FDIC is reaching out to major banks about buying First Republic

The FDIC is reaching out to banks about their interest in buying First Republic (FRC), according to a person familiar with the matter, suggesting to that person that regulators intend to take over the San Francisco lender soon.

This person said the FDIC is approaching some of the same banks that came to the aid of the First Republic in March with $30 billion in uninsured deposits. These banks were reluctant this week to offer a second bailout, lest a First Republic takeover anyway.

That person said the goal was for “someone else to buy it and hopefully open it as soon as possible so there’s no disruption to the markets.”

The Wall Street Journal reported Friday that JPMorgan Chase (JPM) and PNC (PNC) are both vying to buy First Republic in a post-government takeover deal. JPMorgan is the largest bank in the country, and PNC is the sixth largest.

Reuters and CNBC also reported on Friday that the FDIC is likely to place First Republic into receivership.

The FDIC sometimes runs a Marketing process As for the banks that he sees as tending towards failure. And sometimes such a process can happen long before the actual seizure, as much as 60 to 90 days. And sometimes the failure doesn’t happen even after the bids happen.

The FDIC may be able to find a buyer among the big banks willing to take all of First Republic’s deposits and possibly some of its troubled assets as well. Sometimes the FDIC can improve such deals by agreeing to share future losses in loan portfolios, for example.

The San Francisco-based lender began fighting for its survival in March when panic about the stability of regional lenders swept across the country. And it tried to weather the turmoil by borrowing from the Federal Reserve and the Federal Reserve for Home Loans, while also taking in $30 billion in uninsured deposits from 11 of the nation’s largest banks. JPMorgan provided $5 billion of the $30 billion.

But the First Republic’s situation became more precarious on Monday after it disclosed a loss of more than $100 billion in deposits. The decline was larger than expected and raised new concerns about the company’s chances of survival. By Friday, First Republic stock was down to $3.50, down 97% for the year. The bank’s market capitalization, $40 billion, was only $640 million.

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Investors punished the stock, sending it nearly 50% in one day and then nearly 30% on Wednesday. On Thursday it rose about 9% before falling again on Friday by 43%.

Founded in 1985 by Jim Herbert, First Republic has expanded rapidly over the decades attracting affluent clients clustered on either coast by offering great single-family mortgages at rock-bottom rates along with personal service.

It has increased from $88 billion in assets at the end of 2017 to more than $200 billion at the end of 2022. It was the country’s 14th largest lender as of December 31.

Then, like many banks of its size, it struggled to adjust to an aggressive campaign by the Federal Reserve to raise interest rates as a way to slow inflation.

The increases devalued the interest rate-sensitive assets on its balance sheet and helped create billions in unrealized losses, a gap that eventually caught the attention of investors and depositors after the fall of Silicon Valley Bank.

The bank also had a lot of uninsured depositors, making them more at risk of fleeing during the chaos that unfolded in March.

When customers began withdrawing more than $100 billion, First Republic had to replace deposit financing with more expensive borrowing from the Federal Reserve and the Federal Home Loan Bank System. Those loans, which peaked on March 15 at $138 billion, have created another problem by putting pressure on their profitability.

The First Republic has developed a transformation plan. On Monday, while announcing first-quarter results, it said it intends to increase the volume of insured deposits, reduce its loans, reduce its loan balances, and reduce its workforce by 20-25%. Borrowings fell to $104 billion as of April 21 and deposit outflows slowed.

But its disclosure of the amount of lost deposits in March, and the fact that the company decided not to answer any questions from analysts, spooked investors.

Short sellers also exerted more pressure. According to S3 Partners, those betting on First Republic have won $1.37 billion a year to date on a market rate basis. It is the most profitable short position among stocks so far in 2023, according to S3.

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