First Republic bank is under serious pressure after its latest quarterly earnings further sunk its stock, triggering fresh speculation about what options, if any, remain for the financial institution to survive.
The company’s first quarter earnings release revealed deposit losses of about $100 billion after the failure of Silicon Valley Bank triggered a wider banking panic; that revelation contributed to a steep sell-off in the company’s stock. Though shares recovered on Thursday, the path forward for the San Francisco-based bank appears narrow as the company’s valuation hovers at just above $1 billion—a drop of about 95% since early March.
The bank’s advisers are working on a private-sector solution in the hopes of avoiding a shutdown by regulators, according to the Financial Times. Citing three people with knowledge of the discussions, the paper reported that JP Morgan, which led an earlier $30 billion rescue deal in March, is involved in discussions but that the solution has not yet won the support of federal officials.
In a Monday filing, First Republic executives said that the company will lay off 20% to 25% of its staff, cut executive pay, trim its real estate portfolio and pursue “strategic options” to shore up its capital position, but did not answer questions on a subsequent shareholder call.
“I’m a little surprised they’ve made it til Thursday afternoon; the press reports are bad,” said Jay Ritter, a professor of finance at the University of Florida. “It would be a long shot that First Republic continues on in pretty much its current form.”
Wedbush Securities analyst David Chiaverini laid out three possible scenarios for the bank: In the worst case, depositors continue to flee, and the bank enters FDIC receivership. In another scenario, the bank could muddle along further as an independent company and gradually pay down borrowings.
A third scenario, Chiaverini wrote in an email, would “entail First Republic selling some of its loans and securities above fair value and issue preferred equity as consideration to the buyer of the loans and securities.”
No such deal has materialized so far. Bloomberg reported that discussions of the bank’s future turned into a game of chicken this week as both the U.S. government and First Republic’s rivals sought to avoid losses in any further rescue action.
First Republic reportedly approached some of the institutions involved in the March rescue deal to buy assets such as mortgages and securities. It argued that any financial hit from those purchases would be less severe than the potential ramifications of First Republic’s complete collapse. First Republic holds a trove of fixed-rate mortgages issued when interest rates were low, which later became a liability as the Federal Reserve ratcheted up rates.
First Republic declined to comment.
The bank is an “outlier” in terms of a mismatch between assets and liabilities, Ritter said. That was also the case with Silicon Valley Bank, although in that case, its main liabilities were U.S. treasury bonds that lost value as interest rates soared.
Still, there’s some incentive for other banks to find a way to come to First Republic’s aid, Ritter said.
“If First Republic goes under, the FDIC is basically going to be taxing the bigger banks to pay for some of the losses,” Ritter said. “The big banks are aware that if First Republic is forced to close up shop, they're going to be on the hook and, therefore, they’ve got some incentive to overpay for assets to keep this from happening.”
That dynamic may have dissuaded a single buyer from stepping in, Ritter added. Meanwhile, the Biden administration is believed to oppose a big bank or private equity firm buying out First Republic to avoid further concentration in the banking sector.
In a report released Friday morning, the Federal Reserve wrote that Silicon Valley Bank failed to adequately assess its risks but also accepted blame for failing to properly supervise the bank, calling for stronger oversight of the banking system.
First Republic CEO Michael Roffler said on Monday’s shareholder call that it was withdrawing all prior financial guidance, adding that the bank is focused on increasing its insured deposit base from companies, individuals and nonprofits. Moving forward, he said the bank will reduce both the size of its balance sheet and reliance on short-term borrowing.
For now, First Republic is stuck in a tense state of limbo.
“For the near term, it’s looking like it will continue what might not be a slow bleed, but a pretty fast bleed going on,” Ritter said. “Nobody in their right mind is going to be depositing substantial sums right now, other than big banks as a group, to keep it alive.”