A spokesperson for JPMorgan Chase & Co. on Friday has confirmed statements on social media that some customers are seeing duplicate transactions and fees on their checking accounts.
“We’re sorry,” the spokesperson said in an email to MarketWatch. “We’re working to resolve the issue and will automatically reverse any duplicates and adjust any related fees.”
JPMorgan Chase JPM, +2.10%
customers on Twitter and other social-media outlets said payments made through Zelle were showing up twice.
“PSA!!!,” said Twitter user @haunteraIIA. “Anyone waking up to duplicate zelle charges from chase, my call just went through and was told the duplicate charge should be credited within 24hours. they’re having issues with this today. i was on hold for an hour, so just in case anyone else wakes up freaked out lol.”
Zelle is jointly owned by six banks: JPMorgan, Truist Financial Corp. TFC, +3.62%,
Capital One COF, +4.00%,
U.S. Bancorp USB, +4.00%,
PNC Financial Services Group Inc. PNC, +3.21%
and Wells Fargo & Co. WFC, +2.95%.
A spokesperson from Chase clarified that the problems are confined to its customers.
A vote Thursday by the New York City Banking Commission means that KeyBank and Capital One won’t receive municipal deposits from the city for up to two years.
Bloomberg
The New York City Banking Commission voted Thursday to stop depositing city funds at Capital One Bank and KeyBank, saying that the banks failed to meet a requirement that they document their efforts to combat discrimination in lending and employment.
As a result of the 3-0 vote, Capital One and Key won’t receive new municipal deposits from New York City for up to two years. They also won’t be allowed to renew contracts or enter into new agreements with the city during the suspension.
Capital One held $7.2 million in New York City deposits across 108 accounts at the end of April, while KeyBank held $10 million across three accounts, according to a statement from the city’s banking commission following a public hearing Thursday.
The two banks “outright refused” to submit required certifications, which demonstrated a lack of effort to “root out discrimination,” the banking commission’s statement said.
A KeyBank spokesperson said Thursday that the bank provided the required information to the New York City Banking Commission.
“This is a misunderstanding and we look forward to clarifying this issue with the Banking Commission,” the spokesperson said in an email.
The KeyBank spokesperson also denied discrimination in any of the bank’s operations and said that the bank does not currently hold deposits with the City of New York.
A Capital One spokesperson said in an email that the McLean, Virginia-based lender prohibits discrimination against employees and clients, and that its submission to New York City officials was “consistent” with what it submitted in previous years.
In February, New York City tightened its rules for banks that want to receive municipal deposits. The new rules include a requirement that banks provide details about their anti-discriminatory lending and employment practices.
“Banks seeking to do business with New York City must demonstrate that they will be responsible managers of public funds and responsible actors in our communities,” Comptroller Brad Lander, who is a member of the New York City Banking Commission, said in a statement.
“KeyBank and Capital One have atrocious track records of not just under-serving but actively harming the interests of low-wealth communities and people of color,” Jesse Van Tol, president and CEO of the National Community Reinvestment Coalition, said in a press release.
During Thursday’s meeting, Lander also voted against making three other banks — Wells Fargo, PNC Bank and International Finance Bank — eligible to receive the city’s deposits.
Lander accused those three banks of failing to prevent discrimination. But he was not joined by the two other members of the Banking Commission — Deputy Comptroller for Policy Annie Levers and Tonya Jenerette, designee to the commission for Mayor Eric Adams — and the three banks were certified to receive New York City deposits.
A Wells Fargo spokesperson said the San Francisco-based bank values its relationship with New York City. “We are ready to continue serving its needs today and well into the future,” the Wells spokesperson said in an email.
Spokespeople for PNC and International Finance Bank did not respond to requests for comment.
During Thursday’s hearing, the banking commission also voted unanimously to certify 23 other banks to receive city deposits over the next two years.
The hearing was the first time that the city allowed public comments about its designation process. Residents and activists who attended spoke out against banks that were seeking to hold municipal deposits, calling on city officials to instead establish a public bank.
Allowing public comments is a “key first step toward establishing a public bank to hold city deposits and reinvest in communities,” Andy Morrison, associate director of the New Economy Project, said during the hearing.
“We urge the commission to use the full extent of its authority to ensure that public dollars work for the public good,” Morrison said.
Other speakers criticized banks for contributing to climate change, and for providing financing for unfair housing practices.
Alice Hu, senior climate campaigner at New York Communities for Change, pointed to banks’ loans to oil companies, saying that extreme weather events due to climate change impact lower-income New Yorkers “first and worst.”
