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What’s next for the troubled First Republic Bank

What's next for the troubled First Republic Bank

New York (CNN) First Republic Bank is still an independent bank. The question on Saturday was how long it will stay that way.

Shares of First Republic (FRC) fell from $122.50 on March 1 to about $3 a share as of Friday on expectations that the Federal Deposit Insurance Corporation, the independent government agency that insures deposits for bank customers, would step in by the end of the day and take control of the San Francisco-based bank, its deposits and assets. The FDIC had already done this last month with two other similarly sized banks — Silicon Valley Bank and Signature Bank — when their clients attacked these banks, leaving the lenders unable to meet clients’ demands for withdrawals.

Reports from Bloomberg and the Wall Street Journal indicated that JPMorgan Chase and PNC Financial of Pittsburgh are in the process of submitting bids to the FDIC in which they would purchase First Republic. None of those parties commented on the reports.

“We are in multi-party discussions regarding our strategic options as we continue to serve our customers,” First Republic said in a statement Friday evening.

If there is a buyer for First Republic, the FDIC would likely be stuck with some money-losing assets, as it did after finding buyers for the viable portions of SVB and Signature after taking control of those banks.

During the 2008 financial crisis that sparked the Great Recession, a shotgun marriage of sorts occurred a number of times, arranged by regulators who didn’t want a major bank to fail before it was sold. Notably, JPMorgan bought Bear Stearns for a fraction of its previous value in March 2008, then bought savings and loan Washington Mutual in September, shortly after Bank of America bought Merrill Lynch.

The lifeline of the First Republic proved to be insufficient

Shortly after the collapse of SVB and Signature in March, First Republic received a $30 billion lifeline in the form of deposits from a collection of the nation’s largest banks, including JPMorgan Chase (JPM), bank of America (BAG), Wells Fargo (WFC), Citi group (C) And Truist (TFC)which came together after Treasury Secretary Janet Yellen intervened.

The banks agreed to take the risk and work together to keep First Republic even with the money, hoping it would inspire confidence in the country’s suddenly battered banking system. The banks and federal regulators all wanted to reduce the chance that customers of other banks would suddenly start withdrawing their money.

But while the cash allowed First Republic to get through the past six weeks, Monday night’s quarterly financial report, revealing massive withdrawals in late March, raised new concerns about its long-term viability.

Nervous big savers

The financial report showed that savers had withdrawn about 41% of their money from the bank in the first quarter. Most of the withdrawals came from accounts with more than $250,000, meaning those excess funds weren’t insured by the FDIC.

Uninsured deposits at the bank fell $100 billion during the first quarter, a period in which total net deposits fell $102 billion, not counting the infusion of deposits from other banks.

Uninsured deposits amounted to 68% of total deposits as of December 31, but only 27% of non-bank deposits as of March 31.

In its income statement, the bank said insured deposits fell slightly during the quarter and remained stable from late last month through April 21.

Banks never have all the money on hand to cover all deposits. Instead, they take deposits and use the money to make loans or investments, such as purchasing US Treasury bonds. So when customers lose confidence in a bank and rush to withdraw their money, what’s known as a “run on the bank,” even an otherwise profitable bank can go bankrupt.

First Republic’s latest earnings report showed it was still profitable in the first quarter — net income was $269 million, down 33% from a year earlier. But it was news of the loss of deposits that worried investors and ultimately regulators.

While some of those who had more than $250,000 in their First Republic accounts were likely wealthy individuals, most were likely businesses that often need that much money to cover day-to-day operating expenses. A company with 100 employees can easily need more than $250,000 to cover a biweekly payroll.

First Republic’s annual report stated that as of December 31, 63% of total deposits came from business customers, the rest from consumers.

First Republic started operations in 1985 with a single branch in San Francisco. It is known for catering to wealthy clients in coastal states.

It has 82 locations listed on its website, spanning eight states, in high-income communities such as Beverly Hills, Brentwood, Santa Monica, and Napa Valley, California; in addition to San Francisco, Los Angeles and Silicon Valley. Outside of California, branches are located in other high-income communities such as Palm Beach, Florida; Greenwich, Connecticut; Bellevue, Washington; and Jackson, Wyoming.

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