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First Republic Bought By JPMorgan Following Bank's Failure

All 84 First Republic branches will operate as JPMorgan Chase banks as part of a rescue deal with the FDIC.

JPMorgan Chase will purchase the bulk of the operations of First Republic Bank, following the seizure of the bank by regulators on Monday.

JPMorgan, the country’s largest bank, will assume all of First Republic’s $92B in deposits, including uninsured deposits, and will acquire $173B in loans and $30B in securities as part of the deal.

The agreement was brokered over the weekend by the Federal Deposit Insurance Corp. in a bid to head off a bank collapse that could have sent shockwaves through the sector. First Republic's failure, with $229B in assets, marks the second-largest banking collapse in U.S. history, a mantle briefly held by Silicon Valley Bank

The FDIC is providing $50B in financing to JPMorgan for the deal and entering into a loss-share agreement with the bank on the single-family, residential and commercial loans it acquired from First Republic, according to the FDIC’s announcement of the deal. It estimates the cost of the buyout to the Deposit Insurance Fund at $13B.

More than $141B of the $173B of loans on First Republic’s balance sheet at the end of the first quarter were tied to the real estate sector, with just under $22B in multifamily loans, around $11B tied up in commercial real estate loans, $2.4B of commercial and multifamily construction loans and $103B of residential real estate loans.

As part of the takeover, JPMorgan will enter into a loss-share transaction with the FDIC that will limit the bank’s exposure by having the FDIC absorb a portion of the losses associated with a pool of assets. Under these agreements, the bulk of any recoveries made through the sale of assets are typically returned to the FDIC, with 20% going to the bank.

JPMorgan also agreed to reopen all 84 of First Republic Bank’s offices across eight states as branches of JPMorgan Chase starting Monday. The FDIC statement said the branches will operate during normal business hours and that “all depositors of First Republic Bank will become depositors of JPMorgan Chase Bank, National Association, and will have full access to all of their deposits.”

The deal, announced in the early morning hours Monday, comes after the FDIC set a noon deadline on Sunday for banks to bid on a First Republic takeover. On Thursday, the FDIC had asked up to six banks to consider taking over the troubled bank, including JPMorgan, PNC Financial Services and Bank of America, according to a Bloomberg report.

Shares at the bank plummeted last week after it revealed on its earnings call that customers had withdrawn over $100B since March as fixed-rate mortgages with low interest rates weighed on its balance sheet. Almost 60% of its loans were single-family mortgages, according to the firm’s 2022 annual report.

Even as First Republic’s depositors were pulling their cash, the bank continued to lend. The bank originated $1.3B in multifamily loans, $386M in commercial real estate loans and $597M in construction loans. 

The bank’s commercial real estate portfolio had been performing relatively well, with weighted average loan-to-value below 50% across all sectors, and less than 0.1% of the bank’s loans were nonperforming. It had $2.5B of outstanding office debt on its balance sheet.

In San Francisco, where First Republic was the most active multifamily lender, there are concerns that the bank’s failure could stall large development deals. 

“Uncertainty surrounding First Republic Bank, the most active lender in the market, is likely to cause investors and buyers to turn to alternative financing options,” Colliers analysts wrote in the firm’s first-quarter San Francisco market report, GlobeSt reported. “As a result, the market may see a shift towards smaller deals and more creative financing structures as investors look to make the most of available resources and opportunities."

The deal announced Monday comes after what the FDIC called a “highly competitive bidding process” and differs from the FDIC-brokered deal to take over Signature Bank in March. Under that deal, a subsidiary of New York Community Bancorp, Flagstar Bank, agreed to acquire $38.4B in Signature assets but excluded roughly $60B of the bank’s holdings that Flagstar felt were overly exposed. 

“We did not acquire any multifamily or commercial real estate loans,” NYCB spokesperson Salvatore DiMartino told The Real Deal at the time. “Zero.”  

First Republic had focused on winning the business of wealthy Americans on the coast. Large deposits funded low-interest fixed-rate mortgages, and low interest rates helped fuel the bank’s growth. 

The bank’s focus on wealthy clients helped bolster its reputation, with Fitch Ratings calling its assets “pristine” in March even as it downgraded its long-term default rating.

But after originating more than 95% of its mortgages during an extended period of low interest rates, First Republic began to struggle when the Fed began taking steps to tame inflation. 

When the Fed began increasing rates, First Republic’s customers started demanding higher yields to keep their money at the bank just as the value of its loans began to fall. Then the collapse of Silicon Valley Bank sparked fears that there were hidden issues in the banking system. 

Investors with large uninsured deposits at First Republic began to panic and withdraw their money, the bank disclosed the depositor exodus and its share price plummeted. 

“It was a run on the business model,” Steven Kelly, a senior researcher at the Yale Program on Financial Stability, told The Wall Street Journal.

The collapse of First Republic is unlikely to spur another crisis of confidence in the banking sector, the WSJ reported, because the scale of the $1B outflow of deposits from First Republic hasn’t been seen across the sector more broadly.

“This is the last stages of that initial panic. First Republic’s problems started as a result of SVB and Signature,” Kelly said. “This isn’t the story of 2008, where one bank went down and investors focused on the next biggest bank, which would wobble.”

UPDATE, MAY 1, 11 A.M. ET: This story has been updated with more information about First Republic's commercial real estate lending activity.