JPMorgan Chase to acquire First Republic Bank

First Republic originated mortgages when interest rates were at historic lows and kept them on its books, which devalued them as rates rose

Less than two months after the abrupt failures of Silicon Valley Bank and Signature Bank, federal regulators seized First Republic Bank and sold it to JPMorgan Chase Bank.

The Federal Deposit Insurance Corporation (FDIC) and JP Morgan are also entering into a loss-share transaction on single family, residential and commercial loans it purchased from the  former First Republic Bank.

JPMorgan Chase, the largest bank in the country, would be purchasing substantially all of the bank’s assets and deposits, the FDIC announced Monday morning. First Republic is the largest lender to collapse since the 2008 financial crisis and the second-largest bank failure in American history.

“Deposits will continue to be insured by the FDIC, and customers do not need to change their banking relationship in order to retain their deposit insurance coverage up to applicable limits,” the FDIC said in a release.  

As part of the transaction, First Republic Bank’s 84 offices in eight states will reopen as branches of JPMorgan on Monday during normal business hours.  All depositors of First Republic Bank will become depositors of JPMorgan and will have full access to all of their deposits.

The FDIC estimated that its insurance fund would have to pay out about $13 billion to cover First Republic’s losses. JPMorgan also said that the FDIC would provide it with $50 billion in financing.

The intervention from the federal regulators comes days after First Republic reported losing about 40% of its deposits in the first quarter of 2023. Following the failure of SVB and Signature Bank in March, depositors flocked to move their money to banks regarded as safer and offering more attractive returns. 

As of April 13, 2023, First Republic Bank had approximately $229.1 billion in total assets and $103.9 billion in total deposits, according to the FDIC. 

In addition to assuming all of the deposits, JPMorgan agreed to purchase substantially all of First Republic Bank’s assets. 

Federal regulators from the FDIC and Federal Reserve last week issued reports criticizing their oversight of the failed banks, and also said the banks had poor risk management and engaged in excessive risk-taking.

JPMorgan acquired about $173 billion in First Republic’s loans, $30 billion of securities and $92 billion in deposits. The $92 billion in deposits includes $30 billion that JPMorgan and other large U.S. banks put into First Republic in March in efforts to stabilize its finances, according to JPMorgan. JPMorgan said it would repay $30 billion.

The FDIC and JPMorgan are also entering into a loss-share transaction on single family, residential and commercial loans it purchased from the former First Republic Bank.

In 2020 and 2021, when interest rates bottomed out, First Republic offered interest-only mortgages — in which the borrower didn’t have to pay back any principal for the first 10 years of the loan. In that period, First Republic extended close to about $20 billion of these interest-only jumbo loans in San Francisco, Los Angeles, California and New York, according to Bloomberg.

With a stockpile of low-interest loans, the mortgages were performing well but their low rates and delayed repayments hurt their value when rates started rising. 

Bloomberg reported that First Republic was looking to sell up to $100 billion of loans and securities to restructure its balance sheet. 

The government moved to take bids on First Republic over the weekend as the FDIC wanted to announce a closure of the firm and a purchase agreement.

The Fed is still expected to raise interest rates by 25 basis points this week.

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