Barika Williams, executive director at the Association for the Neighborhood & Housing Development, urged city officials to apply further scrutiny in granting deposit designations to banks.
“There must be additional efforts taken to deepen community engagement,” Williams said during the hearing. “[Banks’] ability to hold and profit from New Yorkers’ hard-earned city deposits should be a privilege, not a right, and one they should be required to earn.”
If the U.S. government cannot pay all its bills because of a debt-ceiling impasse, household borrowing costs could soar, the job market could shed millions of jobs and stock-market valuations could shrink, according to forecasts.
The consequences of a prolonged default could be grim, according to Moody’s Analytics. The projected fallout from a brief default is less severe but still enough to push an “already fragile” economy into a mild recession, Moody’s says.
On Wednesday, Treasury Secretary Janet Yellen said it’s “almost certain” that the Treasury will run out of resources in early June. She also said she would provide a new update on the debt-limit deadline “pretty soon.”
For all the uncertainties, financial experts say there are ways individuals can prepare. Start by making sure your deposits are in accounts backed by the Federal Deposit Insurance Corp., and think hard about rate-sensitive purchases like a car or a house.
It’s important for people to have a plan in case there is a default, said Rob Williams, managing director of financial planning, retirement income and wealth management at the Schwab Center for Financial Research, a division of Charles Schwab Corp. SCHW, -1.34%.
“On Wednesday, Treasury Secretary Janet Yellen said it’s ‘almost certain’ that the Treasury will run out of resources in early June.”
“Having a financial plan in place that looks at the long and short term is the best way to prepare for the debt ceiling or any other crisis,” he said.
There is still widespread expectation that Congress will strike a political deal that lifts the federal government’s $31 trillion borrowing limit. President Joe Biden and House Speaker Kevin McCarthy met again on Monday, and more talks are planned.
McCarthy on Wednesday said he “firmly believe[d]” the sides would reach a deal avoiding default.
But the window of time in which to act is getting smaller. It’s “highly likely” that the government will get to the point where it cannot pay all its bills and debt obligations in early June — possibly as early as June 1, Yellen said this week.
Meanwhile, new Federal Reserve figures offer a reminder that Americans’ personal finances over the last year have been under pressure, even as inflation rates retreat slowly.
More than one-third of people in the U.S. (35%) said they were worse off in 2022 than in 2021, according to the Fed’s annual look at economic well-being, released Monday.
That’s the largest percentage of people saying they were worse off since central bank researchers started asking the question nearly a decade ago.
“If there ever was a time for a rainy-day fund, this is it. But it’s not going to be able to help a lot of consumers,” said Rachel Gittleman, financial services outreach manager for the Consumer Federation of America.
For example, Social Security payments and payments to veterans could be delayed in the event of a default, she said. “There will be a lot of consumers who will be in an impossible financial situation,” Gittleman said.
If the government does not raise the debt ceiling, household borrowing costs could soar, the job market could shed millions of jobs and stock-market valuations could shrink, according to forecasts.
Getty Images/iStockphoto
Make sure your money is safe
The FDIC guarantees deposits up to $250,000 on accounts including checking, savings and certificates of deposit. That won’t change in the case of any default, an FDIC spokesperson told MarketWatch.
Deposit-insurance coverage came into hard focus in early spring when Silicon Valley Bank and Signature Bank failed, putting other regional banks under pressure as many customers moved their money into bigger banks.
If economic conditions deteriorate after a default, Gittleman said, people will want assurance their money is safe. If you haven’t taken any of the recent bank failures as a sign to put money in an FDIC-insured account, “this would be the time,” she said.
Start cutting costs quickly
During the early days of the pandemic when there were millions of job losses, many people had to quickly cut back on or delay regular expenses.
If a default puts people in an economic vise, Gittleman said they may need to be ready to shut down nonessential recurring payments and talk with their lenders and credit-card companies. “It’s thinking holistically about all of your financial expectations and where you can possibly either get forbearance or some leniency and ask for some help,” she said.
Credit-card debt reached $986 billion in the first quarter, according to the Federal Reserve Bank of New York, and delinquencies on credit cards and car loans continued to move higher after pandemic lows.
Rate-sensitive purchases
After more than a year of rising interest rates, it’s already a tough time to finance a major purchase. On Tuesday, the 30-year fixed mortgage rate climbed higher than 7% for the third time this year.
Any default lasting at least a month would push the 30-year mortgage up to 8.4% in September and price out hundreds of thousands of buyers, according to Zillow Z, -0.83%.
