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

Before the bank announced the results, its shares rose 12% during the regular Monday session to close at $16, but were trading at $12.60, down 21% in after-hours trading. As of Monday’s close, the stock is 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 in deposits received from large US banks last month as a lifeline for First Republic. 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 at the time the 12th-largest bank in the United States, according to the company’s annual report.

But the rough first quarter took its toll on First Republic. The bank finished the quarter with net income of $269 million, down 33% year over year. Revenue was $1.2 billion, down 13.4%. Neil Holland, Chief Financial Officer of First Republic, said the deposit outflows were “unprecedented”. We moved quickly and leveraged our portfolios of high quality loans and securities to secure additional liquidity. We are restructuring our balance sheet and reducing our expenses and short-term borrowings.”

First Republic says the lifeline it received from big US banks 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. According to the bank, deposit outflows have slowed. Deposits totaled $102.7 billion on April 21, down 1.7% from the end of the first quarter.

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 earnings call lasted about 12 minutes, and the bank did not respond to analyst questions.

It is not just the bank’s deposit base that has come under pressure. The wealth management unit has seen advisers move towards exits since the regional banking crisis erupted in March. 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 It remained 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.

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

First Republic Bank

The first quarter was a tumultuous one. On Monday, the company announced its earnings and the burning question for investors is: How bad has it been?

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

Investors will be looking to see how low the regional banks’ deposit base has been, and whether it is still profitable. Compton will measure the bank’s long-term health. Shares of First Republic (trading symbol: FRC) are down 88% so far this year.

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

It’s a stunning turnaround for the wealth of First Republic (stock ticker: FRC), a regional bank that has found success by focusing on providing private banking and wealth management services to affluent clients in coastal metropolitan areas.

First Republic, founded in 1985 and headquartered in San Francisco, “is one of the more unusual banks under our coverage,” Compton wrote on March 16. I have been able to deliver remarkably high organic growth year over year, resulting in nearly 20% multiplex growth in assets over the past 10 years compared to an industry growth rate of close to 5%,” Compton wrote.

swirl. However, the company’s fortunes changed in March after the collapse of the Silicon Valley Bank, which caused turmoil in regional bank stocks and prompted the banks’ customers to withdraw deposits. Compton says the First Republic was something of an innocent bystander. However, it got caught in a downward spiral and the company’s stock never recovered. First Republic shares 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, tried to boost its business — and got help from competitors. A consortium of major banks gave 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 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.

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

Later in March, the top executives — including CEO James H. Herbert II and CEO Michael J. Roeffler — cut their annual bonuses to zero for the full year 2023, according to a regulatory filing. Herbert also elected to waive his salary as CEO, effective March 12.

And 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.

Earnings for other regional banks in the first quarter so far have been a mixed bag of results. 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.

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

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

Drain the advisor. Even if volatility eases, the First Republic faces another headwind. The bank’s wealth management unit has come under pressure as advisors head for exits. In recent weeks, the First Republic has seen dozens of teams or individual advisors leave; The departing advisors have managed or advised on more than $20 billion. The effects of those trips, which continued into April, may not be seen in Monday’s earnings report.

The bank has spent most of the past decade growing its wealth management business, poaching large teams of advisors from competitors like Bank of America Merrill Lynch. Last year, First Republic hired 13 wealth management teams.

Those efforts have borne fruit. First Republic’s assets under management or management more than doubled to $271 billion at the end of 2022 from $107 billion at the end of 2017, according to the company’s January earnings presentation. Wealth management is also becoming a bigger part of First Republic’s revenue pie: 15% of all sales in 2022 were generated by the Wealth unit, up from 5.5% in 2010.

Executives promoted the benefits that wealth management brings to the bank, and vice versa. In 2022, the company’s bankers transferred more than $11.5 billion in assets under management to the wealth unit, which in turn transferred deposit balances totaling more than $3 billion to their fellow bankers.

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

Monday’s earnings report won’t just reveal the depth of the First Republic’s recent woes. It will also indicate what the road in front of the bank looks like.

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