(Bloomberg) — Just a few days ago, First Republic Bank boasted of another coup for its wealth management business: recruiting a team of six from Morgan Stanley in Los Angeles.
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That comes after massive hiring sprees targeting Bank of America Corp., JPMorgan Chase & Co., Bank of New York Mellon Corp. and Wells Fargo & Co. — raided groups in Boston, New York, and Palo Alto, California. It reflects how the San Francisco-based bank is expanding rapidly thanks to its wealth of technology.
Now, First Republic is racing to reassure customers and clients that it can avoid the fate of Silicon Valley Bank, which collapsed last week after its depositors fled.
Shares of First Republic fell 28% on Thursday and are down about 80% since March 8. The company is exploring strategic options including a sale and is expected to garner interest. interest from larger competitors. JPMorgan and Morgan Stanley are among those discussing a potential deal with the bank that could include a large amount of capital, the Wall Street Journal reported on Thursday.
It was an incredible turn of events for the lender, who built an asset management franchise with approximately $271 billion in assets, making it a rarity among American institutions. However, it is that emphasis on business that could make the fate of the First Republic different from that of SVB and the Signature Bank of New York.
Although it expanded rapidly into lines of credit raising and lending to venture capitalists — services in which SVB specializes — its expertise in serving the wealthy is seen as making it more attractive than its California counterpart.
“First Republic Bank grew up in wealth,” while “SVB started in investment firms,” said Joe Maxwell, managing partner at Fintop Capital, a fintech venture capital firm. Even though there’s a lot of overlap, he says, where they start is still “part of their DNA.”
A representative for the First Republic did not immediately respond to a request for comment. Emails sent to the leaders of the newly added advisory group were not immediately returned.
In a March 12 message to customers, signed by Executive Chairman Jim Herbert and CEO Michael Roffler, the bank said it had taken steps to boost liquidity with accessibility. additional financing from JPMorgan.
“For nearly 40 years, we have operated a simple, straightforward business model that focuses on exceptional care for our customers. They have successfully navigated different macroeconomic and interest rate environments,” they said.
different origins
The origin story of the First Republic could not, in many ways, be more different than the SVB.
Herbert founded the First Republic in 1985, on a hunch that massive home mortgages for wealthy, long-established Californians was too good a business to give up. SVB’s model of providing banking services to startups was conceived a few years ago — over a game of poker.
Over the next four decades, however, as interest rates tumble and hot tech money dominates American finance, their customer bases begin to overlap.
The First Republic began to actively flirt with Silicon Valley’s tech riches. The bank opened a branch inside Facebook’s campus in Menlo Park, California, in an effort to attract early employees on the road to riches. In San Francisco, it has a banking location inside Twitter’s headquarters on Market Street, which remains open.
Meanwhile, SVB’s offerings grew as founders and venture capitalists grew rich, eventually buying asset management firm Boston Private in 2021.
However, that rich business pales in comparison to the First Republic, which has seen assets soar to $271 billion from just $17.8 billion at the end of 2010.
Main Player
Around that time, First Republic executives initiated a plan to transform its property division into a major player. Among its first deals was the purchase of Luminous Capital, with $6 billion in client assets, for a reported $125 million in 2014.
“At the time, they weren’t well penetrated into the high-net-worth investment business,” said David Hou, co-founder of Luminous.
As the fortune continued to grow, eventually surpassing $100 billion, Hou and Mark Sear, his partner, chose to separate from the bank. They left in 2019 to start Evoke Advisors.
Hou, Sear and other Evoke partners though kept the money with the First Republic amid last week’s upheaval. So did other clients and fund managers, some expressing love for the bank on social media and urging people to stay.
One Silicon Valley investor said it plans to keep all of its personal and business funds with the First Republic.
While not from the tech sector, the investor, who requested anonymity when discussing personal information, found the First Republic better understood the intricacies of private tech assets. multiplier compared to big banks — and on par with SVB.
