First Republic (FRC) announced on Monday that it had experienced a net loss of $72 billion in deposits during the first quarter of the year, which would have been over $100 billion if not for a rescue from 11 of the nation's largest banks. The decline in deposits was due to customers withdrawing their money following the failure of Silicon Valley Bank in March, which triggered panic across the banking system and caused depositors to seek the perceived safety of bigger financial institutions.
To weather the turmoil, First Republic borrowed from the Federal Reserve, received $30 billion in uninsured deposits from 11 of the country’s largest banks, and hired advisers to pursue a number of options, including a sale. However, despite these moves, the bank's total deposit balance fell by a net total of 41% during the quarter to $104.4 billion, according to its first-quarter earnings report released on Monday. If not for the $30 billion infusion from the 11 rival banks, its net outflow would have been $102 billion, which was considerably more than expected.
The disclosure caused First Republic's stock to spiral in after-hours trading, dropping as much as 21%. Since January, the bank's stock has dropped more than 85%, and on Monday it closed the trading day up 12%. "The future of this company is very uncertain," said CI Roosevelt Associate Partner Jason Benowitz. First Republic "lost so much in deposits; they have to replace that funding somehow, so they’re doing it with borrowing," he added. The borrowing will "really weigh on their profitability both in the reported quarter and going forward.”
First Republic reported that outflows began to stabilize the week of March 27, and deposit activity "has remained stable" through April 21. As of Friday, its balance was $102.7 billion, a drop of 1.7% since the end of the quarter, which the bank attributed to seasonal client tax payments.
To increase its amount of deposits insured by the Federal Deposit Insurance Corporation, trim its borrowings, and decrease loan balances to correspond with a reduced reliance on uninsured depositors, First Republic plans to reduce its workforce by 20-25% in the second quarter. "Despite the uncertainty of the past two months, and while average account sizes have decreased, we have retained over 97% of client relationships that banked with us at the start of the first quarter," said First Republic CEO Michael Roffler on a conference call following the release of results. The company did not take questions from analysts.
Many other regional banks also reported deposit outflows during the first quarter, although First Republic’s drop was more severe. Credit Suisse also reported that its customers withdrew roughly $75 billion in deposits during the quarter.
The bank is trying to adapt to a period of higher interest rates, as deposit costs rise across the industry while loan margins shrink. Its first-quarter earnings of $269 million were down by 30% from the fourth quarter and 33% from the year earlier period. Its net interest income dropped 21% from the fourth quarter and 19% from the first quarter of 2022.
On Friday, Moody’s downgraded First Republic’s preferred stock rating, along with 10 other regional banks, citing “a deterioration in the operating environment and funding conditions for US banks.”
First Republic borrowed money from the Federal Reserve, JPMorgan Chase, and the Federal Home Loan Bank after experiencing "unprecedented deposit outflows" from March 10. Its borrowings peaked on March 15 at $138.1 billion, at which point it had $34 billion in cash. That was the day before it received its $30 billion deposit infusion from 11 other banks. The bank plans to restructure its balance sheet, reduce expenses and short-term borrowings.
To counter the challenges, First Republic Bank is exploring multiple options, including raising capital or a sale, to restore stability and reinforce its capital position. However, Wedbush Securities, a research firm that covers the banking industry, said First Republic faces a "Hobson's choice" and has no other choice but to move forward as a standalone company due to the amount of unrealized losses on its balance sheet. Other banks are also experiencing billions in unrealized losses due to aggressive interest rate hikes from the Federal Reserve.
Despite the challenges, analysts expect First Republic Bank to avoid regulatory seizure and "grind it out as a standalone company for the foreseeable future." Carlyle Group co-founder David Rubenstein stated that the federal government might need to provide some help for First Republic to find a buyer due to the "hole" on the lender's balance sheet.
Everyday investors have bet $245 million on First Republic stock since the fall of Silicon Valley Bank, according to Vanda Research. However, the stock is also among the highest levels of interest among short sellers betting on the stock to decline. As Vanda noted, First Republic "will be a bellwether of sentiment for the sector." First Republic Bank continues to explore strategic options to restore stability and maintain its position as a leading regional bank.
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