What happened

Shares of First Republic Bank (FRCB) had plunged by about 46% as of 3:38 p.m. ET Tuesday after the beleaguered regional bank released its first-quarter results Monday night.

First Republic has been in the spotlight since early March, as its business model bears many similarities to the handful of regional banks that went bust around that time. Specifically, First Republic has a large volume of uninsured deposits, as well as lots of fixed-rate, long-duration assets such as mortgages. Back in March, a consortium of the country's 11 largest banks come together to save the bank with a $30 billion deposit injection.

The first-quarter release showed that capital injection was absolutely necessary, and suggests that it may not have been sufficient to stave off more trouble for the bank in the near future.

So what

At first glance, First Republic's first-quarter report might not appear that bad. Revenue was down just 13.4%, and while net income was down 32.9%, it was still positive, at $269 million.

However, the deposit exodus only began in mid-March, so the quarter's earnings reflected two and a half relatively normal months. That shows how quickly things deteriorated toward the end of the quarter.

Specifically, deposits fell 40% quarter over quarter, from $176.4 billion as of Dec. 31 to $104.5 billion as of March 31. But that March 31 figure includes the $30 billion injection from the consortium of large banks. Factor that out, and deposits would have fallen by more than half.

As a result of its reduced deposit base, First Republic had to increase its higher-interest-rate borrowings from the Federal Reserve, the Federal Home Loan Bank, and JPMorgan Chase. First Republic noted that borrowing from these three entities peaked at $138.1 billion on March 15, but said it had worked that number down to $104 billion by April 21. Still, First Republic used a lot of its balance sheet cash to pay those debts down, so the amount of cash and equivalents it has available is lower now. And as the Federal Reserve continued to raise short-term interest rates, that higher-interest-rate borrowing caused First Republic's net interest margins to fall from 2.45% in 2022's fourth quarter to 1.77% in 2023's Q1.

In the Q1 release, management outlined its plan to get through this period, which includes increasing insured deposits, laying off 20% to 25% of its workforce, and shrinking its assets to better match up with its deposit base. The release also said First Republic was considering "strategic options" to accelerate progress on these fronts. This likely means there could be asset sales to other entities, or a potential equity raise to bolster its balance sheet.

On Tuesday morning, CNBC reported that the White House, Treasury, and Federal Reserve were looking into a rescue solution or restructuring of First Republic, which could entail sales of assets to other banks, an equity raise, or some combination of the two.

Now what

Things are highly uncertain for First Republic right now, and the threat of a highly dilutive equity raise continues to hang over the bank. It's therefore no wonder that its shares plunged by more than 40% today. The bank now trades at less than 0.2 times book value, a valuation that low suggests severe distress and the not-insignificant chance of a bankruptcy filing.

On the hopeful side, it does appear First Republic has the support of the nation's larger financial institutions, as the failure of another large regional bank wouldn't be good for the system as a whole. And CEO Mike Roffler noted deposit outflows had stabilized as of March 27.

Yet First Republic still has to replace a significant quantity of lost deposits with higher-rate borrowing. That will weigh on margins and earnings in the near term. So, a key factor in its future health will be how fast the bank can replace its deposit base. Yet First Republic has its work cut out for it, as the FDIC still only insures deposits of up to $250,000 per account. Improving its deposit base by adding lots of accounts with balances below that threshold could be a long uphill slog. And if the Fed keeps raising interest rates, that will put even more pressure on its near-term funding costs. This all appears to give First Republic a limited window within which to accomplish its goals.