The first post-revenue stock drop shows a 41% drop in deposits

Deposits at First Republic Bank fell nearly $72 billion, or 41%, during a brutal first quarter that saw its customers pull money from the bank amid a crisis that has brought down three other lenders.

First Republic (ticker: FRC ) reported diluted earnings per share of $1.23, down 38.5%. According to FactSet, analysts were expecting EPS of $0.95.

Its shares rose 12% to close at $16 during the regular session on Monday before the bank reported results, but they settled at $12.60, down 21% in after-hours trading. As of Monday’s close, the stock had fallen 87% so far this year, largely because of the crisis that hit regional banks in March.

First Republic said it had $104.5 billion in deposits at the end of the first quarter, including $30 billion in deposits it received from major U.S. banks last month as First Republic’s lifeline. According to a company press release.

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

But a tough first quarter hit First Republic. The bank ended the quarter with net income of $269 million, down 33% year over year. Revenue was $1.2 billion, down 13.4%. Neil Holland, the First Republic’s chief financial officer, said the outflow of deposits was “unprecedented”. “We moved quickly and leveraged our portfolios of high-quality debt and securities to secure additional liquidity. We are working to restructure our balance sheet and reduce our expenses and short-term debt.

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First Republic says a lifeline from major U.S. banks has helped it weather the storm. When the deposit outflow is in hand, you can access other sources of liquidity, such as First Republic Federal Home Loan Bank loans. But this is an expensive solution. Short-term borrowings from the Federal Reserve Bank, securities sold under repurchase agreements and short-term and long-term FHLB advances totaled $106 billion, the bank said. First Republic said it has access to more liquidity, including $13.2 billion worth of cash and cash equivalents.

Total loans rose to $138.1 billion on March 15, according to the bank. According to the bank, deposit outflows have slowed down. Total deposits as of April 21 were $102.7 billion, down 1.7% from the end of the first quarter.

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

The earnings call lasted about 12 minutes, and the bank did not take questions from analysts.

It is not just the bank’s deposit base that is under pressure. The wealth management division has seen an exodus of advisers since the regional banking crisis erupted in March. In recent weeks, First Republic has decommissioned more than a dozen groups or individual consultants to other firms.

An advisory group that oversaw $13 billion in assets left on Monday Left to join Cresset Asset ManagementA private wealth management firm based in Chicago.

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The full impact of the adviser’s departure was not shown in Monday’s earnings report. Wealth management assets totaled $289.5 billion at the end of the first quarter, an increase of 5.6% year-over-year, First Republic said. Roeffler said on the earnings call that the exiting advisor groups represent less than 20% of total assets, and First Republic expects the advisors to retain a portion of the money they manage.

“We retain almost 90% of our wealth management professionals,” Roeffler said.

This is breaking news. Read a preview of First Republic Bank’s earnings below and check back soon for more analysis.

First Republic Bank

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Busy first quarter. On Monday, the company reports earnings and the pressing question for investors is: How bad was the damage?

“This is the most important earnings report in the bank’s history,” says Morningstar analyst Eric Compton.

Investors will look to see how far the regional bank’s deposit base has fallen and whether it is still profitable. Compton measures the bank’s long-term health. Shares of First Republic (ticker: FRC ) are down 88% so far this year.

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“There are a lot of questions about whether the bank will be profitable after Q1,” he says. “If they don’t, what’s the plan? What will they do about it? Is there a way out of it?”

It’s a surprising shift for First Republic (ticker: FRC ), a regional bank that has found success by focusing on providing private banking and wealth management services to wealthy clients in coastal urban areas.

First Republic, founded in 1985 and based in San Francisco, is “one of the more unusual banks under our coverage,” Compton wrote on March 16. We have been able to reduce significantly higher organic growth year over year, resulting in approximately 20% compound asset growth over the past 10 years compared to an industry growth rate of close to 5%,” Compton wrote.