But that is no reason to speed up a home purchase, said Daniel Milan, founder and managing partner of Cornerstone Financial Services.
“Any default lasting at least a month would push the 30-year mortgage up to 8.4% in September and price out hundreds of thousands of buyers, according to Zillow.”
The Federal Reserve doesn’t set mortgage rates, but its policies influence their direction. The big questions are when the central bank will stop increasing its benchmark rate and when it will begin to reduce the rate.
“The odds of a rate cut outweigh the fear or the rush into buying a home now because of the debt-ceiling crisis,” Milan said.
But the Schwab Center’s Williams noted that trying to time a major financial decision around market and political events is a difficult task.
Financial decisions are a mix of math and emotions, even though many people tend to focus more on the math, he said. That’s why it’s important to figure out a financial plan. Often the best course is to stick to your plan and say, “I’m not going to make major changes in the face of market news,” Williams said.
Tuesday marked the Dow’s third straight trading-day loss. By Wednesday afternoon, the index had shed more than 200 points.
The yields on short-term Treasury debt TMUBMUSD01M, 5.666%
maturing in early June are pushing toward 6% amid continued uncertainty about whether a debt-ceiling resolution can come together fast enough to avoid a government default. Bond prices and yields move in opposite directions, reflecting less investor appetite for debt.
There’s no one rule for preparing an investment portfolio for a debt default, financial advisers said. But older retired investors are in a trickier spot — especially in relation to the prospect of delayed Social Security checks — compared with younger investors who have more time to bounce back from adverse events.
“‘We continue to urge clients to make sure we know about any short-term cash needs so that those funds are not at risk.’”
— Lisa A.K. Kirchenbauer, founder and president of Omega Wealth Management
Cash investments have proven attractive in rocky times. But the risk of a debt default could make a heftier cash allocation even more important for older investors, financial advisers said.
“We continue to urge clients to make sure we know about any short-term cash needs so that those funds are not at risk,” said Lisa A.K. Kirchenbauer, founder and president of Omega Wealth Management.
Kirchenbauer said she’s starting to hear from clients about debt-ceiling concerns. “I am making sure that larger [required minimum distributions] are in cash for 2023 now, before anything bad happens in the markets.”
Required minimum distributions are the minimum yearly amounts that have to be pulled out of qualified retirement accounts once the owner reaches a certain age, currently 73.
Preparing for any default is a mental exercise as much as asset allocation, said Amy Hubble, principal investment adviser with Radix Financial. If there’s been no change in a person’s personal circumstances, like job status, income needs or retirement timeline, they should avoid getting sidetracked by short-term issues, she said.
“There are only a small handful of things we can actually control when investing,” Hubble added. “So my advice is always to focus on that: keeping costs low, staying diversified, managing tax-recognition timing and avoiding stupid emotion-driven actions.”
In a statement Tuesday night, Roc360 said it will buy PacWest’s Civic Financial Services unit for an undisclosed sum. Roc360 will take on the unit’s business operations, but not its previously extended loans or loan-servicing operations.
“In the face of market difficulties, we continue to expand and develop more products and services for real-estate investors,” Roc360 Chief Executive Arvind Raghunathan said in a statement. “We believe that America’s housing stock is severely undersupplied, with more than 50% of homes in deferred maintenance, lacking the modern-day energy efficiencies that our clients install with each loan they take from us. We will continue to prudently expand and invest for long-term solutions to these structural problems.”
New York-based Roc360 is a financial services platform for residential real-estate investors, and includes the brands Roc Capital, Finance of America Commercial, ElmSure, Wimba Title and Tamarisk Appraisals.
On Tuesday, PacWest shares jumped 8% on news of Monday’s loan sale, which also fueled gains among other regional-bank stocks.
PacWest shares have sunk nearly 70% year to date, amid a wider downturn by regional banks following the failures of Silicon Valley Bank, Signature Bank and First Republic Bank.
PacWest Bancorp.’s stock jumped 3% premarket Monday, after the bank announced asset sales that would allow it to focus on its core community banking business.
The regional bank PACW, -1.88%
said it has entered an agreement to sell a portfolio of 74 real estate construction loans with a principal balance of about $2.6 billion to a unit of real-estate investment company Kennedy Wilson Holdings.
“Kennedy Wilson or its designees will also assume all remaining future funding obligations under the acquired loans of approximately $2.7 billion,” PacWest said in a regulatory filing.
The bank has also agreed to sell an additional six real estate construction loans to Kennedy Wilson with a principal balance of about $363 million.
The sale of the loans is subject to Kennedy Wilson’s satisfactory due diligence. The company will place $20 million into a third-party escrow account that will be refundable.
