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In This List

Total failed bank assets hit new annual record high as First Republic falls

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 * 1 May, 2023



TOTAL FAILED BANK ASSETS HIT NEW ANNUAL RECORD HIGH AS FIRST REPUBLIC FALLS

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 * Author Harry TerrisDavid HayesZuhaib Gull
 * Theme Healthcare & PharmaceuticalsReal EstateBankingFintechInsurance

First Republic Bank's collapse pushed the 2023 tally of total failed-bank assets
to a new annual record, as the industry upheaval that emerged in March continued
to reverberate.

Regulators seized First Republic on May 1 and reached a deal to sell most of its
assets to JPMorgan Chase & Co. With $232.94 billion of assets as of March 31,
First Republic is the second largest US bank failure in history. Three of the
four largest failures have occurred since March, bringing total assets at failed
US banks in 2023 to about $550.0 billion — compared to the total in 2008, which
was $364.7 billion — according to S&P Global Market Intelligence data based on
the banks' last regulatory filings before their failures.

Across the industry, bank executives said during recent earnings reports that
deposit flows had stabilized, though First Republic's first-quarter results
underscored how precarious its position had become.





Devastating run

Concerns about First Republic grew after the March failures of Silicon Valley
Bank and Signature Bank, and First Republic faced a deposit run that erased much
of the bank's low-cost funding.

First Republic's first-quarter report on April 24 shed some light on the scale
of the damage. The bank posted a sequential drop of $71.96 billion in deposits
to $104.47 billion, implying a run of about $100 billion after taking into
account an emergency infusion of $30 billion of deposits by a consortium of
other large banks.

The bank had already been under pressure before March, as yields on its assets —
including a residential mortgage portfolio that accounts for about half of its
balance sheet — slowly reset higher but funding costs jumped, grinding down its
net interest margin (NIM).



Upside-down balance sheet

While the bank's NIM took a sequential hit of 68 basis points, it was still wide
enough at 1.79% to deliver a profit for the period and lift tangible book value.



However, most of the balance sheet shifts occurred toward the end of the period,
and the quarterly net interest income and expense figures were not reflective of
First Republic's position at March 31. Using period-end values for deposits and
borrowings, along with the rates data the bank reported for the quarter, would
imply a cost of interest-bearing liabilities of about 3.5%, nearly wiping out
the reported 3.7% yield on earning assets for the period.



First Republic also reported noninterest expense of $852 million in the first
quarter, and the figures suggest the bank could have been in danger of rapidly
eroding its total capital of about $19.64 billion at March 31.

In a note after the earnings report, Wells Fargo analyst Jared Shaw projected
that First Republic's quarterly interest expense would more than double in the
second quarter from the first quarter's $974 million, nearly canceling out its
interest income. The bank's "existence still very much hangs in the balance," he
said.

> – Set email alerts for future data dispatch articles.
> – Download a template to generate a bank's regulatory profile.
> – Download a template to compare a bank's financials to industry aggregate
> totals.

Last gasp

The bank said it was trying to cut expenses, including by eliminating up to 25%
of its workforce, and shed assets. Its first focus, it said, was on increasing
deposits, though seasonal client tax payments had led to a further drop in total
deposits to $102.7 billion at April 21.

Compass Point analyst David Rochester projected quarterly losses starting in the
second quarter that would cut into capital as the bank "pays down higher cost
borrowings sitting at a negative spread on the balance sheet."

"We expect that such near-term losses, with the expectation for the same going
forward, could potentially serve to challenge the bank's ability to capture and
retain core deposits, which is the key to the achievement of profitability
beyond the notable loss we expect in "the second quarter]," he added in an April
25 note. That puts "the bank in a tough spot as it attempts to regain its
footing, and ultimately [makes] the path to survival as an independent bank less
certain."





   
   
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 * Author
 * Harry TerrisDavid HayesZuhaib Gull
 * Theme
 * Healthcare & PharmaceuticalsReal EstateBankingFintechInsurance
   

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