First Republic Bank Needs Another Rescue
First Republic Bank (First Republic) is reported to be in serious financial distress despite last month’s unprecedented $30 billion rescue orchestrated by U.S. Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell, J.P. Morgan CEO Jamie Dimon, and funded by 11 of the largest lenders in the U.S. in an attempt to save First Republic Bank from FDIC seizure. This was also the fate of Silicon Valley Bank and Signature Bank during the worst commercial banking crisis since 2008.
San Francisco-based First Republic was founded in 1985 and is now the 14th-largest commercial bank in the U.S., with multiple offices in 11 states and over 7,000 employees. However, the bank’s stock plunged dramatically after a worse-than-expected first quarter earnings report was released on Monday. The stock price dropped more than 25% on April 26, after plummeting to a record low following a 49% price drop on April 25, despite trading having been halted multiple times due to volatility. According to The Wall Street Journal, the bank was the worst performer yesterday in the S&P 500 and the most actively traded stock in the index.
First Republic suffered a more than $102 billion decrease in customer deposits in the quarter after the March banking debacle. The bank’s bonds are still trading at a steep discount to face value. Federal regulators are closely monitoring the bank but have not publicly announced any anticipated assistance.
The bank said it was seeking strategic alternatives. First Republic is reportedly considering a number of options to help stave off seizure. These options include an asset sale of up to $100 billion in which buyers could receive incentives such as warrants or preferred equity, the creation of a so-called “bad bank” in order to isolate problematic financial assets, and divesting $50 billion to $100 billion of long-dated securities and mortgages to help capitalize the bank and reduce the mismatch between the bank’s assets and liabilities, which resulted from the interest rates rise that forced the bank to pay depositors a higher rate than what it charged borrowers. This problem is more acute at First Republic than at other similar banks given that a large portion of its assets are mortgages that were made when interest rates were historically low.
First Republic is also reportedly trying to persuade some of the same lenders that provided it with the $30 billion deposit infusion in March to purchase its underwater bonds at above-market rates for a loss of a few billion dollars, which the bank is pitching will cost the lenders less than the consequences of another bank seizure. The bank also plans to reduce its balance sheets by cutting expenses including executive compensation, reducing its office footprint and laying off up to 25% of its employees in the second quarter. The bank is being advised by Lazard and J.P. Morgan Chase, and is said to be bringing in additional experts, including the Messina Group.
Please contact your regular AT lawyer or a member of our Distressed Bank Response Team if you have questions about the potential impact of these events on your business.
