Bank of America's $2.5 Billion Blunder: Street Whispers

NEW YORK (TheStreet)--Few objected when Bank of America (BAC) chose to sell First Republic Bank (FRC) in 2010 for $1.86 billion to a group that included existing management and buyout firms Colony Capitaland General Atlantic, though clearly this is a deal the beaten up banking giant wouldn't mind having back.

Less than six months after making their acquisition, First Republic's buyers took the bank public at a value of $3.27 billion. Since then, the shares have run up another 21%, while Bank of America shares are down some 30% over the same period of time. As of Friday's close, First Republic had a market cap of $4.4 billion.

What's more, First Republic may be better positioned than ever. It specializes in selling "jumbo" mortgages, which command higher yields relative to Treasuries than smaller "conforming" mortgages.

"Jumbo mortgages has become a very hot business," says Rochdale Securities analyst Dick Bove. "Wells Fargo (WFC) is chasing it like mad, but this little company First Republic--that's been its core business from day one, so they have a lead in doing it."

Jumbo mortgages have two key advantages over conforming ones, Bove says.

"If you're going to make a conforming mortgage which you've got to try to sell to Fannie Mae (FNMA) , the yields are low and the government is jawboning to get them lower, whereas jumbos, since the government doesn't give a shit about rich people, number one they can price the loans where they want to price them and number two because the wealthy now feel comfortable enough to go out and buy new houses, they're doing it and therefore the demand in that area is quite strong."

You can say that again. First Republic's loan volume rose 7.6% in the third quarter--an annual run rate of just under 30%. An average run rate for a bank is more like 4-6%, Bove says.

True, Bank of America had few options at the time it sold First Republic. It was under pressure from regulators and investors to sell assets and raise capital. Still, now that its accomplished that, everyone is wondering where its earnings will come from.

Few are wondering that about First Republic at the moment.

-- Written by Dan Freed in New York.

Follow @dan_freed

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