April 29, 2023

Good morning, readers! The banking turmoil is not over, and it looks like a third domino is about to fall. Read on...

  • 🚨 Situational awareness: Banks including JP Morgan and PNC are reportedly vying to potentially acquire First Republic Bank, with final bids due to the FDIC by Sunday night.
  • 👋 Reminder: Feel free to send me tips or comments by replying to this email or on Twitter @imkialikethecar.

Today’s Smart Brevity™ count is 1,399 words, a 5-minute read.

1 big thing: How FRB got here

Illustration: Tiffany Herring/Axios

First Republic Bank is uniquely and consistently praised by its customers — mainly wealthy individuals and businesses — but the San Francisco-based bank’s nearly 40 years of existence has been a bumpy ride.

Why it matters: The latest loop in the roller coaster that started nearly two months ago with the collapse of Silicon Valley Bank could soon end with a government takeover, or a sale to a bigger rival.

Flashback: Founded in 1985 by Jim Herbert, who’d previously founded and sold another San Francisco bank, First Republic was initially a California-chartered industrial loan company.

  • It went public on the Nasdaq in 1986, raising $8.4 million. Since the '90s, it's made some acquisitions, including a Nevada-based thrift in 1993.
  • After it successfully lobbied the state to allow the conversion of thrifts into state-chartered banks, it reversed merged with its own subsidiary to become a full-fledged bank and expand its offerings.
  • In 1997, it adopted its signature tagline: “It’s a Privilege to Serve You.”

Later: It was sold to Merrill Lynch in 2007 for $1.8 billion in cash and stock.

  • Following the latter’s acquisition by Bank of America, it was sold to a group of private investors, including General Atlantic and Colony Capital in July 2010; in December of that year it went public for a second time, raising $280.5 million.

The big picture: First Republic’s recent troubles are largely owed to its similarities to SVB: Both are Bay Area-based regional institutions favored by the tech industry.

  • 57% of FRB's business loan portfolio last year went to venture capital and private equity firms; its push into business banking naturally followed its clients into the sectors employing them.
  • Nonprofits and schools, the second-largest category, only make up 22%.

By the numbers: At the end of 2022, First Republic was the 14-largest commercial bank in the country with $212.6 billion in assets — ahead of then-16th spot holder SVB.

  • Last year, First Republic brought in $5.9 billion in revenue, with $1.7 billion in profits.
  • Its wealth management division raked in $877 million in revenue for the year.

Between the lines: In 2019, the bank was rattled when almost 50 bankers from its acquisition of Luminous Capital left the company, taking $17 billion in assets under management with them.

  • The five wealth management advisers who led the exodus went on to form their own smaller shops again (instead of joining large rivals).
  • "If it were classed as a breakaway, which typically refers to brokers who bust out of their wirehouse firms, it would be the largest in history," wrote American Banker of the move.

Yes, but: The bank proved to be more resilient than it seemed. Its wealth management business, which the Luminous acquisition was intended to bolster, continued to grow, according to American Banker.

  • Its wealth management assets grew from $41 billion in 2013 (the year after the acquisition) to $140 billion by March 2019.

The bottom line: Markets are fickle things, and life — like a stock price that plunges by over 90% in a year — comes at you fast.

  • Barring a miracle, First Republic's eventful 40-year history appears headed toward an ending that's at least as dramatic as SVB's.

2. Catch up quick

Illustration: Tiffany Herring/Axios

It's crunch time for First Republic, with the company and regulators reportedly working furiously to find a lifeline (i.e. a potential buyer) to keep the bank afloat.

Driving the news: On Friday, the stock slid by more than 40% after CNBC reported that it would likely be taken over by regulators.

What they're saying: "We are engaged in discussions with multiple parties about our strategic options while continuing to serve our clients," First Republic Bank said, in a statement to Axios.

State of play: First Republic's week kicked off with a disclosure on Monday that customers withdrew more than $100 billion in deposits (or a net of $72 billion, given the $30 billion in deposits from large banks) during the first quarter where crisis swirled around regional banks.