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Maelstrom. However, the company’s fortunes changed in March following the collapse of Silicon Valley Bank, which triggered a rout in regional bank stocks and prompted bank customers to pull deposits. Compton says that the First Republic was an innocent bystander. However, it was caught in a spiral and the company’s stock did not recover. Shares of First Republic closed above $14 on Friday, below their 52-week high of $171.

The company, which had $176 billion in total deposits at the end of the fourth quarter, has been trying to grow its business—and getting help from rivals. A consortium of major banks threw First Republic a lifeline on March 16, transferring uninsured deposits to the foreclosed bank. At the time, First Republic said its cash position was about $34 billion. When the deposit outflow is in hand, you can access other sources of liquidity, such as First Republic Federal Home Loan Bank loans. But this is an expensive solution.

On March 16, First Republic said it varied from $20 billion to $109 billion overnight from the Federal Reserve from March 10 to March 15 at a rate of 4.75%. Also, since the close of business on March 9, as of the March 16 report, First Republic Federal Home Loan Bank has increased its short-term loans at a rate of 5.09% by $10 billion.

In late March, CEO James H. Herbert, II and CEO Michael J. Top executives, including Roeffler, elected to reduce their annual bonuses to zero for the full year of 2023. Herbert also elected to waive his salary as acting chairman effective March 12.

and on April 6, the Board of Directors of the First Republic Suspended Payment of quarterly cash dividend on bank preference shares “as a measure of prudential supervision” Regulatory filings with the Securities and Exchange Commission.

How much these moves help remains to be seen.

First-quarter earnings for other regional banks have been mixed results so far. For example, Zions Bancorp (ZION) missed quarterly earnings estimates. The SPDR S&P Regional Bank ETF (KRE) is down 25% so far this year.

Morningstar’s Compton on March 28 upgraded his fair estimate for Regional Banks, but not First Republic, to $3 a share. Compton gave the company a “severely uncertain” rating. “We think the best outcome for the First Republic is to simply hold rates until the Fed cuts rates, which would make the earnings profile look much better,” Compton wrote. “But the questions that remain for us are how long the bank can hold on and how much damage has already been done to the brand and business model.”

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Analysts at Keefe, Bruyette & Woods said in a March 31 note that uncertainty surrounding First Republic is elevated. “In turn, this has affected our ability to assess the range of potential outcomes with any degree of certainty, and as a result, we are moving our rating to Closed-Underrated and withdrawing our earnings outlook and price target,” KBW analysts wrote. . “We intend to re-establish ratings and valuation when corruption subsides and the outlook becomes clearer.”

Consultant attrition. Even as volatility eases, the First Republic faces other headwinds. The bank’s wealth management arm has come under pressure as advisers leave. In recent weeks, First Republic has seen more than a dozen teams or individual advisors leave; Exit Advisors managed or advised on more than $20 billion. The effects of those departures, which continued into April, may not show up in Monday’s earnings report.

The bank has spent much of the past decade growing its wealth management business and poaching large advisory groups from rivals such as Bank of America Merrill Lynch. Last year, First Republic hired 13 wealth management teams.

Those efforts paid off. First Republic’s assets under management or administration more than doubled from $107 billion at the end of 2017 to $271 billion at the end of 2022, according to the company’s January earnings presentation. Wealth management has also come to occupy a larger share of revenue in the First Republic: 15% of total sales will be generated by the wealth unit in 2022, up from 5.5% in 2010.

Executives tout the benefits wealth management brings to the bank, and vice versa. In 2022, the firm’s bankers recommended more than $11.5 billion in assets to the wealth segment, which in turn recommended more than $3 billion in deposit balances to their banker colleagues.

“A big part of the franchise’s value is this high-net-worth client base they’ve built,” says Morningstar’s Compton. “They’re also known for acquiring talent, whether it’s private bankers or wealth managers. I think that’s another thing for people thinking about the long-term value of ownership. Yes, there are short-term profitability and balance sheet issues. Long-term, how do you retain talent?”

Monday’s earnings report will not only reveal the depth of the First Republic’s recent problems. It will also indicate what the road in front of the bank will look like.

Write to Andrew Welsch at [email protected]

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