The saga of First Republic Bank (FRC +0.00%) came to a close over the weekend, as the Federal Deposit Insurance Corporation (FDIC) took over the San Francisco-based financial institution. The regulatory agency then entered into an agreement with the banking subsidiary of JPMorgan Chase (JPM +0.67%) under which the Wall Street giant will assume all of First Republic's deposits and substantially all of the embattled bank's assets.
The move is the latest in a series of bank failures this year, and it once again raised concerns about the stability of the financial system more broadly. But the news was good for depositors of First Republic, and JPMorgan's stock was up Monday morning.
How did the deal get done?
The FDIC held a snap auction, soliciting competitive bids from several different financial institutions. Various reports named banks including PNC Financial, Citizens Financial, U.S. Bancorp, and Bank of America as possibly having received invitations from the FDIC to request bids for First Republic, although those banks generally chose not to comment on those reports.
In the end, JPMorgan agreed to acquire $173 billion in loans and $30 billion in securities, taking on responsibility for $92 billion in deposits and $28 billion in Federal Home Loan Bank advances. JPMorgan will pay $10.6 billion to the FDIC, but it did not assume First Republic's corporate debt or preferred stock obligations.
In addition, the FDIC agreed to enter into a loss-share transaction with JPMorgan under which the agency will provide 80% loss coverage for seven years on mortgage loans and five years on commercial loans. The two entities will share in losses and potential recoveries on the loans covered under the agreement. The FDIC believes that by keeping those bank assets in the private sector rather than bringing them into the public auction process, it and JPMorgan will get the most in recoveries over the long run. Moreover, the arrangement will be less disruptive for loan customers, many of whom may avoid seeing changes or efforts to renegotiate terms.
The FDIC estimates there will be a $13 billion cost to the Deposit Insurance Fund, which is paid for mostly by financial institutions and contains no taxpayer money.
What the FDIC-JPMorgan deal means for bank customers
For current First Republic customers, the FDIC's arrangement with JPMorgan ensures an orderly continuation of business. The 84 branch offices that First Republic has in eight different states will reopen Monday as new branches of JPMorgan Chase.
Accountholders will have full access to their deposits with no delays, and those deposits will remain insured by the FDIC. Customers won't have to do anything to retain deposit insurance up to applicable limits. As for those who worked at First Republic, JPMorgan said that it was "committed to treating employees with respect, care and transparency."
Why JPMorgan stock is climbing
For JPMorgan Chase, the move was a win, and the stock climbed 2.5% when trading opened Monday. As the bank sees it, it will get an internal rate of return of more than 20% on the deal while maintaining capital ratios at strong levels. JPMorgan expects a better than $500 million accretion to net income and believes that the transaction will boost its tangible book value per share.
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Strategically, the move also favors JPMorgan's business. First Republic concentrated on high-net-worth clients who should be interested in JPMorgan's growing wealth management business. Branch locations on the West Coast will also add to JPMorgan's physical footprint, supporting further expansion.
So is the banking crisis over?
For JPMorgan's part, CEO Jamie Dimon already said early in April that he believed the banking crisis was nearing an end. He didn't foreclose the possibility of further individual bank failures, but as long as none of the problems with any given bank led to a domino effect of contagion with other financial institutions, Dimon believed that such failures could be orderly and not affect the safety of the banking system as a whole.
In Monday morning's conference call on the deal, Dimon reiterated that sentiment: "No crystal ball is perfect, but yes, I think the banking system is very stable. ... This part of the crisis is over. That does not -- down the road, there are rates going way up, real estate, recession, that's a whole different issue. But for now, everyone should just take a deep breath."
What is certain is that scrutiny of regional banks has never been higher, and many banking officials across the industry expect that the failure of First Republic and other banks will result in greater regulation. That could eventually have implications for investors, but they would be less dramatic than the abrupt collapses we've seen recently.
Bank investors can expect to keep hearing news about various regional banks and their exposure to bond losses and potential deposit outflows for a while. As all the skeletons in the closet get discovered, though, the chances of an all-out crisis should diminish.
