Savings And Loan Crisis

[David Goldsmith]

First Republic is also known for being somewhat easier to deal with in buildings with less than ideal financials.

Fannie Mae and Freddie Mac have been really cracking down and vastly expanding their "no fly list" of Coops and Condos. So for portfolio loans like jumbos it's a lot easier for banks to lend where they had no plans to sell the loans anyway. Of course that's the same as self insuring: everything is fine until you have an incident.

The Dawn of a New Reality in Condo, Co-op Lending

This piece originally appeared in the June 2022 edition of MReport magazine, online now. In Janua...

themreport.com

 

[David Goldsmith]

Breaking Down Real Estate’s Banking Crisis Nightmare

Over nine days, bank collapses tested the mettle of everyone from rent-stabilized landlords to high-flying condo developers

therealdeal.com

https://therealdeal.com/
Nine days in hell: Inside the lending crisis that rocked multifamily
Institutions collapsed, deals froze and fear took over. A look back at banking’s crucible
MAR 25, 2023, 9:00 AM
By

• Joe Lovinger

“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”

— Ernest Hemingway, The Sun Also Rises
In the beginning, God created Silicon Valley Bank. The heavens and earth flooded with venture-backed startups fueled by low interest rates and easy money. The bank had more cash than it could lend, and with rates near zero, it put that surplus in long-term, government-backed securities. God saw that it was good.

In 2001, God created Signature Bank. For two decades, the bank catered to cabbies and rent-stabilized landlords, with hardscrabble employees and a decidedly non-blue-blood atmosphere. Screw an Ivy League degree — if you were a grinder, they wanted to work with you.
“They opened me an account pretty quickly,” Anna Sorokin, the famed grifter who charmed her way into New York’s high society under the alter ego Anna Delvey, told Bloomberg.
On March 10, 2023, God saw all that he had made, and it was not good. It was, in fact, very, very bad. He sent down plagues: Bank runs, contagion, regulators, fear. Silicon Valley Bank lost $14 billion of deposits in a single day. Signature customers, including major landlords, pulled out $18 billion. In the span of a long weekend, both institutions collapsed.
It was commercial real estate in the crucible, nine days that tested the mettle of everyone from humble rent-stabilized landlords to swashbuckling condo developers. Nobody knows how the story of the collapse will end, but its impact on the real estate industry so far is stark: This was commercial real estate’s nine days in hell.

“They took their eyes off of that small entrepreneur.”
AL D’AMATO, SIGNATURE BANK

“Total fear”​

Silicon Valley Bank provided banking services to roughly half of all venture-backed tech and life science companies in the U.S., according to the Financial Times. That model worked well when interest rates were near zero, which meant cheap money was pouring into the startups that parked their cash with SVB. In 2021 alone, deposits rose a staggering 85 percent to $189 billion from $102 billion..

Flush with funds, SVB invested in a $120 billion portfolio of government-backed securities. Some $91 billion of them were tied up in fixed-rate mortgage bonds with an average interest rate of less than 2 percent. While T-bills are considered some of the safest investments in the world, SVB’s money was invested in long-term maturities vulnerable to rising rates.
When the tech bubble burst and the Federal Reserve raised rates, it was a double whammy for SVB. Its depositors wanted their money, but all the cash the bank had invested was both unavailable and decreasing in value each time Fed chair Jerome Powell reared his silvered head.
“One of the biggest risks to our business model was catering to a very tightly knit group of investors who exhibit herd-like mentalities,” a bank executive told the FT. “I mean, doesn’t that sound like a bank run waiting to happen?”
Bank bosses expected deposits to fall when the bubble burst, but they declined even faster than expected in February and March. SVB moved to free up cash by selling those long-term deposits at a $1.8 billion loss, but that only added to depositors’ fears of a liquidity crunch.
On March 9, investors tried to pull $42 billion from SVB. By the time the Federal Deposit Insurance Corporation declared the bank insolvent the next day, it had a negative cash balance of almost $1 billion.

“They went for an extra [0.4 percentage points] of yield and blew up the bank,” one investor who bet against SVB told the FT.
As SVB was imploding, an East Coast player was starting to sweat.
Former employees and competitors have likened Signature Bank to a slot receiver: scrappy, hungry and capable of turning niches into big plays.
Al D’Amato, a former senator from New York and a director at Signature Bank, said the firm’s customers were “hard-working people who had come up the hard way, with tough businesses.”
“They did business the old-fashioned way,” John Catsimatidis, the CEO of developer Red Apple Group, told Bloomberg. Signature’s CEO, Joseph DePaolo, studied accounting at Iona and often ate deli lunches at his desk, surrounded by undecorated walls.

