Regulators took ownership of First Republic Bank (NYSE: FRC), resulting in the third failure of a U.S. regional bank since the collapse of Silicon Valley Bank (OTC:SIVBQ) and Signature Bank (OTC:SBNY) in March. The federal repository Insurance Corporation was appointed receiver and accepted an offer from JPMorgan (NYSE:JPM) to support all deposits, including all uninsured deposits, and substantially all of the assets of First Republic Bank. That includes $173 billion in loans and about $30 billion in securities, though it won’t assume First Republic’s corporate debt or preferred stock. Movement before marketing: FRC -32.8% at $2.36/share; JPM +3.6% at $143/share.
Fine print: “Our government called on us and others to step in, and we did,” said JPMorgan (JPM) CEO Jamie Dimon. “Our financial strength, capabilities and business model have allowed us to develop an offer to execute the transaction in a way that minimizes costs to the deposit insurance fund” (which is estimated to be around $13 billion). The FDIC will also enter into a loss-sharing agreement with JPMorgan (JPM) on single-family, residential, and commercial loans, and provide $50 billion in funding to the bank. Meanwhile, JPMorgan (JPM) is expected to make a one-time gain of $2.6 billion from the deal, but expects to spend $2 billion in restructuring costs over the next 18 months.
It was a wild ride for the First Republic, which has been on the brink of failure for nearly two months. The bank’s business model, which funded cheap mortgages to wealthy customers from low- or no-interest deposits, was challenged when rates rose rapidly. Customers then panicked and large paper losses followed for its long-lived assets. Last week, First Republic revealed deposit outflows of $70 billion in the first quarter and shed light on Wall Street institutions that deposited $30 billion in the bank on March 16 to avoid charges. additional impact on the industry.
Outlook: Is this the latest chapter in the banking turmoil that began in March, or just the next phase of the crisis? SA Investment Group Head Lance Roberts explains how things will end, Mott Capital Management explores the impact on rates, while contributor Bill Kort examines how the leak-to-safety operations have fared since turmoil. Other persistent and systematic concerns are whether the nation’s biggest banks are getting even bigger and how the current tight credit environment will translate into the real economy.
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