11 Banks Throw a $30B Lifeline to First Republic. Expect a Volatile Ride for CRE

Article originally posted on Globe St. on March 17, 2023

But is it Enough to Restore Confidence and What are the Implications for CRE?

Big banks have come with a $30 billion unsecured rescue deposit for First Republic Bank in its efforts to stay afloat.

The extraordinary deal involves 11 of the largest banks in the country: Bank of America, Citigroup, JPMorgan Chase and Wells Fargo putting in $5 billion each; Goldman Sachs and Morgan Stanley with $2.5 billion each; and BNY-Mellon, PNC Bank, State Street, Truist and U.S. Bank with $1 billion each.

“The actions of America’s largest banks reflect their confidence in the country’s banking system,” as statement from the banks said.  “Together, we are deploying our financial strength and liquidity into the larger system, where it is needed the most.  Smaller- and medium-sized banks support their local customers and businesses, create millions of jobs and help uplift communities.  America’s larger banks stand united with all banks to support our economy and all of those around us.”

The foundational shake from Silicon Valley Bank and Signature Bank — respectively the 16th and 29th largest banks by asset size in the US according to the Federal Reserve — raised questions about the stability of financial institutions. The aftershocks caught First Republic Bank.

However, what may have moved the larger banks to help might be more than just belief in the system. First Republic, at the end of 2022, was the 14th largest with $212.6 billion in assets by Federal Reserve data.

On Sunday, March 12, First Republic announced that it had access to additional funding through the Federal Home Loan Bank and JPMorgan Chase and that “total available, unused liquidity to fund operations is now more than $70 billion.” That apparently wasn’t enough to calm investors. The share price was $122 on March 1. By March 15, the number was $31.16. After the announcement of the rescue, shares jumped by almost 10%, according to data from S&P Global Market Intelligence. But in after-hours trading at 8pm eastern time, as shown by Yahoo Finance, shares dropped 17% to $28.45.

“With CRE lending, the most relevant question for investors right now is what impact the current bank stress will have on credit availability for CRE,” Mitch Rosen, managing director and head of real estate at Yieldstreet, tells GlobeSt.com. “Currently, we do not see a bank failure occurring in the sense of depositors losing money at this point. Moving forward, banks are going to be mindful of putting money out in CRE loans. This will create a ripple effect. To what extent is unclear.”

First Republic’s 2022 annual report noted that the company originates commercial real estate loans, but “primarily to existing clients.” In the CRE category the bank put “a wide variety of property types, such as mixed-use residential/commercial, retail properties, office buildings, office/warehouses, hotels, motels and healthcare facilities,” with an outstanding balance at the end of 2022 of $10.8 billion, or about 6% of the loan portfolio. “As of December 31, 2022, the average commercial real estate loan commitment size was $4 million, and the weighted average LTV at origination was 46%,” the 10K said.

The bank treated its multifamily/commercial loan portfolio separately. Loans in this category were “for the construction and ownership of other types of properties other than owner-occupied single-family loans.” The balance at the end of 2022 was $2.1 billion, or 1% of its portfolio. “As of December 31, 2022, the average multifamily/commercial construction loan commitment size was $8 million, and the weighted average LTV at origination was 54%.”

“Borrowers can expect increasing difficulty in the coming weeks and months obtaining new commercial real estate financing, extending or refinancing existing real estate financing, and accessing financing draws for ongoing construction projects,” says Noah Grayson, strategic financing advisor at Real Estate Bees, regarding all the signs of bank weakness. “Even strong, well capitalized financial institutions are likely to constrict lending until there is further market clarity and stability.”

Though not everyone sees a problem. “We continue to work with both regional and national lenders on our projects,” Reynolds Asset Management said in a statement to GlobeSt.com.  “We have not seen a pullback in appetite for high quality projects which exhibit strong cash flows and appropriate leverage, backed by sponsors with excellent track records and credit.”