The collapse of First Republic Bank
In this post, we examine the events that led to the collapse of First Republic Bank (FRC) in Q2, 2023.
Balance Sheet, Q4 2022
First, we look at the balance sheets of First Republic Bank at the end of Q4, 2022, as reported on FRC’s Q1 2023 earnings release (FRC Investor Relations).
Assets
Liabilities
Total Loans: $166.084 billion
Bonds, held to maturity: $28.348 billion
Bonds, available for sale: $3.347 billion
Cash: $4.283 billion
Other: …
Deposits: $176.437 billion
Short-term borrowings: $6.7 billion
Long-term FHLB advances: $7.3 billion
Other:
Total Assets: $212.639 billion
Total Liabilities: $195.193 billion
Bank Capital: $17.446 billion
At the end of Q4, 2022, the loans to deposits (LDR) ratio of FRC was: 166.084/176.437 = 94.1 %. This was higher than the safer range of loan to deposits ratio between 80% and 90% (Investopedia). A higher LDR means the bank may not have enough liquidity to cover unforeseen funding requirements.
Uninsured Deposits
Just looking at FRC’s Q4 2022 balance sheet, it’s not immediately clear what issues the bank might run into or had already ran into. Note that in the US, not all deposits are made equal, as deposits up to $250,000 are insured by FDIC. Depositors with uninsured deposits are more likely to withdraw money from a bank if they believe the bank is in trouble. Thus, a bank with a higher portion of uninsured deposits is more likely to be subject to a bank run crisis.
According to FRC’s Q1 2023 earnings release (FRC Investor Relations), the estimated breakdown of FRC’s uninsured and insured deposits at the end of Q4 2022 is:
FRC’s Total Deposits
$176.437 billion
FRC’s Uninsured Deposits
$118.822 billion (67%)
FRC’s Insured Deposits
$57.615 billion (33%)
Note that, banks are not required to provide estimated portions of uninsured deposits in their earnings releases, but this data is available in the FDIC’s BankFind tool. For example , the estimated uninsured deposits provided by FRC match the number in the FDIC’s website (FDIC).
To gain a better understanding, we can compare the portion of uninsured deposits between FRC and the largest bank in the US, JP Morgan Chase, in the same period, end of Q4 2022 (FDIC):
Chase’s Total Deposits
$2440.722 billion
Chase’s Uninsured Deposits
$1463.807 billion (60%)
Chase’s Insured Deposits
$976.915 billion (40%)
The same statistics for Bank of America (BOFA), end of Q4 2022 (FDIC):
BOFA’s Total Deposits
$2042.255 billion
BOFA’s Uninsured Deposits
$854.727 billion (42%)
BOFA’s Insured Deposits
$1187.528 billion (58%)
As we can see, FRC's portion of uninsured deposits was on the higher side, which increased risks of bank runs for FRC. This could be due to the business of FRC which tends to target a high net-worth customer base.
Interest-Rate Risk
As described above, at the end of Q4 2022, FRC held $28.348 billion in Bonds held-to-maturity (HTM), which accounted for 17.09% of total assets. Note that, the value of these HTM bonds are not recorded as their market value as banks intend to hold these bonds until they mature. These HTM bonds are not protected against an increase in interest-rate. As the Fed started raising interest rates in March 2022 to fight inflation, these HTM bonds should already suffer a significant decline in market value (marked-to-market or MTM loss).
On their Q1 2023 earning releases, FRC did not disclose how much MTM unrealized loss on their HTM bond portfolio. The previous highly-publicized collapse of Silicon Valley Bank (SVB) in March 2023 revealed that SVB had an unrealized MTM loss exceeding $15 billion (16.4%) out of their $91.3 billion HTM bond portfolio (Wikipedia). So, if FRC had a MTM unrealized loss on a similar scale, it would be exceeding $28.348 * 16.4% = $4.65 billion. That would mean a decline of 26% in their bank capital. We looked into FRC’s 2022 form 10-K and found they reported unrealized losses on HTM bonds (at the end of 2022) as $4.83 billion (First Republic Bank). In a liquidity crisis, banks may be forced to sell their HTM bonds and realize the paper losses.
Timeline of events Q1, 2023
On March 10, 2023, Silicon Valley Bank collapsed, which triggered the start of the 2023 banking crisis.
The same day, FRC’s share closed down 15%. The following Monday, March 13, 2023, FRC’s share closed down another 62%.