The bank had ambition. Some of its bankers reportedly outearned DePaolo. Within real estate, Signature was a particularly prominent lender on rent-stabilized apartments, which became increasingly difficult to finance after changes to New York’s laws in 2019 restricted rent increases and many tenants fell behind on payments during the pandemic.
Before its collapse, Signature was New York City’s third-largest commercial real estate lender by dollar volume and the top source of middle-market financing, according to data compiled by Maverick Real Estate Partners, an investment firm active in the distressed-debt space.
In 2019, as Signature’s assets swelled to new heights, the firm launched Signet, a digital payments platform built on the blockchain. The platform allowed crypto firms to exchange fiat currency year-round with no delay. DePaolo considered digital currencies an existential threat to banks.
“We have to do this, otherwise we’re not going to exist,” he told Forbes in 2018.
Scott Shay, the bank’s chairman, framed his hand-drawn plan for the payments network and displayed it in his office.

Let he who never considered buying a Bitcoin cast the first stone, but even Signature would soon realize it had jumped a bit too enthusiastically into the crypto boom.
“Their downfall came when they got into this crypto business,” D’Amato told Bloomberg. “They took their eyes off of that small entrepreneur.”
By March of last year, Signet held about $29 billion, accounting for roughly a quarter of Signature’s total deposits. When the crypto bubble burst, Signet’s deposits evaporated — the bank’s digital currency assets fell by $2.4 billion in the second quarter alone. The real estate ramifications were huge.
On an earnings call last summer, Signature said it planned to cut lending by up to $6 billion to balance its loan-to-deposit ratio. That cutback would largely hit its commercial lending department, which accounted for $35.7 billion at the end of 2022, about half of Signature’s total loans.
Signature pivoted hard away from crypto after the exchange FTX collapsed in November, and executives worked to assure customers and investors that it was secure. But the pain worsened on March 8 when Silvergate Bank, a major force in the crypto world, announced it would voluntarily liquidate and return customers’ deposits. Investors’ fears mounted about crypto-friendly banks. Signature’s share price tumbled 12 percent that day.

When SVB fell on March 10, anxiety about regional banks spread across the country. Investors and regulators honed in on banks that replicated SVB’s sins — concentrating heavily in one or two sectors and carrying abnormally high amounts of uninsured debt.
Most analysis has blamed Signature’s collapse on its crypto adventures, but that was just a bruise. Its real estate depositors, the ones who invited its executives to their children’s christenings and bar mitzvahs, struck the haymaker.
On the same Friday that SVB collapsed, depositors began pulling money out of Signature en masse. Signature held assets worth $110 billion and deposits of $89 billion, much of it belonging to nervous landlords.
Ira Zlotowitz, founder of commercial brokerage Gparency, told the Wall Street Journal that a real estate group chat he’s in started buzzing off the hook as panic spread.
“The chat was total fear,” he told the Journal. “Some people were saying, ‘You’ve got to take your money and run.’” Zlotowitz clarified that he kept his money in the bank.

“The regional bank balance sheet option is literally off the table right now.”
MICHAEL SHAH, DELSHAH CAPITAL

Signature tried to stem the bleeding. Around noon, it borrowed $2 billion from the Federal Home Loan Bank of New York. By 1:30pm, it returned for another $2.5 billion, the Journal reported. By the time the second request was filed, Signature customers had pulled about a fifth of the bank’s total deposits.
The Signature brain trust spent the weekend looking for answers, considering or requesting in various strides a sale, a capital infusion and a $20 billion loan from the Federal Reserve.
Nothing materialized, and on Sunday evening, regulators dissolved the board and took over the bank. Three priorities for real estate customers emerged: accessing their money, drawing down on loans and replacing letters of credit, which were suddenly worthless.

Landlords and their fixers began telling commercial tenants their letters of credit from Signature needed to be replaced. Alexandria Real Estate Equities, the Bay Area-based life sciences giant, told investors that its tenants had used just over $108 million in letters of credit backed by Silicon Valley Bank.
Regulators assured customers they would be made whole, even on deposits larger than the $250,000 per account guaranteed by the FDIC. That calmed nerves to an extent.
“There are plenty of other concerns in this business, but that is not one of them,” said Jerry Waxenberg, a New York landlord.
Still, many customers moved their money to larger banks anyway.
“Today, I’ve gotten no less than 30 text messages from other landlords that are pulling their money from regional banks out of fear that something bad’s gonna happen,” Michael Shah, CEO of Signature customer Delshah Capital, said on March 14.

With their deposits secure, real estate’s next fear set in: contagion.

A feelings fight​

“What we are afraid of,” Danny Fishman of Gaia Real Estate said, “is a snowball effect.”
“As soon as rumors start, there’s a run on the bank,” he added. “And no bank can survive a run.”
Over the weekend, the Daily Mail published photos of customers lined up outside of San Francisco-based First Republic Bank, and the following Monday, March 13, the firm’s shares slid 62 percent. An index tracking regional banks fell more than 10 percent.