The deal is expected to close in several tranches in the second and third quarters. “There can be no assurance that the transaction will be completed in part or at all,” said the filing.
PacWest shares are down 75% in the year to date, after being caught up in the regional-bank stock rout that followed the collapse of Silicon Valley Bank in March.
The bank said it lost 9.5% of deposits during the week ending May 5 amid market volatility following JPMorgan’s JPM, -0.23%
rescue of First Republic Bank.
The U.K. government said Monday that it had disposed of its shareholding in NatWest Group through an off-market purchase by the company of 469.2 million ordinary shares for a total consideration of 1.26 billion pounds ($1.57 billion).
The government said it sold the shares at 268.4 pence a share and that this was the closing price on Friday. It added that the purchase is expected to settle on Wednesday.
As a result of the transaction the U.K. Treasury’s participation in the company will fall to around 38.6% from a previous 41.4%.
NatWest said it will cancel 336.2 million of the purchased shares and hold the rest in treasury.
The government said that it “will keep other disposal options under active consideration, including by way of accelerated bookbuilds, when market conditions permit.”
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Deutsche Bank AG will pay $75 million to settle a proposed class-action lawsuit claiming it aided Jeffrey Epstein’s sex-trafficking ring, the Wall Street Journal reported Wednesday night.
The suit was filed by lawyers on behalf of an anonymous victim and others who accused the financier, who died by suicide in federal lockup in 2019, of sexual abuse and trafficking. The suit claimed Deutsche Bank DB, +1.92%
ignored red flags and did business with Epstein for five years despite knowing he was using the money from his accounts to further his sex trafficking.
Wells Fargo & Co. has agreed to pay $1 billion to settle a shareholders lawsuit related to its 2016 fake-accounts scandal, according to the Wall Street Journal.
Citing court documents, the Journal reported Monday night that Wells Fargo WFC, +3.41%
settled a class-action suit brought by shareholders who claimed bank executives overstated the bank’s progress at cleaning up its risk-management systems and governance in the wake of the scandal.
In a statement to the Journal, Wells Fargo said: “While we disagree with the allegations in this case, we are pleased to have resolved this matter.”
The settlement, which still needs to be approved by a judge, likely would be the 17th-largest ever for a shareholders’ class action, the Journal reported.
Wells Fargo has paid billions in fines and settlements related to the scandal. In December, the Consumer Financial Protection Bureau ordered Wells Fargo to pay $3.7 billion as a result of alleged widespread mismanagement, and in March, a former Wells Fargo executive accused of overseeing the fake-account scheme pleaded guilty to criminal charges, agreeing to a 16-month prison term and a $17 million fine.
Wells Fargo shares are down 6% year to date and are off 8% over the past 12 months, compared to the S&P 500’s SPX, +0.30%
8% gain in 2023 and 3% rise over the past year.
U.S. stocks recovered some ground on Friday, after four days of losses, as shares of regional banks rebounded and the main indexes received a boost from a strong April jobs and Apple’s better-than-forecast earnings.
What’s happening
On Thursday, the Dow Jones Industrial Average fell 287 points, or 0.86%, to 33,128. It remains on track for a 1.5% weekly drop.
Pedestrians pass in front of an automatic teller machine (ATM) at a First Republic Bank branch in Los Angeles, California, U.S.
Bloomberg | Bloomberg | Getty Images
You might think that small businesses, which are more likely than the average depositor to have accounts above the federal deposit insurance limit of $250,000, might be uneasy about the U.S. banking system. And you would be right.
The past two months have been rough on the U.S. banking system: Three fast-growing regional banks failed in succession when depositors lost confidence in the banks’ stability and yanked their money, culminating in the over $100 billion pulled from First Republic Bank and eventual sale to JPMorgan. JPMorgan CEO Jamie Dimon declared “this part of the crisis is over” after his bank’s deal, but the volatility in regional banking stocks continued on Thursday, with shares of PacWest plunging.
But small business owners have other worries on their minds when it comes to financial relationships and risks. For one, higher interest rates and more difficulty getting access to capital including loans to grow. And at a time of higher prices on many core business inputs, a rush to switch financial institutions as part of risk management, even with the best of intentions, could lead them to overpay in bank account fees and sacrifice valuable, high-touch relationships.
Right now, small business owners are split about evenly between those who express confidence in America’s banking system and those who do not (49% vs. 50%), according to the Q2 CNBC|SurveyMonkey Small Business Survey released on Thursday morning. A majority (62%) say they are confident their business capital is secure. But fewer (53%) say it is easy for them to access the capital needed for their business to operate. With lending expected to tighten further in the wake of the three banks’ failures, and another interest rate hike by the Federal Reserve on Wednesdaypushing business loans firmly into double-digit percentage territory for many borrowers, the worries will persist.
