10%.

For the year, private wealth management assets were up 21% to $20.4 billion. Private wealth management continues to grow due to our success in hiring top producing wealth management professionals and in cross-selling investment services to our current clients. Seasoned professionals find our model of customized, unbiased advice, as well as deposits and loans offered through a single point of contact, very appealing.

2011 loan originations were the highest in our 26 year history and we began this year with a relatively strong pipeline. Loan balances grew 20% to $23 billion in 2011. Loan growth has been a function of low interest rates and the relative strength of our urban coastal markets. The San Francisco Bay Area with its robust technology sector, is particularly strong. Home loans were 61% of total originations for the year, and of those 35% were for home purchases.

Business loans outstanding increased 36% in 2011. Business deposits grew 56% in 2011 and at year-end business deposits represented almost 40% of total deposits. Business banking is an increasingly valuable contributor to our franchise. Non-performing assets as a percent of total assets at year-end were 11 basis points. This low level of non-performing assets reflects our long standing practice of making the highest quality to well qualified borrowers.

Overall, 2011 was a very strong year. And now I would like to turn the call over to Willy.

Willis Newton

Thank you, Katherine. As Jim mentioned, we are focused on core results which exclude the positive impact of purchase accounting adjustments. For the fourth quarter, core revenues grew 7.5%. And I would note that core revenues grew each quarter in the year 2011. For the fourth quarter, core revenues were $255 million, an 18% increase versus the same quarter last year. Our core net interest income, the largest component of core revenues, is up 20% compared to the fourth quarter of last year.

Our core net interest income has been driven primarily by 23% increase in average earning assets. This quarter, our core or contractual net interest margin or NIM, was 3.55%. This is up 14 basis points compared to the third quarter. This margin increased primarily due to the deployment of excess cash into loans and investments, and the improvement in our deposit mix. This quarter our income from accretion of loan discounts was consistent with the prior quarter. The amount of accretion depends primarily on the repayment rate of real estate loans which continued at an elevated level, and was 22% in the fourth quarter and 19% for the full year 2011.

Over the past year, our salary and benefits expense has grown as we have hired producers, client service personal and other support staff. Our core efficiency ratio remains stable in the fourth quarter at 59.9%. The bank’s effective tax rate in the fourth quarter was 34.8%. Going forward, we would expect our tax rate to be slightly lower. As was mentioned on our last call, First Republic is a straight forward private bank and wealth management company. We are not involved in investment banking, proprietary trading or sub-prime lending. And we do not have any exposure to foreign sovereign debt.

Now I would like to turn the call back over to Jim

Jim Herbert

Thank you, Willis, very much. In closing, I want to reiterate that we are quite pleased with the year. 2011 was transformative in a couple of respects. First was the change in our deposit mix. This was the result of growth in business banking and wealth management related deposits, coupled with our systematic and intentional reduction in certificates of deposit. Second, was the growth in momentum of business banking and wealth management. Together, it added up to a very extraordinary year. We believe we are in a position to achieve good growth in core results during 2012, and we are looking forward to the year.

I want to thank the investors who have been with us since our initial public offering last year. We greatly appreciate your trust and your support. Thank you.

Operator

Thank you, sir. Ladies and gentlemen this does conclude the First Republic Bank fourth quarter 2011 earnings conference call. I would like to thank you very much for your participation and you may now disconnect.

Question-and-Answer Session

(No Q&A session conducted for this event)

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