What to Expect from the Stock Market Today: First Republic Bank's Decision

Federal Deposit Insurance Corporation officials are working quickly to seize and sell First Republic Bank before financial markets open on Monday. Their efforts come after shares in this California bank dropped 75% since Monday when customers withdrew over half their deposits from them.

According to reports, the FDIC is shopping First Republic around to banks like JPMorgan Chase & Co., US Bancorp, and Bank of America Corp in order to solicit buyout bids by Sunday.

Stocks Up

What to Expect from the Stock Market Today: First Republic Bank's Decision

Investors responded with alarm Friday following reports that California-based First Republic Bank (FRC) is in negotiations to secure funds through agreements with banks or private-equity firms, and share prices fell more than 15% premarket trade reversing an earlier gain of more than 9% earlier on in the day.

The New York Times reported that officials were making arrangements to meet with private equity and other investors in an attempt to save First Republic Bank. JPMorgan Chase and PNC Financial had also been invited in, while discussions are also taking place regarding possible Federal Reserve loans for First Republic.

Analysts are concerned that First Republic may be forced to convert an excessive share of its uninsured deposits to equity, placing it in an extremely precarious situation and hindering its ability to attract new depositors.

As such, some analysts are calling on federal regulators to downgrade the bank from investment grade status - effectively cutting it off from federal funding - which would compel it to take on billions in new debt or find another means of funding its operations.

However, if the depositors of an insured bank were protected by the FDIC, then it would likely step in to protect their funds - as was seen with Silicon Valley Bank and Signature Bank recently.

First Republic Bank may face receivership without restructuring, leaving both their assets and customers at risk. That is why they hired former Obama advisor Jim Messina's consulting firm to advocate for help from regulators.

According to Reuters, several large banks are now planning to hand over over 30 percent of their remaining deposits to First Republic; those deposits represent over twice their total deposit base.

But large banks cannot absorb all these uninsured deposits without losing too much money; officials are therefore encouraging them to try converting those deposits to equity.

In April, the University of Michigan's closely followed consumer sentiment index edged down slightly to 63.5 from 65 in March; analysts expect it to continue rising slightly over time.

Stocks Down

What to Expect on the Stock Market Today: First Republic Bank's Decision

On Friday, First Republic Bank (FRC) shares suffered nearly 40% as CNBC reported its intention of filing for FDIC receivership, making them the fourth bank since March to fail and push investors away. Investors fled after news about mismanagement at this regional lender sent them fleeing and left financial industry on brink of even worse crisis than it already existed in March.

Silicon Valley Bank and Signature Bank's collapse last month caused large regional banks to withdraw deposits rapidly, prompting a potential run on these institutions by the Federal Reserve pledging $30 billion in deposit insurance for them - although that amount alone wasn't enough support to protect institutions such as First Republic.

First Republic Bank has been searching for ways to raise money without being declared bankrupt and its assets being seized by regulators, perhaps by selling assets at higher-than-market prices to larger lenders.

Although this option would likely leave First Republic worse off financially than before, it might also provide a short-term solution for larger banks wanting to avoid the risk of their deposits becoming uninsured at First Republic. Furthermore, such an approach would allow First Republic to retain customers and key personnel while still giving creditors time to find other avenues through which to collect on their money owed to them.

First Republic's executives do not wish for such an extended process and so are looking at other avenues which might allow them to remain employed until a buyer comes along who can save the bank from its financial turmoil.

One strategy being explored by First Republic Bank is going public and offering stock in exchange for cash, which is an increasingly common practice among troubled lenders in order to raise capital before their institutions collapse. Unfortunately, it has proven difficult for a bank like First Republic that recently lost all hopes of survival to find success through this avenue despite several attempts being made at getting investors onboard a plan to save themselves.

Stocks in Focus

What to Expect from the Stock Market Today: First Republic Bank's Decision

A regional lender's fate once again weighs heavily on the stock market. News regarding rescue plans for First Republic (FRC) ignited an abrupt selloff that sent shares tumbling to record lows on Friday; it marked one of the week's greatest selloffs driven by several factors, such as economic and banking anxieties.

Shares of the troubled institution suffered more than 40% drop during regular trading following reports that the Federal Deposit Insurance Corporation might put it into receivership, fuelling investor concerns that government might not find an acceptable buyer for it.

But then news spread that major lenders had agreed to put up $30 billion through JPMorgan Chase, Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) among others.

That move and JPMorgan's offer of $70 billion additional capital helped give investors hope, but investors were still concerned that First Republic would become vulnerable to another run on deposits like those seen at Silicon Valley Bank and Signature Bank - two banks which recently collapsed - which both saw run on deposits begin.

Fears were further compounded earlier this week when the bank revealed that customers had withdrawn billions from deposits during its first quarter, revealing it lacked enough liquidity to cover this loss.

Discussions over a private-sector deal took on new urgency this week. According to sources who spoke with Reuters, officials organized meetings in order to explore options available to the bank.

They noted it would be preferable for the government to reach an agreement with a private-sector group rather than placing the bank under FDIC receivership.

On Friday morning, First Republic bank's stock was temporarily suspended following reports by Reuters of US officials holding talks about a rescue plan for them. As a result, their shares saw a 43% decrease during regular trading sessions, leaving the bank with approximately $1 billion market cap.

Stocks to Watch

What to Expect from the Stock Market Today: First Republic Bank's Decision

Following last week's turmoil, fears of a widespread banking crisis appear to have eased somewhat; however, First Republic's announcement to seek lifelines from 11 major banks may cause share prices to decline further in today's session.

First Republic still lacks enough liquid assets to bolster its balance sheet despite receiving $30 billion from rival banks; these losses come on top of its loan portfolio losses and held-to-maturity securities losses.

Investors have taken news that First Republic is seeking a lifeline with caution, fearing that even if it works, First Republic could find itself even deeper in trouble than before.

Its stock has fallen 97% this year and several times hit all-time lows recently as investors question its financial strength and capacity to withstand further turmoil.

Researching First Republic Bank before investing is paramount if you wish to do your due diligence properly and secure its future success. In doing so, evaluate their financial health and valuation before making your investment decision.

Investors should also keep the overall economy in mind, particularly given that the US has been grappling with unemployment, an underperforming job market and rising energy costs.

Today's stock market will be determined by whether or not the banking sector recovers. If this issue is addressed successfully, a broad-based growth-driven rally may develop; otherwise, more likely would be an uneven recovery effort that results in scattered rallies.

To accurately evaluate First Republic Bank stock, it's essential that you understand its financial health and valuation relative to that of other stocks on the market. AAII's Value Grade provides an effective tool for this, using six ratios as measures of company valuation so you can easily compare it against overall market levels to identify its true worth.