By March 15, First Republic’s shares had entered junk territory and Bloomberg reported that larger rivals were looking at buying the bank. Even as First Republic assured customers that it secured additional funding and had over $70 billion in liquidity, fear persisted, particularly in real estate circles. The bank held roughly $24 billion in commercial real estate loans at the end of last year and $62 billion in residential mortgages in California.
“The regional bank balance sheet option is literally off the table right now,” Shah said. “Every regional bank in the country today is in danger as a result of the past three days.”
On March 16, six days after the meltdown began, a group of top banks deposited $30 billion in First Republic as a show of confidence. Since the collapse of SVB, though, the bank has weathered $70 billion in withdrawals, or about the gross domestic product of Croatia.
Despite attempts to stem the bleeding, panic leaked out of California and New York into other real estate markets. Miami, the ultimate WAGMI city, had already been burned by crypto when FTX collapsed, forcing Miami-Dade County to abandon a 19-year, $135 million naming rights deal for the Miami Heat’s arena. South Florida spent years aggressively courting California investors, particularly from the tech set.
“Well, you got them. But you also got Silicon Valley exposure,” said Peter Zalewski, a local real estate market analyst. “You live by the sword, you die by the sword.”

South Florida players said dealmaking was on pause as lenders examined their balance sheets for potential exposure to SVB. Craig Studnicky, CEO of brokerage ISG World, said developers should expect some “short-term heartburn” as construction lending slowed. Under new pressure to keep large reserves of liquid cash, banks were loath to get tied up in long-term development projects.

Bystander effect​

While there hasn’t been a resolution, some white knights have emerged. The Journal found that JPMorgan CEO Jamie Dimon is now leading efforts to further boost First Republic, even by investing in it directly. New York Community Bank, Signature’s top rival, agreed to acquire $12.9 billion worth of its $74 billion loan portfolio, though it will not touch Signature’s crypto-related deals or its commercial real estate debt.
Perhaps NYCB just didn’t want to wade too deeply into the muck of rent-stabilized lending, but it’s worth noting that the bank has $14 billion in loans of less than $100 million each to rent-stabilized properties on its books already, by far the largest in the city.
“Loans that were taken out through the end of 2018 were at peak valuations. Values are down 25 to 55 percent since then,” said Michael Weiser, president of GFI Realty Services, a brokerage that represents many landlords who borrowed from Signature.

“I’d venture to say there are a fair amount of problems there,” he added.
Now, the Treasury Department is studying ways to insure all bank deposits if the crisis continues to grow. While they don’t yet think it’s necessary, officials are looking into whether the government has the power to act unilaterally in guaranteeing all deposits, not just up to $250,000 as current policy allows, according to Bloomberg.
Born in the ashes of the last financial burnout, alternative lenders are now poised to profit off the regional bank panic.
“Now is a great opportunity for debt funds to take a bite at the apple,” said Nelson Stabile, a principal at Miami-based real estate investment firm Integra Investments. “Those debt funds now have plenty of opportunities for them to lend against.”
Free from traditional regulatory scrutiny banks face, alternative lenders can chase higher-risk, higher-reward deals. They can move faster than big banks, too. That sound you hear is them licking their chops.

NY multifamily fears bank contagion
Another winner: the big banks that nearly fell in the run-up to the Great Recession. Under the Dodd-Frank Act, any bank with $50 billion or more in assets was considered “systemically important” and subjected to stricter liquidity requirements, stress tests and more.
To avoid breaking that barrier, Signature and SVB hovered just below $50 billion in assets, but in 2018, Congress raised the threshold to $250 billion. Sure enough, in the four years that followed, Signature’s assets doubled. SVB’s quadrupled.
When those regional players began to falter, the enhanced scrutiny borne by the big banks promised security. Panicked real estate players fled to Jamie Dimon’s warm embrace.
“For in the day of trouble, he will keep me safe in his dwelling; he will hide me in the shelter of his sacred tent and set me high upon a rock.”

Psalm 27:5

 

[David Goldsmith]

Analysis of Signature Bank Real Estate Loans

As Signature Bank’s loans go to market, insiders say buyers will be from private markets.

therealdeal.com

What’s next for Signature’s loans?​

TRD takes industry's temperature in aftermath of lender's collapse

New York Community Bank’s decision to pass on buying Signature Bank’s commercial real estate loans set off alarm bells in the multifamily sector and left the city’s landlords in financial limbo.

Industry insiders laid the blame on the rent-regulated buildings backing most of that debt. Of the $19.5 billion in multifamily loans Signature had on its books, $11 billion was on rent-stabilized buildings, which have seen valuations plummet after changes to the state rent laws in 2019 made rent increases far more difficult.
“[NYCB] didn’t buy their New York City multifamily loans because they knew they were shit,” said Joe Tahl of Manhattan-based landlord Tahl Properties.

Jennifer Recine, who co-chairs the real estate practice at Kasowitz Benson Torres, said NYCB’s decision suggested that the bank “believes the demand for the underlying collateral … may be collapsing.”
So when the Federal Deposit Insurance Corp. tapped Newmark last month to sell Signature’s real estate loans to someone else, it naturally prompted questions: How bad are these loans? Who would want them? And how might a sale impact the rent-stabilized market?
The Real Deal checked in with investors, attorneys and workout experts. Here’s what we’ve learned:
How bad is bad?
Though the rent law hobbled Signature’s rent-stabilized loan book, regional banks’ lending practices before 2019 may have laid the foundation for its collapse.

