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JPMorgan (JPM) Takes Over Failed First Republic for $10.6B

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The largest U.S. bank is now an even bigger financial behemoth. Yes, we are talking about JPMorgan’s (JPM - Free Report) takeover of failed First Republic Bank . The company bought the bulk of First Republic’s $228 billion of assets (adding to its huge $3.7 trillion assets balance) and assumed deposits worth $92 billion by paying $10.6 billion.

The San Francisco-based lender was seized by the Federal Deposit Insurance Corporation (“FDIC”) on early Monday morning after almost two months of efforts to save the flagging institution. The nation’s biggest banks, including JPMorgan, had tried to support the company by infusing $30 billion worth of deposits (in aggregate) to restore investors’ confidence in the banking system.

This followed the collapse of two other major banks – Signature Bank and Silicon Valley Bank – in March and led to the latest banking industry turmoil amid fears of contagious effect on the U.S. regional banks. Both the banks - Signature Bank and Silicon Valley Bank - were seized by the FDIC and then sold to New York Community Bancorp, Inc. (NYCB - Free Report) and First Citizens BancShares, Inc. (FCNCA - Free Report) , respectively.  

NYCB, through its bank subsidiary, Flagstar Bank, acquired $38 billion in assets and assumed $36 billion of liabilities of Signature Bank, while not buying any digital asset banking, crypto-related assets or the fund banking business. FCNCA assumed Silicon Valley Bank’s assets worth $110 billion, deposits worth $56 billion and loans worth $72 billion.

To further understand the gravity of the present situation, it’s worth noting that FRC was the 14th largest bank in the country as of 2022-end. The bank’s demise, the second biggest bank failure in history, seemed imminent following the revelation of $100 billion of deposit flight in the first quarter of 2023. Investors lost confidence in the stock, resulting in an almost 98% plunge in its share price this year as of Apr 28.

Now, let’s discuss the deal details and try to understand what’s in it for JPMorgan.

Transaction Details

As part of the deal, JPM acquired roughly $173 billion of loans and $30 billion of securities. The above-mentioned deposits balance includes $30 billion of “large bank deposits,” which the company plans to repay or eliminate following the consolidation.

The company didn’t acquire any of the First Republic’s corporate debt or preferred stock.

Additionally, the FDIC will provide loss share agreements related to acquired single-family residential mortgage loans (80% loss coverage for seven years) and commercial loans (80% loss coverage for five years).  JPMorgan will also receive a new $50 billion five-year, fixed-rate term financing from the FDIC.

All the 84 banking offices of FRC across eight states reopened Monday as JPMorgan branches.

Transaction to be Modestly Accretive to EPS

JPMorgan expects the transaction to generate more than $500 million of “incremental net income” annually. This doesn’t include nearly $2.6 billion of one-time post-tax gain to be recognized at closing and approximately $2 billion of post-tax restructuring charges anticipated this year and in 2024.

JPM expects to remain “well capitalized” and “maintain healthy liquidity buffers”. Also, its CET1 ratio is projected to be consistent with the first-quarter 2024 target of 13.5%.

These apart, the deal will result in increased penetration within the high-net-worth clients. Also, it adds prime locations in wealthy markets.

Jamie Dimon, Chairman and CEO of JPMorgan, said, “This acquisition modestly benefits our company overall, it is accretive to shareholders, it helps further advance our wealth strategy, and it is complementary to our existing franchise.”

But one can’t say there are no risks from such assisted deals. JPMorgan’s management knows this after having acquired Washington Mutual and Bear Stearns during the height of the 2008 financial crisis. Likewise, at present, the company faces host risks that include potential legal challenges and ensuing charges as well as employee exodus.

Nonetheless, in a vote of confidence, JPMorgan’s shares gained 2.1% yesterday.

Parting Thoughts

Over the past two years, JPMorgan has undertaken several on-bolt acquisitions that supported its fee income base and improved market share across several products and services. The company wasn’t permitted to acquire other banks as it would cause its deposit balance to exceed 10% of U.S. bank deposits, which isn’t allowed.

But given the special situation, JPM won the bid to acquire First Republic, which included several other large industry players. The current deal presents a unique opportunity to support “the U.S. financial system through its significant strength and execution capabilities.”

The banking turmoil that started two months ago and led to deposit runs across the industry seems to be contained for now. At the conference call following the announcement of the transaction, Dimon noted, “this part of this crisis is over.”

Yet, it is not expected to be smooth sailing for the industry. Higher interest rates and a potential recession/severe economic slowdown are some of the major headwinds that the banking industry will have to face in the coming months.

Over the past six months, shares of JPMorgan have rallied 11% against a 7.5% decline for the industry it belongs to.

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At present, JPM carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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