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Why the Bay Area should be more worried about First Republic

A First Republic Bank branch at Montgomery and Sutter Streets in Downtown San Francisco on March 13, 2023 | Morgan Ellis/The Standard
Pedestrians pass a First Republic Bank branch in Downtown San Francisco on March 13, 2023. | Morgan Ellis/The Standard

The Fed’s decision to raise interest rates another quarter percent Wednesday further shook the already-rattled banking sector. The impact of a rapid series of rate hikes on bond values is one of the main reasons for Silicon Valley Bank’s downward spiral and the contagion of instability spreading to other mid-size and regional banking institutions.

Now all eyes are on the Bay Area’s third-largest bank, First Republic. The stock had rallied on more news of a potential acquisition or bailout on Tuesday but shares dropped more than 16% again on Wednesday after news of the rate hike.

While the uncertainty surrounding SVB’s future pushed its clients to pull roughly $42 billion in deposits, San Francisco-based First Republic Bank is now in a similar position, as its customers withdrew a reported $70 billion in deposits in recent weeks and saw its credit rating downgraded as well.

As fellow banks and federal regulators work to calm the fears of First Republic’s customers, the potential failure of a second major regional bank begs the question: How could the instability surrounding First Republic impact its customers and the Bay Area economy overall?

A Bigger Dent in Bay Area Banking 

Both Silicon Valley Bank and First Republic control a significant portion of the Bay Area market, and are within the San Francisco Business Times’s top 10 largest regional banks: First Republic’s 13% Bay Area market share makes it the third largest bank in the region, while SVB’s 3% share ranks it seventh. 

Zooming in on First Republic’s portfolio reveals that roughly 44% of its deposits came from the San Francisco Bay Area, a much higher portion than any of the other top banks serving the Bay Area.

A Big Loss for Deep-Pocketed Depositors?

The banks couldn’t be more different, however: SVB effectively operated as the go-to startup banker, popular among founders and investors for its close ties to the tech industry. First Republic, on the other hand, was the 14th largest bank in the country—holding an elite position as a bank for high net-worth individuals and lender for consumer and commercial real estate—and was widely seen as a blue-chip bank too big to fail. 

But both banks stumbled this month, and some experts say the two banks’ proximity to Silicon Valley and its wealthy denizens effectively set SVB and First Republic up for their recent troubles. 

In particular, both banks had a high share of clients with deposits far bigger than the Federal Deposit Insurance Corporation-insured limit of $250,000. Roughly two-thirds of First Republic’s deposits were uninsured, compared with Silicon Valley Bank’s estimated 88% in uninsured deposits. 

These banks’ high share of uninsured deposits reflects their particular reliance on deep-pocketed depositors, many of whom may be more likely to pull and redirect their funds quickly in the event of a bank run—making these deposits and their holders more volatile. 

In the Bay Area, First Republic has long had a reputation for not only catering to the banking needs of well-heeled clients but also as a firm to go to for wealth management services. 

“What people forget is that First Republic […] has been around a really long time and they tend to work with institutionally wealthy people and people who have old money,” said Paul Griffiths, CEO of Vesta Asset Management and a longtime First Republic client. 

First Republic is highly regarded for its customer service, so much so that a large number of customers have taken to Twitter to log their support for the bank in recent days.

The silver lining? Everyday customers with deposits less than the FDIC-insured limit of $250,000 will be far less likely to bear the brunt of a banking fallout. And as the feds scramble to pull First Republic and SVB from the precipice, regulators may lift the FDIC insurance cap to prevent depositors from withdrawing even more cash from the banks. 

Pedestrians pass a First Republic Bank branch on Pine Street in Downtown San Francisco on March 13, 2023. | Morgan Ellis/The Standard

Griffiths, whose likeness was once used in a First Republic advertisement, says that his and other customers’ interactions with the bank have continued as usual, largely due to the bank’s heavy communication in recent days.

“One of the things that is a sustainable element of First Republic is that they have a really strong loyalty base, and old money doesn’t go away very quickly,” Griffiths said. “They know how to run a really solid communications cycle. And I think this is going to be their saving grace right now to stop people from doing panic draws.” 

Though the banking world’s recent volatility may have scared investors and customers, Griffiths said many of his clients decided against fully pulling deposits from First Republic, instead choosing to diversify their portfolios. 

A Hit to Bay Area Homebuyers 

The banking fallout does not end with individual depositors, however. Bay Area real estate and housing development may suffer some losses from both SVB and First Republic’s volatility. 

Silicon Valley Bank was a major local funder of affordable housing projects in San Francisco. Its implosion means that at least two affordable housing projects could be adversely impacted, including a 112-home project near the Civic Center. 

READ MORE: Hundreds of Affordable Housing Units at Risk After SVB Collapse

Yet, First Republic is a power player in the real estate industry and has built a reputation as a major lender in the mortgage space. According to Inside Mortgage Finance, First Republic is the nation’s fourth largest lender of “jumbo loans”—the home mortgages valued at more than $726,000, which are common in expensive real estate markets like the Bay Area. 

Last year, First Republic was the only bank to increase its lucrative jumbo loans business, growing the segment by 8% compared with an estimated 36% drop that all lenders reported between 2021 and 2022. These figures square with First Republic’s particular customer base: It offers private banking and wealth management services for an affluent clientele. And all of its mortgage lending is secured—a contrast to the more speculative, unsecured startup investments made by SVB. 

Though some real estate agents reported that SVB’s and First Republic’s financial troubles halted some in-process sales, buyer activity largely resumed once federal regulators assured depositors would be made whole. 

“The individuals who bank with First Republic are people, frankly, who have been with the bank for decades and generations,” Griffiths said. “They’re still going to buy and sell because those individuals still have that capital.” 

Another Swipe at Commercial Real Estate in SF

Increased uncertainty in the banking sector will add another hit to San Francisco’s already-battered commercial real estate sector. As layoffs continue at major tech companies and throughout the Bay Area, trouble at First Republic will dramatically impact lending to commercial developers. 

Regional banks play a critical role for local developers, and according to commercial real estate firm Trepp, First Republic has the ninth-largest share of the commercial real estate lending market in the country. Instability at such a prominent lender could cause ripple effects throughout the lending community and make it even tougher to get these projects off the ground.

Yet, support from the FDIC and billions of dollars in cash infusion from 11 major Wall Street banks have helped stabilize First Republic, largely protecting customers’ deposits in the process. First Republic also assured customers on Tuesday that the bank moved forward with operations as usual, including processing transactions, opening accounts and funding loans. 

“Our commitment to client service is unchanged, and we remain well-positioned to continue to manage deposit activity,” said First Republic CEO Michael Roffler and founder James Herbert in a statement.

Two people walk past a First Republic Bank branch, carrying food containers. The bank's sign and FDIC logo are visible.
People walk by the First Republic Bank headquarters in San Francisco on March 13, 2023. | Justin Sullivan/Getty Images