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First Republic Bank’s Q1 earnings painted a more dismal picture than analysts had expected, with deposits at the troubled bank falling far more steeply than projected. Additionally, the amount of loans the bank has taken from the Federal Reserve’s short-term facilities, likely in an effort to stay afloat, will saddle it with suppressed profitability for some time to come. This is concerning for regional banks as a whole, considering negative sentiment can become contagious, and may end up impacting First Republic’s peers as well.

Moreover, short-term capital lent to banks by the Fed rose last week for the first time this month, indicating that pressure on their balance sheets remains entrenched. Though the outright panic that gripped financial sector stocks last month has subsided, it takes time for these disruptive events to play out, as the world witnessed in 2007-2008 when nine months passed from the time the Fed initially rolled out support facilities for banks’ short-term funding needs to the ultimate collapse of Lehman Brothers.

Related ETFs: SPDR S&P Bank ETF (KBE), SPDR S&P Regional Banking ETF (KRE), First Republic Bank (FRC)

Fears regarding bank insolvencies were revived yesterday evening when First Republic Bank’s earnings showed that the drain on their deposits was greater than expected and dependency on the Federal Reserve for short-term funding remained substantial. Deposits fell -40.8% to $104.5 billion in the first quarter, significantly below analyst estimates of about $145 billion. The situation would be even more dire if it weren’t for a financial lifeline from JPMorgan and ten other US banking peers who injected $30 billion worth of deposits into First Republic’s accounts to shore up confidence in the bank last month.

In at least one way, however, withdrawals out of the bank actually worked in First Republic’s favor. More specifically, its proportion of uninsured deposits, which had been significantly higher than rivals, dropped from 68% to 27% after the withdrawals. That figure excludes the aforementioned $30 billion deposited by the eleven other banks. First Republic reported that it now has a combined $45.1 billion of cash and unused available borrowing capacity, enough to cover more than double its remaining uninsured deposits. Despite that, shareholders’ concerns were not assuaged and the bank’s shares tumbled more than -28.5% to trade at an all-time low on Tuesday morning.

In addition to their deposit issues and a plan to reduce headcount significantly, the sell-off was partially rooted in the bank’s continual need to rely heavily on assistance from the Federal Reserve to stay afloat. The Wall Street Journal notes that the bank’s total borrowings peaked at $138.1 billion on March 15 and were equivalent to $104 billion as of April 21. Though this liquidity has provided time for First Republic to shore up enough capital to…

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