JPMorgan to acquire First Republic’s deposits as US regulators step in

JPMorgan Chase is to acquire most of First Republic after US regulators orchestrated an overnight deal to shut the embattled California lender, wiping out its shareholders in the second-biggest bank failure in the country’s history.

The Federal Deposit Insurance Corporation and California regulators, which announced the deal early on Monday morning, said they were simultaneously closing First Republic and selling off all $93.5bn of its deposits and most of its assets to JPMorgan.

The Wall Street bank is paying the FDIC $10.6bn as part of the deal.

JPMorgan’s chief executive Jamie Dimon defended the administration’s handling of the process, arguing that ultimately nobody had wanted to acquire First Republic as a going concern.

“The whole world knew it was available, and no one bought it,” he said.

The only bigger bank failure in US history was the collapse of Washington Mutual in 2008. While First Republic’s market capitalisation was $25bn in February, all its previous shareholders have now been wiped out.

Shares in US regional banks were under pressure after the announcement. Citizens and PNC, which both bid unsuccessfully for First Republic’s assets, were each down around 5 per cent by early afternoon trading, while PacWest was more than 5 per cent lower, trimming earlier losses.

The US Treasury department said it was “encouraged” that First Republic depositors had been protected and that costs to the FDIC’s deposit insurance fund — estimated at about $13bn — had been minimised by the deal with JPMorgan.

“These actions are going to make sure that the banking system is safe and sound,” US president Joe Biden said on Monday as he stepped up calls for greater regulation of the sector. “Critically, taxpayers are not the ones that are on the hook.”

The regulators’ move follows weeks of turmoil in the US banking system after the failure of Silicon Valley Bank in March.

First Republic, which is marginally bigger than SVB, is the third bank to be taken over by the FDIC in less than two months, as rising interest rates have weakened banks that relied on low-cost deposits.

Many midsized banks initially suffered deposit runs and share-price collapses after SVB went bust, although most have stabilised in recent weeks.

But First Republic revealed last Monday that it had suffered more than $100bn in outflows. It had $229.1bn in assets when it was taken over and ranked as the nation’s 14th-largest lender at the end of 2022.

Its takeover and sale came after a frantic weekend in which the FDIC invited half a dozen financial companies to review detailed information about First Republic’s assets and deposits.

PNC made multiple bids, including one that would have involved selling some of First Republic’s assets to private equity group Apollo and asset manager BlackRock, according to people briefed on the offer.

First Republic had been teetering on the brink of failure for nearly two months as deposits fled and its business model of providing cheap mortgages to wealthy customers was squeezed by rising interest rates. Its funding costs also rose rapidly and it racked up large paper losses on its mortgage book and other long-dated assets.

“I fear that delays in closing the bank may have contributed to the FDIC’s costs,” said former FDIC chair Sheila Bair. “For any failing bank, the longer regulators wait to close it, the more good customers and employees leave, eroding franchise value . . . On the plus side, as uninsured deposits shrink, it makes it easier for the FDIC to secure bidders for all deposits.”

The FDIC’s brief takeover of the bank allowed it to enter into a five-year burden-sharing arrangement with JPMorgan on unrealised losses in First Republic’s loan portfolio due to recent interest rate rises.

JPMorgan is acquiring $173bn in loans from First Republic, and approximately $30bn of securities. It is not assuming the failed lender’s corporate debt or preferred stock.

Jeremy Barnum, JPMorgan’s chief financial officer, rejected suggestions his bank was conflicted because it had been an adviser to First Republic before deciding to buy its assets.

“In reality there were people looking at the interests of the company and . . . a team of people engaged with First Republic,” he said. “Those two were separate.”

JPMorgan will recognise a one-time $2.6bn gain on the deal but said it expected to spend $2bn on restructuring costs in the next 18 months. The FDIC is also providing $50bn of five-year fixed-term financing.

The deal means that all First Republic depositors, including those above the $250,000 insurance limit, retained access to their money when the bank’s 84 outposts in eight states reopened on Monday morning. JPMorgan said it would repay the $25bn in deposits that 10 other large banks placed with First Republic in a failed effort to stabilise the bank. Its own $5bn contribution will be eliminated.

JPMorgan said in an investor presentation that the deal “accelerates” and “complements” its wealth management strategy, which has focused on better-off rather than super-rich customers.

Some First Republic branches will be converted to wealth management centres and the smaller bank’s wealth management platform will become part of JPMorgan Advisors.

Monday’s transaction follows the FDIC’s seizures last month of SVB and Signature Bank, in which government authorities invoked a so-called systemic risk exemption. That move allowed the FDIC to guarantee all deposits at the banks to stem contagion. But the immediate sale to JPMorgan does not involve such a step.

As the nation’s largest bank, JPMorgan would ordinarily be barred from acquiring another lender because it controls more than 10 per cent of American deposits. But regulators can waive the cap if necessary. JPMorgan said all regulatory approvals had been obtained and estimated that the deal would add roughly $500mn of annual income to its earnings.

Additional reporting by Harriet Clarfelt