First Republic stock falls after earnings Show a 41% drop in deposits

Before the bank reported results, shares rose 12% in Monday’s regular session to close at $16, but changed hands at $12.60, down 21% in after-hours trading. As of Monday’s close, the stock was down 87% so far this year, largely due to 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, a figure that included $30 billion of deposits received from major U.S. banks last month as a lifeline for First Republic, according to a company press release.

The San Francisco-based bank had $1[ads1]76.4 billion in total deposits at the end of the fourth quarter, which at the time made it the 12th largest bank in the United States, according to the company’s annual report.

But a rough first quarter took its toll on 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%. Deposit payouts were “unprecedented,” said Neal Holland, chief financial officer of First Republic. “We moved quickly 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.”

First Republic says the lifeline it received from major US banks has helped it weather the storm. When deposit payments exceed cash on hand, First Republic can access other sources of liquidity such as Federal Home Loan Bank loans. But it is an expensive solution. The bank said secured short-term loans from the Federal Reserve, securities sold under repurchase agreements, and short-term and long-term FHLB advances totaled $106 billion. First Republic said it has access to more liquidity, including cash and cash equivalents totaling $13.2 billion.

Total borrowing peaked on March 15 at $138.1 billion, according to the bank. The deposit outflow has decreased, according to the bank. Total deposits were $102.7 billion as of April 21, down 1.7% from the end of the first quarter.

During the company’s earnings call, CEO Mike Roffler 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 part 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 has been under pressure. The wealth management unit has seen advisers heading for the exits since the regional banking crisis exploded in March. In recent weeks, First Republic has seen a dozen teams or solo advisors decamp for other companies.

The exodus continued on Monday, when a team of advisers overseeing $13 billion in assets left to join Cresset Asset Management, a private wealth management firm based in Chicago.

The full effects of the advisor departures did not emerge in Monday’s results report. Assets under management 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 departing advisor teams represented less than 20% of total assets, and that First Republic expects to retain a portion of the money that departing advisors manage.

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

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

First Republic Bank

had a turbulent first quarter. On Monday, the company reports earnings and the pressing question for investors is: How big were the damages?

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

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

“There are many questions about whether the bank will be profitable after the first quarter,” he says. “If they’re not, what’s the plan? What will they do with it? Is there a way out of it?”

It’s a stunning change in fortunes for First Republic (ticker: FRC), a regional bank that 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. “The bank was exclusively led by its founder, Jim Herbert, until mid-2021, and has been able to achieve remarkably high organic growth year-on-year, resulting in compound asset growth of approximately 20% over the past 10 years compared with industrial growth of close to 5%,” Compton wrote.

Maelstrom. However, the company’s fortunes changed in March after the collapse of Silicon Valley Bank, which triggered a slide in regional bank stocks and prompted bank customers to withdraw deposits. First Republic was something of an innocent bystander, says Compton. Nevertheless, it got caught up in the maelstrom and the company’s shares have not recovered. Shares of First Republic closed above $14 on Friday, well 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 strengthen its business — and getting help from competitors. A consortium of major banks threw First Republic a lifeline on March 16, moving uninsured deposits totaling $30 billion to the beleaguered bank. At the time, First Republic said it had a cash position of approximately $34 billion. When deposit payments exceed cash on hand, First Republic can access other sources of liquidity such as Federal Home Loan Bank loans. But it is an expensive solution.

On March 16, First Republic said that from March 10 to March 15, Federal Reserve bank loans ranged from $20 billion to $109 billion with an overnight rate of 4.75%. In addition, since the close of business on March 9, First Republic had also increased short-term borrowings from the Federal Home Loan Bank by $10 billion at a rate of 5.09%, according to the March 16 statement.

Later in March, top executives — including Executive Chairman James H. Herbert, II and CEO Michael J. Roffler — chose to reduce their annual bonuses to zero for the full year 2023, according to a regulatory filing. Herbert also chose to waive his salary as executive chairman with effect from 12 March.

And on April 6, First Republic’s board suspended the payment of the quarterly cash dividend on the bank’s preferred stock “as a measure of prudential oversight,” according to a regulatory filing with the Securities and Exchange Commission.

How much these moves have helped remains to be seen.

Other regional banks’ earnings in the first quarter have so far been a mixed bag of results. For example, Zions Bancorp ( ZION ) missed quarterly earnings estimates. The SPDR S&P Regional Banking ETF (KRE) is down 25% so far this year.

Morningstar’s Compton updated his fair value estimates for regional banks on March 28, but not for First Republic, which he pegged at $3 a share. Compton gave the company an “extreme uncertainty” rating. “We think the best outcome for First Republic would be to just hang on until the Fed cuts interest rates, which would make the earnings profile look much better,” Compton wrote. “However, how long the bank can hold on and how much damage has already been done to the brand and business model are still outstanding questions for us.”

Analysts at Keefe, Bruyette & Woods said in a March 31 note that uncertainty surrounding First Republic was elevated. “In turn, this has affected our ability to estimate the range of potential outcomes with any degree of certainty, and because of this we are moving our rating to Covered-Not Rated and withdrawing our earnings outlook and price target,” KBW wrote -analysts. “We intend to reinstate estimates and ratings as volatility subsides and the outlook clears.”

Advisor wear. Although volatility is easing, First Republic faces other headwinds. The bank’s wealth management unit has come under pressure as advisers lead the exits. In recent weeks, First Republic has seen a dozen teams or solo advisors leave; the departing advisors managed or advised on more than $20 billion. The effects of these departures, which have continued through April, may not show up in Monday’s earnings report.

The bank spent most of the past decade growing its wealth management business, acquiring large advisory teams from competitors such as Bank of America’s Merrill Lynch. Last year, First Republic employed 13 wealth management teams.

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

Managers have pointed out the benefits asset management brings to the bank, and vice versa. In 2022, the company’s bankers referred over $11.5 billion of assets under management to the wealth unit, which in turn referred deposit balances totaling more than $3 billion to its bank counterparts.

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

Monday’s earnings report will not only reveal the depth of First Republic’s recent problems. It will also indicate what the way forward looks like for the bank.

Write to Andrew Welsch at andrew.welsch@barrons.com