First Republic Reports First Quarter 2023 Results

First Republic Bank (NYSE:FRC) today announced financial results for the quarter ended March 31, 2023.

Jim Herbert, Founder and Executive Chairman, and Mike Roffler, CEO and President of First Republic said, "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. We remain fully committed to serving our communities, and we are grateful for the ongoing support of our clients and colleagues."

Financial Results

• Year-over-year:
  • Revenues were $1.2 billion, down 13.4%.
  • Net interest income was $923 million, down 19.4%. ⁽¹⁾
  • Net income was $269 million, down 32.9%.
  • Diluted earnings per share of $1.23, down 38.5%.
  • Book value per share was $76.97, up 10.4%.
• Net interest margin was 1.77%, compared to 2.45% for the prior quarter. ⁽¹⁾
• Efficiency ratio was 70.4%, compared to 63.9% for the prior quarter.

Capital Position and Credit Quality

• Tier 1 leverage ratio was 8.25%.
• Common Equity Tier 1 ratio was 9.32%.
• Nonperforming assets were 0.06% of total assets.
• Net recoveries were $0.2 million.

Wealth Management

• Year-over-year:
  • Wealth management assets were $289.5 billion, up 5.6%.
  • Wealth management revenues were $223 million, up 0.7%.

Balance Sheet

• Year-over-year:
  • Loans totaled $173.3 billion, up 22.6%.
  • Deposits were $104.5 billion, down 35.5%. ⁽²⁾
  • Borrowings were $106.7 billion, up $101.2 billion.

Neal Holland, Chief Financial Officer of First Republic said, "With the closure of several banks in March, we experienced unprecedented deposit outflows. We moved swiftly and leveraged our high-quality loan and securities portfolios to secure additional liquidity. We are working to restructure our balance sheet and reduce our expenses and short-term borrowings."

Recent Industry Events

The recent industry events, beginning in March 2023, have impacted the Bank's funding sources.

As of March 9, 2023, total deposits were $173.5 billion, down 1.7% from year-end 2022. On March 10, 2023, following the highly public closure of a large regional bank, First Republic began experiencing unprecedented deposit outflows.

On March 16, 2023, First Republic received uninsured deposits totaling $30 billion from a group of America's largest banks. This support for First Republic allowed the Bank to reduce its short-term borrowings. At that time, daily deposit outflows had slowed considerably.

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.

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.

As a result of the recent events, the Bank is taking actions to strengthen its business and restructure its balance sheet. These actions include efforts to increase insured deposits, reduce borrowings from the Federal Reserve Bank, and decrease loan balances to correspond with the reduced reliance on uninsured deposits. Through these actions, the Bank intends to reduce the size of its balance sheet, reduce its reliance on short-term borrowings, and address the challenges it continues to face. Refer to the Forward-Looking Statements below.

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.

In addition to these actions, the Bank is pursuing strategic options to expedite its progress while reinforcing its capital position.

Suspension of Dividends on Common Stock and Noncumulative Preferred Stock

In response to recent events, as announced on March 16, 2023, the Bank's Board of Directors determined to suspend its common stock dividend. In addition, on April 6, 2023, the Bank's Board of Directors determined to suspend payment of the quarterly cash dividend on each series of the Bank's outstanding noncumulative perpetual preferred stock.

Asset Quality

Nonperforming assets were 6 basis points of total assets at March 31, 2023.

The provision for credit losses for the quarter was $16 million. The Bank had net loan recoveries of $0.2 million for the quarter.

Book Value

Book value per common share at March 31, 2023 was $76.97, up 2.1% from the prior quarter.

Capital Position

The Bank's Tier 1 leverage ratio was 8.25% at March 31, 2023, compared to 8.51% in the prior quarter. The Common Equity Tier 1 ratio was 9.32% at March 31, 2023, compared to 9.17% in the prior quarter.

In February 2023, the Bank sold 2,875,000 new shares of common stock in an underwritten public offering, which added $397 million to common equity.

Balance Sheet

Loans

Loans totaled $173.3 billion at March 31, 2023, up 3.9% compared to the prior quarter. The increase was primarily due to increases in single family and multifamily loans, as well as higher capital call lines of credit outstanding due to increased utilization in March.

Investments

Total investment securities at March 31, 2023 were $34.8 billion, a 9.8% increase compared to the prior quarter. High-quality liquid assets, including eligible cash and unencumbered investment securities, totaled $14.4 billion at March 31, 2023, and represented 6.6% of quarterly average total assets.

