First Republic (FRC) lost $72 billion in deposits during the first quarter as profits plunged, offering the first detailed view of damage done to a troubled regional lender at the center of last month’s banking turmoil.
Customers pulled their money from the San Francisco institution following the March 10 failure of Silicon Valley Bank, an event that triggered panic across the banking system and caused depositors to seek the perceived safety of bigger financial institutions.
First Republic tried to weather the turmoil by borrowing $70 billion from the Federal Reserve, receiving $30 billion in uninsured deposits from 11 of the country’s largest banks and hiring advisers to pursue a number of options, including a sale. It also suspended common and preferred stock dividends and eliminated executive bonuses.
Despite these moves First Republic’s total deposit balance still fell by a total of 41% during the quarter, to $104.4 billion. Without the $30 billion infusion from the 11 rival banks its outflow would have been more than $100 billion.
The bank said Monday that outflows began to stabilize the week of March 27 and deposit activity “has remained stable” through April 21. Its balance as of Friday was $102.7 billion, a drop of 1.7% since the end of the quarter that the bank attributed to seasonal client tax payments.
The bank said Monday that it is taking steps 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 for funding. It also plans to reduce its workforce by 20-25% in the second quarter.
“With the closure of several banks in March, we experienced unprecedented deposit outflows,” said First Republic CFO Neal Holland in a release. “We moved swiftly and leveraged our high-quality loan and securities portfolios to secure additional liquidity. We are working to restructure our balance sheet and reduce our expenses and short-term borrowings.”
Its stock has dropped more than 85% since January. On Monday it closed the trading day up 12% and then fell more than 17% in after hours trading once the results were announced.
Many other regional banks also reported deposit outflows during the first quarter, although First Republic’s drop was more severe than most. A Swiss banking giant, Credit Suisse, also said Monday that its customers withdrew roughly $75 billion in deposits during the quarter.
First Republic, like many regional banks, 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, which measures the difference between what it makes on its loans and pays for its deposits, dropped 21% from the fourth quarter and 19% from the first quarter of 2022.
On Friday, Moody’s cut First Republic’s preferred stock rating as part of a larger downgrading of 10 other regional banks, citing “a deterioration in the operating environment and funding conditions for US banks.”
Since mid March the bank has been exploring multiple options that might restore more stability, including raising capital or a sale.
One research firm that covers the banking industry, Wedbush Securities, said earlier this month that First Republic faces a “Hobson’s choice in which it essentially has no other choice than to move forward as a standalone company” due to the amount of unrealized losses on its balance sheet.
These don’t count as actual losses until they are sold or if First Republic were to be acquired. Many other lenders also have billions in unrealized losses due aggressive interest rate hikes from the Federal Reserve that lowered the value of bank assets.
Even a sale of First Republic at $0 a share is unlikely, Wedbush said, because any buyer would still essentially have to pay billions to absorb those losses.
The only way First Republic gets sold, Wedbush said, is if regulators were to seize the bank and sell off its assets at a bargain price. It expects the bank to stave off that type of regulatory seizure and “grind it out as a standalone company for the foreseeable future.”
Carlyle Group co-founder David Rubenstein told Yahoo Finance earlier this month that the federal government will need to provide some help for First Republic to find a buyer due to the “hole” on the lender’s balance sheet.
“I think First Republic Bank is clearly on a watchlist, and probably somebody at some point will buy it. But the challenge there is that it needs government assistance,” Rubenstein said earlier this month in a lengthy chat on Yahoo Finance Live.
A lot of money is riding on its fate. Everyday investors have bet $245 million on First Republic stock since the fall of Silicon Valley Bank, according to Vanda Research, the third highest inflow to a specific bank stock behind Bank of America and Charles Schwab (SCHW).
It also has one of the highest levels of interest among so-called short sellers betting on the stock to decline, according to analytics firm S3 Partners, accounting for $480 million in such bets over the last 30 days.
First Republic “will be a bellwether of sentiment for the sector,” Vanda said in a note last week.
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