Kirsten Quigley, the CEO of Lunchskins, a Bethesda, Md.-based small business that sells environmentally friendly sandwich bags, said the interest rates on the loans Lunchskins uses for working capital have more than doubled in the past year. “When you’re funding your growth with that kind of debt. It really takes a toll on your cash flow,” said Quigley.
The regional bank she uses, Eagle Bank, isn’t anywhere near the “too big to fail” category.
But she values the personal attention she gets for her firm, which was founded in 2008 and is now in more than 13,000 grocery stores nationwide, including Walmart, Target and Kroger. In March, the CEO of the Bethesda-based Eagle Bank, which has 14 locations, sent a note to its customers assuring them that it has ample reserves. “It’s a physical office and physical person,” Quigley said. “When I call, they call back.”
Small businesses can feel like they’re up against a wall. They don’t have the leverage of a big business to negotiate a special deal on interest rates and fees, or the luxury of time to keep moving their financial services around.
But there are steps small businesses can take to manage their financial services relationships that balance risks, costs and time.
Always keep up on interest rate offers.
Quigley keeps tabs on the interest rates, so she knows that while rates are high, what she gets from her local bank is competitive.
According to the CNBC survey, small business owners are almost evenly split across banking institutions by size. About 40% of small business owners say they do their business banking with a large bank. Almost equal percentages work with regional banks (31%) and community banks (32%).
Safety of deposits is a concern, but not a huge one.
Safety is a concern, and the PacWest headlines are sending more jitters through the market, but overall, national banking system data shows that the deposit safety issue is a shrinking one. In the wake of the three bank failures, some depositors pulled money from smaller and regional banks and put them into larger banks. But the outflows stabilized by the end of April, down only about 1% at the 850 smallest banks, according to the Federal Reserve Board of Governors deposits data.
The CNBC survey finds that the majority of business owners (71%) do not plan to open new accounts in the next year, while 43% say they’re moving money from one account to another about as frequently as they were a year ago.
Bank size does matter to business owners.
That doesn’t mean there’s no distinction being made by owners based on bank size. When asked if it is easy to access necessary capital right now, the percentages go down by large bank client (59%) to regional bank client (56%) to community bank client (50%), according to the survey. And there is a similar small it noticeable trend line on confidence that their business capital is secure: 67% among large bank clients; 66% among regional bank clients; and 60% among community bank clients.
“There is a run to larger banks,” said Eleni Delimpaltadaki Janis, CEO of Equivico, an impact investment firm that provides capital to responsible lenders to increase fair lending to underserved small businesses.
Big banks aren’t necessarily the best choice.
Delimpaltadaki Janis doesn’t think the biggest banks are the best choice for the majority of small businesses. “That’s not who they’re interested in banking,” she said.
In fact, the CNBC survey that among the minority of business owners who do plan to open a new account in the next year, they are almost evenly split between planning to do so with a large (30%), and regional or community bank (28%).
“On the other side, you must protect your money,” Delimpaltadaki Janis said.
She advises small businesses worried about safety to look for a bank that offers an insured cash sweep account. If your balance exceeds the $250,000 federal insurance cap, money will be automatically moved into other institutions, multiplying your cap by two to five times.
It’s worth noting that, in the wake of the three bank failures, the Federal Deposit Insurance Corp. recommended that the federal government expand its insurance program for business accounts.
There’s not much a small business can do about the rising interest rate environment. But you can look for banks that are more likely to approve your loan or an expansion in the first place, or work with you to find the right credit line. Small business owners say emotional support and the time savings of being able to reach people is a under-valued commodity.
“I bank with CommunityAmerica Credit Union,” said Isaac Collins, who owns three Yogurtini franchises in Kansas City, Missouri, by email. “It’s a local credit union here in KC and I LOVE my experience with them. … I have an entire team that I can reach out to serve me in whatever area I want without even going into a local branch. That buys a lot of my time back since I’m so busy!”
Review a bank’s loan approval rates.
If you sever your ties with a smaller bank in the interests of safely, you might make it less likely that you’re approved for a loan. Even though more small businesses apply at a large bank for a loan at a higher rate than any other, small banks and alternative lenders, including online lenders, approve loans at higher rate than large banks, according to the Federal Reserve’s Small Business Credit Survey 2023. Some 82% of loans were approved at small banks, versus 68% at the 25 largest banks. Online lenders and finance companies were in between, at 76% and 71%, respectively.
