$FRC: Do they have an issue?

First, my intention in writing up Schwab and First Republic Bank is to show readers in a concise manner the issues that are concerning investors and the markets right now. I am not out to spook the markets like Bill Ackman, who clearly has a financial motive in his lengthy diatribe on Twitter yesterday. Frankly, most investors tell me this is above their understanding or knowledge of financial statements and Bill yelling fire is enough to scare them. Bill is right in that this set of mark to market issues (mismatches) need to be addressed pronto with a Fed and Treasury policy bazooka. Sitting here Sunday morning, I am skeptical the government, in such a short period of time, can comprehensively put these issues to bed. If you want to understand the problem succinctly, read below on the problem FRC potentially faces.

If you read our Schwab write up, then FRC’s issues can be quickly absorbed. First, FRC has a tangible book value of $12.8 billion at the end of 2022 (Chart 1). Second, they also have the same valuation issue of assets held for sale and assets held til maturity. FRC is a large real estate loan originator and lender with $160 billion of loans that mature over the normal life of a mortgage loan curve (business and residential). This is a very solid bank prima facie, until you look at the carrying value of their securities versus their “estimated fair value”.