Source: Wind

Let's say another bank buys it for a dollar$First Republic Bank (FRC.US)$It could end up costing buyers tens of billions of dollars.

Over the years, First Republic has enjoyed an excellent reputation as a rapidly growing lender focusing on one very ideal client—the wealthy. Some might think that such a franchise would be perfect for any bank looking to develop a business such as wealth management.

Its assets also appear to be mostly stable, such as government securities and mortgages provided to wealthy clients. However, the bank's market capitalization is currently hovering around 1 billion US dollars, down about 95% from the beginning of the year, but there are still no buyers.

While First Republic may want to weather the crisis by waiting for time for its bonds and loans to expire or be fully repaid, the acquirer wouldn't have such a luxury idea. According to consolidated accounting standards, the acquirer must immediately write down the acquired assets to fair value.

The bank did not provide updated information on its estimates of the fair value of its assets in its first-quarter report. As a result, these values are likely to improve as government bond yields fall in the first three months of this year. However, by the end of last year, the company had a book loss of approximately $4.8 billion on its maturing securities.

Furthermore, the fair value of its real estate secured loans was about $19 billion lower than the book value. Many of these mortgages pay fixed interest rates at relatively low current rates, either for an indefinite period or for years to come.

Even if these losses in terms of market capitalization have now been reduced by a few billion dollars, and after adjusting the tax benefits for the losses, the necessary write-offs could effectively offset the bank's shareholders' equity, which was around $18 billion at the end of the first quarter. This means that when adding assets to the balance sheet, buyers will have to invest billions of dollars to keep their capital ratios in line with the minimum requirements of regulators.

Autonomous Research analyst David Smith said, “The free acquisition of this bank may require an additional $30 billion.”

In a typical banking transaction, the buyer can rely on intangible assets to offset the loss in the value of bonds and loans. For example, acquirers often acknowledge some added value of the acquired bank deposits. Compared to the assets of the acquired bank, these deposits may be worth more than what appears on the books because they are cheap or stable. Given the First Republic's deposit problems, it's hard to say how much it's worth. Furthermore, intangible assets such as these do not count towards the regulatory capital required for a bank to operate.

Editor/jayden