Deposits

Total deposits declined $72.0 billion during the quarter, to $104.5 billion at March 31, 2023 reflecting outflows toward the middle of March 2023. At March 31, 2023, excluding the $30 billion of deposits made by the large U.S. banks, total deposits consisted of 58.4% in checking deposits, 15.0% in other liquid deposits, and 26.6% in CDs. At March 31, 2023, excluding the $30 billion of deposits made by the large U.S. banks, our estimated uninsured deposits totaled $19.8 billion, or 27% of total deposits. Insured deposits declined moderately during the quarter and have remained stable from March 31 through April 21. Refer to the Deposits table for additional details regarding our deposits.

Funding

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.

Our unused, available borrowing capacity at the Federal Reserve Bank discount window and FHLB at March 31, 2023 was $12.4 billion and $1.7 billion, respectively. This available borrowing capacity is supported by pledged loans and investment securities. In addition, at March 31, 2023, cash and cash equivalents totaled $13.2 billion.

As of April 21, 2023, the Bank had $45.1 billion of cash and cash equivalents and unused available borrowing capacity, representing more than two times our estimated uninsured deposits, excluding the $30 billion of deposits made by the large U.S. banks.

Wealth Management

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.

Income Statement and Key Ratios

Revenue

Total revenues were $1.2 billion for the quarter, down 15.9% compared to the prior quarter. The decrease was due to a decrease in net interest income, partially offset by an increase in noninterest income. Following the recent industry developments, net interest income and net interest margin were, and continue to be, materially impacted due to the unprecedented loss of deposits resulting in higher funding costs.

Net Interest Income

Net interest income was $923 million for the quarter, down 21.4% compared to the prior quarter. The decrease in net interest income was primarily due to substantially higher funding costs, which was partially offset by CD withdrawal penalties that reduced interest expense on deposits by approximately $57 million.

Net Interest Margin

The net interest margin decreased to 1.77% for the quarter, from 2.45% in the prior quarter. The decrease was primarily due to higher short-term borrowings, which was partially offset by the impact of CD withdrawal penalties that increased the net interest margin by 11 basis points.

Noninterest Income

Noninterest income was $286 million for the quarter, up 8.7% compared to the prior quarter. The increase was primarily driven by higher investment management fees.

Noninterest Expense and Efficiency Ratio

Noninterest expense was $852 million for the quarter, down 7.4% compared to the prior quarter. The decrease was primarily due to a reversal of previously recognized share-based compensation expense related to performance-based stock awards of $107 million. The decrease was partially offset by higher FDIC assessment expense of $27 million and goodwill impairment of $25 million. The impaired goodwill consisted of all of the Commercial Banking operating segment's goodwill. The Commercial Banking operating segment is one of the Bank's two reportable operating segments as identified in the Bank's Annual Report on Form 10-K for the year ended December 31, 2022.

The efficiency ratio was 70.4% for the quarter, compared to 63.9% for the prior quarter.

Income Taxes

The Bank's effective tax rate for the first quarter of 2023 was 21.2%, compared to 20.9% for the prior quarter.

Conference Call Details

First Republic Bank's first quarter 2023 earnings conference call is scheduled for April 24, 2023 at 1:30 p.m. PT / 4:30 p.m. ET.

To access the conference call by telephone, please dial (877) 400-0505 and provide confirmation code 3782547 approximately 15 minutes prior to the start time (to allow time for registration). International callers should dial +1 (856) 344-9221 and provide the same confirmation code.

To access the conference call online, please visit the Investor Relations section of First Republic's website at ir.firstrepublic.com/events-calendar approximately 15 minutes prior to the start time (to allow time to register, download and install any necessary audio software).

For those unable to join on April 24, 2023, a replay will be available following, accessible in the Investor Relations section of First Republic Bank's website at ir.firstrepublic.com/events-calendar.

The Bank's press releases are available after release in the Newsroom and Investor Relations section of First Republic Bank's website at firstrepublic.com.

About First Republic Bank

Founded in 1985, First Republic specializes in delivering exceptional, relationship-based service. First Republic provides a complete line of banking products, including residential, commercial and personal loans, deposit services, as well as private wealth management, including investment, brokerage, insurance, trust and foreign exchange services. Services are offered through preferred banking or wealth management offices primarily in San Francisco, Palo Alto, Los Angeles, Santa Barbara, Newport Beach and San Diego, California; Portland, Oregon; Boston, Massachusetts; Palm Beach, Florida; Greenwich, Connecticut; New York, New York; Jackson, Wyoming; and Bellevue, Washington. First Republic is a constituent of the S&P 500 Index and KBW Nasdaq Bank Index. For more information, visit firstrepublic.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in this press release that are not historical facts are hereby identified as "forward-looking statements" for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Any statements about our expectations, beliefs, projections, future plans and strategies, objectives, assumptions or anticipated events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as "anticipates," "believes," "can," "could," "may," "predicts," "potential," "should," "will," "estimates," "plans," "projects," "continuing," "ongoing," "expects," "intends" and similar words or phrases.

