May 01, 2023

First Republic Bank: Second-largest bank failure in U.S. history

Posted May 01, 2023 7:30 PM
photo courtesy First Republic Bank
photo courtesy First Republic Bank

NEW YORK (AP) — Regulators seized troubled First Republic Bank early Monday, making it the second-largest bank failure in U.S. history, and promptly sold all of its deposits and most of its assets to JPMorgan Chase in a bid to end the turmoil that has raised questions about the health of the U.S. banking system.

It's the third midsize bank to fail in less than two months. The only larger bank failure in U.S. history was Washington Mutual, which collapsed at the height of the 2008 financial crisis and was also taken over by JPMorgan in a similar government-orchestrated deal.

“Our government invited us and others to step up, and we did,” said Jamie Dimon, chairman and CEO of JPMorgan Chase.

First Republic's 84 branches opened on Monday as branches of JPMorgan Chase, which acquired the bank's $92 billion in deposits and $203 billion in loans and other securities. The bank's shareholders are likely to be wiped out as part of the deal.

Dimon said in a conference call with both reporters and investors that he believed “this part of this (banking) crisis is over.” Other midsize banks reported their results last week and the vast majority of them showed deposits had stabilized and profits remained relatively healthy. The outlier was First Republic.

Once the envy of the banking industry, First Republic has struggled since the March collapses of Silicon Valley Bank and Signature Bank. The bank catered to wealthy clients and had taken on a large amount of uninsured deposits — that is, deposits above the $250,000 limit set by the FDIC.

As was the case with Silicon Valley Bank and Signature Bank, those clients with large accounts at First Republic were quick to pull their money at the first sign of trouble.

“Too many (First Republic) customers showed their true loyalties were to their own fears,” wrote Timothy Coffey, an analyst with Janney Montgomery Scott, in a note to investors.

A coalition of a dozen banks pulled together a $30 billion funding package for First Republic last month that, for awhile, seemed to stanch the bleeding of deposits. But it became increasingly clear that First Republic was on borrowed time: it needed to find a buyer, or find new forms of funding to replace the deposits that had left the bank.

First Republic planned to sell off unprofitable assets, including low interest mortgages that it provided to wealthy clients. It also announced plans to lay off up to a quarter of its workforce, which totaled about 7,200 employees in late 2022. But it was seen as too little, too late, by analysts.

The $30 billion package “bought time when time was needed” for First Republic, said Jeremy Barnum, JPMorgan’s chief financial officer, in a call with reporters.

Last Monday, First Republic reported its first-quarter results and stunned analysts and investors when it revealed that $100 billion in deposits had flowed out of the bank, most in mid-March immediately after the failure of Silicon Valley Bank and Signature Bank. Its executives took no questions from analysts on an earning conference call. First Republic's stock plunged more than 50% the day after the report.

By mid last week, it became clear government intervention in First Republic was necessary. Treasury officials asked banks to submit bids for First Republic, and bankers and regulators worked through the weekend to find a way forward.

Once again JPMorgan Chase, the nation’s biggest bank with a reputation as a dealmaker during times of crisis, became the government's go-to bank. Treasury officials had enlisted JPMorgan last month to lead the $30 billion rescue package. Back in 2008, Dimon was the go-to banker for Washington to find private solutions for that banking crisis and JPMorgan acquired both Bear Stearns and Washington Mutual.

The Federal Reserve and FDIC, which regulate the banking industry along with the Office of Comptroller of the Currency, could face renewed criticism over their handling of First Republic. Both acknowledged Friday in separate reports that lax supervision had contributed to the failures of Silicon Valley Bank and Signature Bank.

As First Republic grew its deposits, it used them to fund more and more low interest rate loans to customers. When the Fed rapidly increased interest rates last year, the value of those loans decreased.

“These banks were allowed to get too big too quickly when interest rates were low,” Coffey said in an interview.

There could also now be questions about the size of JPMorgan Chase, which has more than $3 trillion in assets and is by far the biggest of the “too big to fail” institutions around the world.

Regulators "permitted the country’s biggest bank to get even bigger. We expect this will be a Democratic focus for months,” said Jaret Seiberg, banking analyst at TD Cowen.

JPMorgan is so big that by law it would not be allowed to buy First Republic because no one bank can have more than a 10% market share of deposits in the U.S. It is only because First Republic failed that JPMorgan was able to step in.

