What happened
Shares of First Republic Bank (FRCB) had plunged by more than 34% as of 10:28 a.m. ET today after the bank announced last night that it is exploring strategic options that might include a sale or further attempts to shore up liquidity.
So what
First Republic is one of the banks that investors are closely monitoring after the collapse of SVB Financial and Signature Bank last week. While First Republic is not in nearly as bad shape as SVB was, it does have billions of unrealized losses sitting in its bond portfolio that would destroy substantial shareholder equity if the bank had to sell them more immediately. First Republic also has lots of uninsured deposits, which have spooked investors.
Recently, First Republic said it had secured additional liquidity from the Federal Reserve and JPMorgan Chase, which brought their unused liquidity to $70 billion. First Republic CEO Jim Herbert also told CNBC a few days ago that the bank wasn't seeing too many depositors leave. But the idea that the company is exploring strategic options hints that it might still be seeing deposit outflows.
"Normally, a headline of a potential sale would support the stock," KBW analyst Christopher McGratty wrote in a recent research report. "However, the potentially significant deposit outflows post-[Silicon Valley] failure likely leave [First Republic] in a tough spot."
And reports have come out saying that the Fed's new Bank Term Funding Program (BTFP), which is essentially meant to backstop deposits, would not be as useful for a bank like First Republic because it doesn't have that much qualifying collateral it could pledge.
Now what
While a sale might be needed if there is a deposit run, I don't think it would result in a good outcome for shareholders right now because First Republic currently only trades at about 30% of its tangible book value (TBV) or net worth. Last year, the stock traded as high as 240% to its TBV.
And even before all of these bank collapses, First Republic, which holds a large book of mortgage loans, was looking at margin compression in the near term. So I doubt any purchase price right now is going to be attractive to long-term shareholders.
