FDIC hands muni-laden First Republic to JPMorgan Chase

The Federal Deposit Insurance Corp. placed First Republic Bank into receivership on Monday morning, and JPMorgan Chase has acquired much of the San Francisco bank, ending a frantic week as regulators scrambled to arrange a last-minute rescue.

The bank was closed by the California Department of Financial Protection and Innovation overnight and handed to the FDIC, which said in a news release that it selected a bid from JPMorgan for all of First Republic’s deposits and “substantially all” of its $229.1 billion of assets. The bank’s 84 offices in eight states are scheduled to reopen Monday as branches of JPMorgan Chase during normal business hours.

As part of the purchase and assumption transaction, the FDIC and JPMorgan have entered into a loss-share agreement on certain single-family residential mortgages and commercial loans. The two will share in the losses and potential recoveries on former First Republic loans covered by agreement, the release said.

The failure is expected to cost the federal Deposit Insurance Fund about $13 billion, the release said.

“Our government invited us and others to step up, and we did,” JPMorgan Chairman and CEO Jamie Dimon said in a separate news release issued by the company.  “Our financial strength, capabilities and business model allowed us to develop a bid to execute the transaction in a way to minimize costs to the Deposit Insurance Fund.”

The deal “modestly benefits our company overall, it is accretive to shareholders, it helps further advance our wealth strategy, and it is complementary to our existing franchise,” Dimon said.

The company expects to record an upfront, one-time, post-tax gain of about $2.6 billion. That does not include about $2 billion of post-tax restructuring costs anticipated over the next 18 months, the JPMorgan release said.

First Republic had $103.9 billion of deposits at April 13, according to the FDIC release. JPMorgan said in its release Monday that it has assumed $92 billion of deposits. The difference in those two figures was not immediately clear.

First Republic is the second-largest bank failure in U.S. history by assets, pulling ahead of the collapse of the $209 billion-asset Silicon Valley Bank last month, according to FDIC data.

Fears about First Republic’s health had deepened over the last week after the bank disclosed a massive drop in deposits, spurring regulators and big banks to engage in talks about rescuing the troubled firm. A week ago, First Republic signaled that its situation was more dire than previously believed, and said it was “pursuing strategic options.”

Its stock sank after the earnings report and fell further later in the week as a failure looked increasingly likely. The share price fell below $4 on Friday, a staggering drop from its highs of nearly $220 in 2021.

Regulators and banks spent the weekend discussing options, with theFDIC asking banks to place bids for the company by Sunday, according to Bloomberg News. Besides JPMorgan, PNC Financial Services Group, U.S. Bancorp and Bank of America weighed bids, the news outlet said. Reuters also reported that Citizens Financial Group was interested.

The last-minute talks followed failed efforts to negotiate a deal that would have avoided the need for government intervention.

The government’s calculus was complicated by a provision in federal law that prohibits regulators from approving mergers of banks from different states that would result in the acquiring bank controlling more than 10% of all insured deposits in the United States. The law provides an exception for deals involving banks that are “in default or in danger of default.”

There was no mention of the deposit cap in the FDIC’s announcement on Monday. The agency said its deal with JPMorgan was the result of a “highly competitive bidding process.”

The First Republic’s collapse came only weeks after similar concerns emerged over the now-failed Silicon Valley Bank. Regulators stepped in and deployed a systemic risk exception for Silicon Valley and Signature Bank, a crypto-friendly bank that also collapsed in March, in the hopes that covering their uninsured deposits would curb contagion throughout the banking system.

“First Republic was like the person waiting at the crosswalk when a drive-by shooting occurs on the corner,” said Todd Baker, a senior fellow at the Richman Center for Business, Law & Public Policy at Columbia University. “They essentially would not have had anywhere near the kind of problems they had if Silicon Valley Bank had not failed because there was significant crossover in the types of customers, and it all happened in the Bay Area.” 