Be wary of credit card offers as loan replacement.
In a higher interest-rate environment, banks are more likely to try to sell credit card financing to small businesses. There are valuable offers to be had; some bank credit cards offer travel and cash rewards. But in the current rate environment which has seen the Fed raise its benchmark rates from 0% to 5% in a year, credit card debt can come at interest rates topping 25% annually. “Credit cards can be expensive – in a rising interest rate environment they will be especially so,” said Andy Schmidt, vice president and global industry banking lead for CGI, a Montreal-based IT and business consulting firm. “One does need to be careful.”
Seek interest on cash accounts.
Everyone is chasing higher interest rates on accounts right now. That’s not a business owner phenomenon specifically, with individual savers fleeing low-yielding big bank deposit accounts for money market funds and other higher-yielding offers in the 4% to 5% range as long as they can lock up money for longer without a liquidity issue. According to one recent estimate offered on CNBC, as much as $1 trillion could move out of bank deposit accounts yet, not for safety concerns, but as investors and savers seek higher yields.
For business owners who might not have the leverage to lower the interest rate on debt or a working credit line, the flexibility of financial offerings today and the ease of moving money between financial institutions — which the Silicon Valley Bank run proved — is a reason to seek a higher interest rate on the cash you maintain in accounts. As a small business, you might have tens or hundreds of thousands of dollars on average in your accounts; that money can be earning interest of as much as 4%, Schmidt said.
“Our products are undifferentiated, generally speaking. They’re good products, but they’re undifferentiated,” First Republic Founder James Herbert II said in a video for his induction into the Bay Area Business Hall of Fame. “What’s differentiated is the people and their passion, their caring for clients and the service they deliver,”
Jamey Stillings
James Herbert II spent four decades building one of the nation’s 20 largest banks. Then, in the span of just seven and a half weeks, the 78-year-old founder saw it all come crashing down.
First Republic Bank, which Herbert founded in 1985, collapsed on May 1 after being toppled by a deposit run. As the San Francisco bank’s executive chairman, Herbert was involved in desperate efforts to arrange a private-sector solution. But after those efforts failed, he was left to watch as the Federal Deposit Insurance Corp. seized the bank and sold it to JPMorgan Chase.
Herbert is taking the bank’s failure hard, according to his friend Frank Fahrenkopf Jr., a longtime First Republic board member. In recent days, Herbert has been staying with family members in Jackson Hole, Wyoming — sitting in the backyard, looking at the Grand Tetons and trying to forget what went wrong, Fahrenkopf said in an interview.
“The bank was his life. It’s a tragedy for him,” Fahrenkopf said. “I call him every day to make sure he’s doing all right.”
The story of First Republic’s demise has several elements. It’s about the impact of fast-rising interest rates on a large mortgage portfolio that quickly lost value, as well as about the fears sparked by the March 10 failure of Silicon Valley Bank.
But it’s also a deeply personal story. The son of a banker, Herbert built his own large banking franchise before agreeing to its $1.8 billion sale. He later regained control, then held on to the CEO job past age 75, all while collecting pay packages that rivaled the CEOs of larger banks. Finally, approximately a year after he ceded day-to-day control, he watched it all crumble.
Herbert declined to comment for this story. People who know him said that he built First Republic around a distinct business philosophy, which focused on providing exceptional service.
The bank’s branches were known for offering fresh-baked chocolate chip cookies and wood-handled umbrellas to its well-to-do clients. During the pandemic, when some big banks raised their hourly minimum wages above $20, First Republic hit $30 per hour.
“The bank reflected Jim’s view that customer service could play a central role in clients’ lives,” said Tim Coffey, an analyst at Janney Montgomery Scott. “And it worked until interest rates went parabolic.”
‘Exceptional service’
Herbert’s father, also named James, was a longtime banker in Ohio who eventually served as president of the Ohio Bankers Association. When his son graduated from college in the mid-1960s, he offered some career advice: Don’t become a banker.
The younger Herbert had other ideas, though. One of his earliest jobs was at Chase Manhattan Bank, a predecessor to the industry behemoth that swooped in this week to purchase First Republic.
During the early 1980s, Herbert and a partner, Roger Walther, bought two California-based thrifts and formed a holding company called San Francisco Bancorp. After selling that firm in 1984, they opened First Republic Thrift & Loan the following year.
First Republic took savings deposits and offered jumbo mortgages, largely to wealthy consumers. In 1986, when First Republic held an initial public offering, it had a total enterprise value of $23.3 million. But the bank was well positioned for growth.
