(Bloomberg) — First Republic Bank is cutting its workforce, shrinking its balance sheet and making strategic choices after deposits fell more than analysts expected during the regional banking crisis last month.
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Bank executives laid out plans to shore up finances after customer deposits fell 41% to $104.5 billion in the first quarter, missing an average of $137 billion by analyst estimates compiled by Bloomberg. The drop came even after the country’s largest lenders parked $30 billion of their own money there.
The San Francisco-based bank plans to cut up to 25% of its workforce, reduce non-core projects and activities, and reduce outstanding loan balances. Meanwhile, outflows have slowed in recent weeks, with deposits falling just 1.7% this month through last Friday.
“Although we have faced challenges and uncertainties with the stability of our deposit base, the strength of our credit quality and our capital position, we continue to take steps to strengthen our business,” CEO Mike Roffler said on the conference call.
First Republic shares were down 22% in late New York trading as of 6:48 p.m. after the executives ended the call without answering any questions. The decline also led to a drop in shares of some other regional US lenders, including PacWest Bancorp, which is set to report earnings on Tuesday.
First Republic’s earnings report marks its first detailed update since investors backtracked in mid-March on a group of regional lenders. Much of the concern has focused on its ability to handle withdrawals because interest rates dilute the value of certain assets on its books.
The turmoil escalated with the collapse of SVB Financial Group’s Silicon Valley bank, which fell into government receivership after asset sales spooked depositors in the venture capital community. The move highlighted banks sitting on large piles of unrealized losses on their balance sheets, as well as deposits that exceeded insurance limits.
First Republic finished last year with about $27 billion in loan writedowns and a host of unrealized losses on Treasury notes and other long-term securities on the company’s balance sheet. This was much more than the roughly $13 billion in tangible common stock it held at the time.
Bloomberg News reported earlier that executives had considered selling the entire bank. People familiar with the matter said that large unrealized losses – which should crystallize in most trades – have caused some buyers to dismiss the possibility.
First Republic’s first-quarter results underscore the impact of last month’s regional banking crisis on its business, even as giant banks and a number of regional peers have since released numbers that have reassured shareholders. For example, competitors including KeyCorp, East West Bancorp and OZK Bank reported first-quarter filings that met or beat analyst estimates.
“While depositors are looking for safer banks, it is the First Republic that has faced more outflows than other regional banks,” said Herman Chan, an analyst at Bloomberg Intelligence, in an interview with Bloomberg Television. “It will be difficult for them to find a buyer given the fact that there is a huge hole in the balance sheet.”
First-quarter revenue fell 13% from a year earlier to $1.21 billion, hurt by a 19% decline in net interest income. That compares to an average of $1.1 billion analyst estimates compiled by Bloomberg.
Meanwhile, operating expenses fell unexpectedly, falling 1.6% to $852 million. That was helped by net income for the period, which fell 33% to $269 million, beating the $171 million average of analyst estimates compiled by Bloomberg.
Founded in 1985, First Republic has spent years expanding wealth management services and other offerings to the wealthy. The company saw total wealth management assets rise 6.7% to $289.5 billion from $271.2 billion at the end of last year. Work-related fees also jumped.
But in recent weeks, the company has seen a raft of advisors leave for competitors. The assets associated with those team represent less than 20% of the company’s total, Roffler said on a conference call with analysts, and the company expects to keep a portion of that money despite the departures.
Roffler added that the company has retained 90% of its wealth professionals and remains “fully committed” to the business.
The Company has undertaken that uninsured deposits will, henceforth, remain a smaller portion of its total deposit base. First Republic also plans to adjust loan sizing and will now focus on creating loans that can be sold on the secondary market.
“We intend to keep servicing on these loans as we always have so that we remain the primary point of contact for our customers,” Roffler said on the call. “Through these measures, we intend to reduce the size of our balance sheet, reduce our dependence on short-term borrowing and address the challenges we continue to face.”
(Updates with information about other lenders begin in the fifth paragraph)
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