First Republic stock fell after earnings showed a 41% drop in deposits

First Republic (stock ticker: FRC) said it had $104.5 billion in deposits at the end of the first quarter, a figure that included $30 billion in deposits received from large US banks last month as a lifeline for First Republic, According to a company press release.

“They probably lost $100 billion in deposits when you exclude the $30 billion they got from those big banks,” Morningstar analyst Eric Compton said. it’s huge.”

Neil Holland, the bank’s chief financial officer, said the deposit outflows were “unprecedented”.

The company said outflows have slowed and it is taking steps to right the ship, including “significant cuts” in executive compensation, shrinking corporate office space and laying off workers. First Republic said it expects to reduce its workforce by about 20-25% per second
a fourth.

It’s a stunning change of fortune for First Republic, a regional bank that has succeeded by focusing on providing private banking and wealth management services to affluent clients in coastal metropolitan areas.

Things changed in March after the Silicon Valley bank collapsed, causing turmoil in regional bank stocks and prompting customers at other banks to withdraw deposits. Morningstar’s Compton said the First Republic was just an innocent bystander. However, it was caught in the crisis, and its stock is still far from recovery. As of Monday’s close, shares are down 87% so far this year.

Before the bank announced the results, its shares were up 12% during the regular Monday session to close at $16, but they slumped during after-hours trading and have recently fallen 18%.

On Monday, First Republic reported diluted earnings per share of $1.23, down 38.5%. Analysts expected earnings per share of $0.95, according to Facttest.

The San Francisco-based bank had $176.4 billion in total deposits at the end of the fourth quarter, making it at the time the 12th-largest bank in the United States, according to the company’s annual report.

But a tough first quarter took its toll. First Republic ended the quarter with net income of $269 million, down 33% year over year. Total revenue was $1.2 billion, down 13.4%.

Morningstar’s Compton said the bank will struggle to turn a profit in the second quarter. “I don’t see how profitable they are in the second quarter.”

First Republic says a lifeline from big US banks has helped it weather the storm.

When deposit outflows exceed cash on hand, First Republic can access other sources of liquidity such as Fed Home Loan loans. But it is an expensive solution. The bank said short-term Federal Reserve secured loans, securities sold under repurchase agreements, and short- and long-term FHLB advances totaled $106 billion. The First Republic said it had access to more liquidity, including cash and cash equivalents totaling $13.2 billion.

Total loans peaked on March 15 at $138.1 billion, according to the bank. Deposits totaled $102.7 billion on April 21, down 1.7% from the end of the first quarter.

However, the company’s total interest expense ballooned to $974 million at the end of the first quarter from $525 million in the fourth quarter. As a result, net interest income was $923 million, a decrease of 19.4%.

Speaking during the company’s earnings call, CEO Mike Roffler said the bank’s deposit base has stabilized and that First Republic will focus on rebuilding it. “Going forward, uninsured deposits will remain a much smaller portion of total deposits than they were in the past,” he said.

The company has taken other actions to support its business. For example, in March, top executives — including CEO James H. Herbert, II — cut their annual bonus to zero for the entirety of 2023, according to a regulatory filing. Herbert also elected to waive his salary as CEO, effective March 12.

On April 6, the Board of Directors of First Republic hanging Paying a quarterly cash dividend on a bank’s preferred stock “as a measure of prudent oversight,” according to Regulatory filing With the Securities and Exchange Commission.

How these moves helped remains to be seen. “How do you find growth when you cut the workforce by 20-25%?” Compton told Morningstar. “It’s a very bad situation.”

First Republic’s earnings call lasted about 12 minutes, and bank executives did not respond to analyst questions.

Earnings for other regional banks in the first quarter so far have been mixed. For example, Zions Bancorp (ZION) missed its quarterly earnings estimates. The SPDR S&P Regional Banking Index (KRE) is down 25% so far this year.

Of course, it wasn’t just the First Republic’s deposit base that was under pressure. Its wealth management unit has seen advisers direct exits since the outbreak of the regional banking crisis. In recent weeks, the First Republic has seen dozens of teams or individual consultants move to other companies.

The exodus continued on Monday when an advisory team oversaw $13 billion in assets Left left to join Cresset Asset ManagementIt is a privately owned Chicago-based wealth management firm.

The full effects of the advisor’s departure were not shown in Monday’s earnings report. Wealth management assets were $289.5 billion at the end of the first quarter, up 5.6% year over year, according to First Republic. Roffler said on the earnings call that the departing advisors teams account for less than 20% of total assets, and that First Republic expects to keep a portion of the money managed by the leaving advisors.

“We’ve retained close to 90% of the wealth management professionals,” Roffler said.

Staff retention will be a major figure to pursue in the future.

“If things don’t go well, do you start losing to private bankers or wealth managers?” Compton said. “It looks like this has already started, and I’m not sure how to solve that.”

Write to Andrew Welsch at [email protected]