In 2018, the state’s Department of Financial Services raised concerns about allegations that regional banks had knowingly issued high-leverage loans to bad actors on a bet that these landlords could force stabilized tenants out and deregulate their units.
Signature wasn’t called out directly, but the bank had been tied to notorious players such as Raphael Toledano, who faced multiple accusations of tenant harassment and was eventually given a five-year ban from engaging in any New York real estate business by state Attorney General Letitia James.
Signature had backed a $124 million loan issued to Toledano by Madison Realty Capital. The loan-to-value ratio of 128 percent signaled that lenders expected Toledano to be able to dramatically increase the income from the portfolio, likely through deregulation.
The bank’s then-CEO, Joseph DePaolo, denied that Signature was knowingly financing tenant harassment, saying in 2017 that its loans were “always based on current cash flow.”
Within months of DFS’ 2018 memo, however, Signature made a public pledge to be more responsible in its underwriting.

In a tweet this week, landlord advocate Jay Martin of the Community Housing Improvement Program called the idea that Signature lent on a deregulation model “fundamentally false,” and said its loan book lacked suitors solely because of the 2019 rent law.
But attorneys say those loans did sit on the bank’s books, and that aggressive landlords were the first to feel the pain when the rent laws changed.
“The music stopped and the market was already seeing who was left without a chair,” said Kenneth Fisher, an attorney at Cozen O’Connor. “[Those] buildings were overpriced on a mark-to-market basis.”
In blocking most routes to hike rents on stabilized units, the changes to rent laws drove down values by up to 65 percent, according to an analysis by Maverick Real Estate Partners, a distressed-debt player in the space.
“[Rent-stabilized] properties have come down as high as 50 percent,” said Lev Mavashev, principal at investment sales brokerage Alpha Realty. “So many are definitely underwater now.”

Only 4 percent of Signature’s multifamily book is currently distressed, according to an analysis by the University Neighborhood Housing Program, a nonprofit that says it’s been monitoring the portfolio “for years.”
But owners often take money from cash-flowing buildings and invest it into some of their more troubled assets. Data gathered by the city’s Rent Guidelines Board, which sets limits on rent increases at stabilized properties, show that in 2021, owners saw their net operating income drop to $576 per unit, a record 9.1 percent annual decline from 2020.
Once owners attempt to refinance, today’s far higher interest rates could put a chunk of properties into delinquency and default. Moreover, the buyer pool for such assets is shallow.
“I can’t sell a lot of the buildings that I’m asked to sell,” Manashev said, “because you know the market value or the value they would trade at right now is below their debt.”
Who’s buying, anyway?

New York Community Bank was thought to be an ideal buyer for Signature’s loan book. It’s already the top lender in the rent-stabilized space and works with a lot of the same clients.

​

A spokesperson for NYCB said its decision to turn down Signature’s multifamily loans was rooted in the fact that it is already the top lender to rent-stabilized landlords in the city.
“Taking on Signature’s entire portfolio would have resulted in NYCB being overly concentrated in this lending vertical,” the spokesperson said. “[The] decision to not bid on Signature’s multifamily/CRE portfolio had nothing to do with credit quality.”
Insiders doubt an institutional player will step into the mix.

“They also don’t want to have such toxic loans on their books,” said Manashev, speculating that the loans would instead be purchased by multiple private lenders, such as debt funds or “one of these cowboy private equity firms.”
“I think it’s definitely going to be private markets,” said Wesley Carpenter, co-founder of alternative lender Stormfield Capital, pointing to hedge funds or private credit. “This is going to be yet another step function of the private markets: picking up the slack for what the regional banks haven’t been able to serve.”
Reset
What’s clear to the industry is that the loan book will be sold on the cheap.
The $12.9 billion in Signature loans that NYCB did pick up sold for a $2.7 billion discount.

“There’s going to be a large percentage of defaults,” said Carpenter of the rent-stabilized portfolio. “That is going to manifest itself in the purchase price.”
Insiders say a sale could have implications across the city.
“It’s going to force other regional banks to mark loans to value,” Manashev said.
What’s yet to be seen is how low bidders will go — or what the FDIC will accept.
Some optimists predict the loans will sell for 80 to 90 cents on the dollar. That could benefit the borrowers, giving their lender the leeway to work things out. If a hedge fund buys the loans at 80 cents, it could offer distressed borrowers a plan to repay the loan at 90 cents.

“[The sale] may actually be the step down in basis New York’s real estate market, particularly the rent-controlled and rent-stabilized assets, really need,” said Carpenter.
But if the loans sell to a private equity fund seeking fatter returns, that firm may buy the debt for cheap, limit the restructuring options and collect on default interest or a foreclosure.
The Uncle Sam question
Another complication for borrowers staring down distress may be government oversight.
On April 3, U.S. Rep. Ritchie Torres, whose district covers much of the Bronx, called on the FDIC to consult with city and state housing officials on the sale of Signature’s loans.

