First Republic Bank WIPEOUT

JPMorgan did not assume First Republic’s corporate debt or preferred stock, meaning institutional investors will not be made whole. Common shareholders are to get wiped out, too.

JPMorgan Chase JPM 0.00%↑ purchased First Republic Bank FRC 0.00%↑ in the latest fallout from the collapse of Silicon Valley Bank. While JPMorgan CEO Jamie Dimon said Monday that the "crisis is over," the same can't be said for First Republic investors.

JPMorgan did not assume First Republic’s corporate debt or preferred stock, meaning institutional investors will not be made whole.

Neither JPMorgan nor the Federal Deposit Insurance Corporation has explicitly said what the purchase means for First Republic common shareholders. Those shareholders are not expected to be made whole either, though, according to the banking equity analyst team at Wedbush Securities.

“We expect a wipe-out of common shareholders following FRC entering receivership and being sold to JPM,” Wedbush Securities equity analyst David J. Chiaverini wrote on Monday.

After entering the banking crisis at $115 per share, First Republic stock stopped trading on the New York Stock Exchange at $3.51 on Monday.

First Republic Bank's stock market collapse

Regulators seized the First Republic early Monday morning and sold the majority of the bank’s operations to JPMorgan Chase. JPMorgan Chase acquired $173 billion of loans and $30 billion of securities in the deal. The largest banking failure since the 2008 financial crisis came less than a week after the company revealed deposit losses exceeding $100 billion in the first quarter.

Since FDIC seized the bank, investors would need to file their grievances with the agency, said John Popeo, a former FDIC attorney.

Stockholders can file a claim with the FDIC to seek payment for their shares via an online portal or mail. But on a new FDIC web page answering questions for those impacted by First Republic's failure, stockholders are listed as the fourth and final group of creditors to be paid out. Depositors, general unsecured creditors, and subordinated debt would be paid out first. All of those claims will be paid out after administrative expenses, according to the FDIC.

A security guard stands outside a First Republic Bank branch in San Francisco, California, U.S., April 28, 2023.

The First Republic banks themselves are still open for clients and operating as normal, JPMorgan executives said on a call with the media on Monday.

The full balance of all customer deposits has been transferred to JPMorgan, according to the FDIC. JPMorgan doesn’t plan to keep the First Republic name, Dimon said on Monday.

“First Republic customers can bank as usual and feel confident that their deposits are backed by the strength and security of JPMorgan Chase,” JPMorgan Chase CFO Jeremy Barnum said on a call with the media on Monday.

JPMorgan Chase asked more than 800 people to work over the weekend to make a bid for the First Republic. It had to wait until the middle of the night to get what it wanted.

The US government informed JPMorgan after 1 a.m. Monday that it won an auction for the troubled San Francisco lender. The news capped a marathon weekend of back-to-back meetings with people from every JPMorgan business line, fueled by takeout Mexican and lots of coffee. The CFO even pulled an all-nighter.

In Pittsburgh, the news wasn’t as good. There, PNC Financial Services Group PNC 0.00%↑ knew by roughly 12:30 a.m. that its bid wasn't successful, and it didn't know which bank was the winner. Regulators announced the deal at 3:22 AM ET.

The decision made just hours before markets opened in the US on Monday ended speculation about the destiny of the nation’s 14th-largest lender after a bidding war managed by the Federal Deposit Insurance Corporation attracted some of the biggest names in banking.

Bank of America BAC 0.00%↑, the second-largest US lender, ultimately decided against an offer, as did US Bancorp USB 0.00%↑, the nation’s fifth-largest bank.

Citizens Bank CFG 0.00%↑ and Fifth Third Bancorp FITB 0.00%↑, sizable regional lenders based in Providence, R.I., and Cincinnati, also participated in the bidding, according to The Wall Street Journal.

For those watching the auction unfold, the competition really came down to two heavyweights: JPMorgan and PNC. The nation’s largest and sixth-largest banks.

Both had survived the 2008 crisis by getting even bigger via a series of acquisitions encouraged by the US government.

In JPMorgan’s case, it picked up New York investment bank Bear Stearns and Seattle thrift Washington Mutual in March and September of 2008, giving it a coast-to-coast empire. PNC got Cleveland's rival National City in October of that year and eventually established a foothold in nearly every top metro area.

A PNC sign in Pittsburgh.

Both were also involved in a prior attempt in March to stabilize First Republic with uninsured deposits, a rescue attempt that received encouragement from Treasury Secretary Janet Yellen and other top Washington officials. JPMorgan kicked in $5 billion, and PNC kicked in $1 billion. Another nine banks contributed an additional $24 billion.

The infusion bought First Republic time, but it didn’t solve the bank’s underlying crisis of confidence. A disclosure last Monday that it lost more than $100 billion in deposits during the first quarter sent its stock tumbling again.

So JPMorgan got another call Wednesday evening fielded by JPMorgan CFO Jeremy Barnum. Would the bank be interested in gathering information for a bid to acquire First Republic after its seizure by the FDIC?

To answer that question, the bank convened roughly 800 people. It tapped executives from its investment banking, commercial banking, and private banking units, as well as tax advisers, mortgage experts, asset and wealth management experts, and valuation specialists.

The assignment for every business at the bank was to look at the First Republic and to report on what it expected a deal to be worth to its particular unit.

JPMorgan Chase CEO, here testifying in Congress last year, is once again playing the role of rescuer during a banking crisis.

On Saturday, each team presented its findings to JPMorgan’s senior managers via a series of meetings from 9 a.m. to 6 p.m. Many on the executive floors ate at their desks as they worked.

The pros of buying the First Republic were that it would help restore some stability to the banking system and it would lower the costs JPMorgan might have to pay to the FDIC if the First Republic were to fail without a buyer in hand. The FDIC charges banks a special assessment to cover the costs of industry failures.

The risks were many, too. There were potential legal headaches, credit challenges, and the possibility that First Republic employees could weaken the franchise by leaving.

Bids were due Sunday at noon. After the first batch came in, it was clear to JPMorgan that not all bidders wanted the same assets. Some were willing to take First Republic’s jumbo mortgages, and some were not, said a person familiar with JPMorgan’s negotiations.

Source

The FDIC needed a way to confirm the bids so that they could start comparing them, this person said. Regulators began asking JPMorgan to resubmit its bid with additional parameters and refocus it around certain categories.

“They started trying to get everyone on the same page,” this person said.

JPM submitted four new bids between noon and 9 pm on Sunday. The final call came from the FDIC at roughly 1:15 a.m., this person said, and the First Republic was seized at roughly 2 a.m. The bank's CFO didn’t get much sleep Sunday night, this person said.

“There were a lot of people up all night,” Mr. Dimon said on a call with reporters Monday.

By 5:30 a.m., some of Dimon's top executives, including Marianne Lake and Jennifer Piepszak, were on a plane and flying to California to meet their new colleagues. First Republic now belonged to JPMorgan.