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First Republic Bank Reports Strong Results for Fourth Quarter and Year
January 26, 2004
San Francisco, California, January 26, 2004 – First Republic Bank (FRC-NYSE) reports that the year ended December 31, 2003 resulted in record net income and lending volume, substantial growth in checking and total deposits, growth and development in all aspects of its wealth management activities, a continued high level of asset quality and increased capital resources.
Net income for the year ended December 31, 2003 increased 40% to $37,050,000 from $26,401,000 in 2002. Diluted EPS was $2.41 per share for 2003, a 42% increase compared with $1.70 per share for 2002. In addition to higher net interest income resulting from an increase in average balance sheet size and strong loan sale gains, net income for the year included a first quarter deposit sale gain of $4.4 million ($0.29 per share).
For the fourth quarter, net income was $6,654,000 in 2003 compared with $7,101,000 in 2002. Diluted EPS for the fourth quarter was $0.41 per share in 2003 versus $0.46 per share for the fourth quarter of 2002. As previously announced, state income tax benefits recorded in the first three quarters were reversed and reduced fourth quarter earnings by $2.3 million, or $0.14 per share.
Fourth Quarter Cash Dividends Declared
The Bank also announced that it has declared a fourth quarter cash dividend of $0.125 per share of outstanding common stock, payable on February 25, 2004 to shareholders of record on February 10, 2004.
Other Financial Highlights of 2003
• The Bank originated a record $3.8 billion in loans, up from $3.2 billion in 2002.
• Total deposits grew 26% over the past year and checking account balances grew 58%.
• The Bank and its subsidiaries raised $80 million of new capital, and total capital grew by 22% during the year.
• Total Bank assets were $6.0 billion, an increase of 24% for the year.
• Total wealth management assets were $10.9 billion, compared with $7.8 billion a year ago, an increase of 41%.
• Total managed assets, including the Bank, wealth management assets and loans serviced, grew to $20.0 billion, a 28% increase over the past year.
“Results for 2003 were strong and have started to reflect the results of the many strategic improvements we have been striving for throughout the enterprise,” said Jim Herbert, CEO. “Our asset quality remains excellent and our capital position was further strengthened. Our fundamental emphasis on truly extraordinary service, cross-selling, high quality products, and expanding low-cost deposits continues to be successful.”
Asset Quality Remains Strong
The Bank continued to have a high level of asset quality. At December 31, 2003, there were no foreclosed assets. Nonaccruing assets totaled $13.4 million, or 0.22% of total assets, and consisted of one construction loan, which has been on nonaccrual status since mid-2002.
At December 31, 2003, the Bank’s allowance for loan losses totaled $31.4 million, or 0.70% of loans, net of loans held for sale. For the quarter, the Bank recorded recoveries, net of chargeoffs, of $10,000 and provided $1,000,000 to the allowance for loan losses. For the year, the Bank recorded net chargeoffs of $4,317,000 and added $7,000,000 to the allowance for loan losses, in response to strong loan growth throughout the year.
Growth in Bank Assets
Total assets of First Republic Bank were $6.0 billion at December 31, 2003, an increase of 24% for year 2003. The Bank experienced good growth during the year in substantially all categories of loans. At year-end, loans held for sale increased to $398 million versus $117 million at December 31, 2002.
Loan originations for the year increased 19% to a record $3.8 billion in 2003, compared with $3.2 billion in 2002. Loan originations in the fourth quarter were $885 million, or 22% lower than the prior quarter and 8% lower than the fourth quarter of 2002.
Deposit Growth Strong
Total deposits grew $957 million in the last twelve months, or 26%. Checking account balances continue to expand and increased 58% in the past year to a total of $1.2 billion. Checking accounts now represent 27% of total deposits, up from 22% a year ago. The Bank’s core transaction accounts, consisting of checking, money market and passbook accounts, increased to 82% of total deposits at December 31, 2003.
Capital Strength Remains Strong
First Republic remains well capitalized. The Bank’s ratio of capital to risk-adjusted assets was 13.2%. Tier 1 eligible capital was further strengthened by the issuance of $10.4 million of common stock in the fourth quarter and the sale of $70.0 million of subsidiary perpetual preferred stock earlier in the year. Overall, total capital grew by $104.5 million, or 22% during the year.
