First Republic Bank, headquartered in San Francisco, announced its financial results for the first quarter ending on March 31, 2023, on Tuesday. The data suggests that the bank is currently encountering a major financial obstacle, as deposits declined by 40% during the first quarter. It appears that the banking crisis in the United States is not yet entirely resolved.
First Republic Bank has announced plans for significant cost-cutting measures, including the sale of assets worth $100 billion and large-scale layoffs, as it continues to face ongoing struggles. These measures were prompted by the closure of Silicon Valley Bank and Signature Bank in March 2023, which caused panic and resulted in unprecedented deposit outflows from First Republic.
There are unverified reports suggesting that the US government may seize and nationalize First Republic Bank in the near future.
The shares of First Republic Bank experienced a sharp decline of nearly 50% yesterday following reports of significant deposit losses, and plans for large-scale layoffs and asset sales.
While the bank has stated that deposit activity started to stabilize during the week of March 27, 2023, the analysis of the most recent quarterly results does not indicate positive signals overall.
A brief analysis of the balance sheet
A balance sheet analysis of First Republic Bank shows a significant increase in loans year-over-year, with loans totaling $173.3 billion, up by 22.6%. However, deposits during the same period decreased by 35.5% to $104.5 billion. It is worth noting that deposits were down 40.8% from December 31, 2022.
It is important to note that the bank’s deposits at March 31, 2023, included $30 billion of time deposits that it received from a group of large US banks. Meanwhile, borrowings increased by a staggering $101.2 billion to reach $106.7 billion.
BREAKING:
First Republic Bank's deposits fell by 40% in 22 days.If not for $30 Billion rescue package from big banks, the decline would have been 57%. pic.twitter.com/wIkjGDRP30
— Jack Farley (@JackFarley96) April 24, 2023
Overall, the balance sheet suggests that the bank continues to face significant financial challenges, as indicated by the decline in deposits and the surge in borrowings. However, the time deposits from large US banks has provided some temporary relief.
This puts the bank in an uncomfortable position to take further action to stabilize its financial position, such as implementing cost-cutting measures or seeking additional sources of funding.
Surviving on liabilities
According to recent reports, First Republic Bank is heavily reliant on external funding from various sources, including the Federal Reserve, Federal Home Loan Banks (FHLB), and large banks. Specifically, out of the total liabilities of $215.0 billion, government- and GSIB-related activities account for $135.9 billion, which is approximately 63% of the bank’s liabilities.
While this reliance on external funding may help to reduce liquidity risk, it can also compress net interest margin (NIM), a measure of the profitability of a bank’s lending activities.
The net interest margin (NIM) of First Republic Bank declined to 1.77% in the quarter from 2.45% in the previous quarter. The decrease in NIM can be attributed to the rise in short-term borrowings, which resulted in higher funding costs. However, this was partially offset by the increase in net interest margin by 11 basis points due to penalties imposed on CD withdrawals.
To manage this heavy dependence on external funding and liabilities, First Republic Bank may need to take extraordinary measures to reduce its reliance on these sources and maintain liquidity. This could involve implementing cost-cutting measures, improving efficiency, and seeking alternative sources of funding. Failure to address this issue could lead to a continued decline in NIM, which could ultimately impact the bank’s profitability and financial stability.
 Income and Revenue
According to results of first quarter of 2023, First Republic Bank is passing through a challenging operating environment. Total revenues for the quarter were $1.2 billion, which is a decline of 15.9% compared to the prior quarter.
This decline was primarily due to lower net interest income, which was partially offset by an increase in non-interest income. The unprecedented loss of deposits resulting in higher funding costs heavily impacted net interest income and net interest margin.
Net income was positive $269 million, down from $364 million in Q4.
Net interest income is likely to compress further as the effects of higher interest funding flow through.
If you the funding rate was 200 bps higher, you'd need to find $2.7 billion/year.
4/10 pic.twitter.com/6X61VBlBxK
— Brandon Carl (@brandonjcarl) April 25, 2023
Net interest income for the quarter was $923 million, down 21.4% compared to the previous quarter. The decline was mainly due to significantly higher funding costs, which offset the impact of CD withdrawal penalties that reduced interest expense on deposits by approximately $57 million.
Non-interest income, on the other hand, was $286 million for the quarter, up 8.7% compared to the prior quarter. This increase was mainly driven by higher investment management fees.
Wealth Management Division stays strong
The bank has reported that its wealth management assets totaled $289.5 billion as of March 31, 2023, representing an increase of 6.7% compared to the previous quarter. These assets are composed of investment management assets, brokerage assets, money market mutual funds, and trust and custody assets.
Wealth management fees, which are earned through investment management, brokerage, insurance, trust, and foreign exchange activities, totaled $223 million for the quarter, making up 18.5% of the bank’s total revenues.
However, some wealth management teams have left First Republic, leading to concerns about the bank’s ability to retain these assets. As of April 21, 2023, the assets associated with these departing teams accounted for less than 20% of the bank’s total wealth management assets.
Nonetheless, the bank has retained nearly 90% of its total wealth professionals and expects to hold onto a portion of the assets previously managed by these departing teams.
The future course of action for First Republic Bank
First Republic Bank is implementing several measures to mitigate the financial crisis it is currently facing. These measures include increasing insured deposits, decreasing borrowings from the Federal Reserve Bank, and reducing loan balances to align with the decreased dependence on uninsured deposits. The primary objectives of these measures are to downsize the bank’s balance sheet, decrease its reliance on short-term borrowings, and tackle the persisting challenges it is confronted with.
To curb expenses, the bank is also making significant reductions to executive officer compensation, consolidating corporate office space, and cutting down on non-essential projects and activities. Furthermore, the bank intends to reduce its workforce by around 20-25% in the second quarter.
However, the effectiveness of these efforts in stabilizing the American banking sector is uncertain, given the prevailing uncertainty and lack of trust in the industry. It should be noted that anxiety and mistrust in banks are among the major reasons for deposit withdrawals, not solely financial factors.
