First Republic Bank is perilously in financial turmoil, and getting out of it seems increasingly difficult.
The First Republic, a little-known name just a few weeks ago, is now of prime interest to Wall Street investors, bankers and Washington officials. The most likely outcome for banks, according to people familiar with the matter, is that the federal government will have to either go it alone or somehow engage with private investors.
The bank, which has 88 branches, mainly focused on the coast, is still in operation today, but those involved with the bank, including executives and some of its directors, are unaware of how long it can survive in its current form. I won’t say what.
San Francisco-based First Republic has been widely seen as the most endangered bank since the failures of Silicon Valley Bank and Signature Bank last month. Like Silicon Valley Bank, it catered to the wealthy, a group of customers who could withdraw their money in bulk, amassing large amounts of loans and assets that depreciated in times of rising interest rates.
But while SVB and Signature survived under pressure for just a few days, First Republic neither declined nor flourished. It has endured deposit flights and Crater stocks. All attempts by bank executives and advisers to build confidence appear to have backfired.
The bank’s founder and chairman, Jim Herbert, until recently one of the industry’s most admired figures, has disappeared from public view. On March 13, CNBC host Jim Cramer said on air: Herbert said to him Banks were “business as usual” and “there weren’t that many people wanting money.”
That was erred by the bank’s earnings report this week, which said on March 10 that “First Republic began experiencing unprecedented deposit outflows.”
First Republic’s stock continued its disastrous decline, dropping about 30% to close at $5.69. On Tuesday, the stock plunged his 49%. The company is now valued at just over $1 billion, about a twentieth of what it was valued before the bank turmoil began in March.
In what became a disturbing pattern, the New York Stock Exchange halted trading in the stock 16 times on Wednesday as volatility thresholds were triggered.
Stock prices have always been an imperfect measure of a lender’s health, and there are strict rules about what types of entities can buy a bank. Still, the drop in First Republic’s stock price means that its branch and his $103 billion deposit could theoretically be bought for less than the market cap of Chicago-area hot dog vendor Portillo’s. . Of course, the company that bought First Republic would lose billions of dollars in loan portfolios and assets.
Banks are more likely to end up in government hands. The result is likely to wipe out shareholders and leave the bank’s fate in the hands of the Federal Deposit Insurance Corporation.
Although the FDIC, under its own rules, guarantees that only deposit accounts up to $250,000 are complete, in practice (in the case of SVB and signature) several government officials have invoked special statutory provisions. can complete accounts of any size. Of First Republic’s remaining deposits, about half, or nearly $50 billion, passed the insurance threshold as of March 31, including his $30 billion deposited by a major bank in March. had exceeded.
In conversations with industry and government officials, First Republic advisers have proposed various restructuring solutions that involve the government in one way or another, according to people familiar with the matter. The government may seek to minimize financial risk for buyers, said the people, who asked not to be identified.
So far, the Biden administration and the Federal Reserve appear to be disagreeing. Policy experts say regulations enacted by Congress after the 2008 financial crisis will make it more difficult for authorities to step in to save the First Republic.
As a result, a six-week effort by the First Republic and its advisers to sell all or part of the business did not constitute a viable plan to save the bank, at least so far.
After the close of trading on Monday, First Republic released its first-quarter results, revealing a $102 billion decline in customer deposits since early March. Those withdrawals were slightly improved by a coordinated emergency action by 11 of the largest US banks, temporarily depositing his $30 billion into the First Republic.
To plug the hole, First Republic borrowed $92 billion, primarily from the Fed and government-backed lending groups, effectively replacing deposits with loans. The move helped the bank survive, but it replaced relatively cheap deposits with more expensive loans, essentially undermining its business model.
The bank is paying the government more interest on its new debt than it has earned on long-term investments, including mortgages to wealthy coastal customers, financing real estate projects, and more.
One of the biggest parts of the bank’s business was to provide large home loans at attractive interest rates to wealthy people. Unlike other banks that take out many mortgages, First Republic retained many of those loans rather than packaging them into mortgage-backed securities and selling them to investors. At the end of December, banks had about $103 billion in mortgages on their books, up from $80 billion a year earlier.
However, most of these loans were taken at a time when mortgage interest rates were much lower than they are today. That means those loans will be worth a lot less, and anyone trying to buy First Republic will bear those losses.
It is not clear what can realistically be done to make First Republic itself or its assets more attractive to buyers.
The only concrete changes the bank has committed to include cutting its workforce by up to 25% and an unknown amount of cuts in executive pay. At the earnings call, First Republic executives declined questions and spoke for only 12 minutes.
