Regulators are preparing to take control of First Republic Bank, according to a report from Reuters, potentially marking an astonishing downfall for a Bay Area institution whose affluent clientele and customer loyalty once made it the envy of the banking sector.
"We are engaged in discussions with multiple parties about our strategic options while continuing to serve our clients," a First Republic spokesperson said in a statement.
The Wall Street Journal reported late Friday that JPMorgan Chase and PNC Financial Services Group were vying to buy First Republic in a deal that would transpire after the government seized the bank.
On Monday, First Republic told shareholders that it had lost about $100 billion in deposits after Silicon Valley Bank's collapse, as anxiety around uninsured deposits led wealthy clients and businesses to pull assets and park them in larger banks customers consider to be safer. The bank had been forced to borrow heavily to make up for the losses.
A coalition of banks deposited $30 billion into the bank on March 16, which helped to temporarily stabilize the bank but failed to instill much confidence among shareholders.
First Republic's stock sunk to historic lows throughout March and April amid scrutiny of its losses and seemingly similar profile to Silicon Valley Bank, a regional bank catering to startups and venture capitalists with a high percentage of uninsured deposits. Its stock closed at $3.51 per share on Friday, down more than 95% since March 8, when news of Silicon Valley Bank's troubles first emerged.
First Republic executives, government officials and financial institutions had urgently sought to cobble together a deal this week that might have involved selling off underwater assets, such as fixed-rate mortgages, to other institutions in the hopes of avoiding a shutdown. First Republic executives had also announced plans to lay off up to 25% of its staff, cut executive pay and trim real estate holdings.
Although First Republic was hoping for a white knight in the form of a buyer, the distressed assets on the bank's books would have to be marked down as losses, making it a less attractive target.
Founded in 1985 by Jim Herbert, San Francisco-based First Republic was known for high-touch customer service that extended into banking, wealth management and loans to individuals and businesses. As the company floundered in recent weeks, customers took to social media to voice support for the bank.
First Republic was the Bay Area's third-largest bank and the 14th-largest in the U.S. at the end of last year, with 44% of its deposits originating in the Bay Area. At the end of last year, it held $98.8 billion worth of loans in single-family homes, $21.6 billion in multifamily properties and another $14 billion in construction and development loans.
The company had 7,213 employees at the end of last year.
First Republic's collapse would be the third banking failure since March. Silicon Valley Bank and New York-based Signature Bank failed within two days of each other in early March.
'It Didn’t Look Good'
Ludwig Chincarini, a professor of finance at the University of San Francisco, said he did a back-of-the-envelope calculation for First Republic’s valuation after the announcement that the bank would lay off up to a quarter of its workforce after losing some $100 million in deposits.
While his assessment doesn’t include an evaluation of First Republic’s brand or potential losses from its mortgages and bond portfolios, what he got back was a valuation under zero.
“It didn’t look good, and that’s not accounting for other effects like people withdrawing more money after the bad news they put out,” Chincarini said. “It was fairly clear they would either have to get bought or they will probably go into receivership.”
Still, he doesn’t believe that First Republic’s downfall would create additional contagion in the banking system, at least any more than already existed, as it was common knowledge that the bank was teetering.
Morris Pearl, chairman of Patriotic Millionaires and a former BlackRock managing director who helped the federal government assess the impact of bailouts during the Great Financial Crisis, said the bank failures are indicative of regulators needing to be more “proactive” with the “power and will” to step in when they see bad risk-management practices.
“First Republic had some $100 billion in withdrawals, and they got $30 billion deposited by other big banks, who are now probably wondering if they’re getting their money back," Pearl said. "They couldn’t sell stuff fast enough to make up the difference, plus there were other areas of the business that were failing."
Pearl said that federal officials raising the depository limit past $250,000 is a likely and necessary outcome of the recent banking sector volatility.
“The bank had really good customer service, but a lot of people aren’t willing to take a chance on a bank even with rumors of a failure,” Pearl said. “If people don’t have confidence in the bank, they’re not going to put their money in.”
Brian Dolan, CEO of the Boston staffing company WorkReduce, spent part of his San Diego vacation Friday lining up at a First Republic Bank branch to make a withdrawal.
“I was there right at closing time, and I could hear bank personnel commenting on all the withdrawals that had been going on that day,” said Dolan.
With news of a possible FDIC takeover emerging Friday, he decided to go to the nearest teller window to make sure his company didn’t have more on deposit than $250,000.
Dolan had been postponing such a move while preparing to shift various lines of banking business to another institution, a time-consuming process.
“That’s why we were sitting here with money in a risky bank,” he said. “We have been looking to move our funds out of the First Republic since the Silicon Valley Bank collapse, because it seemed relatively clear that there were issues.”
Stacy Small, owner of the Santa Rosa travel agency Elite Travel Club, was on a plane back from Bali on March 13 when she got a text from a friend sharing news of First Republic’s troubles. Two days later, she opened an account with Chase and transferred funds in order to make sure she didn’t have deposits with First Republic greater than $250,000, the maximum insured by the Federal Deposit Insurance Corporation.
“My reaction is one of sadness, but I can’t say I am surprised,” Small said Friday.
Small had opened her First Republic account in 2010 upon recommendations from friends.
“For me, now, it’s more of an emotional thing," she said. "I was just starting my business, and I was fortunate to be in a position to bank with people who I could call or email.”