First Republic Bank is sliding dangerously into a financial maelstrom, one from which an exit appears increasingly difficult.<\/p>\n
Hardly a household name until a few weeks ago, First Republic is now a top concern for investors and bankers on Wall Street and officials in Washington. The likeliest outcome for the bank, people close to the situation said, would need to involve the federal government, alone or in some combination with a private investor.<\/p>\n
While the bank, with 88 branches focused mostly on the coasts, is still open for business, no one connected to it, including its executives and some board members, would say how much longer it could exist in its current form.<\/p>\n
First Republic, based in San Francisco, has been widely seen as the most in-danger bank since Silicon Valley Bank and Signature Bank collapsed last month. Like Silicon Valley Bank, it catered to the well-off \u2014 a group of customers able to pull their money en masse \u2014 and amassed a hoard of loans and assets whose value has suffered in an era of rising interest rates.<\/p>\n
Yet while SVB and Signature survived just days under pressure, First Republic has neither fallen nor thrived. It has withstood a deposit flight and a cratering stock price. Every attempt by the bank\u2019s executives and advisers to project confidence appears to have had the opposite effect.<\/p>\n
The bank\u2019s founder and executive chairman, Jim Herbert, until recently one of the more admired figures in the industry, has disappeared from public view. On March 13, Jim Cramer, the CNBC host, said on the air that Mr. Herbert had told him that the bank was doing \u201cbusiness as usual,\u201d and that there were \u201cnot any sizable number of people wanting their money.\u201d<\/p>\n
That was belied by the bank\u2019s earnings report this week, which stated that \u201cFirst Republic began experiencing unprecedented deposit outflows\u201d on March 10.<\/p>\n
Neither Mr. Herbert nor the bank\u2019s representatives would comment Wednesday, as First Republic\u2019s stock continued a harrowing slide, dropping about 30 percent to close the day at just $5.69 \u2014 down from about $150 a year earlier. On Tuesday, the stock plummeted 49 percent. The company is now worth a little more than $1 billion, or about one-twentieth its valuation before the banking turmoil began in March.<\/p>\n
In what has become a disquieting pattern, the New York Stock Exchange halted trading in the shares 16 times on Wednesday because volatility thresholds were triggered.<\/p>\n
Source: FactSet<\/p>\n
By The New York Times<\/p>\n
Stock prices are always an imperfect measure of a lender\u2019s health, and there are strict rules about what types of entities can acquire a bank. Still, First Republic\u2019s stock slide means that its branches and $103 billion in deposits could be bought for, theoretically, an amount less than the market capitalization of Portillo\u2019s, the Chicago-area hot dog purveyor. Of course, any company that buys First Republic would be taking on multibillion-dollar losses on its loan portfolio and assets.<\/p>\n
The bank is more likely to fall into the hands of the government. That outcome would likely wipe out shareholders and put the bank\u2019s fate in the hands of the Federal Deposit Insurance Corporation.<\/p>\n
The F.D.I.C. by its own rules guarantees that deposit accounts only up to $250,000 will be made whole, though in practice \u2014 and in the case of SVB and Signature \u2014 it can make accounts of all sizes whole if several top government officials invoke a special legal provision. Of First Republic\u2019s remaining deposits, roughly half, or nearly $50 billion, were over the insured threshold as of March 31, including the $30 billion deposited by big banks in March.<\/p>\n
In conversations with industry and government officials, First Republic\u2019s advisers have proposed various restructuring solutions that would involve the government, in one form or another, according to people familiar with the matter. The government could seek to minimize a buyer\u2019s financial risk, the people said, asking not to be identified.<\/p>\n
Thus far, the Biden administration and Federal Reserve appear to have demurred. Policy experts have said officials would find it more difficult to intervene to save First Republic because of restrictions Congress enacted after the 2008 financial crisis.<\/p>\n
As a result, six weeks of efforts by First Republic and its advisers to sell all or part of its business have not resulted in a viable plan to save the bank \u2014 at least thus far.<\/p>\n
The state of affairs became plain after the close of trading on Monday, when First Republic announced first-quarter results that showed that it had lost $102 billion in customer deposits since early March. Those withdrawals were slightly ameliorated by the coordinated emergency move of 11 large U.S. banks to temporarily deposit $30 billion into First Republic.<\/p>\n
To plug the hole, First Republic borrowed $92 billion, mostly from the Fed and government-backed lending groups, essentially replacing its deposits with loans. While the move helped keep the bank going, it essentially undermined its business model, replacing relatively cheap deposits with more expensive loans.<\/p>\n
The bank is paying more in interest to the government on that new debt than it is earning on its long-term investments, which include mortgage loans to its well-heeled customers on the coasts, funding for real estate projects and the like.<\/p>\n
One of the biggest parts of the bank\u2019s business was offering large home loans with attractive interest rates to affluent people. And unlike other banks that make a lot of mortgages, First Republic kept many of those loans rather than packaging them into mortgage-backed securities and selling them to investors. At the end of December, the bank had nearly $103 billion in home loans on its books, up from $80 billion a year earlier.<\/p>\n
But most of those loans were made when the mortgage interest rates were much lower than they are today. That means those loans are worth a lot less, and anybody looking to buy First Republic would be taking on those losses.<\/p>\n
It is not clear what First Republic can realistically do to make itself or its assets more attractive to a buyer.<\/p>\n
Among the only tangible changes that the bank has committed to is cutting as much as 25 percent of its staff and slashing executive compensation by an unspecified amount. On its earnings call, First Republic\u2019s executives declined to take questions and spoke for just 12 minutes.<\/p>\n