There were lots of affluent households in the Bay Area, where First Republic was based, as the region rode the tech revolution. First Republic later expanded to other well-off coastal cities, including New York, Boston, Los Angeles, San Diego and Palm Beach, Florida, and grew its wealth management business.
“The real story of First Republic is exceptional service — exceptional service delivered by exceptional people, all the time, every day, to every client,” Herbert said in a video for his induction into the Bay Area Business Hall of Fame.
“We have products, but all banks have products. Our products are undifferentiated, generally speaking. They’re good products, but they’re undifferentiated. What’s differentiated is the people and their passion, their caring for clients and the service they deliver,” he added.
During the mortgage boom of the early 2000s, Herbert got an offer to sell First Republic to Merrill Lynch. He was initially reluctant. But the deal he struck with Merrill in 2007 allowed the bank to keep its brand, its management team, its offices, its employees and substantial authority to make decisions.
First Republic grew its assets from $22 billion in 2010 to $212.6 billion at the end of last year.
Eric Thayer/Bloomberg
Then came the 2008 financial crisis. Merrill Lynch, on the verge of failing, was acquired by Bank of America, which had a competing private bank and wasn’t a good fit for First Republic. In 2009, Herbert led a group that raised $2 billion to buy back the bank. And the following year, in late December, First Republic went public for the second time. The spinoff was lucrative for Herbert, whose compensation in 2010 totaled $36.3 million, most of it from stock option awards.
Growth continued at a rapid and steady pace, as a sustained period of low interest rates drove heavy mortgage volumes. First Republic went from $22 billion of assets three months prior to its second IPO to $55 billion of assets in the fall of 2015. And Herbert benefited handsomely.
His annual compensation fluctuated, but there were years where it rivaled the sums paid to the CEOs of very large banks. In 2012, Herbert’s total compensation was $15.2 million, mostly in stock awards.
And in 2021, Herbert was paid $17.8 million, again mostly in stock awards, according to the bank’s disclosures. Among U.S. commercial banks, only the CEOs of JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and PNC Financial Services Group collected more money that year.
As of March 2022, Herbert owned more than 800,000 shares of the company’s common stock, representing 0.4% of the total shares available, according to the bank’s proxy statement last year.
‘A silver platter’
During his final decade at the helm of First Republic, Herbert had a good deal of stature in the industry. In 2018, the Federal Reserve Bank of San Francisco appointed him to the Federal Advisory Council, which typically meets four times per year with the Fed’s Board of Governors to dismiss economic and banking issues.
At First Republic, questions were arising about who would succeed Herbert. Initially, the bank’s only CEO in its nearly 40 years of existence was set to remain chairman and chief executive through 2017, and to stick around as executive chairman through 2021.
But that deal was reworked, and then it was reworked at least three more times. In 2021, Herbert, then 77, was set to remain CEO through the end of last year, and Hafize Gaye Erkan, the bank’s then-president, was named co-CEO, setting her up as Herbert’s heir apparent.
But in an unexpected move, Erkan resigned from her post on Dec. 31, 2021, just two weeks after the company announced that Herbert would soon begin a medical leave of absence to address a coronary health issue. In March 2022, then-Chief Financial Officer Michael Roffler, who had been appointed interim CEO, was named to the post permanently and joined the bank’s board of directors.
Herbert, meanwhile, became the executive chairman, a role that allowed him to stay active “in the development of the bank’s overall strategy, preservation of its unique culture and maintenance of key relationships with clients and shareholders,” according to the bank’s 2022 proxy statement.
First Republic’s loan growth accelerated over the last three years, with total loans increasing by 48% between the end of 2020 and the end of 2022.
The bank was his life. It’s a tragedy for him.
Frank Fahrenkopf Jr., a longtime First Republic board member, on the bank’s founder, James Herbert II
Last year was an especially good year. The bank reported record-setting loan growth, loan-origination volume, revenue and earnings per share. Growth continued even as mortgage lending volumes fell industrywide, with the bank’s residential real estate book swelling by 28% between the first quarter and the fourth quarter.
At the end of 2022, First Republic’s assets were $212.6 billion — a nearly tenfold increase in the 12 years since Herbert bought back the bank.
In a January 2023 call with analysts, Herbert said the industry’s slowdown in mortgage lending presented “an extraordinary opportunity” for First Republic to take market share.
“Moments like this are very special,” Herbert said. “The volume of demand is down, we all know that … but the disruption that’s going on in the mortgage market … is just handing us [opportunity] on a silver platter.”
