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First Republic faces 'Hobson's choice': analyst

The troubled regional bank has to continue as a standalone company because no buyer will be willing to take on its unrealized losses, according to Wedbush.

The stock of troubled San Francisco lender First Republic (FRC) wobbled Monday after it announced it would stop paying dividends on its preferred stock and an analyst said the bank wouldn't be able to find a buyer willing to take on its problems voluntarily.

The bank has been exploring various options that might restore some stability, including a sale, but Wedbush Securities said in a note Monday that First Republic faces a "Hobson's choice in which it essentially has no other choice than to move forward as a standalone company" due to the amount of unrealized losses on its balance sheet.

Even a sale at $0 a share is unlikely, Wedbush said, because any buyer would still essentially have to pay billions to absorb those losses.

First Republic and many other regional banks are under intense investor scrutiny because they have billions in bonds that are now worth less due to an aggressive campaign by the Federal Reserve to hike interest rates. First Republic had $4.18 billion in unrealized losses on its held-to-maturity securities at the end of 2022, according to Wedbush. These don't count as actual losses until they are sold or if First Republic were to be acquired.

The only way First Republic gets sold, Wedbush said, is if regulators were to seize the bank and sell off its assets at a bargain price. It expects the bank to stave off that type of regulatory seizure and “grind it out as a standalone company for the foreseeable future.”

Exterior of First Republic Bank building with brick facade, plants, and flowerpots on the property, Walnut Creek, California, March 30, 2023. (Photo by Smith Collection/Gado/Getty Images)
First Republic bank branch. (Photo by Smith Collection/Gado/Getty Images) (Smith Collection/Gado via Getty Images)

First Republic's stock dropped more than 1% Monday before clawing changing course. Over the past month, it has dropped roughly 85%. A First Republic spokesman told Yahoo Finance "we remain well-positioned to manage short-term deposit activity." The bank reports earnings on April 24.

First Republic is trying to weather turmoil that began with the March 10 and March 12 failures of Silicon Valley Bank and Signature Bank. It tapped $70 billion from the Federal Reserve’s Bank Term Funding program and received another $30 billion in uninsured deposits from 11 of the country’s largest banks, including JPMorgan Chase (JPM) and Bank of America (BAC).

It has eliminated yearly bonuses for all its executives, suspended its common-stock dividend and hired JPMorgan’s investment banking division as well as Lazard to help advise on financial options that include raising capital and exploring a sale.

Its announcement Friday that it would also be suspending its preferred stock dividend "reflects the acute stress on its business in the wake of recent bank failures," Wedbush said.

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