Book Value
Book value per share was $21.31 at December 31, 2003, a 9% increase over the past year. The Bank repurchased 131,000 shares during 2003 for a total cost of $2.8 million. Future stock repurchases may be limited due to opportunities for asset growth and the adoption of the dividend payment policy during 2003.
Loan Sales and Servicing
During 2003, the Bank sold $1.2 billion of loans and recorded net gains of $12.9 million (1.05% of principal sold), compared with loan sales of $1.6 billion during 2002 and net gains of $12.9 million (0.80% of principal sold). If interest rates rise or remain at their current level, the Bank expects that refinance loan volume, the volume of loan sales, and the level of gain on sales will decline during 2004. In the fourth quarter of 2003, the Bank committed to sell $83 million of loans with rates initially fixed for up to 10 years and recognized a loss of approximately $800,000.
Loans serviced for investors totaled $3.0 billion at both December 31, 2003 and 2002.
Net Interest Income
Net interest income was $42,916,000 in the fourth quarter of 2003, up slightly from $42,782,000 for the third quarter of 2003 and 10% above $39,080,000 for the fourth quarter of 2002. The Bank’s average balance of loans and average checking deposits continued to increase, contributing to higher net interest income. The Bank prepaid $167.5 million of longer-term FHLB advances and recognized prepayment penalties of $345,000 in the fourth quarter of 2003. The Bank’s margin on interest earning assets was 3.11% for the fourth quarter of 2003, compared with 3.17% for the third quarter of 2003 and 3.21% for all of 2003.
Noninterest Expense
The Bank’s noninterest expense totaled $36,877,000 for the fourth quarter of 2003, a decrease of 8% compared with $40,178,000 for the prior quarter and an increase of 7% compared with $34,398,000 for the fourth quarter of 2002. The increase in noninterest expense during the year is due to the expansion of our branch system, the hiring of new personnel, sales-based incentive compensation and other customer acquisition and service costs.
The Bank’s operating efficiency ratio, or recurring noninterest expense as a percentage of net interest income and recurring noninterest income, was 66.4% for the fourth quarter of 2003, compared with 70.5% for the year 2003 and 71.8% for the year 2002. The Bank recorded lower incentive compensation in the fourth quarter due to lower loan volume and the achievement of certain goals within the first nine months.
As previously reported, following a recent tax announcement by California tax officials with respect to REITs, the Bank reversed in the fourth quarter of 2003 certain previously recognized state income tax benefits recorded in the first three quarters of 2003 and did not take such benefits in the fourth quarter. This tax related change has reduced the Bank’s earnings for the full year 2003 by approximately $3.1 million, or $0.20 per diluted share.
Branch Development
During the year, the Bank opened three California branches in Santa Rosa, La Jolla and San Francisco at the Embarcadero Center. At December 31, 2003, 28% of the Bank’s branches have been open less than 24 months. In December 2003, the Bank was named the Preferred Financial Services Partner at the new Time Warner Center in New York City and expects to open a full service branch in the spring of 2004. In addition, the Bank will open an office in Orange County, California, in the second quarter of 2004.
Loan Prepayment Rates
The historically low interest rates existing through June 2003 caused high levels of single family loan refinances through the third quarter of 2003. For the fourth quarter, loan repayments on single family loans in the Bank’s permanent loan portfolio slowed to an annualized rate of 19%, compared with 26% for the year and 30% for 2002. Loans serviced for investors prepaid at an annualized rate of approximately 19% for the fourth quarter of 2003 and 40% for the year, compared with 38% for the year 2002.
As a result of rapid prepayments, the Bank recorded pre-tax impairment charges of $1.8 million for the year, primarily in the first three quarters, to reduce the carrying value of mortgage servicing rights (“MSRs”). At December 31, 2003, the carrying value of the Bank’s remaining MSRs was $14.9 million on $3.0 billion of loans serviced for investors, which represented 49 basis points on loans serviced, or 1.64 times the annual service fees. During 2003, the Bank collected $3.4 million in prepayment penalties. These fees are included in noninterest income but conceptually act as an offset to MSR charges.
