A one-time “bargain purchase gain” of $2.6 billion, “over $500 million” in net income accretion, lots of other goodies amounting to an IRR of “over 20%.”
By Wolf Richter for WOLF STREET.
So JP Morgan Chase won the “highly competitive bidding process” for the dismembered pieces of First Republic. It will cost the FDIC’s insurance fund about $13 billion, the FDIC said. Even the uninsured depositors were made whole, mainly the 11 banks, including JPM itself, that put in $30 billion on deposit at First Republic back in March to prop it up. Stockholders and preferred stockholders were bailed in and wiped out. We discussed all this here.
But JP Morgan came out this morning and in a presentation to its shareholders bragged about the great deal it got – another instance of a bank and its owners getting rich off yet another government bailout.
This is how JPM will benefit, according to JPM:
- A one-time “bargain purchase gain” of $2.6 billion in 2023.
- “Over $500 million” in annual net income accretion.
- All producing an “IRR” (internal rate of return) of over 20%.
- “Accelerates growth initiatives” in JPM’s U.S. wealth strategy.
- “Increased penetration with U.S. high net worth clients.
- “Adds prime locations in affluent markets” (including San Francisco Bay Area, Los Angeles, Portland, Seattle, New York City, Boston, Jackson (Wyoming)…
- “Accretive to tangible book value per share.”
JPM bought assets it then wrote down to $184.7 billion:
- $172.9 billion in loans at book value, which JPM wrote down 13% to $150.3 billion.
- $29.6 billion in securities, which JPM continues to carry at par.
- $5.0 billion in other assets, which JPM wrote down to $4.8 billion.
In addition, future credit losses on the loans (such as a result of foreclosure) are partially covered by a loss-share agreement. The FDIC will cover 80% of the losses from the single-family residential mortgages for seven years, and 80% of the losses of commercial loans, including commercial real estate (CRE) loans, for five years.
The loan portfolio, now written down to $150.3 billion, consists of single family mortgages, mostly to wealthy clients (60%), multifamily CRE mortgages (13%), business loans (12%), other CRE loans (6%), and other loans.
JPM paid $182.4 billion for it:
- Will pay $10.6 billion to the FDIC.
- Assumed $92.4 billion in deposits (liabilities, amounts owed depositors of First Republic). This includes $30 billion in deposits from 11 banks: $5 billion from JPM itself, which it will eliminate, and $25 billion from 10 other banks, which it will repay.
- Assumed $28 billion in advances the First Republic got from Federal Home Loan Banks (FHLB).
- Assumed other liabilities of $1.4 billion, which it wrote up to $2.3 billion.
- Took out a $50 billion five-year fixed-rate loan from the FDIC.
JPM faces $63.6 billion in near-term cash outflow:
- Pay $10.6 billion to the FDIC as part of the purchase price.
- Repay $25 billion in deposits to the other 10 banks.
- Pay off the $28 billion in FHLB advances.
JPM shares rose 2.2% this morning on the good news, an increase of about $9 billion in market cap, but are still down 17.5% from their peak in October 2021.
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