They were introduced to both banks six years ago as an early tech employee and chose First Republic over SVB to manage customer relationships. They now have a personal line of credit, mortgage and venture capital fund with the bank – and plan to keep it there.
That kind of solution was put to the test again on Wednesday, when both S&P Global Ratings and Fitch Ratings downgraded First Republic’s credit rating to junk, citing the risk that their customers would bulk withdrawals.
No chance
Other First Republic customers are also hoping to see the bank weather the turmoil — but not taking any chances.
Joske Thompson, a real estate broker at Compass in San Francisco, said Bay Area homebuyers are now resorting to a “double-apply” approach – applying for a second bank loan to get a loan offer. room.
Thompson, who has been a real estate broker for four decades, said: “Just last week, having a reserve was unprecedented.
They are not the only ones to be cautious.
A New York-based wealth management firm that caters to wealthy investors transferred more than eight-figure amounts of cash from First Republic last week, including money in checking accounts, corporate funds and certificates of deposit, according to a person familiar with the matter.
The person who requested anonymity discussing personal information said the wealth manager has no intention of leaving the bank forever, but is looking to allocate cash and diversify in the wake of SVB’s collapse.
The person said the money is being transferred to institutions including JPMorgan and BNY Mellon.
cultural connection
Herbert, who served as CEO of the First Republic for 37 years, ranks among the highest-paid executives in the United States. The bank’s board of directors includes Tom Barrack, founder of Colony Capital.
Herbert’s total compensation is $17.8 million in 2021, according to the company’s proxy statement. He has served on the boards of organizations from coast to coast, including the San Francisco Ballet Association and New York’s Lincoln Center for the Performing Arts.
Herbert’s wife, Cecilia, has long served on the board that oversees BlackRock Inc’s iShares exchange-traded fund complex. She also serves on the boards of nonprofits including Stanford Health Care and WNET Group, a New York-based mass media company.
Jean-Marc Berteaux had been a wealthy private client of First Republic for over 15 years when he and another client introduced the bank to the Boston Youth Symphony Orchestra, a nonprofit where they work. member of management Council.
“They are supporting nonprofits with the understanding that they can grow their private property business,” said Berteaux, a retired investment manager.
He said his banker spoke to him on the phone on Saturday and Sunday, ensuring that a covered cash withdrawal was made to allocate the institution’s millions of dollars. non-profit into blocks of $250,000 for other banks.
“Give me a big bank that can do that,” Berteaux said.
Concentration risk
The similarities — and differences — between the First Republic and SVB are visible on their balance sheets.
Both SVB and First Republic sponsor private equity and venture capital funding lines. But SVB’s $41 billion balance makes up more than half of its loan portfolio. The First Republic has $10 billion outstanding on such loans.
Both stemmed from single-family mortgages, but SVB lent less than $9 billion. That’s a fraction of First Republic’s $99 billion balance, which is 59% of their loan portfolio (it gave Mark Zuckerberg a 1.05% rate in 2012). It has an additional $22 billion in multi-family loans and $11 billion in other commercial real estate.
One area of contrast is their deposit base. Consumer accounts make up 37% of the First Republic, with businesses making up the rest. SVB had no similar breakdown in its most recent annual report, but noted that deposits came mainly from commercial clients in the technology, life sciences, private equity and venture capital.
First Republic says no sector accounts for more than 9% of total corporate deposits, while it has a smaller proportion of unsecured deposits than SVB.
Dick Bove, chief financial strategist at Odeon Capital Group, thinks Royal Bank of Canada is more likely to bid for the First Republic, attracted by the wealth management business.
“Banks have always wanted what they like to call the ultra-wealthy clientele,” he said. First Republic’s clients have accumulated wealth over decades, he said, while many of SVB’s customers just prefer “hot money”.
–With support from Max Reyes, Pierre Paulden, Amanda Albright, Patrick Clark, Amanda Gordon, Blake Schmidt and Sally Bakewell.
(Share price update, additional details on First Republic picks in fourth paragraph.)
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