“It remains unclear who might end up purchasing this portfolio and whether the buyer will be committed to prioritizing the needs of residents and maintaining affordable housing,” Torres wrote.
The same day, the FDIC said it would seek input from state and local governments, given its “statutory obligation” to preserve affordable housing.
“FDIC is giving [the Department of Housing Preservation and Development] a chance to review the loans before they are sold to identify potential distress,” said Rachel Fee, executive director of affordable housing group New York Housing Conference, who said the move may “ensure loans for at-risk buildings land in responsible hands.”

That may prevent the debt from being scooped up by a buyer intent on foreclosing. But for property owners already wary of the regulatory environment, additional oversight could mean prioritizing tenants’ needs over their own.
“It probably helps that FDIC Chair [Martin] Gruenberg grew up in an apartment building in the Bronx,” Fee added. “He understands what’s at stake.”

 

[David Goldsmith]

First Republic Bank Lost $102 Billion in Customer Deposits

The regional bank received a $30 billion lifeline from big banks last month, but depositors and investors remain worried about its prospects.

www.nytimes.com

First Republic Bank Lost $102 Billion in Customer Deposits​

The regional bank received a $30 billion lifeline from big banks last month, but depositors and investors remain worried about its prospects.

• Give this article
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During the first quarter, First Republic borrowed $92 billion, mostly from the Federal Reserve and government-backed lending groups, essentially replacing its deposits with loans.Credit...Gabby Jones for The New York Times

By Maureen Farrell and Rob Copeland
Maureen Farrell and Rob Copeland cover Wall Street and finance.
April 24, 2023
4 MIN READ
First Republic Bank, the most imperiled U.S. lender after last month’s banking crisis, on Monday disclosed the grisly details of just how troubled its business has become — and not much else.
In the bank’s highly anticipated first update to investors since entering a free-fall over the past month and a half, its leaders said little. In a conference call to discuss its first quarter results with Wall Street analysts, the bank’s executives offered just 12 minutes of prepared remarks and declined to take questions, leaving investors and the public with few answers about how it would escape its crater.
“When a bank feels like it has few options remaining, it starts to play by its own rules,” said Timothy Coffey, a bank analyst at Janney Montgomery Scott. “Every day, every week from now until whenever — it’s going to be a fight for them.”
One thing is certain: The bank, which caters to a well-heeled clientele on the coasts, seems to be hanging by a thread. During the first quarter, it lost a staggering $102 billion in customer deposits — well over half the $176 billion it held at the end of last year — not including a temporary $30 billion lifeline it received from the nation’s biggest banks last month.

Over that same period, it borrowed $92 billion, mostly from the Federal Reserve and government-backed lending groups, essentially replacing its deposits with loans. That’s a perilous course for any bank, which generally do business by taking in relatively inexpensive customer deposits while lending money to home buyers and businesses at much higher interest rates.
First Republic is still making some money; it reported a quarterly profit of $269 million, down one-third from a year earlier. It made far fewer loans than it had in earlier quarters, keeping with a general trend in banking, as industry executives worry about a recession and softening home prices and sales.
The bank’s stock dropped about 20 percent in extended trading, with the fall worsening after executives declined to take questions from analysts.

First Republic’s share price is down more than 85 percent since mid-March.
The bank said that its deposit exodus largely ceased by the last week of March. From March 31 to April 21, the bank said that it lost only 1.7 percent of its deposits and that most of those withdrawals were related to tax payments by its clients.

The slide began roughly six weeks ago, when the midsize lenders Silicon Valley Bank and Signature Bank were taken over by federal regulators after customers pulled billions of dollars in deposits. First Republic, based in San Francisco, was widely seen as the lender most likely to fall next, because it had many clients in the start-up industry — similar to Silicon Valley Bank — and many of its accounts held more than $250,000, the limit for federal deposit insurance.

First Republic has been in talks with financial advisers and government officials to come up with a plan to save itself that could include selling the bank or parts of it, or raising new capital.
Much more remains to be done. The bank said on Monday that it would cut as much as a quarter of its work force, and slash executive compensation by an unspecified sum.
Until recently, First Republic was a darling of Wall Street. It was founded in 1985 by Jim Herbert, who is still the bank’s executive chairman at 78. The company distinguished itself by offering wealthy clients jumbo mortgages, which can’t be sold to the government-backed mortgage giants Fannie Mae and Freddie Mac. Mr. Herbert consistently touted First Republic’s business model as a sound one because its borrowers had good credit records.

In 2007, Merrill Lynch paid $1.8 billion to acquire the bank, but its ownership lasted only three years. Mr. Herbert, with the help of other investors, bought the bank back after the 2008 financial crisis and took it public.
Since then, First Republic has focused on expanding by setting up branches in the poshest parts of New York, Boston, San Francisco and Los Angeles and in places synonymous with wealth like Greenwich, Conn., and Palm Beach, Fla. The bank’s branches endeared themselves to clients and prospective customers with personal touches, like warm, freshly baked cookies.

