Moments ago the regional bank at the forefront of the banking crisis, First Republic, whose stock crashed from $125 to $12 one month ago amid the broader banking crisis, reported its closely watched earnings. And, on the surface, they weren't terrible: the company beat on both EPS, Net Interest Income and revenues:
- Q1 Revenue $1.2BN, -14% Y/Y, beating the estimate of $1.12BN
- Q1 EPS of $1.23, beating estimates of $0.72
- Q1 Net Interest Income $923MM, -19%, but beating estimates of $889.9MM
The balance sheet was relatively solid:
- Common equity Tier 1 ratio 9.32%, beating estimates of 8.84%
- Provision for credit losses $16 million, +60% y/y, below the estimate $22.2 million
- Return on average common equity 6.55% vs. 11.9% y/y, estimate 4.22%
- New originations $11.44 billion, -36% y/y
- Debt securities available-for-sale $3.41 billion, +1.9% q/q, above the estimate $2.8 billion
- Debt securities held-to-maturity $31.39 billion, +11% q/q, above the estimate $28.21 billion (2 estimates)
- Cash and cash equivalents $13.16 billion vs. $4.28 billion q/q, well above estimate $3.62 billion
The company also "optimized" on the expense side:
- Non-interest expenses $852 million, -1.6% y/y, below the estimate $898.1 million
- The bank is also taking steps to reduce expenses, "including significant reductions to executive officer compensation, condensing corporate office space, and reducing non-essential projects and activities. The Bank also expects to reduce its workforce by approximately 20-25% in the second quarter."
But the one item that everyone was looking at was the bank's deposit and loan exposure, and it was here that the bank reported a doozy: deposits at March 31 were down 41% from $172BN as of year end to $104.5BN at quarter end (including $30BN from a consortium of banks, so really $74BN), and then dropped another 1.7% through April 21, which is if nothing else a silver lining: at least the pace of outflows is slowing.
Some more color here:
“Deposit activity began to stabilize beginning the week of March 27, 2023, and has remained stable through Friday, April 21, 2023. Total deposits were $102.7 billion as of April 21, 2023, down only 1.7% from March 31, 2023, primarily reflecting seasonal client tax payments that occur each April.”
As note above, that $100BN or so in deposits also includes some $30BN from the consortium of bailing out banks including JPM, Citi and so on. This is how the bank described the recent bank run:
"In response to the unprecedented deposit outflows, the Bank enhanced its financial position through access to additional liquidity from the Federal Reserve Bank, the Federal Home Loan Bank and JP Morgan Chase & Co. Total borrowings peaked on March 15, 2023, at $138.1 billion. At that time, the Bank had $34.0 billion of cash on its balance sheet. Total borrowings totaled $104.0 billion, and cash and cash equivalents totaled $10.0 billion as of April 21, 2023. This includes $25.5 billion of long-term advances with the Federal Home Loan Bank, compared to $7.3 billion as of December 31, 2022."
And some more detail on the funding side:
Other sources of funding at March 31, 2023 included secured short-term borrowings from the Federal Reserve, securities sold under agreements to repurchase, and short-term and long-term FHLB advances, which totaled $105.9 billion.
This is both bad news, in that the bank needs some $100BN in ongoing emergency funding to stabilize its operations, and good news in that it isn't getting any worse in the past month.
Against this plunge in deposits, the bank's loans at March 31 actually rose 3.9% to $173.31 billion, above the estimate of $168.31 billion, and indicating that the bank is at least not engaging in asset firesales and is instead relying on funding goodwill from the Fed and JPM (+ other banks) to remain alive.
The bottom line is that FRC has borrowed some $100BN in emergency loans on which it is paying about 5% in blended interest. How long it can continue doing that remains to be seen, but until then it will likely wipe out about 100% of the bank's net interest income. The one potential way out is if FRC somehow manages to sell its viable loans (many of which are IO loans backed by Hampton properties) at something close to par and repays the Fed, FHLB and banking consortium. With $173 in loans (as a reminder, a lot of FRC's loan exposure is to super prime NY real estate), it may just find enough loans to pay back the emergency loans and start rebuilding its balance sheet without too much impairment. And sure enough, management just confirmed as much:
- FRC SAYS IT AIMS TO REDUCE RELIANCE ON SHORT TERM BORROWINGS
Alternatively, if only FRC can survive 1-2 years to take it to the next QE, it will find that its loan book is actually money good.
Elsewhere, the bank spent some time discussing its prize jewel, the wealth management group, which manages some $290BN in assets. What is most notable here is that FRC has "retained nearly 90% of its total wealth professionals and anticipates retaining a portion of the wealth management assets associated with departing teams." Some more details:
Total wealth management assets were $289.5 billion at March 31, 2023, up 6.7% compared to the prior quarter and included investment management assets of $118.9 billion, brokerage assets and money market mutual funds of $149.7 billion, and trust and custody assets of $20.9 billion.
Wealth management fees, which consist of investment management, brokerage and investment, insurance, trust and foreign exchange fee income, totaled $223 million for the quarter, up 6.7% compared to the prior quarter. Such revenues represented 18.5% of the Bank’s total revenues.
Following the recent industry events and as of April 21, 2023, wealth management assets from teams that have departed First Republic were responsible for less than 20% of total wealth management assets as of March 31, 2023. As of April 21, 2023, First Republic has retained nearly 90% of its total wealth professionals and anticipates retaining a portion of the wealth management assets associated with departing teams.
The bank also announced that it is pursuing strategic alternatives, that it is withdrawing all previous guidance, and that it won't
After soaring during the regular session, the stock has sunk in postmarket trading, tumbling to just above $13 from a session high of $16.85. For context, the implied stock move, according to options data, was about 23%.