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.

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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."