Froley Revy Increases Assets - Nuveen Convertible Funds
Earlier this year, Froley Revy was selected as sub-adviser for the convertible portion of two new closed-end Nuveen Preferred and Convertible Income Funds. At December 31, 2003, Froley Revy was managing $1.7 billion from this source, bringing total assets under management to $4.1 billion at year end, a growth of 102% for the year.
Investment Management, Trust and Brokerage Services
Assets managed or administered by Trainer Wortham, Froley Revy, Starbuck Tisdale, First Republic Trust Company, First Republic Securities Company and loans serviced totaled $14.0 billion at December 31, 2003, an increase of 29%, compared with $10.8 billion as of December 31, 2002. The Bank’s fee income and other types of noninterest income for 2003, excluding the gain on sale of deposits, was $56.8 million, or 26% of net revenues.
At December 31, 2003, the Bank’s three investment advisory subsidiaries collectively managed $8.9 billion of assets, up 44% since last year. For 2003, investment advisory fees were $27.6 million, a 16% increase over 2002. Due to poor equity market conditions from 2000 to early 2003, fee revenues and net earnings of these asset management subsidiaries have been under pressure and have not grown as fast as assets managed. However, the Nuveen fund additions to Froley Revy, improvements in the equity markets, marketing activities of all of the entities and the cross-selling efforts of the Bank have resulted in new customers, growth in wealth management assets and higher revenue run rates.
The Bank offers personal trust services to its private banking clients through First Republic Trust Company. At December 31, 2003, this group was managing or administering $1.3 billion of trust and custody assets, a 38% increase compared with a year ago. The Bank offers money market mutual funds and, in addition, conducts its customer-directed brokerage activities through First Republic Securities Company, LLC, a broker-dealer subsidiary. There were $780 million of customer assets in brokerage accounts at December 31, 2003, a 20% increase from December 31, 2002.
Common Stock Plans
In March 2003, the Bank began expensing the cost of stock options as set forth in Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation,” beginning January 1, 2003. Under SFAS No. 148, the Bank has voluntarily changed to the fair value method of accounting for stock options, using the prospective method of transition. The cost of all stock options granted beginning January 1, 2003 is included as a component of compensation expense in the Bank’s income statement over the vesting period for such options.
Additionally, following shareholder approval in May, the Bank adopted a broad-based restricted stock plan. The total cost for stock options and restricted stock, included in 2003 compensation expense, was $368,000 for the fourth quarter and $969,000 for the year.
About First Republic
First Republic Bank is a NYSE-traded commercial bank and wealth management firm. The Bank specializes in providing personalized, relationship-based wealth management services, including private banking, investment management, trust, brokerage, and real estate lending.
As of December 31, 2003, the Bank had total banking and other assets under management and administration of $20.0 billion. First Republic provides its services online and through branch offices in seven major metropolitan areas: San Francisco, Los Angeles, Orange County, San Diego, Santa Barbara, Las Vegas and New York City. More information is available on the Bank's Web site at http://www.firstrepublic.com.
The Bank wishes to take advantage of the “safe-harbor” provisions of the Securities Litigation Reform Act:
This press release may include forward-looking statements that involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include fluctuations in interest rates, inflation, government regulations, and economic conditions and competition in the geographic and business areas in which the Bank conducts its operations.
Additional information, including the Bank’s most recent filings on Forms 10-K and 10-Q, is available at www.firstrepublic.com.
Conference Call Details
First Republic Bank’s fourth quarter 2003 earnings conference call is scheduled for January 26, 2003 at 11:00 AM PST. Investors may listen to the conference call live on the Internet at http://www.firstrepublic.com. It may be necessary to download audio software to hear the conference call. To do so, investors should click on the Earnings Call Button and follow directions. A replay of the webcast will be available on First Republic Bank’s Web site for 30 days. A replay of the conference call will also be available for two weeks by calling (888) 203-1112 for domestic participants and (719) 457-0820 for international participants. The passcode number is 521615. The Bank’s press releases are available after release on the Bank’s Web site at www.firstrepublic.com..P>
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Contact:
- Greg Berardi
- Blue Marlin Partners
- (415) 239-7826
- greg@bluemarlinpartners.com
