Bank of the First Republic FRC -14.84%
came under renewed pressure amid Friday’s collapse of Silicon Valley Bank as investors tried to determine which other banks might face similar risks.
First Republic shares fell 52% in early trading before recovering to near the previous day’s closing level, only to end the day down 15%. Investors have expressed concerns about unrealized losses on the bank’s assets as well as its heavy reliance on deposits that could prove fickle.
The First Republic issued a late morning statement aimed at calming investors, stressing its “continued security and stability and strong capital and liquidity positions.”
First Republic shares lost 34% of their value last week.
Addressing its liquidity, First Republic said: “Sources beyond a well-diversified deposit base include more than $60 billion of available and unused borrowing capacity at Federal Home Loan Bank and Federal Reserve Bank. .” Regarding its financial condition, First Republic said it “has always maintained a strong capital position with capital levels well above regulatory requirements to be considered well capitalized.”
Investors are wary of First Republic for reasons similar to those that worried SVB. Like SVB, First Republic showed a significant discrepancy between the fair market value and the balance sheet value of its assets. Unlike SVB, where the biggest divergence is in its debt portfolio, First Republic’s gap lies primarily in its loan portfolio.
In its annual report, First Republic said the fair market value of its “real estate-backed mortgages” was $117.5 billion as of December 31, or $19.3 billion less than their value at the time. balance sheet of $136.8 billion. The fair value gap for this asset class alone was greater than First Republic’s $17.4 billion in total equity.
In total, the fair value of First Republic’s financial assets was $26.9 billion lower than their balance sheet value. Financial assets included “other loans” with a fair value of $26.4 billion, down $2.9 billion from their carrying value of $29.3 billion. The so-called held-to-maturity securities, consisting mostly of municipal bonds, had a fair value of $23.6 billion, or $4.8 billion less than their book value of $28.3 billion.
A spokesperson for First Republic declined to comment on information about the fair value of the bank and its deposits.
Another area of concern echoing SVB is First Republic’s liabilities, which are heavily reliant on customer deposits. At SVB, those deposits came largely from tech startups and venture capitalists, who quickly withdrew their money when the bank ran into trouble.
The financing of the First Republic relies heavily on high net worth individuals who have increasingly had options to seek higher returns on their cash from other financial institutions as interest rates have risen.
First Republic’s total deposits were $176.4 billion, or 90% of its total liabilities, as of December 31. About 35% of his deposits were non-interest bearing. And $119.5 billion, or 68%, of its deposits were uninsured, meaning they exceeded Federal Deposit Insurance Corp limits.
Uninsured deposits can turn out to be fickle as they may suffer losses if a bank fails. At SVB, it is unclear based on the FDIC statement whether uninsured depositors will be cured.
Write to Jonathan Weil at jonathan.weil@wsj.com
Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the March 11, 2023 print edition as “First Republic Hit by SVB Meltdown”.