Regulators seized First Republic (FRC) early on Monday and sold the bulk of the bank's operations to JPMorgan Chase (JPM) in the largest bank failure since the 2008 financial crisis.

JPMorgan, the nation's largest bank, agreed to assume $173 billion in assets, $30 billion in securities and all of First Republic's $92 billion in deposits. The Federal Deposit Insurance Corporation sweetened the deal by agreeing to share losses on certain residential and commercial loans, giving JPMorgan some protection if the assets go bad.

The fall of the $229 billion First Republic makes it the biggest casualty yet of the banking system turmoil that began in March, larger than either Silicon Valley Bank or Signature Bank. Seattle's Washington Mutual, which went under with $307 billion in assets in September 2008, is still the largest bank failure in US history.

Even though JPMorgan agreed to protect all of First Republic's depositors, the seizure does add more of a burden to the FDIC's Deposit Insurance Fund, which is used to absorb losses when banks go down.

The FDIC estimates the First Republic failure will cost it $13 billion, on top of more than $22 billion from the two other failures in March. Taxpayer money does not support the fund; instead the FDIC recoups its costs with an assessment paid for by banks.

As part of the First Republic agreement JPMorgan will make a cash payment of $10.6 billion to the FDIC, and the FDIC will also provide the bank with $50 billion in loans. JPMorgan said it will recognize a one-time, post-tax gain of roughly $2.6 billion. It anticipates $2 billion in post-tax restructuring costs over the next 18 months.

The announcement followed a bidding war among various banks. The FDIC invited several big banks to make bids, including JPMorgan, Bank of America (BAC), and PNC Financial Services Group (PNC), according to people familiar with the matter. Citizens Financial Group (CFG) and US Bancorp (USB) were also reportedly invited.

Some of the same banks came to First Republic's aid in March with $30 billion in uninsured deposits, including $5 billion from JPMorgan. They were reluctant last week to provide a second rescue on their own, fearing First Republic would be seized anyway. JPMorgan will repay the $25 billion to the 10 other banks that provided them.

Dimon as rescuer

The deal to buy First Republic places CEO Jamie Dimon at the center of a national banking crisis for the second time in 15 years and further solidifies his status as a rescuer of weaker institutions.

“Our government invited us and others to step up, and we did,” Dimon said in a statement.

In 2008, Dimon acted twice to help stabilize the financial system. JPMorgan purchased New York investment bank Bear Stearns in March of that year, getting a $29 billion backstop from the federal government, and then Seattle’s Washington Mutual in September of 2008.

In the case of Washington Mutual, JPMorgan purchased its operations after regulators seized the Seattle thrift, just as JPMorgan did Monday with First Republic after it was seized by the California Department of Financial Protection and Innovation.

First Republic's 84 branches will open as JPMorgan offices this morning.

The US government decided to make a critical exception in handing First Republic to JPMorgan. There is an existing rule preventing any bank from making an acquisition providing it with more than 10% of all US deposits, and JPMorgan is already above that cap. Regulators waived those deposit concentration restrictions and blessed the deal anyway.

Rise and fall

First Republic became the subject of a government bidding war after a fight for its survival that began in March when panic about the stability of regional lenders cascaded across the country. It tried to weather the turmoil by borrowing from the Federal Reserve and the Federal Home Loan Bank while also taking in $30 billion in uninsured deposits from 11 of the country's largest banks.

But First Republic's situation turned more serious Monday after it disclosed a loss of more than $100 billion in deposits. The drop was greater than expected and raised new concerns about the company's chances for survival.

Investors punished the stock, sending it down nearly 50% in one day and then nearly 30% on Wednesday. On Thursday it rose nearly 9%, before plunging again Friday by 43%.

First Republic was founded in 1985 by Jim Herbert, and over the decades expanded rapidly as it attracted wealthy customers clustered on either coast by offering them large single-family mortgages at ultra-low rates along with personalized service.

It went from $88 billion in assets at the end of 2017 to more than $200 billion at the end of 2022. It was the nation's 14th-largest lender as of Dec. 31.

Then it, like many banks of its size, struggled to adapt to an aggressive campaign by the Federal Reserve to raise interest rates as a way of slowing inflation.

The hikes lowered the value of the interest-rate sensitive assets on its balance sheet and helped create billions in unrealized losses, a hole that ultimately attracted the attention of investors and depositors following the fall of Silicon Valley Bank.

The bank also had lots of uninsured depositors, making them a greater flight risk during the chaos that unfolded in March.

When customers began pulling more than $100 billion, First Republic had to replace its deposit funding with more expensive borrowing from the Fed and the Federal Home Loan Bank system. Those borrowings, which peaked on March 15 at $138 billion, created another problem by placing more pressure on its profitability.

First Republic developed a turnaround plan. It said Monday while releasing its first-quarter results that it planned to increase its amount of insured deposits, trim its borrowings, decrease its loan balances and reduce its workforce by 20-25%. Borrowings had dropped to $104 billion as of April 21 and the deposit outflows had slowed.

But its disclosure about the amount of deposits lost in March, and the fact that the company decided not to take any questions from analysts, spooked investors.

Short sellers also applied more pressure. Those with bets against First Republic have earned $1.37 billion year to date on a mark-to-market basis, according to S3 Partners. It is the most profitable short position among stocks thus far in 2023, according to S3.

By Friday, First Republic's stock had dropped to $3.50, down 97% for the year. The bank's market value, once $40 billion, was just $640 million.

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