First Republic to Shrink After Deposits Drop More Than Expected

(Bloomberg) — First Republic Bank is slashing its workforce, shrinking its balance sheet and pursuing strategic options after deposits plummeted even more than analysts expected during last month’s regional-banking crisis.

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Executives at the bank laid out plans for shoring up finances after customer deposits plunged 41% to $104.5 billion in the first quarter, missing the $137 billion average of analyst estimates compiled by Bloomberg. The drop came even after the country’s largest lenders parked $30 billion of their own cash with the San Francisco-based bank.

Still, such outflows have slowed in recent weeks, according to First Republic. Between the end of March and April 21, deposits slipped just 1.7%, meaning customer activity has largely been stable, the company said.

“Though we faced challenges and uncertainties with the stabilization of our deposit base and the strength of our credit quality and capital position, we continue to take steps to strengthen our business,” Chief Executive Officer Mike Roffler said on a conference call.

In response to the “unprecedented” outflow of deposits, the company said it plans to cut its workforce by as much as 25% and that it’s weighing strategic options as it works to reinforce its capital position.

First Republic shares fell 12% at 5:07 p.m. in late New York trading. The stock has cratered 87% this year, compared with the 3.3% decline for the S&P 500 Financials Index.

The results are the first detailed update from First Republic since investors pulled back from the stock in the midst of a crisis that engulfed regional lenders nationwide last month.

The turmoil started with the collapse of SVB Financial Group’s Silicon Valley Bank, which fell into government receivership after a sale of available-for-sale securities spooked depositors in the venture capital community. The move put a spotlight on banks sitting on large piles of unrealized losses on their balance sheets that might have to take similar action if faced with excessive withdrawals.

Indeed, First Republic ended last year with almost $27 billion in markdowns on loans and a bevy of unrealized losses on Treasuries and other long-dated bonds on the company’s balance sheet. That was far greater than the roughly $13 billion in tangible common equity it had at the time.

Bloomberg News has previously reported that executives have also considered a sale of the entire bank. The large unrealized losses — which would have to be crystallized in most deals — have caused some buyers to balk at the prospect, people with knowledge of the matter have said.

Revenue for the first quarter slumped 13% from a year earlier to $1.21 billion, hurt by a 19% drop in net interest income. That compares with the $1.1 billion average of analyst estimates compiled by Bloomberg.

Operating expenses, meanwhile, unexpectedly dropped, falling 1.6% to $852 million. That helped net income for the period, which slumped 33% to $269 million, beat the $171 million average of analysts’ estimates compiled by Bloomberg.

Founded in 1985, First Republic has spent years expanding its wealth-management services and other offerings for the ultra-rich. The company saw total wealth-management assets climb 6.7% to $289.5 billion from $271.2 billion at the end of last year. Fees tied to the business also jumped.

But in recent weeks, the firm has seen a bevy of advisers leave for rivals. Assets tied to those team represented less than 20% of the firm’s total, and the company anticipates retaining a portion of those funds despite the departures, Roffler said on a conference call with analysts.

The company has retained 90% of its wealth professionals and remains “fully committed” to the business, Roffler added.

The company vowed that, going forward, uninsured deposits would remain a smaller part of its total deposit base. First Republic also plans to moderate loan volumes and will now focus on originating loans that can be sold on the secondary market.

“We intend to retain servicing on these loans as we always have so that we remain the primary point of contact for our clients,” Roffler said on the call. “Through these actions we intend to reduce the size of our balance sheet, reduce our reliance on short-term borrowings and address the challenges we continue to face.”