In a statement, JPMorgan portrayed the First Republic deal as beneficial both to the financial system and the company. As part of the agreement, the FDIC will share losses with JPMorgan on First Republic’s loans.

JPMorgan expects the addition of First Republic to add $500 million to its net income per year, although it expects to incur $2 billion in costs integrating First Republic into its operations over the next 18 months.

---------------

NEW YORK (AP) — Regulators seized troubled First Republic Bank early Monday and sold all of its deposits and most of its assets to JPMorgan Chase Bank in a bid to head off further banking turmoil in the U.S.

San Francisco-based First Republic is the third midsize bank to fail in two months. It is the second-biggest bank failure in U.S. history, behind only Washington Mutual, which collapsed at the height of the 2008 financial crisis and was also taken over by JPMorgan.

First Republic has struggled since the March collapses of Silicon Valley Bank and Signature Bank and investors and depositors had grown increasingly worried it might not survive because of its high amount of uninsured deposits and exposure to low interest rate loans.

The Federal Deposit Insurance Corporation said early Monday that First Republic Bank’s 84 branches in eight states will reopen as branches of JPMorgan Chase Bank and depositors will have full access to all of their deposits.

Regulators worked through the weekend to find a way forward before U.S. stock markets opened. Markets in many parts of the world were closed for May 1 holidays Monday. The two markets in Asia that were open, in Tokyo and Sydney, rose.

“Our government invited us and others to step up, and we did,” said Jamie Dimon, chairman and CEO of JPMorgan Chase.

As of April 13, First Republic had approximately $229 billion in total assets and $104 billion in total deposits, the FDIC said.

At the end of last year, the Federal Reserve ranked it 14th in size among U.S. commercial banks. The FDIC estimated its deposit insurance fund would take a $13 billion hit from taking First Republic into receivership. Its rescue of Silicon Valley Bank cost the fund a record $20 billion.

Before Silicon Valley Bank failed, First Republic had a banking franchise that was the envy of most of the industry. Its clients — mostly the rich and powerful — rarely defaulted on their loans. The bank has made much of its money making low-cost loans to the wealthy, which reportedly included Meta Platforms CEO Mark Zuckerberg.

Flush with deposits from the well-heeled, First Republic saw total assets more than double from $102 billion at the end of 2019’s first quarter, when its full-time workforce was 4,600.

But the vast majority of its deposits, like those in Silicon Valley and Signature Bank, were uninsured — that is, above the $250,000 limit set by the FDIC. And that worried analysts and investors. If First Republic were to fail, its depositors might not get all their money back.

Those fears were crystalized in the bank’s recent quarterly results. First Republic experienced a modern day bank run as customers rushed to pull out more than $100 billion in deposits following the failure of Silicon Valley and Signature Bank. Unlike bank runs throughout history, First Republic's demise was fueled by the speed of social media and digital withdrawals that can be made in seconds from a cell phone.

San Francisco-based First Republic said that it was only able to stanch the bleeding after a group of large banks stepped in to save it with $30 billion in uninsured deposits.

First Republic had been looking for a way to quickly turn itself around. The bank planned to sell off unprofitable assets, including the low interest mortgages that it provided to wealthy clients. It also announced plans to lay off up to a quarter of its workforce, which totaled about 7,200 employees in late 2022.

Investors were skeptical, and the devastating quarterly report sent them running for the exits. First Republic shares fell 75% last week and closed Friday at $3.51. Any remaining shareholders are likely to get wiped out. The shares traded at $115 on March 8, right before Silicon Valley Bank failed.

The Fed and FDIC, which regulate the banking industry along with the Office of Comptroller of the Currency, could face renewed criticism over their handling of First Republic. Both acknowledged Friday in separate reports that lax supervision had contributed to the failures of Silicon Valley Bank and Signature Bank.

For Dimon and JPMorgan, there may be a sense of déjà vu: Back in 2008, Dimon was the go-to banker for Washington to find private solutions for that banking crisis and JPMorgan acquired both Bear Stearns and Washington Mutual.

In a statement, JPMorgan portrayed the First Republic deal as beneficial both to the financial system and the company. As part of the agreement, the FDIC will share losses with JPMorgan on First Republic’s loans. JPMorgan expects the addition of First Republic to add $500 million to its net income per year, although it expects to incur $2 billion in costs integrating First Republic into its operations over the next 18 months. .