There are three ways out of the First Republic mess. All have downsides.


First Republic Bank

Shares in First Republic are down 95% this year. If the bank survives, it will be smaller, and it will post little, if any, profits for some time, analysts say.

Michael Nagle/Bloomberg

First Republic Bank’s woes may not extend past the weekend, as federal regulators and big banks continue discussing ways to rescue the firm.

But analysts say there’s still a chance that the San Francisco bank may survive on its own, despite bleeding some $100 billion of deposits last month and seeing its stock price sink by 95% this year. If it lives, First Republic will be a shell of its former self — a smaller bank with little, if any, profits for quite some time.

For now, some sort of emergency action looks more likely, with the key question being whether big banks or the private sector can engineer a deal without the Federal Deposit Insurance Corp.’s direct help. But the details are tricky, with banks seemingly more willing to wait out the storm while regulators want quicker action.

The talks remain unresolved, and they could theoretically drag on until the big banks must decide what to do with the $30 billion they deposited into First Republic in mid-March to shore up its balance sheet. The initial term of those deposits was 120 days.

Or, if other depositors who stuck around after last month’s chaos end up leaving, the FDIC could be forced to take quicker action. So far, however, regulators have allowed the bank to stay open — a positive indicator that its deposits have remained stable.

“This situation could go on for a while, until it doesn’t,” said Tim Coffey, an analyst at Janney Montgomery Scott.

Below is an overview of three possible scenarios facing the bank.

Bank-led solution

One way out for First Republic would be for big banks, or other private buyers, to buy either the embattled company or a large chunk of its assets.

Doing so would be no easy feat. Many of First Republic’s assets are mortgage loans that it made to wealthy clients when interest rates were at rock bottom during the pandemic. Those mortgages are now worth far less than they were before last year’s rate hikes, which has left a $19 billion hole in the bank’s balance sheet.

Any First Republic buyer would have to absorb those losses, as accounting rules dictate that the purchaser would need to take on the current market value of the loans.

Big banks have previously “shown willingness to step up and support” First Republic and the overall system, Autonomous Research analyst David Smith wrote in a note to clients. “But it is one thing to park a relatively small amount of cash at a peer, and another to recognize losses via overpaying on bonds and/or loans.”

First Republic has sought to sell $50 billion to $100 billion of mortgages and bonds, according to Bloomberg News, which reported that buyers could get preferred equity or other incentives to make up for buying assets above their current prices.

It may be tough to convince big-bank CEOs to swoop in again, but one argument that might be persuasive is that they’ve already stuck a collective $30 billion into First Republic. If the bank ends up failing, the big banks are at risk of losing that money, as well as paying the FDIC to help resolve the collapsed institution.

Even worse, a failure of First Republic could mean markets “get jittery again,” stirring worries about other banks’ health, said Michael Driscoll, an analyst at the ratings firm DBRS Morningstar. Such stress could emerge, he added, even though earnings reports over the last two weeks have shown that the industry remains healthy and deposits have been fairly stable.

“It’s such a confidence game,” Driscoll said. “Any kind of crack in that confidence can cause problems, whether it’s deserved or not.” 

One potential option may be for the big banks to turn their $30 billion in deposits into First Republic equity, according to Todd Baker, managing principal of Broadmoor Consulting. That move would help restore trust in the industry’s ability to work out its problems, and it would likely also be cheaper for the big banks than letting First Republic fail, Baker wrote on LinkedIn.

Another option for the big banks would be to extend the duration of their $30 billion in deposits, giving the San Francisco bank more flexibility as it tries to work its way out of the hole.

“If they do extend that duration beyond the 120 days, there is a path forward,” said Jared Shaw, a bank analyst at Wells Fargo Securities who covers First Republic.

FDIC receivership

If a deal doesn’t materialize, or if First Republic depositors flee amid fears that were renewed following its brutal earnings announcement on Monday, regulators could shutter the bank and put it into receivership. After last month’s failures of Silicon Valley Bank and Signature Bank, yet another bank requiring FDIC involvement is likely a scenario the agency wants to avoid.

Regulators have thus far allowed First Republic to remain open, a sign that deposit outflows have not accelerated too much after the bank’s first-quarter earnings report. While the deposit picture was far worse than markets expected, there was nothing that regulators “were not already aware of,” given that they monitor a bank’s health in real time if it’s facing major stress, according to Jaret Seiberg, an analyst at TD Cowen.

“Seizures only happen quickly if there is a liquidity run that the bank is unable to handle,” Seiberg wrote, making the critical question whether the uninsured deposits that remain at First Republic will stick around.

Regulators are likely to give the bank time “unless there is a new liquidity run,” wrote Seiberg, who added that he believes a broader restructuring led by big banks is the most likely outcome.

Mitchell Glassman, the former longtime head of the FDIC’s Division of Resolutions and Receiverships, recalled previous instances when a troubled bank appeared “dead in the water” but was saved by a last-minute capital infusion.

“As long as it’s open, and it hasn’t deteriorated, there’s still a chance a white knight can come in and salvage it,” said Glassman, who is now senior executive advisor at Secura/Isaac Group.

Zombie bank

There’s also a slight possibility that First Republic may not require an intervention — either private or public. 

If the bank’s deposits remain steady, it could shrink its balance sheet, become a more traditional bank and figure out how to repay the higher-cost borrowings it’s taken on recently to survive.

That option isn’t cheap, given the sheer amount of debt the bank has shouldered. Short-term borrowings and long-term advances soared to $105.9 billion at the end of last quarter, up from $14 billion a quarter earlier, the company said this week. Interest expenses also jumped as the bank paid for those borrowings.

First Republic laid out an expense-cutting plan on Monday that includes reducing staff by as much as 25%, consolidating corporate real estate and cutting executive pay.

“They’re gonna have to focus on profitability,” said Coffey of Janney Montgomery Scott. “To get to profitability, you have to be smaller. You have to be a lot more cognizant of your lending decisions. And maybe you’re not the bank for every high-net-worth person out there.”

For a bank that’s long focused on wealthy clientele — and which grew dramatically as it offered cheap mortgages to its well-heeled customers — that shift may be tough to pull off.

“That’s going to be a big change for this organization,” Coffey said. “That’s not in their DNA.”

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