Is First Republic Bank Running Aground?

First Republic Bank (NYSE: FRC), a private bank and wealth management company, recently reported its first-quarter results which sent shockwaves through the market. Following the news, shares of the company plummeted, falling by up to 8% before eventually settling at 2.3% lower at $101.52 per share.

Investors were disheartened by the announcement that deposit outflows for the quarter were worse than anticipated, leading to a need for cost-cutting measures such as cutting jobs. This article will explore the details behind this disappointing earnings report and what it means for the future of First Republic.

Q1 Earnings Recap

First Republic (NYSE:FRC) stock tanked after news broke that Q1 deposit outflows had been worse than expected, and CEO Jim Herbert announced plans to cut costs by reducing headcount by about 7%. FRC shares fell as much as 8% before closing down 2.3% at $101.52 per share.

Deposits were off -$1 billion in total, or just over $400 million excluding seasonal declines from December’s fourth quarter. The wealth management firm saw net interest income rise 9%, but net interest margin was squeezed to 2.81%, with loans growing just 0.3%. Total revenue growth came in at a disappointing 2.3% year-over-year increase to $866 million, despite strong investment fees growth. While assets under management grew a healthy 5% YoY, they now stand at a record high of $149 billion.

Deposit Outflow Woes

One of the primary reasons why FRC's stock dropped so precipitously lies squarely upon the company's unexpectedly negative deposit situation. Deposits decreased by nearly $1B, even accounting for traditional seasonality between quarters four and one. However, when adjusting for holiday spending habits seen annually between late December and early January, the shortfall still stood at roughly $400M during Q1 2023. These results suggest that clients may have lost confidence in the stability and security of their funds held within FRC accounts or simply transferred them elsewhere due to more favorable conditions found at competitor banks.

Net Interest Margin Concerns

Another red flag raised during the earnings call was the compression of net interest margin, which tightened to 2.81% from 3.04% the previous year. Despite positive trends in credit quality metrics like nonperformers and delinquency rates across various lending segments, FRC failed to offset rising funding costs via asset yields.