Janna Koretz, a 37-year-old psychologist in Boston, started banking with First Republic roughly a decade ago as she was building a group practice. “It’s not like I had all this money,” she said, but her banker was constantly available. The bank would send couriers to her office to pick up cash from her practice.
In mid-December, the bank hosted a holiday party at a performing arts space in Manhattan for hundreds of employees and clients, according to two attendees who spoke on the condition of anonymity because they wanted to preserve their relationships with the bank. A graffiti artist wielding black spray paint, and flamenco dancers entertained the crowd. The bank’s chief executive Mike Roffler, who had been in the top job only since March of 2022, warned the crowd that 2023 could be a challenging year for the bank.

Three months later, the bank found itself in the spotlight of a different sort. In the days and weeks after Silicon Valley Bank’s demise, numerous larger banks looked into buying First Republic. But a deal didn’t come together and the chief executive of JPMorgan Chase, Jamie Dimon, and the Treasury secretary, Janet L. Yellen, worked together to inject $30 billion in deposits into the bank. The big banks that put in that money can withdraw it in as soon as four months.
On the brief conference call on Monday, Mr. Roffler said little about what could happen next and merely reiterated the bank’s public disclosures. “I’d like to take a moment to thank our colleagues for their commitment to First Republic and their uninterrupted service of our clients and communities throughout this challenging period,” he said. “Their dedication is inspiring.”

 

[David Goldsmith]

https://www.cnn.com/2023/05/01/business/first-republic-purchase-hnk-intl/index.html

JPMorgan Chase to buy most First Republic assets after bank fails​

By Chris Isidore and Olesya Dmitracova, CNN
Updated 9:36 AM EDT, Mon May 01, 2023

New York/London(CNN)JPMorgan Chase is buying most assets of First Republic Bank after the nation's second-largest bank failure ever, in a deal announced early Monday that protects the deposits of First Republic's customers.
JPMorgan Chase said it had acquired "the substantial majority of assets" and assumed the deposits, insured and uninsured, of First Republic from the Federal Deposit Insurance Corporation, the independent government agency that insures deposits for bank customers.
"Our government invited us and others to step up, and we did," said JPMorgan Chase CEO Jamie Dimon. He said the deal is also a good one for his bank's shareholders, adding to its expected earnings going forward.

Under the deal, the FDIC will cover 80% of any losses incurred on First Republic's portfolio of single-family residential mortgage loans and commercial loans over the next five to seven years. JPMorgan Chase also will not assume First Republic's corporate debt, and it will receive $50 billion in financing from the FDIC to complete the deal.
Under terms disclosed by JPMorgan Chase, it will make a $10.6 billion payment to the FDIC, return $25 billion in funds that other banks deposited with First Republic in March in a lifeline negotiated with Treasury at that time, and will eliminate a $5 billion deposit it had made with First Republic. JPMorgan will record a one-time gain of $2.6 billion on its books from the deal, although it expects to spend $2 billion on restructuring through the end of 2024.
Besides being good news for JPMorgan Chase and First Republic's worried customers, it was also cheered by Treasury Department officlals, who are worried about a loss of confidence in the banking system causing damage to the US economy.
"Treasury is encouraged that this institution was resolved with the least cost to the Deposit Insurance Fund, and in a manner that protected all depositors," said a Treasury Department spokesperson. "The banking system remains sound and resilient, and Americans should feel confident in the safety of their deposits and the ability of the banking system to fulfill its essential function of providing credit to businesses and families."
The FDIC took control of the embattled First Republic and then immediately announced the sale. The failure will cost the FDIC about $13 billion. That money will be paid by the nation's banks, which pay premiums to support the agency. It is less than the $20 billion cost of the failure in March at Silicon Valley Bank, which was a bit smaller than First Republic.
The FDIC conducted an auction among several banks to see which would end up with First Republic's assets. Those bids were submitted late Sunday afternoon, a source told CNN. Then came hours of waiting for news about which bid was successful.

Health of the regional banking sector​

The move represents the latest effort by federal regulators to prop up consumer confidence in the US banking system, which has suffered three major bank failures in the last seven weeks. Silicon Valley Bank and Signature Bank both were taken over by the FDIC last month following runs on those banks by their customers.
The collapse of those banks sparked weeks of speculation about the health of US regional banks, especially those with a largely uninsured deposit base.
Deposits at First Republic will continue to be insured by the FDIC, and "customers do not need to change their banking relationship in order to retain their deposit insurance coverage up to applicable limits," the agency said in its statement Monday.
"As part of the transaction, First Republic Bank's 84 offices in eight states will reopen as branches of JPMorgan Chase Bank, today during normal business hours," it noted.
First Republic, which started operations in 1985 with a single San Francisco branch, is known for catering to wealthy clients in coastal states. It had assets of $229.1 billion as of April 13. As of the end of last year, it was the nation's 14th-largest bank, according to a ranking by the Federal Reserve. JPMorgan Chase is the largest bank in the United States with total global assets of nearly $4 trillion as of March 31.

