First Republic goes from Wall Street raider to victim in days

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(Bloomberg) — Just days ago, First Republic Bank claimed another coup for its wealth-management business: poaching a six-person team from in Los Angeles.

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The spree that followed targeted Bank of America Corp, JPMorgan Chase & Co, Bank of New York Mellon Corp and Wells Fargo & Co followed raids in Boston, New York and Palo Alto, California. This mirrors how the San Francisco-based bank behind the tech money was expanding rapidly.

Now First Republic is rushing to reassure customers and clients that it can avoid the fate of the Silicon Valley bank, which collapsed last week after its depositors fled.

First Republic stock plunged 28% on Thursday and is down nearly 80% since March 8. It is exploring strategic options, including a sale, and is expected to draw interest from larger rivals. The Wall Street Journal reported Thursday that JPMorgan and are among those discussing a possible deal with the bank, which could involve a large capital infusion.

It’s a surprising turn of events for the lender, which built a wealth-management franchise with $271 billion in assets, putting it in rarified air among US institutions. Yet it’s that emphasis on business that could make First Republic’s fortunes so different from those of SVB and Signature Bank of New York.

While it quickly expanded into Capital Call lines of credit and lending to venture capitalists – services in which SVB specialized – its specialty of serving the affluent is seen as making it more attractive than its California counterpart. .

“First Republic Bank grew assets,” said Joe Maxwell, managing partner at fintech venture capital firm Fintop Capital, while “SVB ushered in portfolio companies.” Even though there’s a lot of overlap with where they started, it’s still “part of their DNA,” he said.

A representative for First Republic did not immediately respond to a request for comment. Emails sent to the leaders of its newly added advisory team were not immediately returned.

In a March 12 message to customers, signed by Executive Chairman Jim Herbert and Chief Executive Officer Michael Roeffler, the bank said it has taken steps to bolster its liquidity with access to additional financing from JPMorgan.

“For nearly 40 years, we have operated a simple, straightforward business model focused on taking exceptional care of our customers. We have successfully navigated various macroeconomic and interest environments,” he said.

various origins

The story of the origins of the First Republic could not be more different from that of the SVB in many ways.

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Herbert founded First Republic in 1985, based on the idea that jumbo home mortgages were great business for wealthy, established Californians. SVB’s model of providing banking to startups was conceived a few years back – over a poker game.

Yet over the next four decades, as interest rates fell and hot tech money began to dominate finance, their customer bases began to overlap.

The First Republic began actively pursuing the technological wealth of Silicon Valley. The bank opened a branch on Facebook’s campus in Menlo Park, California, in an effort to attract early employees on their path to wealth. In San Francisco, it has a bank location inside Twitter’s headquarters on Market Street, which remains open.

Meanwhile, SVB’s offerings grew as founders and venture capitalists got richer, with the firm eventually buying out wealth manager Boston Pvt in 2021.

Still, that wealth business pales in comparison to First Republic, which saw rise from just $17.8 billion to $271 billion at the end of 2010.

Key Players

It was around that time that First Republic officials began planning to turn their wealth division into a major player. Among its earlier deals was buying Luminous Capital, with $6 billion in client assets, for a reported $125 million in 2014.

“They weren’t entering the high-net-worth investment business very well,” said David Hou, co-founder of Luminous.

As climbed, eventually exceeding $100 billion, Hou and Mark Sayer, his partner, opted to separate from the bank. He left in 2019 to start Evoke Advisors.

Hough, Sears and other Evoque partners, however, have kept money with First Republic amid last week’s turmoil. There are other clients and fund managers too, some expressing love for the bank on social media and urging people to stay tuned.

One Silicon Valley investor said he planned to keep all of his personal and business funds with First Republic.

Despite not having its origins in tech, the investor, who asked not to discuss personal information, finds that First Republic understands the intricacies of private tech money better than the big banks — and on a par with SVB. But.

