Regulators seized First Republic (FRC) early on Monday and sold the bank’s operations to JPMorgan Chase in the largest bank failure since the 2008 financial crisis.
“The [California Department of Financial Protection and Innovation] appointed the Federal Deposit Insurance Corporation (FDIC) as receiver of First Republic Bank,” a press release stated. “The FDIC has accepted a bid from JPMorgan Chase Bank, National Association, Columbus, Ohio, to assume all deposits, including all uninsured deposits, and substantially all assets of First Republic Bank.”
The fall of the $233 billion First Republic is larger than both Silicon Valley Bank and Signature Bank, which were the second- and third-largest bank failures in US history at the time of their undoing roughly seven weeks ago. Seattle’s Washington Mutual, which went under with $307 billion in assets in September 2008, was still bigger.
“As of April 13, 2023, First Republic Bank, based in San Francisco, had total assets of approximately $229.1 billion and total deposits of approximately $103.9 billion,” the press release added. “Its deposits are federally insured by the FDIC subject to applicable limits.”
The announcement followed a bidding war among various banks. The Federal Deposit Insurance Corporation invited several big banks to make bids, including JPMorgan Chase (JPM), Bank of America (BAC), and PNC Financial Services Group (PNC), according to people familiar with the matter. Citizens Financial Group (CFG) and US Bancorp (USB) were also reportedly invited.
Some of the same banks came to First Republic’s aid in March with $30 billion in uninsured deposits. They were reluctant last week to provide a second rescue on their own, fearing First Republic would be seized anyway.
The deal to buy First Republic places CEO Jamie Dimon at the center of a national banking crisis for the second time in 15 years.
“Our government invited us and others to step up, and we did,” Dimon said in a statement.
In 2008, Dimon acted twice to help stabilize the financial system when JPMorgan purchased New York investment bank Bear Stearns in March of that year, getting a $29 billion backstop from the federal government, and then Seattle’s Washington Mutual in September of 2008.
In the case of Washington Mutual, JPMorgan purchased its operations after regulators seized the Seattle thrift.
First Republic became the subject of a government bidding war after a fight for its survival that began in March when panic about the stability of regional lenders cascaded across the country. It tried to weather the turmoil by borrowing from the Federal Reserve and the Federal Home Loan Bank while also taking in $30 billion in uninsured deposits from 11 of the country’s largest banks.
But First Republic’s situation turned more serious Monday after it disclosed a loss of more than $100 billion in deposits. The drop was greater than expected and raised new concerns about the company’s chances for survival.
Investors punished the stock, sending it down nearly 50% in one day and then nearly 30% on Wednesday. On Thursday it rose nearly 9%, before plunging again Friday by 43%.
It tried this week to persuade JPMorgan Chase (JPM), Bank of America (BAC) and other giant financial institutions to once again come to its aid as they did in March. But the banks were reluctant to provide a second rescue, fearing it would still be seized anyway. Talks with US officials also didn’t produce a deal to keep it out of FDIC receivership.
Rise and fall
First Republic was founded in 1985 by Jim Herbert, and over the decades expanded rapidly as it attracted wealthy customers clustered on either coast by offering them large single-family mortgages at ultra-low rates along with personalized service.
It went from $88 billion in assets at the end of 2017 to more than $200 billion at the end of 2022. It was the nation’s 14th-largest lender as of Dec. 31.
Then it, like many banks of its size, struggled to adapt to an aggressive campaign by the Federal Reserve to raise interest rates as a way of slowing inflation.
The hikes lowered the value of the interest-rate sensitive assets on its balance sheet and helped create billions in unrealized losses, a hole that ultimately attracted the attention of investors and depositors following the fall of Silicon Valley Bank.
The bank also had lots of uninsured depositors, making them a greater flight risk during the chaos that unfolded in March.
When customers began pulling more than $100 billion, First Republic had to replace its deposit funding with more expensive borrowing from the Fed and the Federal Home Loan Bank system. Those borrowings, which peaked on March 15 at $138 billion, created another problem by placing more pressure on its profitability.
First Republic developed a turnaround plan. It said Monday while releasing its first-quarter results that it planned to increase its amount of insured deposits, trim its borrowings, decrease its loan balances and reduce its workforce by 20-25%. Borrowings had dropped to $104 billion as of April 21 and the deposit outflows had slowed.
But its disclosure about the amount of deposits lost in March, and the fact that the company decided not to take any questions from analysts, spooked investors.
Short sellers also applied more pressure. Those with bets against First Republic have earned $1.37 billion year to date on a mark-to-market basis, according to S3 Partners. It is the most profitable short position among stocks thus far in 2023, according to S3.
By Friday, First Republic’s stock had dropped to $3.50, down 97% for the year. The bank’s market value, once $40 billion, was just $640 million.
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