First Republic Bank, the fourth-largest non-agency jumbo lender in America, is exploring strategic options, including a sale and a capital infusion, and is expected to attract interest from larger rivals, Bloomberg reported on Wednesday, citing anonymous sources with knowledge of the matter.
No decision has been made, and the bank can remain independent, people who requested anonymity for discussing confidential information said. According to Bloomberg, the bank is also weighing options for shoring up liquidity.
In addition, the Wall Street Journal reported on Thursday morning that JPMorgan, Morgan Stanley and several other big banks are discussing a potential “sizable capital infusion,” people familiar with the matter said. A full takeover is also a possibility, but looks unlikely at this point.
Amid the liquidity problems affecting regional banks in the past week, California-based First Republic announced fresh access to capital from the Federal Reserve Bank and JPMorgan Chase & Co. on Monday, resulting in $70 billion available to fund operations.
In a joint statement, Jim Herbert, founder and executive chairman, and Mike Roffler, CEO and president, said the bank continued to fund loans and process transactions.
“First Republic’s capital and liquidity positions are very strong, and its capital remains well above the regulatory threshold for well-capitalized banks,” the executives said.
Still, on Wednesday, S&P and Fitch Ratings downgraded the bank to “junk.” Among the reasons for a speculative investment grade, First Republic’s deposits are concentrated on wealthy customers who are uninsured and less sticky in times of stress – the same problem that led Silicon Valley Bank and Signature Bank to collapse.
The bank, however, says its consumer deposits have an average account size of less than $200,000, and the standard insurance amount by the Federal Deposit Insurance Corporation is $250,000. The bank said business deposits’ average account size is less than $500,000.
Meanwhile, First Republic had 61% of the book value of its investment portfolio in municipal securities at the end of 2022, a higher share than its peers. According to Fitch, these assets have credit quality but are relatively illiquid compared to U.S. treasury and agency securities.
First Republic share was trading at $20.53 on Thursday morning, down 34.10% from the previous closing.
The jumbo market
In the mortgage space, a potential buyer of First Republic Bank will inherit a growing non-agency jumbo loans production while the overall market has been in a downward spiral.
According to Inside Mortgage Finance data, the bank was the only one to increase its volume among the top 10 non-agency jumbo mortgage producers in 2022. First Republic originated $31.6 billion last year, up 8% compared to the previous year. The estimated total for all lenders was $410 billion, down 36.3% in the same period.
First Republic reached a 7.7% market share in the space last year. Wells Fargo & Co. is the leader in the category with an 11.1% market share, followed by Chase (9.3%) and Bank of America Home Loans (8.1%).
Focusing on jumbo loans (greater than $726,200) makes sense if considering First Republic’s customer base. Founded in 1985, the bank offers private banking, private business banking and private wealth management. According to the bank, no single sector in the U.S. economy represents more than 9% of total deposits, with the largest being diversified real estate.