First Republic has branches in high-income communities such as Beverly Hills, Brentwood, Santa Monica and Napa Valley, California; in addition to San Francisco, Los Angeles and Silicon Valley. Outside of California, branches are in other high-income communities such as Palm Beach, Florida; Greenwich, Connecticut; Bellevue, Washington; and Jackson, Wyoming. It had about 7,200 employees as of the end of last year.
The bank's failure comes after its stock plunged more than 97% since the problems at Silicon Valley Bank surfaced in mid-March, worrying investors about the state of the banking sector. Attempts by some larger banks to provide a $30 billion dollar lifeline proved to be insufficient to turn things around at First Republic.
Its final woes kicked off early last week when the bank reported financial results that disclosed it had lost more than half of its deposits during the first quarter, not counting the infusion of cash it received from other banks.
The FDIC's rules mean that any customers with $250,000 or less in First Republic will have those funds insured by the agency. First Republic reported last week that its uninsured deposits totaled $19.8 billion, not counting $30 billion in uninsured deposits it received from other banks as part of the attempt to keep the bank afloat.
Many of the bank's customers who withdrew money during the last month were likely above that $250,000 threshold. Uninsured deposits at the bank fell by $100 billion during the course of the first quarter, a period in which total net deposits fell by $102 billion, not including the infusion of $30 billion in deposits from other banks.
The uninsured deposits stood at 68% of its total deposits as of December 31, but only accounted for 27% of its non-bank deposits as of March 31.
In its most recent earnings statement, the bank said insured deposits declined moderately during the quarter and have remained stable from the end of last month through April 21.

Support for the banking system​

The infusions of cash into First Republic came after the collapse of Silicon Valley Bank and Signature Bank in mid-March. The cash came from the nation's largest banks, including JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (CBEAX), Citigroup (C) and Truist (TFCPRF), which worked together after the intervention by Treasury Secretary Janet Yellen.
The banks agreed to keep First Republic flush, in the hopes it would provide confidence in the nation's battered banking system. The banks and federal regulators wanted to reduce the possibility that customers of other banks would start withdrawing their cash.
But while the cash allowed First Republic to make it through several weeks relatively unscathed, its Monday quarterly financial report, which disclosed massive withdrawals by the end of March, spurred new concerns about its long-term viability.
Banks never have the full amount of cash on hand to cover all deposits. They instead take in deposits and use the cash to make loans or investments, such as purchasing US Treasuries.
When customers lose confidence in a bank and rush to withdraw their money all at once, in what is known as a "run on the bank," it can cause even an otherwise profitable bank to fail.
First Republic's latest earnings report showed it was still profitable in the first quarter: Its net income was $269 million, down 33% from a year earlier. But it was the news about the loss of deposits that worried investors and, eventually, regulators.
https://www.cnn.com/2023/05/01/politics/biden-economy-first-republic-bank/index.html
While those who had more than $250,000 in their accounts were likely wealthy individuals, most were likely businesses that often need that much cash just to cover daily operating costs.
A company with 100 employees can easily need more than $250,000 just to cover a biweekly payroll. First Republic's annual report said 63% of its total deposits were from business clients, with the rest from individuals.
Over the past decade, roughly 70 banks have failed, according to FDIC data, though most of those have been smaller regional lenders. But there were no failures in either 2021 or 2022. The three failures since March 10 matches the total number of bank failures in the previous 36 months from March 2020 through February 2023.
Each of the recent failures involved banks with assets of more than $100 billion. The last time there was a failure of a bank with $1 billion in assets was in May 2017, when Guaranty Bank in Milwaukee went under.
And the last time there was a $100 billion bank that failed was Washington Mutual in September 2008, which had $307 billion in assets, which is still the record for a US bank failure.
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[David Goldsmith]

FDIC Targets Cross River, Another Regional Bank With CRE Ties

Cross River Bank has lent to numerous mid-market landlords and developers in New York, but an FDIC consent order could jeopardize its future.

therealdeal.com

Cross River, emerging lender to NYC dealmakers, in rough waters​

NJ-based bank with $1.1B in real estate loans faces FDIC scrutiny

Another regional lender with ties to New York’s commercial real estate sector has drawn regulatory scrutiny as the industry navigates a string of high-profile bank failures.

New Jersey-based Cross River Bank, an increasingly active lender to the city’s mid-market landlords, was flagged by the Federal Deposit Insurance Corporation for engaging in “unsafe or unsound banking practices” and “failing to establish and maintain internal controls,” according to a March consent order which predated that month’s bank failures but was only recently made public.
The order requires Cross River to conduct a bevy of internal assessments and implement corrective actions on its lending practices by early next month, 90 days after the order was issued.

