First Republic Bank Earnings Call Nuggets: Run Rate Guidance, NIM Drivers
On Wednesday, First Republic Bank (NYSE:FRC) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.
Run Rate Guidance
Dave Rochester – Deutsche Bank: On the expense side, maybe if you could just talk about that trajectory going forward. I know you are making a lot of new investments. Can you talk generally about a good run rate for 2Q? Then, when do you think that that growth could slow? It sounds like that might be in maybe the second quarter next year after the build-out of all the branches and the new hires.
Katherine August-deWilde – President and COO: Hi, it’s Katherine. We would expect the expense ratio to be between 58% and 62% on a run rate basis. A brunt of the new investments are going to be hitting throughout the rest of this year. Then we will be able to reap the benefits of them. While we don’t project forward, this will be an important year for investment spending. Its particularly important as we have the first accounting adjustments that will run off in the future to make the investments now.
Willis H. Newton, Jr. – EVP and CFO: Dave, this is Willis. A couple of comments, the salary and related benefits line includes some seasonal factors. We have higher payroll taxes this quarter, about $7 million in the first quarter of this year compared to $5 million last year in the first quarter and $2.5 million or so on average during the other three quarter in last year, so about half of the increases in salary and expenses in the first quarter, are related to seasonal factors. Our occupancy line includes much of the rev cost for our new offices, but we are not yet bearing the cost of the depreciation, because the offices are not yet open, nor are we bearing the cost of all of the people. We’ve hired some but not all of those folks. Then the tax credit investment line is up about a $1.5 million over the last quarter, and that’s where we write-off the low income housing tax credit investments that we make on our balance sheet, but get a greater benefit in the tax provision, than you see that increase in expense.
Dave Rochester – Deutsche Bank: Then just switching to loan pricing real quick, if you can update us on some of the yields on the C&I, and CRE, the 10 year current pipeline, just to get a sense of where the market is today, where you guys are today?
Katherine August-deWilde – President and COO: We are putting loans on – single family loans at about 3.25%, that includes both, adjustable loans as well as 5 and 7 year hybrid loans. The income property loans are a bit higher than that and most of the C&I loans are approximately prime.
Dave Rochester – Deutsche Bank: And it sounds like you are saying the pipeline is still strong. Would you characterize that as being stronger than last quarter sort of leading to maybe an acceleration in growth into 2Q?
Katherine August-deWilde – President and COO: The pipeline is very strong. It has picked up a little bit from last quarter but we went into the first quarter with a very strong pipeline as well. We are pleased about the strength in our markets and the business that we are seeing.
Ken Zerbe – Morgan Stanley: First question I have is for Willis. I was hoping if you could just give a little more information on the underlying drivers of the high record NIM this quarter so excluding all the purchase accounting adjustments. So it seems like it was (indiscernible) security yields but I just want to make sure that that was the case and is it sustainable going forward and obviously layer in what negative impact this seems you might have from the advances in loan sales that you had mentioned?
Willis H. Newton, Jr. – EVP and CFO: The NIM this quarter increased primarily as a result of us having a lower average cash balances. The average cash balances declined from $1.8 billion in the fourth quarter of last year to $900 million this quarter which is about as low as it’s likely to get you in the near future. You can just see that our ending cash was $1.4 billion and that’s as a result of the additional advances as well as deposits coming in, in anticipation of tax payments. So the NIM benefited from putting that that cash to work and also from the investments and loans that we booked in the fourth quarter last year and we had outstanding for the entire quarter. I would comment on our contractual loan yields which had declined steadily over the past five quarters from 4.68% a year ago to 4.14% this past quarter. That’s a decline of 54 basis points. By comparison our contractual deposit costs which we did mention in the release have declined 39 basis points to 40 basis point or 0.4%. As Katherine mentioned our new loans are going on at lower rates and we are doing things to match up and draw down these advances. So that’s those are elements that we see playing the role in next quarter’s NIM.
Ken Zerbe – Morgan Stanley: I think I got it, so it sounds like it should be sustainable, but you have the loans repricing going forward as you’ll bring that down over time. So there is nothing unnecessarily unusual this quarter other than the cash.
James H. Herbert, II – Chairman, CEO (Founding), and Board Member: That’s correct.
Ken Zerbe – Morgan Stanley: The other question I had, this goes over the Silicon Valley, are you able to quantify how much of your loan growth came from Silicon Valley or is there any way that that we can measure the impact of, so the technology boom over there is having on your overall business.
James H. Herbert, II – Chairman, CEO (Founding), and Board Member: It’s really not that as Jim. It’s really not that identifiable Ken we could look at the growth of loans in that area in our home lending activity is particularly robust in that area as you might expect but it’s not, but it’s not physically quite frankly that large relative to the entire base of the bank, on the other hand the venture capital fund business that we do down there is quite active, but those loans don’t tend to be outstanding for any length of time. We are picking up some business lending and that’s improving. But it isn’t all there. So, it’s really holding its own as a share of the enterprise, but it is not particularly standing out except in the home lending area and in the strength of a housing market just in terms of safety.