First Republic Bank has been teetering on the edge for weeks. It may be finally falling.
The San Francisco-based lender could be next in the line to collapse, following in the footsteps of former competitors Silicon Valley Bank and Signature Bank.
It certainly fits the bill: First Republic, like SVB, is a mid-sized regional bank with a highly concentrated customer base, outsized amounts of uninsured deposits and loads of unrealized losses on the bonds and treasuries it holds.
Rumors swirled on Wednesday as publications rushed out reports from unnamed sources saying that the bank was looking to cut a deal to sell assets, that the White House wasn't interested in facilitating a bailout (there were also reports that it is) and that the Federal Deposit Insurance Corporation is considering downgrading the bank's debt, which would limit its access to essential Federal Reserve loans.
The FDIC, Federal Reserve, White House and First Republic did not respond to requests for comment about those reports. But the damage has been done.
Shares of the stock fell by nearly 30% on Wednesday, after plunging by 49% on Tuesday. The stock's trading was halted numerous times both days as its rapid decline triggered volatility-triggered timeouts by the New York Stock Exchange.
But what's actually happening here?
The reality of the situation: What we do know for certain is that First Republic reported on Monday that its total deposits fell 41% in the first quarter of 2023 to $104.5 billion, even after a consortium of banks stepped in with $30 billion to prevent the lender from failing. Without that cash infusion, deposits would have fallen by over 50%.
But, importantly, the bank said that while it saw a sharp drop in deposit activity after the collapse of SVB and Signature Bank last month, activity began to stabilize at the end of March and has since remained steady.
We also know that First Republic's net interest income, which shows how much money the bank earned from lending and borrowing, was down 19.4% year-over-year at the end of the first quarter.
On top of all that, the bank is vulnerable to liquidity problems.
When the banking crisis erupted in mid-March, about two-thirds of First Republic's deposits were uninsured with the FDIC. That's lower than the 94% at Silicon Valley Bank — but at the end of last year, First Republic had an exceptionally high ratio of 111% for loans and long-term investments to deposits, according to S&P Global — meaning it has loaned and invested more money than it has in deposits.
In short: The outlook for the bank is not good.
"It's becoming clearer each day" that First Republic is "toast," said Don Bilson at Gordon Haskett, in a note Wednesday. "The only question that really needs to be answered is whether the [Federal Deposit Insurance Corporation] moves in before the weekend or during the weekend, which is when it usually does its thing."
Possible solutions: We also know that it's not over until it's over and that the bank is still operating. There are still some narrow paths forward.
There's a small chance that First Republic stays the course and "muddles along as a standalone company," said David Chiaverini, managing director of equity research at Wedbush Securities.
What's more likely is that the company will try to sell some of its loans and securities at the same cost they bought them for. In exchange, the buyer would receive a preferred equity interest in the company.
That will be a tough sell since those assets would probably sell for well above market rate. First Republic's bonds maturing in 2046 are currently trading at just 43 cents on the dollar. But the bank has been lucky before. First Republic has stayed afloat since March largely thanks to a $30 billion bailout from a conglomerate of large US banks and a $70 billion line of credit from JPMorgan.
The third option is the worst for shareholders: the bank could go into receivership. When a struggling bank goes into receivership it means that a regulatory authority or government agency takes control of the bank and its assets, usually with the goal of liquidating those assets to repay the bank's creditors.
Investors in First Republic would most likely see their money wiped out in that scenario.
Coming next: First Republic is in a very tricky situation. Investors will be crossing their fingers and holding their breath until Friday at 4 p.m. ET. That's when newly collapsed banks have admitted defeat in the past.
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