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The First [Republic] Problem


In the near-term, FRC appears to have little to no earnings power.  FRC’s dividends will be suspended to preserve capital.  Because FRC is at risk of being closed by regulators if FRC sustains sufficient capital losses, FRC may be attacked by large investors seeking to profit from stock price declines. 

The market price of the equity reflects these facts and conclusions.  We expect FRC stck price to fall significantly from today [3/17/2023].

  • Intermediate term, FRC is unable to generate profit.  The assets FRC makes money on have a long duration at a fixed interest rates.  Meanwhile, FRC needs cash to offset those assets.  The interest rate that FRC must pay for that cash that FRC needs exceeds the yield on FRC’s assets and is increasing.   So, the outlook for Net Interest Margin Spread (“NIMS”) is bleak.
  • FRC needs capital, and a dividend cut is almost certain.
  • FRC’s equity is at risk, at a certain point the FDIC must close any bank if equity gets too low.
  • These facts make FRC a target, and Lawinformation speculates investors will continue to attack FRC
  • The most recent $30 bn deposits for at least 120 days is a temporary stopgap that does nothing to address the above underling problems.  Rather that bolster confidence, the deposits indicate the precarious position of FRC.
  • Lawinformation sees little to no value in FRC stock.


Unsurprisingly, as proven by the rapidly declining stock price of FRC, the equity markets have revealed the first, most important problem with FRC, before Lawinformation did.

Unless the Federal Reserve reduces interest rates quickly, there is no practical way for FRC to generate operating profit for the foreseeable future.  Worse, if deposits decline rapidly, and FRC needs to sell bonds that it currently holds at a loss, it may be impossible for FRC to ever make those losses back.  It is possible that FRC will never report positive earnings per share or pay a dividend again.

Banks generate profit on NIMS, Net Interest Margin Spread, meaning the difference between what banks earn in interest and what banks pay in interest.  FRC has two major sources of interest income – loans [$166 bn] and bonds [$31.7 bn].  [FRC 2022-10K, p. 131].

The following analysis shows that it appears as if for a long time, FRC is locked into earning a lower interest rate on those assets than the short-term rates [eg Fed Funds and Average Deposit rates] that FRC must pay to hold the cash FRC requires to stop the FDIC from taking over the bank.

Analysis of the loans to customer side indicates that most of those loans are locked into low rates of interest paid for at least several years.  Thirty-seven (37%) of FRC’s loans are fixed interest rate [FRC 2022-10K, p. 104].  Ostensibly, those loans will lose money forever.  62% of FRC’s loans to customers mature in excess of fifteen (15) years, and loan issuance was $73 bn in 2022 and $65 bn in 2021.  [FRC 2022-10K, p. 113].   These figures indicate that a large percentage of FRC’s loans were issued during the last several years when interest rates on issued loans were historically low.  Only 18% of FRC’s loans to customers are classified as “adjustable.”  [FRC 2022-10K, p. 104].  Anecdotally, FRC may be yielding 3% to 4.2% on its portfolio.

As to the $31.7 bn in bond assets, of that $28.0 bn are what is known as Held to Maturity [“HTM”]. [FRC 2022-10K, p. 99].  96% of those mature in ten (10) years or more.   The range of stated interest rates on the material balances those 10-year plus maturities is from a low of 2.27% to a high of 3.9%, with some insignificant balances paying slightly more.   The weighted average rate on FRC’s HTM bond portfolio is 3.4%.

Key point – FRC is not likely to earn much more than 4% on its bonds and loans.

Meanwhile, FRC needs to pay interest to hold cash.  FRC needs to hold cash, o the FDIC is required to take over the bank.

The current Federal Reserve overnight rate is 4%.  Meanwhile, NerdWallet reports that the average rate paid on a savings account is 0.35%.  That may be misleading, as Marcus, Goldman Sach’s retail bank, is offering 3.75% and Capital One is offering 3.4%.

The Federal Reserve meets March 21, 2023, and the market probability is 50%/50% as to either a 1/4 point or 1/2 point interest rate increase.  This follows on of approximately numerous consecutive increases raising the Fed Funds rate from 0% to 4% in a little more than a year.  The Fed’s justification for raising rates has been out-of-control inflation that recent macro numbers indicate is not quite as high as peak, but is running close to a 40-year high.

Key point – It appears as if right now, FRC cannot make a positive NIMS, and the prospect is becoming worse, because interest rates that FRC needs to pay to hold cash are likely to keep increasing.

The FDIC monitors Banks Tier 1 capital. Tier 1 Capital is roughly equity divided by average assets.

If realized, the $6.0 bn losses on the HTM portfolio would decrease FRC’s equity to $11.o bn, reducing the Tier 1 capital ratio from approximately 8.5% to 5%.

On its $28.0 bn HTM portfolio, FRC has at least $6.0 bn unrealized losses.  Ninety-six (96%) of that HTM portfolio has a maturity of ten years or more.  The prices of longer maturity bonds are more negatively impacted when interest rates rise.  So, that $6.0bn loss is likely to be larger in actuality and growing.

Future balances of equity are determined by adding past balance of equity, $17.0 bn., to either positive profits, or negative losses, minus dividends.

In 2022, FRC generated $1.3 bn in profits.

So, assuming a reverse to $1.3 bn in losses, and an additional $2.0 bn in unrealized losses on the HTM portfolio, to $8.0 bn, then realizing half of that, it is not unlikely that FRC could wipe $5.3 bn in equity off its balance sheet.

It is not difficult to see FRC’s Tier 1 Capital Ration decline to 5.4%, possibly more.  Minimum is 4% [FRC 2022-10K, p. 126].  So, this does not indicate immediate FDIC intervention.

However, the risks are now clear to lawinformation, and by looking at the FC stock price, the risks are also clear to the market.

Because FRC locked in very low rates of interest that it can earn on its assets over a long period of time at very low earnings rates, while the cost, in terms of interest rate on shorter duration funding sources that FRC must pay to fund those assets has recently surpassed the rates that FRC can earn, and those rates that FRC must pay seem poised to increase, profits in the foreseeable future are unlikely. 

Dividend suspension is almost certain. 

Even normal operations under these circumstances would threaten FRC’s capital.  FRC looks weak, and its is well understood that large investors can and have engineered circumstances that hurt companies and markets that those large investors bet against by short selling.   FRC is a target, and some investors will attempt to take actions to deplete FRC’s capital and cause a FDIC takeover.

In the near-term, because FRC appears to have little to no earnings power in the near future, and dividends will be suspended, the stock price is unattractive.  Because FRC is at risk of being close by regulators if FRC sustains sufficient capital losses,  FRC could be worthless.








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