First Republic, Menlo’s Primary Bank, Collapses

First Republic Bank, Menlo’s primary financial services provider for decades, was acquired by banking giant JP Morgan Chase in a deal that was announced on May 1. While the acquisition has yet to affect the normal banking activities for the school’s dozen or so First Republic accounts, Menlo Chief Financial Officer Bill Silver said he is “concerned” that JP Morgan Chase will not keep the First Republic policies that enabled Menlo’s Faculty Housing Loan Program (FHLP). If Menlo can’t continue the program at America’s largest bank, Silver said he would have to find another bank with lending policies that are permissive of the program.

The FHLP provides faculty with money for a down payment on a house. While mortgage lenders typically provide around 80% of a home’s purchase price, the rest is paid as a down payment by the home’s buyer. However, according to Silver, Menlo’s faculty often can’t afford 20% of the notoriously high home prices on the Peninsula, so the school loans it to them.

These loans the school offers for down payments come on top of the banks’ first mortgage, but many banks, including JP Morgan Chase wouldn’t loan the first mortgage to faculty if they paid the down payment with a loan from Menlo in the past, according to Silver. First Republic was one of few banks that was willing to finance mortgages despite the FHLP. “Helping a teacher to buy a home here and get them into the housing market — owning a home as opposed to renting — has a lot to do with whether they can stay at Menlo for the long term,” Silver said. “Keeping our good teachers for the long term is really important,” he added.

After the collapse of Silicon Valley Bank and Signature Bank in March, finance watchers set their eyes on First Republic Bank as the potential next victim of America’s banking crisis. However, working with the finance committee of Menlo’s board of trustees, Silver decided not to withdraw all of the school’s deposits from First Republic, worrying that doing so would destroy its important relationship with the bank and fuel the flames of a bank run. “That relationship that we have with First Republic is important,” Silver said. “So we didn’t want to be pulling all of our deposits out of First Republic like some people did, because if you do that, they won’t do other things for you, like they won’t lend you money.”

He added that he saw the possibility of a complete loss of First Republic deposits as unlikely. “I used to work at Citibank, I’ve been through bank crises before in my career as a corporate person, and I was very confident that the FDIC was going to sooner or later figure out how to protect the depositors [of First Republic Bank],” Silver said, referring to the Federal Deposit Insurance Corporation, a government agency which guarantees bank deposits up to $250,000 per account in the event of a bank crash. 

Although the amount of money the school has deposited in First Republic can at times be as much as $20 million, Silver noted that only $400,000 of that amount was left uninsured by the FDIC, a fraction of the school’s $237 million in assets. When the school’s accounts run over a certain balance, a scheme known as an insured cash sweep automatically deposits the overflow in other banks, thus keeping Menlo’s deposits insured while maintaining the relationship with First Republic, according to Silver.

Additionally, Silver said, the school only keeps around one third of its cash in First Republic, with the rest being kept in government money market funds in either Vanguard or Bank of America subsidiary Merrill Lynch.