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

JPMorgan Chase will acquire most of First Republic, the embattled California lender that US government officials had been racing to save for much of the past week.

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

The move makes San Francisco-based First Republic the second-largest bank failure in US history, after Washington Mutual in 2008 — marginally bigger than Silicon Valley Bank, the Santa Clara-based lender that collapsed in March.

It 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. JPMorgan, PNC and Citizens were among the lenders who put in binding offers.

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.” 

The FDIC’s brief takeover of the bank allowed it to enter into a burden-sharing arrangement with JPMorgan on unrealised losses in First Republic’s loan portfolio due to recent interest rate rises. Marking the cost of the failure to federal authorities, the FDIC estimated that the losses to its insurance fund would be about $13bn. It added that it chose JPMorgan to minimise such costs.

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.

“Our government invited us and others to step up, and we did,” said Jamie Dimon, JPMorgan’s chief executive. “Our financial strength, capabilities and business model allowed us to develop a bid to execute the transaction in a way to minimise costs to the deposit insurance fund.”

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, will retain access to their money when the bank’s 84 outposts in eight states reopen as Chase branches on Monday morning. JPMorgan said that the $30bn that it and 10 other banks placed with First Republic in a failed effort to stabilise the bank would be repaid.

Monday’s transaction follows the FDIC’s seizure last month of SVB and Signature Bank, in both of 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 estimated that the deal would add roughly $500mn of annual income to its earnings.