First Republic Bank
A First Republic Bank branch in Los Angeles. A sale to JPMorgan would require exception to rule on size Image Credit: Bloomberg

Washington: US regulators were working into the night to resolve the First Republic Bank crisis late Sunday after a midday deadline passed for submitting final bids to take over the struggling lender.

The Federal Deposit Insurance Corp. had asked banks including JPMorgan Chase & Co., PNC Financial Services Group Inc., and Citizens Financial Group Inc. to submit offers, according to people with knowledge of the matter. Bank of America Corp. and US Bancorp were also invited but decided against bidding, according to the people, who asked not to be identified discussing confidential talks.

Regulators have been asking follow-up questions to at least some of the bidders as they compare the banks' proposals. If no agreement is reached, regulators would have the option of seizing First Republic and taking ownership of the bank. Spokespeople for JPMorgan, PNC, Citizens Financial, US Bancorp, Bank of America and the FDIC declined to comment.


The bidding process kick-started by regulators " after weeks of fruitless talks among banks and their advisers " could pave the way for a tidier sale of First Republic than the drawn-out auctions that followed the failures of Silicon Valley Bank and Signature Bank last month. Authorities are stepping in after a particularly precipitous drop in the company's stock over the past week, which is now down 97% this year.

Unclear to some involved in the process is whether regulators might use a bid for a so-called open-bank solution that avoids formally declaring First Republic a failure and seizing it.

The stock's drop "- leaving the company with a $650 million market value "- has made such a takeover at least somewhat more feasible.

First Republic was founded in 1985 by James "Jim" Herbert, son of a community banker in Ohio. Merrill Lynch acquired the bank in 2007, but it was listed in the stock market again in 2010 after being sold by Merrill's new owner, Bank of America Corp, following the 2008 financial crisis.

For years, First Republic lured high-net-worth customers with preferential rates on mortgages and loans. This strategy made it more vulnerable than regional lenders with less-affluent customers. The bank had a high level of uninsured deposits, amounting to 68% of deposits.

The San Francisco-based lender saw more than $100 billion in deposits fleeing in the first quarter, leaving it scrambling to raise money.

Despite an initial $30 billion lifeline from 11 Wall Street banks in March, the efforts proved futile, in part because buyers balked at the prospect of having to realize large losses on its loan book.

A source familiar with the situation said on Friday that the FDIC decided the lender's position had deteriorated and there was no more time to pursue a rescue through the private sector.

By Friday, First Republic's market value had hit a low of $557 million, down from its peak of $40 billion in November 2021.

Shares of some other regional banks also fell on Friday, as it became clear that First Republic was headed for an FDIC receivership, with PacWest Bancorp down 2% after the bell and Western Alliance down 0.7%.

Jumbo Mortgages

But finances aren't the only hurdle to doing a deal.

JPMorgan is among a small number of giant banks that have already amassed more than 10% of nationwide deposits, making the firm ineligible under US regulations to acquire another deposit-taking institution. Authorities would have to make an exception to allow the country's largest bank to get even bigger.

As of Friday evening, the FDIC had yet to reach a decision on putting First Republic into receivership, people with direct knowledge of the matter said. Representatives for California's banking regulator, which would take the lead in declaring whether the San Francisco-based lender has failed, didn't respond to requests for comment.

Weighing on First Republic's balance sheet is a mountain of low-interest loans, including an unusually large portfolio of jumbo mortgages to wealthy clients. Such debts have lost value amid interest-rate hikes, leaving the firm facing losses if forced to sell them.

During last month's regional banking crisis, wealthy customers and businesses yanked their cash from banks with such flaws in their balance sheets. In response, the Federal Reserve opened up an emergency lending facility to give banks a way to borrow against some of their holdings to meet any demands for cash.

If JPMorgan Wins First Republic, OCC Standing By for Key Nod
One question looming over First Republic Bank's emergency auction this weekend is whether giant bidder JPMorgan Chase & Co. would be granted a rare exception to rules forbidding banks that hold more than 10% of US deposits from buying competitors.

An answer could come fast.

Behind the scenes, the Office of the Comptroller of the Currency is standing by to quickly vet a deal and render a verdict if the Federal Deposit Insurance Corp. deems JPMorgan's offer attractive and seeks approval, according to people with knowledge of the matter.

JPMorgan, the nation's largest bank, has the advantage of what Chief Executive Officer Jamie Dimon calls its fortress balance sheet heading into the government-led attempt to sell First Republic. FDIC officials spent Sunday afternoon weighing options after a deadline passed for offers and they're widely expected to announce their decision later in the evening.

Waiting for Aid

A group of 11 banks that deposited $30 billion into First Republic in March "- giving it time to find a private-sector solution "- have proved reluctant to band together on making a joint investment. A few proposals that surfaced in recent days called for a consortium of stronger banks to buy assets from First Republic for more than their market value. But no agreement materialized.

Instead, some stronger firms have been waiting for the government to offer aid or put the bank in receivership, a resolution they view as cleaner "- and potentially ending with a sale of the bank or its pieces at attractive prices.

But receivership is an outcome the FDIC would prefer to avoid, in part because of the prospect it will inflict a multibillion-dollar hit to its own deposit insurance fund. The agency is already planning to impose a special assessment on the industry to cover the cost of SVB and Signature Bank's failures last month.