Largest Bank in Texas Is Seeking FDIC Bailout
First RepublicBank Corp., the largest banking company in Texas, said Tuesday that it is seeking federal assistance to avert a failure caused by billions of dollars in bad loans and more than $600 million in recent withdrawals by wary customers.
The bank acknowledged in a statement released in Dallas that it began talks last week with the Federal Deposit Insurance Corp. in an effort to come up with a plan to restructure the bank and bring in enough new capital to restore profitability and public confidence.
The shape and size of what could be one of the biggest bank rescues in history has not been determined. But any federal assistance would probably have to be augmented with cash from outside investors or through a merger with an out-of-state bank, analysts said Tuesday.
An investment banker familiar with First Republic’s financial condition said seeking aid from the FDIC was the only way the bank could survive.
Another Texas bank, First City Bancorp in Houston, was struggling Tuesday to hold together a $1.5-billion bailout by the FDIC and a private investor group.
First Republic, based in Dallas, was created last year by the merger of Republic Bank and InterFirst, two big Texas banks. The merger was an effort to avoid out-of-state control in the face of the severe economic problems spawned by the decline in oil prices in the early 1980s.
Run on Deposits
The company, with assets of $33.2 billion at the end of 1987, operates 73 banks in Texas and is the nation’s 13th-largest bank holding firm. At year’s end, it had $3.9 billion worth of bad loans, nearly 16% of its entire loan portfolio. More than half the problem loans are in real estate.
The company lost $656.3 million last year, and an internal report projected a 1988 loss of $450 million in 1988 without extensive cost-cutting measures.
First Republic’s problems were compounded last month by a run on deposits by anxious customers. In just five days in February, customers withdrew $600 million from the main bank in Dallas and smaller amounts from other banks within the holding company.
Depositors apparently grew worried after an influential New York investment bank, Keefe Bruyette Woods, dropped its rating of First Republic’s certificates of deposit to its lowest grade, citing “very serious problems.”
The bank tried unsuccessfully to restore confidence through an advertising campaign and said Tuesday that its appeal to the FDIC was an effort to reassure customers.
“The decision to approach the FDIC is, in our judgment, important to providing a stable environment for First RepublicBank’s customers,” said Gerald W. Fronterhouse, its chairman and chief executive.
Also on Tuesday, the bank suspended a stock dividend that it had planned to pay April 1, and Standard & Poor’s downgraded its debt in response to the talks with the FDIC.
Acknowledgment of its failure to stay afloat on its own is a bitter disappointment for the company’s management, according to several analysts.
Potential Partner
“This is the least attractive alternative for the bank,” said Frank Anderson, an independent banking consultant in Dallas. “It is safe to assume that they could not raise money from private investors and they felt the bank would not be viable without new capital.”
An infusion of cash from the FDIC could make the institution more attractive to investors or as an acquisition by another bank.
One potential merger partner mentioned by analysts Tuesday was Los Angeles-based Security Pacific, which was reportedly interested in acquiring InterFirst before its merger with Republic. But a spokeswoman for Security Pacific said the company has no interest in First Republic.
Whatever form the FDIC aid takes, it is likely to nearly wipe out existing stockholders.
One possible plan would be to create a new bank by spinning off the worst loans into a separate entity and giving it to the existing stockholders.
First Interstate Bancorp did that in its acquisition earlier this year of another troubled Texas bank, Allied Bank in Houston. That plan, however, did not involve federal assistance. Chemical Bank of New York structured a similar deal last year in its acquisition of Texas Commerce Bank, also without federal aid.
Republic Bank had been one of the shining stars of Texas banking and had weathered the energy problems that began to plague the state’s banks in the early 1980s. It was expected that its merger with InterFirst, which was suffering from severe losses on energy-related loans, would allow both banks to survive through cost-saving measures.
But it turned out that Republic’s loan portfolio contained real estate loans that deteriorated badly throughout last year, apparently dooming its effort to remain independent.
WHEN BANKS NEED A HAND
The Federal Deposit Insurance Corp. says it has made 48 “assistance transactions,” or bailouts, to banks and S&Ls; since 1971. First RepublicBank has asked for this kind of help; its headquarters in Dallas is shown above. The first institution to receive FDIC funds was Unity Bank of Roxbury, Mass.; it was given $1.5 million in July, 1971. Listed below are major FDIC allocations. Dollar figures in millions.
Date Bank State July, ’84 Continental Illinois Illinois March, ’82 N.Y. Bank for Savings New York Nov., ’81 Greenwich Savings New York April, ’82 Western Savings Fund of Philadelphia Pennsylvania April, ’80 First Pennsylvania Pennsylvania Jan., ’88 United Bank of Alaska and Alaska Mutual* Alaska Oct., ’85 Bowery Savings New York July, ’87 BankTexas Group** Texas Dec., ’81 Central Savings New York Aug., ’86 Bank of Oklahoma Oklahoma
Date Assets Aid July, ’84 $33,600 $4,500 March, ’82 $3,400 $461 Nov., ’81 $2,400 $437 April, ’82 $1,000 $425 April, ’80 $5,500 $325 Jan., ’88 $1,300 $295 Oct., ’85 $5,200 $273 July, ’87 $1,300 $150 Dec., ’81 $899 $145 Aug., ’86 $500 $130
* The institutions have merged to become Alliance Bank; ** 11 banks in group.
Source: FDIC
