First Republic Bank, the San Francisco-based lender reeling from the fallout of Silicon Valley Bank and grappling with holding fixed-rate mortgages with low interest rates on its balance sheet, reported sobering news for investors in its first-quarter filing on Monday.
For the first time since the collapse of Silicon Valley Bank and Signature Bank, First Republic disclosed it had lost about $102 billion in deposits over the course of the first quarter — about half of the deposits that sat on its books at the end of last year. It ended the quarter with $104 billion in deposits — a number that included $30 billion in deposits put into First Republic by 11 banks last month.
Any outflow of deposits poses problems for lending, given that banks need deposits to make loans for commercial and residential property, businesses and individuals.
First Republic increased its loan book to $173.3 billion in the first quarter, a roughly 4 percent increase from the prior period. This was primarily due to “increases in single family and multifamily” loans.
The bank’s interest expenses soared to $555 million in the first quarter — a whopping 2,675 percent increase from $20 million in the first quarter of last year, before the Federal Reserve raised rates for the first time.
That increase in expenses led to a decline in net interest income to $923 million — a 21 percent drop compared to the last three months of last year, according to the earnings release.
The “decrease in net interest income was primarily due to substantially higher funding costs,” First Republic said in the release.
CEO Mike Roffler said on an earnings call the firm was working to reduce its expenses by taking measures including condensing office space, reducing executive compensation and laying off up to 25 percent of its staff. The firm did not have a question-and-answer session with equity analysts to provide further details.
First Republic is mostly in the business of lending to homeowners, and for the most part, to individuals with very high credit scores. Almost 60 percent of its loans were single-family mortgages, according to the firm’s 2022 annual report.
About 97 percent of all mortgages — a total of $96 billion — on its books were issued after 2008, its annual report shows, when mortgage rates dipped below 5 percent for the first time ever. However, as interest rates have increased in the last year, the company must pay out more in interest on certificates of deposits and other savings accounts, while its income from long-term mortgages remains fixed..
About half an hour after markets closed on Monday, First Republic’s stock dropped 16 percent to $13.47 per share, down from $123 a share before Silicon Valley Bank collapsed last month.
Investment bank Raymond James expected First Republic would report a “material decline in core deposits,” according to an analyst note earlier this month, which will cause “severe profitability headwinds for the foreseeable future.”