In the first eight months following the acquisition of First Republic by 'fortress' JPMorgan, the failing bank generated $4.1 billion for the megabank

When JPMorgan Chase acquired failing First Republic in May, CEO Jamie Dimon said the purchase “modestly benefits” the company overall, expecting the acquisition to generate more than $500 million of incremental net income per year.

It did eight times that number in as many months.

First Republic contributed $4.1 billion to JPMorgan's profits, giving the bank a 9% end-of-year boost to hit a record $50 billion net income last year. The acquisition shielded JPMorgan from even steeper losses in net income during its fourth quarter.

Despite paying $10.6 billion for First Republic, in its first earnings report following the acquisition, JPMorgan estimated a bargain purchase gain of $2.7 billion — meaning the investment bank saw a multi-billion-dollar boost from the below-market price it paid for First Republic. That quarter alone, net income attributable to First Republic was $2.4 billion.

So how did JPMorgan turn a failing bank into a boon to its balance sheet? For starters, JPMorgan wooed most of First Republic's clients to stay — not by marketing but by its sheer size and stability. JPMorgan retained 90% of First Republic’s clients following the acquisition, Marianne Lake, the co-CEO of the bank’s consumer and community-banking division, said at the Goldman Sachs U.S. Financial Services Conference in early December.

When JPMorgan, the largest bank by assets in the U.S., with $3.4 trillion in assets under management, scooped up First Republic, it easily rebuilt depositor confidence, Columbia Business School professor Kairong Xiao told The Messenger.

“Everyone understands it’s too big to fail,” Xiao said. “There's no way that they can fail, and they are well-managed, so they’re not taking tons of risks. If you acquire this small, regional bank, and everyone understands there’s no way that First Republic bank as a kind of division of JPMorgan Chase will fail, you will see the client retention rates are super high.”

JPMorgan’s “fortress balance sheet," a term coined by Dimon, describes the bank’s essentially shockproof balance sheet cushioned with liquidity. That allows it to weather even severe problems, like the acquisition of a distressed institution, Larry White, professor of economics at New York University’s Stern School of Business, told The Messenger.

“Size, in this industry, clearly matters,” White said.

Under Dimon’s leadership, the bank has seen limited scandals, unlike some of its peers, which has given it a reputational advantage as a stable figure in the financial world, he said. That induces confidence — and the ability to absorb troubled institutions with minimal negative impacts.

With most clients staying put, JPMorgan drove its deposit margins up, even though deposits had dropped 6% in the quarter of the acquisition.

“They’re probably paying a whole lot less to depositors now that the deposits are part of Chase, which is a much safer, comfortable place to be, than First Republic had to pay to its depositors,” White said. That was probably particularly true for First Republic's uninsured depositors, he said.

In the lead-up to its collapse, San Francisco-based First Republic had a sound and profitable business model. However, failing regional peers Silicon Valley Bank and Signature Bank in March 2023, stirred up fears of a banking crisis that made it "guilty by association," according to Xiao.

One month before its collapse, 27% of First Republic’s total deposits were uninsured, excluding the $30 billion lifeline of uninsured deposits it received from 11 of the country’s largest banks in March. Uninsured deposits are those worth more than $250,000; losses beyond that point are not covered by the Federal Deposit Insurance Corporation. The 14th-largest U.S. bank at the time, First Republic had also invested almost half of its assets in low-interest securities, and was hit especially hard by the Federal Reserve interest rate hikes at the beginning of 2023. This set off a large-scale, rapid bank run as many clients began cashing out in search of better returns.

The successive failures gave depositors and regulators the jitters over the potential spillover if the collapses continued. After JPMorgan scooped up First Republic, Dimon urged people to take a deep breath: “This part of the crisis is over,” he said in a call with analysts immediately following the acquisition.

First Republic was the second-largest U.S. bank by assets to ever fail after Washington Mutual, which JPMorgan also bought from federal regulators for $1.9 billion in September 2008. At the time of its collapse, WaMu (as it was known) had $188 billion in deposits, 43,000 employees, and 2,300 banking branches across 15 states. It also helped JPMorgan expand its western U.S. footprint in markets WaMu had previously dominated, including Los Angeles, Portland and Seattle.

Checking accounts at JPMorgan more than doubled following its acquisition of WaMu, totaling 24.5 million at the end of 2008, but its fiscal year net income was slashed from $5.6 billion to $702 million that year — in large part due to the wider recession that depressed profits across the board and the costs of the acquisitions.

At the end of the following year, with the completed integration of its 2008 mergers and the subsided financial crisis, JPMorgan doubled its reported net income.

JPMorgan declined to a request for comment from The Messenger, beyond what is available in public disclosures and representations. CFO Jeremy Barnum, during a fourth-quarter earnings call with analysts, noted that First Republic produces a “modest” increase in expenses but will have a “significantly lower 2024 exit run rate” thanks to the bank’s smooth business integration.

Consumer and community-banking chief Lake, who oversaw much of the integration of First Republic, said the process was not only on track but was poised to “outperform the deal model.”

Rocio Fabbro

How ‘Too Big to Fail’ Turned Into Billions in Profits for JPMorgan Chase