The troubled First Republic Bank is looking to sell up to $100 billion in assets.
The San Francisco-based bank, grappling with holding fixed-rate mortgages with low interest rates on its balance sheet, may try to rescue itself by divesting $50 billion to $100 billion of assets, Bloomberg reported, citing unidentified sources.
The sales, which include long-dated mortgages and securities, would reduce the mismatch between the bank’s assets and liabilities — a factor that left First Republic reeling after a run on deposits last month.
Potential buyers, including large U.S. banks, could receive warrants or preferred equity as an incentive to buy assets above their market value, a source familiar with the matter told Bloomberg.
The challenges facing the bank dawned on investors after First Republic reported earnings that fell far short of analysts’ estimates.
For the first time since the collapse of Silicon Valley Bank and Signature Bank, First Republic disclosed it had lost $102 billion in deposits over the course of the first quarter — about half of the deposits that sat on its books at the end of last year.
It ended the quarter with $104 billion in deposits — a number that included $30 billion in deposits put into First Republic by 11 banks last month.
The bank holds long-term mortgages to wealthy borrowers — Fitch Ratings recently called its assets “pristine” — but with the Federal Reserve’s rate hikes, it must pay higher interest to hold deposits than it makes on its loans. The result is a huge increase in interest expenses.
The lender is trying to shore up its balance sheet to avoid being seized by the Federal Deposit Insurance Corp. and clear the way for a potential capital raise, the source told Bloomberg.
It may need the U.S. government to facilitate negotiations with some of the country’s largest banks to stabilize the lender as it executes its turnaround, the person added.
That would be a much cheaper alternative than a failure of the bank.
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In addition to selling assets, First Republic also plans to focus on loans that can be sold on the secondary market, it said Monday. That’s a sharp break from its strategy of providing interest-only jumbo mortgages that drew rich borrowers.
First Republic had total assets of $233 billion as of March 31, including $173 billion of loans and $35 billion of investment securities, according to its first-quarter earnings report.
— Dana Bartholomew