First Republic Bank Faces Challenges as the FRC Stock Price Crashes

“With the closure of several banks in March, we experienced unprecedented deposit outflows. We moved swiftly and leveraged our high quality loan and securities portfolios to secure additional liquidity.”
Statement by Neal Holland, Chief Financial Officer of First Republic 

First Republic, a troubled San Francisco-based regional bank, reported a significant decline in deposits during the first quarter of 2023, following the collapse of two other mid-sized banks. According to the bank’s first-quarter earnings report, deposits fell by 40.8% to $104.5 billion during the quarter, worse than the estimated figure of $145 billion. The news sent shockwaves through the financial industry, sparking concerns about widespread bank failures.
Currently, as of 20:00 p.m. on April 26th, the price of FRC is $5.69, which is a significant drop from its price of $115.01 at 2:30 a.m. on March 9th, marking a decline of 95.05%.

First Republic’s Deposit Decline

March 9, 2023

First Republic Bank had $173.5 billion in total deposits, which was 1.7% less than December 2022.

March 10, 2023

The bank experienced a significant surge in deposit outflows after the closure of a large regional bank.

March 15, 2023

On March 15, 2023, the maximum amount of funds borrowed by the bank was $138.1 billion, while its balance sheet reflected $34.0 billion in cash.

March 16, 2023

To address this challenge, First Republic Bank received uninsured deposits of $30 billion from a group of America’s largest banks on March 16, 2023, which helped the bank reduce its short-term borrowings. This led to a considerable decrease in daily deposit outflows.

March 27, 2023

From the week of March 27, 2023, deposit activity began to stabilize.

April 21, 2023

First Republic Bank’s total borrowings amounted to $104.0 billion, while its cash and cash equivalents stood at $10.0 billion. On that day, the bank had a total of $104.5 billion in deposits, which indicates a minor decline of 1.7% from March 31, 2023, primarily due to the yearly client tax payments that usually take place in April. The numbers reduced the effect of an otherwise good report for the first three months of the year, where the bank earned more profit and revenue than expected.

First Republic Reports FIRST QUARTER 2023 Results have been published, and the whole stock blew off the hood within days.

Financial Results

– Year-over-year:
– Revenues were $1.2 billion, down 13.4%.
– Net interest income was $923 million, down 19.4%.(1)
– Net income was $269 million, down 32.9%.
– Diluted earnings per share of $1.23, down 38.5%.
– Book value per share was $76.97, up 10.4%.
– Net interest margin was 1.77%, compared to 2.45% for the prior quarter. (1)
– Efficiency ratio was 70.4%, compared to 63.9% for the prior quarter.

1. Following the recent industry developments, net interest income and net interest margin were, and continue to be, materially impacted due to the unprecedented loss of deposits, resulting in higher funding costs.

Balance Sheet

– Year-over-year:
– Loans totaled $173.3 billion, up 22.6%.
– Deposits were $104.5 billion, down 35.5%.(2)
– Borrowings were $106.7 billion, up $101.2 billion.

2. Deposits were down 40.8% from December 31, 2022. Deposits at March 31, 2023, included $30 billion of time deposits received from the large U.S. banks.

Recovery Plan and Challenges

First Republic is exploring strategic measures to strengthen its capital position and accelerate its progress. To achieve this goal, the bank intends to raise the number of insured deposits, decrease borrowings from the Federal Reserve Bank, and align loan balances with the reduced reliance on uninsured deposits.

Stabilize the Deposit

Despite the sharp drop in deposits, First Republic is trying to improve its financial position by considering different ways to increase its capital and speed up its progress. It announced that deposit flows had stabilized since the week of March 27, 2023. Total deposits were $102.7 billion as of April 21, 2023, down only 1.7% from March 31, 2023.

Headcount Reduction Efforts

First Republic also announced expense reductions through cuts in executive compensation, office space consolidation, and headcount reductions of 20% to 25% in the second quarter. As per its earnings release, the bank is pursuing strategic alternatives to accelerate its progress while strengthening its capital position.

Jim Herbert, Founder and Executive Chairman, and Mike Roffler, CEO and President of First Republic said, “With the stabilization of our deposit base and the strength of our credit quality and capital position, we continue to take steps to strengthen our business.” 

Asset Sales

Bloomberg reported that First Republic is considering selling between $50 billion and $100 billion of its long-dated securities and mortgages to shore up its balance sheet. Fitch Ratings has expressed that the bank’s strategic alternatives would be “very challenging” and might result in substantial write-downs in the value of its assets. The bank’s deposits have declined by 40.8% to $104.5 billion in the first quarter, which is worse than Wall Street’s estimate of $145 billion. The bank’s shares closed down nearly 50% on Tuesday, after the San Francisco-based lender disclosed a loss of $72 billion in deposits.

Conclusion

Despite these challenges, First Republic Bank remains committed to addressing the issues it faces and strengthening its business for the future. While the bank’s stock price has declined significantly, it is taking steps to address its financial challenges and emerge stronger in the long run. 

However, investors have questioned whether First Republic has a future as an independent lender or as part of a bigger bank. Any potential buyer of First Republic would face a significant writedown in the value of the lender’s assets, according to Christopher Wolfe, head of North American banks at Fitch Ratings. The bank faces substantial business, liquidity, funding, and profitability challenges, as per S&P, which cut the bank’s credit rating to junk status in the days following Silicon Valley Bank’s collapse.

Michael Scott
Michael Scott

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