With FRC Auction Results Imminent, Handicapping The Reported Bidders For First Republic

By Todd Baker, Senior Fellow at the Richman Center for Business, Law & Public Policy at Columbia and the Managing Principal of Broadmoor Consulting LLC; first published on Medium

According to the collective wisdom of The Wall Street Journal, Bloomberg, and Reuters, there are five banks that have been asked to submit bids to the FDIC in this weekend’s rumored receivership sale of First Republic Bank. All can “afford” the bank with sufficient FDIC assistance, although a private deal is effectively impossible outside of a collective bid by the banks that provided $30 billion in emergency deposits last month.

Unlike most bank deals, this one won’t be fueled by cost cutting and branch closings. The key for bidders is finding a way to hold on to First Republic’s rainmakers and customer service model, which are the reason it has been so successful in acquiring and retaining wealthy customers. That means hitting the ground running with retention packages and active outreach to front line employees.

JP Morgan

It’s good to be the King, as Mel Brooks once said. JP Morgan has a large wealth management business and a deep presence in First Republic’s key California and New York markets. It has high customer satisfaction ratings in California tied in part to its acquisition of Washington Mutual in 2008. It also worked hard to help First Republic when the initial run happened and tried its best to find a private solution to the bank’s problems, so there should be some employee goodwill should JP Morgan be the winner. While generally prohibited from buying more deposits due to the 10% national deposit cap, it can do a deal like this with the FDIC. Can it integrate First Republic’s quirky culture and customer focus into its disciplined private banking behemoth? We stand a good chance of finding out as it is probably the favorite going into the auction.

Bank of America

It would be deeply ironic if Bank of America turned out to be the successful bidder. It owned First Republic Bank as a result of buying Merrill Lynch and sold it in 2010 because it didn’t fit in well with the bank’s own wealth management plans. Nevertheless, times change and the attractiveness of First Republic’s customer base is real for Bank of America asset management and Merrill Lynch business lines. One problem…Bank of America’s California customer satisfaction ratings are much lower than competitors’ (other than Wells Fargo) and many First Republic California customers came to the bank initially because they were dissatisfied with Bank of America.

PNC Bank

In many ways, this is the best fit for First Republic. PNC has relatively few operations in the Western US and only a small presence in New York, where First Republic has also been successful. That means fewer layoffs in a deal. Like many of the other potential bidders, it has made wealth management a focus and punches above its weight in that field. It will be most likely to value the existing First Republic high-touch business model and keep the revenue producers and other front line staff happy. An added bonus is geographic diversification coming into a credit downturn. I’d bet on PNC to either win or place in the auction.

US Bank

It seems unlikely for US Bank to be an active bidder because it is currently integrating its own acquisition of California-based Union Bank which closed at the end of last year. It has also faced criticism about its relatively low capital levels which might make a large transaction challenging. Finally, First Republic’s huge California single family jumbo loan portfolio might be too much to handle given the size of a similar loan portfolio acquired by US Bank in the Union Bank deal.

Citizens Bank

Citizens would be a real dark horse winner, but like PNC it has no geographic overlap to speak of so it would be likely to keep all the front line staff and a significant part of the back office functions. It recently acquired Investors Bancorp to strengthen its New York to Philadelphia presence, as well as HSBC’s East Coast branches and national online deposit business. The introduction of First Republic’s customer-service model into those geographies could be a winner, as could increasing the geographic diversity of Citizens’ loan portfolio with addition of California.