First Republic Bank Faces Possible Government Takeover

First Republic Bank, one of the largest lenders to wealthy individuals and businesses in California, is scrambling to avoid a government takeover as it faces mounting losses from its exposure to the commercial real estate sector.

The bank, which has more than $150 billion in assets and operates in six states, has seen its share price plunge by more than 80% since the beginning of the year, as the coronavirus pandemic and the collapse of several large banks have triggered a wave of defaults and foreclosures in the office and retail markets.

First Republic’s advisers have been working on a plan to raise capital, sell assets or find a buyer for the bank, but have struggled to provide a credible proposal that would satisfy regulators and investors, according to people familiar with the matter.

The bank’s situation is so dire that the Federal Deposit Insurance Corporation (FDIC), which insures deposits at U.S. banks, has asked other banks, including JPMorgan Chase and PNC Financial Services Group, to submit final bids for First Republic by Sunday, Bloomberg News reported on Thursday.

The FDIC has the authority to seize and sell failing banks to protect depositors and maintain financial stability. The agency has already taken over two other large banks this year: Silicon Valley Bank, which failed in February due to mismanagement and regulatory violations, and Credit Suisse, which was rescued by UBS in March after suffering massive losses from its involvement in the Archegos Capital Management scandal.

First Republic declined to comment on its financial condition or the FDIC’s actions. In a statement on Wednesday, the bank said it had “a strong capital position” and was “confident in our ability to navigate through this challenging environment.”

But analysts and investors are skeptical that First Republic can survive on its own, given the severity of the crisis and the lack of interest from potential buyers.

“First Republic is facing a perfect storm of headwinds that are beyond its control,” said David Hendler, an analyst at Viola Risk Advisors, a research firm that specializes in bank risk. “The commercial real estate market is in free fall, the regulatory environment is hostile and the competition is fierce. I don’t see how they can pull this off without government intervention.”

First Republic was founded in 1985 as a spin-off from Bank of America. It focused on serving affluent customers in San Francisco and other major cities, offering personalized banking services, high-end mortgages and wealth management products. It also expanded into commercial lending, especially to developers and owners of office buildings, hotels and shopping centers.

The bank was acquired by Merrill Lynch in 2007, but was sold back to its management and private equity investors in 2009 after Merrill Lynch was bought by Bank of America during the global financial crisis. It went public again in 2010 and grew rapidly over the next decade, benefiting from low interest rates, strong demand for luxury properties and a booming tech sector.

But the pandemic and the subsequent recession have upended First Republic’s business model. As millions of people shifted to working from home and shopping online, demand for office and retail space plummeted, leading to lower rents, higher vacancies and lower property values. Many borrowers have defaulted on their loans or sought forbearance from their lenders.

According to its latest quarterly report, First Republic had $32 billion in commercial real estate loans at the end of March, accounting for 40% of its total loan portfolio. About 15% of those loans were classified as nonperforming or troubled, meaning they were either delinquent or restructured. The bank also reported a net loss of $1.2 billion for the first quarter, compared with a net income of $295 million a year earlier.

First Republic’s woes have been compounded by the failure of several other banks that were active in the same sector. In February, Silicon Valley Bank, which had $120 billion in assets and was known for lending to tech startups and venture capitalists, collapsed after regulators found that it had violated capital requirements and accounting rules. The FDIC sold most of its assets to Citigroup for $2.5 billion.

In March, Credit Suisse, which had $800 billion in assets and was one of the world’s largest investment banks, was forced to merge with UBS after losing more than $10 billion from its exposure to a hedge fund run by former Tiger Management trader Bill Hwang.

Credit Suisse was one of the main lenders to Archegos and had to write off $5 billion from its exposure to the fund. The Swiss bank also faced regulatory scrutiny and legal action from investors and employees who accused it of mismanagement and negligence.

First Republic had a close relationship with Credit Suisse and was one of its preferred partners for providing banking services to its wealthy clients. The bank also had a large exposure to Archegos, which accounted for about 10% of its total assets at risk, according to analysts.

The bank’s troubles have raised concerns about its governance and risk management practices, as well as its reliance on a narrow customer base and a concentrated loan portfolio. Some analysts have questioned whether First Republic should have been more transparent about its exposure to Archegos and whether it had adequate capital and liquidity buffers to withstand the shock.

“First Republic has always prided itself on being a conservative and prudent lender, but this episode has tarnished its reputation and raised doubts about its business model,” said Nancy Bush, an independent bank analyst and a former board member of Dime Community Bancshares. “They need to explain to their shareholders and regulators how they got into this mess and how they plan to get out of it.”

First Republic’s troubles have also cast a shadow over the broader banking sector, which has been struggling to cope with the fallout from the pandemic and the financial crisis. While some banks, such as JPMorgan Chase and Goldman Sachs, have reported strong earnings and increased their dividends and share buybacks, others have suffered losses, cut costs and faced regulatory pressure.

The FDIC, which is chaired by former Treasury official Jelena McWilliams, has been more aggressive in intervening in troubled banks under the Biden administration, which has vowed to crack down on financial misconduct and protect consumers and taxpayers. The agency has also been working closely with other regulators, such as the Federal Reserve and the Office of the Comptroller of the Currency, to monitor the health of the banking system and prevent systemic risks.

The fate of First Republic will depend on whether it can find a viable solution before the FDIC runs out of patience and decides to take action. The bank’s shareholders, who have seen their holdings lose most of their value, are hoping for a miracle.

“I’m still holding on to my shares, but I’m not optimistic,” said John Smith, a retired teacher who invested $50,000 in First Republic in 2015. “I thought this was a safe and solid bank that would grow steadily over time. I never expected it to end up like this.”