A spokesperson for Cross River called the consent order “the result of a standard review pertaining to certain aspects of our lending processes conducted two years ago” and said it will have no impact on the bank’s commercial real estate loan portfolio, which the spokesperson described as “very high credit quality.”
Cross River has already complied with a number of the FDIC’s demands, added the spokesperson, who pointed to a Kroll Bond Rating Agency report issued last week stating that “the consent order is not expected to have any material effect on the bank’s operations.”
Cross River holds $1.1 billion in real estate loans, including $400 million on multifamily properties, several of which were provided to well-known dealmakers in Brooklyn and mid-sized landlords across the city and in New Jersey.
Founded in 2008, Cross River emerged from the financial crisis as a key partner to fintech and later cryptocurrency companies as both sectors grew rapidly during the 2010s. But the venture-backed bank has faced substantial challenges of late from rising interest rates, cratering cryptocurrency prices and the expiration of the federal Paycheck Protection Program, under which the bank churned out tens of thousands of loans to small businesses during the pandemic.
“They were the facilitator for an awful lot of the fintech boom,” said banking consultant Chris Whalen, chairman of Whalen Global Advisors. “Now that that’s over, I don’t know what they’re gonna do.”

According to the Small Business Administration, Cross River was the nation’s sixth-largest originator of Covid relief loans in 2021. When that revenue channel dried up, the bank’s net income dropped by a stunning 73 percent last year, according to the Information and publicly filed reports.
T. Rowe Price, which invested in the bank’s parent company at a $3 billion valuation, cut the value of its shares in Cross River by 26 percent in December. Other investors in the $620 million haul Cross River garnered in March 2022 include private equity firm Eldridge and venture capital giant Andreessen Horowitz.
If Cross River pulls back on commercial real estate lending, it could push more multifamily borrowers toward larger banks like JPMorgan, exacerbating what one multifamily broker called a “gaping hole in the market” left by First Republic’s seizure and sale last month.
While Cross River doesn’t have as large a presence in New York commercial real estate as Signature Bank did, it recently played a role in a number of high-profile deals in Brooklyn. Last year, it provided a group of investors including Hutton Capital and Rosewood Realty’s Aaron Jungreis with a $27 million loan for their takeover of a Williamsburg apartment complex developed by Toby Moskovits and Michael Lichtenstein, ending a long-running series of disputes over the property.

In Crown Heights, Cross River provided Cheskie Weisz’s CW Realty with a $44 million construction loan for a 98-unit rental project at 1499 Bedford Avenue in November, then gave Abraham Fruchthandler’s FBE Limited a $29 million loan in December to refinance its 75-unit rental property at 1120 St. John’s Place.
When Bushburg and the Moinian Group were ready to begin their redevelopment of a landmarked former dairy factory in East New York into a 320-unit luxury residential and retail complex, the developers turned to Cross River and Valley Bank, who provided a $105 million construction loan.
While any suggestion about the bank’s future is purely speculative, Cross River’s crypto and fintech ties have clearly caused concern.
“If they have examiners living with them, which is what it looks like, I don’t know how they’re gonna keep doing business,” said Whalen. “It becomes very burdensome when you’re under something like this. It’s a real problem for a lot of investors.”
This story was updated with a statement from Cross River Bank and to clarify that the FDIC consent order was issued before the failures of Silicon Valley and Signature Bank.

​

 

[David Goldsmith]

Key Signature Bank CRE Employees Laid Off

Signature Bank executed layoffs that hit its commercial real estate team as Newmark prepares to sell its $60 billion loan book.

therealdeal.com

Signature Bank layoffs hit key CRE team
Cuts come as Newmark looks to sell $60B loan book

As Newmark lays the groundwork to sell Signature Bank’s $60 billion loan book, some of the failed bank’s top players are being shown the door.
A dozen members of Signature’s commercial real estate team will be laid off at the end of the month, the Commercial Observer reported. The layoffs include Joseph Fingerman, who served as the managing group director and senior vice president of the bank’s commercial real estate lending team.

Fingerman, who had been with Signature for around 16 years, took charge of the CRE originations team five years ago.
The cuts impacted several senior members of the lending group and people familiar with the situation told the outlet they are only the start of eliminations in the department. Some clients were surprised to hear of the layoffs.

Signature’s CRE lending team executed 632 loans in 2021 alone for a total of $4 billion in new transactions. But it wasn’t enough to save the regional bank from failure in March, when it followed in the footsteps of another collapsed regional bank, Silicon Valley Bank on the opposite coast.
New York Community Bank, through subsidiary Flagstar Bank, acquired a $12.9 billion portion of Signature’s $74 billion portfolio. Notably, the deal didn’t include Signature’s commercial real estate portfolio — $35 billion at the end of last year — or its $19.5 billion multifamily loan book.

​

The Federal Deposit Insurance Corp. in March tapped Newmark to sell $60 billion of remaining loans from Signature, a task believed to likely fall upon recent additions Adam Spies and Doug Harmon. Flagstar and NYCB are servicing the portfolio in the interim; it is expected to be sold in seven loan pools, the first of which is expected to hit the market soon.

Since 2020, Signature issued the largest volume of commercial real estate mortgages in New York City, according to PincusCo.

It lent out $13.4 billion against New York City properties with loan amounts of $5 million or above. Office loans accounted for about 5 percent of Signature’s total loans, while the majority of its outstanding multifamily loans were on rent-stabilized properties, severely hurt in value by 2019 rent law changes.