First Republic’s Survival Plan Could Come at the Cost of Wealth Unit

(Bloomberg) -- First Republic Bank spent decades building its wealth-management franchise into a $290 billion behemoth. Now, that business may become a casualty of the bank’s efforts to save itself.

As part of an attempt to shore up its finances amid a rush of customer withdrawals, First Republic is reversing two key pieces of its old strategy. It’s vowing to rely less on big depositors, who are more likely to yank their money in times of trouble. And it will focus on loans that can be sold on the secondary market — hardly the interest-only jumbo mortgages that attracted legions of wealthy borrowers.

The moves add to pressure on the firm’s wealth business, which has recently seen dozens of advisers jump to top rivals including Morgan Stanley, UBS Group AG and Royal Bank of Canada. It has left analysts worried about the future of a once-prized business that hoovered up clients as it poached crews from New York to Boston and Palo Alto to serve the ultra-rich.

“They can attempt to pull it off, but it is threading a needle and it is a bit of a divergence from the way First Republic has operated in the past,” David Chiaverini, an analyst with Wedbush Securities Inc., said in an interview.

A representative for First Republic declined to comment beyond its earnings, which it reported on Monday.

Jumbo Mortgage

As it sought to turn its wealth business into a major player, the San Francisco-based bank lured clients from wealthy enclaves across the country, offering giant mortgages that put off principal payments for a decade, giving borrowers more time to invest and grow their money.

But First Republic’s own filings offer a warning about those jumbo loans: Despite being granted to borrowers with sterling credit, the debts can be difficult to sell into the secondary market, limiting the bank’s ability to unload them. By the end of last year, First Republic’s books held about $58 billion in interest-only mortgages on single-family homes.

First Republic on Monday said it plans to curb loan origination and focus on offering loans it can actually sell on that market, where the debt is guaranteed by Fannie Mae and Freddie Mac. It also announced it is exploring exploring divesting $50 billion to $100 billion of assets, including long-dated mortgages and securities, which are aimed at reducing the mismatch between the bank’s assets and liabilities — one of the factors that has left First Republic teetering after a run on deposits in March, according to people familiar with the matter.

Potential buyers, including large US banks, could receive warrants or preferred equity as an incentive to buy assets above their market value, one of the people said.

First Republic also said it aims to lower the share of its total deposits that are uninsured — or exceeding the Federal Deposit Insurance Corp.’s $250,000 limit for coverage. At a number of regional banks in March, customers holding more than that fled en masse to larger lenders, worried about facing losses if the smaller firms collapsed.

Both of First Republic’s moves potentially reduce the bank’s services — and appeal — to the affluent clientele it once strived to attract.

“It’s going to have to be a smaller wealth management business just like the overall balance sheet is going to have to be smaller,” said Tim Coffey, an analyst at Janney Montgomery Scott.

Wealth Exodus

First Republic’s stock has plunged about 91% this year amid concerns it could fall victim to the same forces that caused a trio of US banks to collapse last month. Its shares hit an all-time low in intraday trading in New York on Tuesday morning.

Now, the bank plans to cut as much as 25% of its workforce, pursue strategic options and curb non-essential projects and activities after customer deposits fell even more than analysts expected.

“Through these actions, we intend to reduce the size of our balance sheet, reduce our reliance on short-term borrowings and address the challenges we continue to face,” Chief Executive Officer Mike Roffler said on a conference call discussing its first-quarter earnings.

As soon as the crisis spread to the bank, its wealth division began losing employees. Within days, a team led by James Marchetti left for Rockefeller Capital Management. Shortly after, the wealth and investment advisory firm announced the arrival of another 17-person group from the lender.

This week, a team of 30 advisers and support staff from First Republic joined Cresset Capital Management, a Chicago-based investment advisory firm. With that team concentrated mainly in Menlo Park, California, and Greenwich, Connecticut — places where Cresset doesn’t have much exposure — the additions are a “great complement in geographic diversity,” Jack Ablin, chief investment officer and a founding partner, said in an interview.

Even the bigger banks — which largely prohibited staffers from actively recruiting advisers from First Republic — have added staff. Many headed to Morgan Stanley, with a team of advisers led by Adam Zipper and Joseph Duarte as well as a five-person team led by Laszlo Vasady-Kovacs joining just this month, filings show.

Those hires were unsolicited, according to a person familiar with the matter who asked not to be identified discussing private information.

“The adviser recruiting pipeline remains healthy,” Morgan Stanley Chief Financial Officer Sharon Yeshaya told analysts on a conference call when asked how the company was benefitting from the regional bank turmoil. “What we continue to see is that we remain a destination of choice.”

A spokeswoman for Morgan Stanley declined to comment. A representative for Rockefeller Capital also declined to comment.

In all, First Republic has lost about 10% of staffers connected to its wealth management business as of April 21, with assets tied to those departures representing less than 20% of the unit’s total, Roffler said.

Assets in the business climbed 6.7% to $289.5 billion from $271.2 billion at the end of last year and fees from the business also jumped. Firmwide, the bank also retained more than 97% of the client relationships that banked with the firm at the start of the first quarter, though average account sizes have decreased, Roffler said.

“We anticipate retaining a portion of the wealth management assets associated with departing teams,” Roffler said. “We remain fully committed to our integrated banking and wealth management model, and the unique benefits it provides to clients.”

--With assistance from David Scheer and Heather Smith.

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