First Republic Bank (FRC) Q1 2023 Earnings Call Transcript

First Republic Bank (NYSE:FRC) Q1 2023 Earnings Call dated Apr. 24, 2023.

Corporate Participants:

Mike Ioanilli — Vice President and Director Investor Relations

Mike Roffler — Chief Executive Officer

Presentation:

Operator

First Republic Bank’s First Quarter 2023 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Mike Ioanilli, Vice President and Director of Investor Relations. Please go ahead.

Mike Ioanilli — Vice President and Director Investor Relations

Thank you. Before we begin, please note that our remarks include forward-looking statements. Information about these statements are available in the earnings press release and the Bank’s FDIC filings, all available on the Bank’s website. The forward-looking statements reflect our current views about future events and financial performance and they are subject to risks, uncertainties, assumptions and changes in circumstances, a number of which have increased as a result of recent developments that may cause our actual results to differ materially from historical results and those expressed or implied in any forward-looking statement. Forward-looking statements made on this call speak only as of today and will not be updated. Given the events of March, we are withdrawing our previously communicated financial guidance. Please note that there will be no question-and-answer session following our prepared remarks.

And now I would like to turn the call over to Mike Roffler, CEO and President.

Mike Roffler — Chief Executive Officer

Thank you, Mike. On today’s call, we’ll discuss the events in March, actions to strengthen our business and first quarter results. Since our founding, First Republic has been fully committed to serving our clients and communities. Over the past seven weeks, as we were impacted by industry events, our commitment to delivering exceptional client service has not wavered. We continue to meet our clients’ banking and wealth management needs as we always have. I’d like to take a moment to thank our colleagues for their commitment to First Republic and their uninterrupted service of our clients and communities throughout this challenging period. Their dedication is inspiring.

I would also like to reiterate our appreciation for the Group of America’s largest banks, who placed $30 billion in uninsured deposits with us, as well as for our state and federal regulators, who have continued to provide us with expert support. Lastly, I would also like to thank our clients for their ongoing advocacy. Despite the uncertainty of the past two months and while average account sizes have decreased, we have retained over 97% of client relationships that banked with us at the start of the first quarter. We are grateful for our clients who continue to place their trust in First Republic.

Let me now discuss our current funding. As the industry events unfolded in March, we experienced unprecedented deposit outflows. Beginning the week of March 27th, our deposits stabilized and they have remained stable since that time. As of March 31st and excluding deposits from the large banks, insured deposits were $54.6 billion or 73% of total deposits. Uninsured deposits were $19.8 billion or 27% of total deposits.

Consumer deposits represented 52% of total deposits. Total deposits as of April 21st, including the $30 billion received from the large banks were $102.7 billion, down only 1.7% from the end of the first quarter. This slight decline from March 31st reflects seasonal client tax payments that occur each April. In response to the unprecedented deposit outflows we experienced towards the middle of March 2023, we accessed additional liquidity to ensure we could serve client needs. Our ability to do so swiftly was supported by the outstanding credit quality of our loan portfolio.

Total borrowings peaked on March 15th at $138.1 billion. At that time, we had $34 billion of cash and cash equivalents available on our balance sheet. We have since repaid a portion of our borrowings. As of March 31st, total borrowings have declined to $106.7 billion and we had $13.2 billion of cash and cash equivalents available on our balance sheet. Importantly, as of April 21st, we had $45.1 billion of unused available borrowing capacity and cash on hand. This available liquidity is more than two times our uninsured deposits, excluding the $30 billion of uninsured deposits received from the large banks.

Turning to credit, strong credit quality has been a pillar of First Republic and the strength of our portfolio was demonstrated again this quarter. During the first quarter, we had net recoveries of approximately $200,000. Non-performing assets ended the quarter at only 6 basis points of total assets. Given the current industry focus on commercial real-estate, I want to note that our total commercial real-estate portfolio represents only 6% of total loans, it has an average loan-to-value ratio of just 46%.

Turning to capital, we remain well-capitalized with a Tier 1 leverage ratio of 8.25%, our common equity Tier1 ratio of 9.32% and a total risk-based capital ratio of 12.71% at quarter-end. As previously announced and as a matter of prudent capital management, we have suspended dividends and all common and preferred stock.

Turning to Wealth Management, during the quarter, assets under management increased 7%, including $11 billion of net client inflows. Following the recent industry events, wealth management assets from teams that have departed were responsible for less than 20% of total wealth management assets as of March 31st, 2023. However, we anticipate retaining a portion of the wealth management assets associated with departing teams. As of April 21st, 2023, First Republic has retained nearly 90% of wealth professionals. This is a testament to the terrific Wealth Management franchise our talented teams have built over the years.

We remain fully committed to our integrated banking and wealth management model and the unique benefits it provides to clients. Though we faced challenges and uncertainties, 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.

First, we are focusing on increasing our deposits. We are doing so by focusing on insured deposits from new consumers, small businesses and non-profit organizations. We are also focused on serving our existing clients by providing off-balance sheet liquidity solutions, as well as educating on and optimizing their FDIC insurance options and we are leveraging our preferred banking offices, which remain an important channel for driving deposit growth. Going forward, uninsured deposits will remain a much smaller percentage of total deposits than in the past.

Second, we are working to decrease our loan balances to correspond with our reduced reliance on uninsured deposits. We are doing so by moderating our loan volumes and we are focusing on originating loans to sell in the secondary market. We intend to retain servicing on these loans as we always have, so that we remain the primary point of contact for our clients. Through these actions, we intend to reduce the size of our balance sheet, reduce our reliance on short-term borrowings and address the challenges we continue to face. Third, we are taking steps to meaningfully reduce our expenses to align with our focus on reducing the size of the balance sheet. These expense reductions are designed in a way that supports our continued focus on client service and does not affect our regulatory and risk-related support and controls.

Actions are underway include, significant reductions to executive officer compensation as previously disclosed, condensing corporate office space within our markets and reducing non-essential projects and activities. With reductions in projects, activities and loan volume, we expect to reduce the size of our workforce by approximately 20% to 25% during the second quarter. This will be an incredibly difficult decision to make and we are committed to doing so with respect and care for our colleagues.

In addition to the actions I’ve outlined, we are pursuing strategic options to expedite our progress, while reinforcing our capital position. I also wanted to underscore the key aspects of our business that will remain unchanged. These include operating a simple and straightforward business model focused on delivering exceptional client service, working collaboratively to meet the banking and wealth management needs of our clients, maintaining consistently high credit quality and serving and creating opportunity within our communities.

During 2022, First Republic dedicated $4.8 billion in lending and investment capital to support underserved and underrepresented communities. It is a privilege to serve our clients and help drive economic growth within our communities. We are grateful for the continued support and thank everyone for joining today’s call.

Questions and Answers:

Operator

[Operator Closing Remarks]