Pressure mounts on First Republic as its stock continues to plunge

The stock of First Republic (FRC) plunged again Wednesday morning as pressure on the San Francisco lender intensified following a depositor exodus in March and new attempts to sell some of its underwater assets.

The bank’s price dropped more than 16%, after plummeting 49% Tuesday, before being halted for volatility. Other regional bank stocks were up, reinforcing First Republic’s predicament. They include PacWest (PACW), which said Tuesday it gained back some deposits in April after losing billions during the first quarter. Its stock was up 15%.

First Republic is now considering a variety of alternatives to save itself without being seized by US regulators, according to media reports, from the creation of a so-called “bad bank” to divesting $50 billion to $100 billion of long-dated securities and mortgages to make an eventual capital raise easier. It said Monday that it was pursuing “strategic options” after losing more than $100 billion in deposits during last month’s banking system turmoil.

First Republic has a potential to avoid being seized by regulators, a source familiar with the matter told Yahoo Finance, but it will require assistance from the US government.

“There is an open bank path solution here, but it’s a matter of the government needing to convene to bring all the parties together to make it happen,” this person said. First Republic declined comment.

CNBC reported Wednesday that First Republic’s advisers will try to persuade some of the same banks that provided First Republic with a $30 billion deposit infusion in March to purchase underwater bonds at above-market rates for a loss of a few billion dollars. That rescue came from JPMorgan Chase (JPM), Bank of America (BAC) and nine other giant institutions.

The losses, CNBC reported, would be less than what those same big banks would have to pay to the Federal Deposit Insurance Corporation if regulators were to seize First Republic. The FDIC recoups the costs of resolving failures via a levy paid largely by the nation’s biggest banks.

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The market reaction to First Republic’s woes “puts bank stress back on the front-burner” for policy makers in Washington, EvercoreISI’s Krishna Guhu said in a new research note, and creates “fresh complexities” for the Federal Reserve as it prepares to decide on the possibility of another interest rate hike in May.

“You’ve got a large super regional bank with a limited number of prospective acquirers. It’s a situation I think that needs to be quickly addressed,” said John Popeo, a principal at financial consulting firm Gallatin Group.

The bank, which is already being advised by Lazard and JPMorgan Chase, is also bringing in some new experts. Bloomberg reported the Messina Group, a consulting firm started by former Obama Administration official Jim Messina, has been hired to help First Republic in its talks with the Biden Administration.

When the bank began to wobble in March following the failure of Silicon Valley Bank, it tried to weather the turmoil by borrowing from the Federal Reserve while also taking in the $30 billion in uninsured deposits from 11 of the country’s largest banks.

The goal was to give the bank time to avoid the same fate of Silicon Valley Bank, perhaps by finding a buyer on its own. The challenge is that any buyer would have to pay billions to absorb all of the unrealized losses on First Republic’s loans and securities. Those losses were $27 billion as of the fourth quarter, according to Evercore.

Some of the new ideas now being considered also have drawbacks, according to Evercore, including the sale of some underwater assets.

First Republic may be hoping it can convince other big banks to buy some of those assets in exchange for equity warrants, but “there may not be enough market equity value left in the firm to subsidize the clear-out of underwater assets on a large enough scale,” Evercore said.

The value of any warrants could also swing on how many low-cost depositors First Republic is able to keep. “The clear risk – not certainty – is that the plunge in First Republic’s stock price and further adverse headlines and tweets on social media results in further rapid deposit outflows that make the notion of a warrant-subsidized sale non-viable,” Evercore said.

Policy makers have some decisions to make, according to Evercore. The Fed could extend more liquidity to First Republic via a new program it created in March to deal with regional bank stress, or its traditional discount window.

The FDIC could also seize First Republic, as it did with Silicon Valley Bank and Signature Bank in March. “The attraction of going down the FDIC seizure route is that it would allow the authorities to subsidize a quick rescue sale of First Republic assets and liabilities on to another bank” and that any costs to the FDIC can be covered by other banks.

“Policymakers may judge that the market response to the renewed outbreak of stress around First Republic is moderately encouraging, at least in so far as there appears to be much more differentiation between banks this time than in March,” Evercore said.

Could the renewed stress on First Republic cause the Fed to pause its rate hikes? Only in an extreme scenario, Evercore said. “Certainly, it is unlikely that the Fed would hike right in the middle of an unresolved renewed depositor run on First Republic or any other bank that was generating material real-time spillovers to the wider banking system.”

But “we think the Fed has a strong bias to hike in May and will be wary of deferring that move to June or July.”

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