He was introduced to both the banks six years ago as a starting technical employee and chose First Republic over SVB for relationship management with customers. He now has personal loans, mortgages and venture funding with the bank — and plans to keep it there.

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That kind of resolve was put to the test again on Wednesday, when both S&P Global Ratings and Fitch Ratings cut First Republic’s credit grade to junk, citing the risk that its customers would pull their money in a big way. .

no chance

Other First Republic clients are also hoping to see the bank through turmoil – but are taking no chances.

Bay Area homebuyers are now resorting to “double apping” — submitting loan applications to another bank, said Joske Thompson, a real estate broker with Compass in San Francisco.

“Until last week the backup was not heard of,” said Thompson, who has been a real estate broker for four decades.

They are not the only ones taking precautions.

A New York-based wealth-management firm for high-net-worth investors pulled an upper-eight-figure amount of cash from First Republic last week, which includes money in checking accounts, corporate funds and certificates of deposit, according to one person. familiar with the matter.

The person, who asked not to be identified discussing personal details, said the wealth manager does not intend to leave the bank forever, but is looking to spread cash around and diversify after the collapse of SVB.

The money is being rerouted to institutions including JP Morgan and BNY Mellon, the person said.

cultural affiliation

Herbert, who was First Republic’s CEO for 37 years, has been ranked among the highest-paid executives. The bank’s board includes Tom Barrack, founder of Colony Capital.

Herbert’s compensation was to total $17.8 million in 2021, according to a company proxy statement. He has been on the boards of institutions from coast to coast, including the San Francisco Ballet Association and New York’s Lincoln Center for the Performing Arts.

Herbert’s wife, Cecilia, has long been on the board overseeing BlackRock Inc.’s iShares exchange-traded fund complex. She has also been on the boards of nonprofits including Stanford Health Care, a New York public media company, and the WNET Group.

Jean-Marc Bertoux was a personal wealth customer with First Republic for more than 15 years when he and another customer introduced the bank to the Boston Youth Symphony Orchestra, a non-profit where they serve as board members. work as.

“They are supporting nonprofits with the understanding that they can grow their private money business,” said Berto, a retired investment manager.

He said his banker was on the phone with him Saturday and Sunday to make sure there was an insured cash sweep to distribute $250,000 of the nonprofit’s millions of dollars to other banks.

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“Give me a mega bank that would do that,” Berto said.

concentration risk

The similarities — and differences — between First Republic and SVB are visible on their balance sheets.

SVB and First Republic Finance Capital call lines for both private equity and venture capital funds. But SVB’s $41 billion balance accounted for more than half of its loan portfolio. The First Republic was owed $10 billion in this way.

Both originated single-family mortgages, but SVB loaned than $9 billion. This is a fraction of First Republic’s $99 billion balance, which was 59% of their loan portfolio (it gave Mark Zuckerberg a of 1.05% in 2012). It had $22 billion in multifamily loans and $11 billion in other commercial real estate.

One area of ​​contrast is their deposit base. Consumer accounts make up 37% of First Republic’s, with businesses covering the remainder. SVB doesn’t have a similar breakdown in its most recent annual report, but notes deposits largely came from commercial clients in tech, life sciences, private equity and venture capital.

First Republic states that no sector represents more than 9% of total business deposits, while it has a lower percentage of unsecured deposits than SVB.

Dick Bove, chief financial strategist at Odeon Capital Group, expects the Royal Bank of Canada to be most likely to make a bid for First Republic, which is anchored by the wealth management business.

“Banks have always wanted what they like to call the ultra-wealthy customer group,” he said. First Republic’s clients have accumulated wealth over the decades, he said, while many SVB clients were on the wad of “hot money”.

— With assistance from Max Reyes, Pierre Paulden, Amanda Albright, Patrick Clark, Amanda Gordon, Blake Schmidt, and Sally Bakewell.

(Updates stock price, additional details on First Republic’s options in fourth paragraph.)

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