This post was originally published on this site
https://content.fortune.com/wp-content/uploads/2023/04/GettyImages-1484874436-e1682448694269.jpg?w=2048
First Republic Bank is exploring divesting $50 billion to $100 billion of long-dated mortgages and securities as part of a broader rescue plan, according to people with knowledge of the matter. Shares of the company tumbled as much as 48%.
Any sales would help reduce the bank’s asset-liability mismatch, the people said, asking not to be identified discussing confidential information. Potential buyers, including large US banks, might receive warrants or preferred equity as an incentive to buy assets above their market value, one of the people said.
The lender is trying to shore up its balance sheet to avoid being seized by the Federal Deposit Insurance Corp. and clear the path for a possible capital raise, the person said. It may need the US 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 company. Play Video
A spokesman for the San Francisco-based firm declined to comment.
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.
An asset-liability mismatch can happen when interest rates rise, forcing banks to pay depositors a higher interest rate than what they charge borrowers. At First Republic, the problem is significant because a lot of its assets are single-family mortgages made when interest rates were at historic lows. Unloading those would help alleviate the mismatch.
The problem: Loans made when rates were low are worth less now, which means First Republic can’t sell them without booking a loss unless it entices buyers to scoop them up at near face value. Buyers may demand some kind of sweetener such as warrants.
Read more: Interest-Only Loans to Hamptons Set Impale First Republic
First Republic extended earlier declines after Bloomberg reported its proposed asset sales. The shares dropped 41% to $9.46 at 1:26 p.m. in New York. They were down as much as 30% earlier Tuesday after reporting a bigger-than-expected drop in deposits in the first quarter. The figure fell to $104.5 billion, well below the $137 billion average of analyst estimates compiled by Bloomberg. The total included a $30 billion infusion from 11 of the largest US lenders.
The bank on Monday confirmed it’s exploring strategic options. “We are working to restructure our balance sheet,” Chief Financial Officer Neal Holland said in a statement.
(Updates with share reaction in seventh paragraph.)
