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Deposits At First Republic Bank Fell By More Than $100 Billion As It Seeks Options

Deposits At First Republic Bank Fell By More Than $100 Billion As It Seeks Options
After the bell rang on Monday, First Republic Bank said that deposits had fallen by more than $100 billion and that it was looking into possibilities like restructuring its balance sheet. This news caused shares of the bank to drop more than 20%.
Profits for the struggling company, which were bolstered by deposits from major American banks last month after two regional lenders failed, were overshadowed by the deposit decline.
First Republic, based in San Francisco, announced on Monday that it will reduce CEO salaries, reduce office space, and eliminate 20% to 25% of its workforce in the second quarter.
The corporation also wants to decrease borrowings from the Federal Reserve Bank and boost insured deposits.
"We're taking steps to meaningfully reduce our expenses to align with our focus on reducing the size of the balance sheet," CEO Mike Roffler said in a post-earnings conference call. The briefing lasted less than 15 minutes and ended without executives taking questions from analysts.
It was reminiscent of calls made during the 2008 financial crisis, said Timothy Coffey, an analyst at Janney Montgomery Scott LLC who had dialled in, that managers chose not to hold a question-and-answer session with analysts.
Without going into specifics, First Republic added that it was "pursuing strategic options" to hasten the process of strengthening the bank.
According to a source familiar with the situation who spoke on the condition of anonymity because the conversations were private, the lender was considering all of its options.
According to the source, the bank was hoping the U.S. government would assist by bringing together parties that might be able to boost First Republic's fortunes, such as private equity groups and major lenders.
After Silicon Valley Bank (SVB) and Signature Bank failed last month, clients began moving billions of dollars to larger institutions, shattering consumer faith in U.S. regional banks.
"With the closure of several banks in March, we experienced unprecedented deposit outflows," said Neal Holland, First Republic's finance chief.
Despite the lender receiving a $30 billion lifeline in combined deposits from U.S. banking titans like Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., and Wells Fargo & Co., deposits declined to $104.47 billion in the first quarter from $176.43 billion in the fourth quarter.
The drop in deposits would have been close to $102 billion if big banks hadn't contributed $30 billion in deposits.
"We had estimated net outflow of deposits to be around $40 billion," Coffey told Reuters. "Losing that much in deposits and having to replace them with borrowings is very expensive."
Nevertheless, the business said that deposits started to stabilise in the week of March 27 and continued to do so through April 21.
According to Refinitiv statistics, the lender earned $1.23 per share in the first quarter that ended in March, far more than the 85 cents per share analysts had predicted for the period.
Results revealed the full magnitude of First Republic's losses following the banking crisis last month, which increased worries of a panic spreading throughout the financial system.
Banking analysts and business professionals say it too faces a challenging route to turn around its woes.
It attracted high net worth clients for years by offering them advantageous rates on mortgages and loans, which made it more prone to risk than regional lenders with less wealthy consumers.
Due to the fact that "a large mortgage portfolio at incredibly low rates generating little revenue is not very attractive," said Robert Conzo, CEO of New York-based investment advice firm The Wealth Alliance, this will deter potential purchasers of the bank.
As interest rates increased, the value of First Republic's loan book and investment portfolio decreased as well.
When it comes to selling assets, the bank's options are constrained. According to Autonomous Research analyst David Smith, selling the wealth management division would result in the loss of one of its most lucrative businesses while divestingtment of the mortgage division would probably result in losses.
He continued, "I think they'd be hesitant about selling that since wealth management is one of the strongest elements of the bank that's still there.
According to three people with knowledge of the situation, Reuters reported last month that the bank is considering ways it can reduce its size if its efforts to acquire new capital are unsuccessful.
On Monday, the rating agency Moody's downgraded First Republic along with a number of other banks. The lender's rating was downgraded by three notches, which was more severe than that of competitors like US Bancorp, Western Alliance Bancorp, and Comerica Inc.
Investors are examining the financial reports of a number of local banks to evaluate their condition and capacity to withstand potential financial shocks. The biggest American banks posted first-quarter windfall profits due to increasing interest payments, mostly ignoring the upheaval.
"It's just a really tight picture for First Republic based on its earnings," said Autonomous Research analyst Smith. "Getting the bank in shape will be a lot of work, to put it mildly."

Christopher J. Mitchell

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