The third bank failure in less than two months raises questions about whether the turmoil in the industry is over, despite regulators’ reassurances that the sector is strong and stable. It also highlights how fatal the spread of fear can be to a bank’s health.

“This is a sad example of a spooked public,” said Gene Ludwig, a former comptroller of the currency and current managing partner of Canapi Ventures. “This is fundamentally a tragedy.”

Across the industry, some regional banks have reported moderate deposit outflows in their first-quarter earnings reports, but deposits have been largely stable.

First Republic’s first-quarter figures, though, were grim. The bank’s deposits had plunged 40.8% since the end of last year — and were down by more than $100 billion when excluding an effort from big banks to shore up its balance sheet.

Eleven big banks — including JPMorgan, Citigroup, Bank of America, Wells Fargo and several large regional banks — deposited $30 billion at First Republic last month in a show of confidence. Those funds comprised roughly 60% of the uninsured deposits at the bank as of March 31.

The agreement with JPMorgan ensures that First Republic’s uninsured depositors will be covered. If First Republic had failed through the FDIC’s normal process, without a buyer lined up for the bank’s deposits, there would have been no way to ensure that uninsured depositors would be made whole without again invoking the systemic risk exception.

Such a move would have been politically fraught in the case of First Republic, since the 11 large banks that had $30 billion of uninsured deposits at the bank would have been major beneficiaries. Critics would have been able to frame such a move as a bailout for some of the nation’s biggest banks.

First Republic, long known for catering to wealthy clients, was caught off guard last year by the rapid rise in interest rates. 

As the housing market thrived during the pandemic, business had boomed at First Republic, as wealthy customers took out mortgages at ultralow interest rates. Once rates rose, those mortgages proved to be the bank’s undoing, since it was saddled with long-term assets whose value had fallen.

“There’s a lesson in that for all finance that what seems like a darling and a wonderful winner at one moment seems like the opposite only a little while later,” said Alex Pollock, a former Treasury Department official.

In addition to its large mortgage portfolio, the value of which cratered once rates started rising, First Republic, which had to be rescued by a group of larger banks, carries $19.4 billion of state and municipal securities.

The losses on First Republic’s balance sheet made a rescue difficult, since potential buyers would have been forced to reckon with the bank’s massively underwater assets. The bank’s $137 billion of mortgages were worth $19 billion less at the end of last year, according to its annual report. Those losses would have materialized if the mortgages were sold.

“Obviously there’s a very generalized problem of people making the most classic financial mistake, which is investing in long-term fixed-rate assets and funding them with floating-rate money,” Pollock said. “They were lulled into it by the actions of the central banks — by keeping interest rates both long and short-term very low for very long periods of time, and convincing people that it was going to continue.”

The large sums of money that First Republic’s wealthy clientele stuck at the bank also made it more vulnerable to a depositor panic. Nearly 68% of its deposits at the end of last year weren’t covered by the FDIC. Many customers fled when they realized their money was at risk.

“Throughout its run, First Republic filled a niche,” Ludwig said. “It was a private banking business for comfortable but not the wealthiest Americans. Yes, other banks do this, but the loss of competition in the marketplace and the disruption to clients is unfortunate.”

In recent weeks, the bank’s prized wealth management business had also been bleeding staff as advisors defected to competitors.

During the bank’s quarterly earnings call on Monday, First Republic President and CEO Mike Roffler laid out plans to slash 25% of its staff, cut executive pay and reduce its corporate office space. But Roffler did not take questions from analysts, underlining the bank’s troubled status.

Earlier this year, Roffler had told the Federal Reserve and the FDIC that he expected the bank could be resolved without extra oversight or government requirements. Those comments came in response to an advance notice of public rulemaking on the possibility of extending resolvability measures like total loss-absorbing capacity or long-term debt requirements to midsize banks.

“In the event of failure, it is expected that the bank could be resolved in an orderly fashion in accordance with its resolution plan,” Roffler wrote in a January letter to regulators.