  • Its stock plunged 49% at market open the following day.
  • The bank reportedly weighed selling up to $100 billion in assets in an attempt to shore up its balance sheet, per Bloomberg.
  • The company also reportedly hired The Messina Group, founded by former President Barack Obama's deputy chief of staff, to help it navigate talks with the Biden White House.

3. Bank failure post-mortems

Illustration: Aïda Amer/Axios

The Federal Reserve is considering stricter regulations for banks after an internal review found that looser rules were one key culprit behind Silicon Valley Bank's collapse — the second-largest bank failure in U.S. history, per Axios' Courtenay Brown and Kate Marino.

Why it matters: The review, released Friday, lays blame on the bank itself, as well as Fed supervisors charged with overseeing it and a regulation rollback, for the failure. The episode forced the government to take extraordinary action to backstop the banking system.

What they're saying: "SVB's failure demonstrates that there are weaknesses in regulation and supervision that must be addressed," Michael Barr, the Fed's vice chair for supervision who led the review, said in a statement.

Details: The 114-page report is the most comprehensive look so far at the failures on the parts of supervisors and bank executives that led to the collapse of the bank.

  • But underpinning those failures are 2019 changes that loosened regulations and requirements for financial institutions of a similar size as Silicon Valley Bank, Barr said.

Where it stands: Those rule changes, which came in response to federal legislation, and a "shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity and promoting a less assertive supervisory approach," Barr said.

The big picture: Barr also proposed tougher rules related to capital and liquidity requirements, as well as the format of periodic stress tests — all of which had been under consideration before Silicon Valley Bank's failure. The event, however, intensified the urgency for review, according to senior Fed officials.

Between the lines: The report details the extent to which some of Silicon Valley Bank's troubles were identified by Fed supervisors but not followed up on.

  • Silicon Valley Bank's "foundational problems were widespread and well-known, yet core issues were not resolved, and stronger oversight was not put in place," the report says.
  • For instance, by the time Silicon Valley Bank failed, it had accumulated 31 supervisory warnings — triple the average received by peers — about a list of issues that ultimately led to the bank's demise.
  • The bank's supervisors also identified problems in the bank's interest rate risk management in annual exams dating back to 2020, but did not issue findings until 2022. Supervisors had planned to downgrade a key rating for the Silicon Valley Bank, but the bank collapsed before that rating was finalized.

Meanwhile: The FDIC on Friday released a report of its own, on the failure of Signature Bank. This agency, too, highlights weaknesses in its supervision — but it blames those failings in part on being under-staffed.

  • The document also reads as a scathing report card on Signature Bank's management and board, which the FDIC says are ultimately to blame for the bank's failure.
  • Management "did not prioritize good corporate governance practices, did not always heed FDIC examiner concerns, and was not always responsive or timely in addressing FDIC supervisory recommendations," according to the report.
  • They also dropped the ball when it came to crypto, the report finds. "[Signature] failed to understand the risk of its association with and reliance on crypto industry deposits or its vulnerability to contagion from crypto industry turmoil that occurred in late 2022 and into 2023," it said.

Worth noting: A separate report from the GAO, also issued Friday, highlights inadequate bank supervision in both banks' failures.

📚 Due Diligence

  • $17B gone: The biggest-ever advisory team exit and the bank that lost it (American Banker)
  • First Republic shows how not to bolster confidence (Bloomberg)
  • Jim Herbert, founder of a teetering First Republic (Financial Times)

🧩 Trivia

2023 has been quite the year for banks, less than four months into it.

  • Question: Can you recall the order in which the various banks folded beginning in March? (Answer at the bottom.)

🧮 Final Numbers

Data: Yahoo! Finance; Chart: Axios Visuals

🙏 Thanks for reading! And to Javier E. David and Amy Stern for editing. See you on Monday for Pro Rata's weekday programming, and please ask your friends, colleagues and commercial bankers to sign up.

Trivia: After crypto-favorite Silvergate bit the dust, Silicon Valley Bank was taken by the feds; next was Signature, followed by First Republic.