On March 15, 2023, Fitch downgraded FRC’s credit ratings, citing a high portion of uninsured deposits (Fitch). To quote from Fitch’s report,
“Fitch views FRC's deposit base as concentrated given the strategic focus on banking wealthy and financially sophisticated customers in select urban coastal markets in the U.S. This not only drives a high proportion of uninsured deposits as a percentage of total deposits but also results in deposits that can be less sticky in times of crisis or severe stress. Fitch believes this feature of the business model has resulted in franchise erosion following the high profile failures of SVB Financial and Signature Bank, despite the deposit base being more diversified from a sector/industry standpoint.”.
On March 16, 2023, it was publicly announced that FRC received a $30 billion infusion from the largest US banks (CNN). On March 17, 2023, FRC’s share declined further 32.8%. The following Monday, March 20, 2023, FRC’s share closed down another 47.1%.
On April 24, 2023, FRC released its Q1 2023 earnings report. It disclosed unprecedented deposit outflows between March 10, 2023 till the end of Q1, 2023.
Excluding $30 billion inflows from other banks, total deposits at the end of Q1, 2023 was $74.5 billion, representing an outflow of $102 billion in a period of 3 weeks. Deposits were down by 58% and the bank faced a significant liquidity crisis. On April 25, following the earning report, FRC’s share closed down 49%.
FRC headed towards a collapse and on May 1, 2023, FDIC seized the bank and its assets were sold to JP Morgan Chase. This marked the second-largest bank failure in U.S. history in terms of assets.
Conclusion
First Republic Bank failed due to a combination of factors:
A bank run following the collapse of Silicon Valley Bank and Signature Bank.
A high portion of uninsured deposits from its wealthy client-base, making the bank more vulnerable to a bank run.
Exposure to long-term bonds that lost a significant amount of market value due to interest rate increases.
The failure of communication from the bank’s management might have also be an important factor that caused a crisis of confidence that triggered the bank run on FRC:
The bank was not transparent about the deposit outflows when the news of $30 billion rescue from other banks was first announced.
The bank decided not to take questions during its Q1 2023 earning call.
Works Cited
CNN. “First Republic secures $30 billion rescue in aftermath of SVB and Signature Bank collapse.” CNN, 17 March 2023, https://edition.cnn.com/2023/03/16/investing/first-republic-bank/index.html. Accessed 8 July 2023.
FDIC. “Institution Financial Reports - Bank of America.” BankFind Suite: Institution Financial Reports, https://banks.data.fdic.gov/bankfind-suite/FinancialReporting/details/3510. Accessed 8 July 2023.
FDIC. “Institution Financial Reports - Chase.” BankFind Suite: Institution Financial Reports, https://banks.data.fdic.gov/bankfind-suite/FinancialReporting/details/628. Accessed 8 July 2023.
FDIC. “Institution Financial Reports - First Republic Bank.” BankFind Suite: Institution Financial Reports, https://banks.data.fdic.gov/bankfind-suite/FinancialReporting/details/59017. Accessed 8 July 2023.
First Republic Bank. “FEDERAL DEPOSIT INSURANCE CORPORATION FORM 10-Q.” Investor Relations | First Republic Bank, 8 November 2022, https://ir.firstrepublic.com/static-files/3b107b00-8b0b-4347-9850-2697be0e3887. Accessed 8 July 2023.
Fitch. “Fitch Downgrades First Republic to 'BB'; Places Ratings on Negative Watch.” Fitch Ratings, 15 March 2023, https://www.fitchratings.com/research/banks/fitch-downgrades-first-republic-to-bb-places-ratings-on-negative-watch-15-03-2023. Accessed 8 July 2023.
FRC Investor Relations. “FRC Earnings Release Q1 2023.” Investor Relations | First Republic Bank, 24 April 2023, https://ir.firstrepublic.com/static-files/013f57fb-b980-4353-bbb3-0e7a3b27f20a. Accessed 8 July 2023.
Investopedia. “Loan-to-Deposit Ratio (LDR) Definition.” Investopedia, https://www.investopedia.com/terms/l/loan-to-deposit-ratio.asp. Accessed 8 July 2023.
Wikipedia. “Collapse of Silicon Valley Bank.” Wikipedia, https://en.wikipedia.org/wiki/Collapse_of_Silicon_Valley_Bank. Accessed 8 July 2023.