First Republic Bank Faces Crisis of Customer Withdrawals and Low Deposits
First Republic Bank, a regional lender based in San Francisco, has been facing a crisis of customer withdrawals that has brought it to its lowest point in its 38-year history. The bank reported a net deposit outflow of $72bn in Q1, leading to a 41% fall in total deposits to $104.5bn, even after a consortium of banks provided $30bn to prevent the lender from failing. Without this cash injection, deposits would have fallen by over 50%. The bank's stock fell nearly 50% to $8.10, a new low, and is down 93% year-to-date. The bank also announced plans to reduce its headcount by 20%-25%, which is expected to save between $200m and $250m per quarter going forward.
First Republic will need to find a way to replace the disappearing deposits with cheap funding in order to survive. The regional bank's borrowings increased to $106.7bn by the end of Q1, from $15.3bn in December 2022. The bank had to pay over $1bn in quarterly interest expenses from these borrowings, compared to the $419m it paid during Q1'23 and minimal amounts back in 2022. The bank is attempting to adapt to a period of higher interest rates as deposit costs rise across the industry while loan margins shrink.
Following the chaos, First Republic is taking steps to “increase insured deposits, reduce borrowings from the Federal Reserve Bank, and decrease loan balances to correspond with the reduced reliance on uninsured deposits.” According to CFO Neal Holland, the bank is currently focusing on restructuring its balance sheet, shrinking its size, and cutting down on expenses. First Republic desires to decrease its dependence on short-term loans. In addition to downsizing its workforce, the bank plans to cut expenses through substantial reductions in executive pay, downsizing its corporate headquarters, and eliminating unnecessary projects and tasks.
First Republic has also announced plans to sell up to $100bn of mortgages and long-dated securities in order to improve its asset-to-liability mismatch. According to Bloomberg, warrants or preferred shares may be offered in order to incentivise buying the assets above market value. This is part of an attempt to shore up its finances amid a rush of customer withdrawals. The bank is reversing two key pieces of its old strategy: relying less on big depositors, who are more likely to yank their money in times of trouble, and focusing on loans that can be sold on the secondary market, instead of interest-only jumbo mortgages that attracted legions of wealthy borrowers.
First Republic, which caters mostly to wealthy clients, is particularly vulnerable to quick, massive withdrawals by customers worried about their deposits. At the close of the previous year, 70% of the bank's deposits lacked insurance, which is higher than the median of 55% for mid-sized banks in the industry. The bank announced on Monday that it will borrow less from the Federal Reserve Bank and try to rely less on uninsured deposits going forward.
0. “First Republic Q1 Earnings: Rising Funding Costs Pose Headwind (NYSE:FRC)” Seeking Alpha, 25 Apr. 2023, https://seekingalpha.com/article/4596163-first-republic-decent-q1-earnings-rising-funding-costs-pose-headwind
1. “First Republic bank says deposits tumbled 40% to $104.5 billion in the first quarter” NBC News, 24 Apr. 2023, https://www.nbcnews.com/business/corporations/first-republic-bank-says-deposits-tumbled-40-1045-billion-first-quarte-rcna81251
2. “First Republic stock tanks after Q1 deposit outflows, plans to cut headcount (NYSE:FRC)” Seeking Alpha, 25 Apr. 2023, https://seekingalpha.com/news/3959649-first-republic-stock-tanks-after-q1-desposit-outflows-plans-to-cut-headcount
3. “First Republic lost $72 billion in deposits amid bank turmoil” Yahoo Finance, 24 Apr. 2023, https://finance.yahoo.com/news/first-republic-lost-72-billion-in-deposits-amid-bank-turmoil-201258847.html
4. “First Republic shares slide after 40% dip in deposits tied to banking crisis” Fox Business, 24 Apr. 2023, https://www.foxbusiness.com/markets/first-republic-shares-slide-q1-report-reveals-40-percent-dip-deposits-banking-crisis
5. “First Republic will cut up to 25% of staff after bank run” SFGATE, 25 Apr. 2023, https://www.sfgate.com/tech/article/first-republic-bank-job-cuts-17917582.php
6. “First Republic Plans up to 25% Layoffs after $100B Deposit Flight, Shares Plunge” TipRanks, 25 Apr. 2023, https://www.tipranks.com/news/first-republic-plans-up-to-25-layoffs-after-100b-deposit-flight-shares-plunge
7. “How First Republic Bank's strategy of low-rate mortgages backfired” Business Insider, 25 Apr. 2023, https://www.businessinsider.com/why-first-republic-bank-in-trouble-mortgages-backfired-rising-rates-2023-4
8. “First Republic falls nearly 50% to record low after reporting massive deposit drop” CNBC, 25 Apr. 2023, https://www.cnbc.com/2023/04/25/first-republic-falls-more-than-40percent-to-record-low-after-reporting-massive-deposit-drop.html
9. “FRC Crashes as Outflows Puts Its Existence at Risk” TipRanks, 25 Apr. 2023, https://www.tipranks.com/news/special-purpose-entity-may-be-used-to-save-first-republic-bank
10. “First Republic's Survival Plan Could Come at the Cost of Its Prized Wealth Unit” Bloomberg, 25 Apr. 2023, https://www.bloomberg.com/news/articles/2023-04-25/first-republic-survival-plan-may-curb-jumbo-mortgages-it-prized