Examples of forward-looking statements and general risks include, among others: statements regarding our expectations with regard to our business, financial and operating results; forecasts of future economic conditions generally and in our markets in particular, including expectations relating to interest rates and inflation, and their impact on our net interest margin; and our plans and actions to strengthen our business following recent industry developments, such as restructuring our balance sheet, reducing our expenses, repaying our borrowings, reducing reliance on uninsured deposits and increasing our insured deposit base, decreasing loan balances and pursuing other strategic options; and descriptions of assumptions underlying or relating to any of the foregoing. The forward-looking statements contained herein reflect our current views about future events and financial performance and are subject to risks, uncertainties, assumptions and changes in circumstances, including in the near term, that may cause our actual results to differ materially from historical results and those expressed in any forward-looking statement.

There can be no certainty that the Bank will be able to take actions to strengthen our business within a time frame that is acceptable to the market or our regulators. There can be no certainty as to the future of the Bank if we are not able to do so.

Some factors that could cause actual results to differ materially from historical results or expected outcomes include, but are not limited to: demand for our products and services, including deposit attrition or further significant deposit outflows; our ability to retain our banking and wealth management clients, including those associated with departing wealth management teams; our ability to access adequate sources of funding and liquidity, in particular through the Federal Reserve, the Federal Home Loan Bank and other sources where our borrowings are far above historic levels or where we had not previously borrowed; our ability to satisfy our obligations when they become due; our ability to reduce our funding costs and improve our asset and liability mix; difficulties encountered by, or the soundness of, other financial institutions; adverse publicity about First Republic or the banking industry more generally, including as a result of bank failures and concerns about capital and liquidity; changes in our credit ratings and the impact on the cost of, and the ability to access, additional funding and capital, and our ability to conduct bank operations (such as offering our products and services and acting as a loan servicer); inflation and actions by central banks to manage inflation; interest rate risk (sensitivity to increases or decreases to interest rate fluctuations) and credit risk; our ability to retain key managers and employees, including those in our wealth management business; the regulatory environment in which we operate, our regulatory compliance and future regulatory requirements, which may result in costs, fees, penalties, business restrictions, reputational harm or other adverse consequences; any changes to liquidity and regulatory capital requirements applicable to us; legislative and regulatory actions affecting us, the banking industry or the financial services industry more generally; litigation, investigations and other legal actions or proceedings, and associated costs and liabilities; future Federal Deposit Insurance Corporation ("FDIC") special assessments or changes to regular assessments; and other matters discussed in the risk factors included in the Bank's Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the FDIC. In addition, state and federal banking regulators, including the California Department of Financial Protection and Innovation and the FDIC, have broad authority to oversee the Bank and to close the Bank and commence a conservatorship or receivership under various circumstances specified in state and federal banking laws.

Any forward-looking statement made by us in this press release is based only on information currently available to us and speaks only as of the date on which it is made. We do not intend and disclaim any duty or obligation to update or revise any industry information or forward-looking statements, whether written or oral, that may be made from time to time, set forth in this press release to reflect new information, future events or otherwise.

Non-GAAP Financial Measures

Our management uses and believes that investors benefit from using certain non-GAAP measures of our financial performance, which include return on average tangible common shareholders' equity and net interest income on a fully taxable-equivalent basis. Management believes that return on average tangible common shareholders' equity is a useful additional measure to evaluate our performance and capital position without the impact of goodwill and other intangible assets and preferred stock. In addition, to facilitate relevant comparisons of net interest income from taxable and tax-exempt interest-earning assets, when calculating yields and net interest margin, we adjust interest income on tax-exempt securities and tax-advantaged loans so such amounts are fully equivalent to interest income on taxable sources. We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information that is not otherwise required by GAAP or other applicable requirements. These non-GAAP financial measures should be considered in addition to, not as a substitute for, financial measures prepared in accordance with GAAP. A reconciliation of the non-GAAP calculation of the financial measure to the most comparable GAAP financial measure is presented in relevant tables in this document.

Explanatory Note

Some amounts presented within this document may not recalculate due to rounding.