First Republic’s focus on mortgage lending, including its push for additional growth as the Federal Reserve began raising interest rates, ultimately contributed to its undoing, said David Chiaverini, a banking analyst at Wedbush Securities.
“The way that they were winning against the competition is by undercutting on price,” Chiaverini said this week in an interview. “They were offering what were essentially long-duration jumbo mortgages at an attractively low rate, which is great for customers and leads to fast growth.”
As other lenders scaled back their mortgage originations amid rising interest rates, First Republic faced questions about its ability to attract deposits while continuing to extend new loans. Herbert argued that First Republic’s reputation as an experienced and high-value lender would enable it to weather a potential downturn.
“Most of our business is with existing clients and their direct referrals,” he told an analyst during First Republic’s July 2022 earnings call. “When their friends are having trouble getting something done, they say, ‘You ought to try First Republic.'”
The bank’s push-forward mentality led to a liquidity crunch, Chiaverini said. After rates rose, the bank faced the prospect of having to sell mortgages at below par value to raise capital, since the market value of those loans had fallen, he said.
“That’s why it ended up failing. No investor wanted to recapitalize First Republic, just like they didn’t want to recapitalize Silicon Valley Bank,” Chiaverini said. “They viewed it as throwing good money after bad, given how deep of a hole their balance sheet was in.”
‘Demise can happen very quickly’
During the first three months of this year, Herbert was among a handful of First Republic executives who sold millions of dollars of First Republic stock, according to regulatory filings. The shares were priced on average in the $130-per-share range, and Herbert’s stock sales totaled $4.5 million, The Wall Street Journal reported in March.
The sales were in line with Herbert’s annual estate planning and philanthropic donations, a spokesperson for Herbert told The Wall Street Journal.
And they represented about 5% of Herbert’s holdings, according to a source familiar with the situation. “It’s important that people have that perspective,” this source said. “He held onto a vast majority of his shares.”
When Silicon Valley Bank failed, First Republic was particularly vulnerable to the fallout. Both banks were based in the Bay Area, and both had upscale clienteles.
“I’ve spent a lot of nights not sleeping thinking about this: What could we have done to have avoided this?” said Fahrenkopf, the longtime First Republic board member. “And I came to the conclusion: If our bank was headquartered in Reno, Nevada, rather than San Francisco, so close to Silicon Valley Bank, this probably wouldn’t have happened.”
One First Republic customer who withdrew funds from a branch in San Francisco on Saturday, March 11 — one day after Silicon Valley Bank was seized by the government — described an anxious scene, with many customers still waiting to be served at 2 p.m., after the branch was scheduled to close.
A First Republic employee climbed onto a file cabinet to tell the assembled customers that their requests would be fulfilled, but also expressed uncertainty about whether the bank would survive the weekend, according to the customer, who spoke on condition of anonymity.
The next day, another regional bank, Signature Bank in New York City, also failed, as fear spread.
By the end of March, First Republic’s deposits, which totaled $176.4 billion at the end of last year, had fallen by more than $100 billion, not counting the $30 billion that 11 big banks deposited at the bank on March 16 in an effort to stabilize the situation.
“Certainly the outflow of $100 billion in a three-week period is a major factor, and … before Silicon Valley, not something that anyone had really anticipated,” said the source who spoke about Herbert’s stock sales.
During First Republic’s final weeks, company executives mounted an all-hands-on-deck effort to find a private-sector solution that would keep the bank out of government receivership — and avoid wiping out shareholders.
As executive chairman, Herbert was no longer required to be involved in the bank’s day-to-day operations. But the crisis created an intense level of pressure that was hard for him to ignore, and his involvement increased. Still, the efforts failed, and First Republic became the second largest bank failure in U.S. history.
The level of complexity involved made a private-sector solution hard to achieve, said the source familiar with the bank’s situation.
The demise of three regional banks in the last two months is a reminder of how rapidly bank runs can happen. “As soon as an institution loses the confidence of its customers, demise can happen very quickly,” said Coffey of Janney Montgomery Scott.
But Fahrenkopf said that he’s advised Herbert not to dwell on the past. “It doesn’t do any good to look behind,” Fahrenkopf said. “We can look forward. Don’t fret too much.”
PacWest Bancorp PACW shares tumbled more than 50% in after-hours trading Wednesday, taking other bank stocks with it after a report that the company’s executives were weighing a possible sale.
The report, from Bloomberg News, adds to the concerns over the financial stability of regional banks, following the collapse in March of Silicon Valley Bank and Signature Bank, and the sale of First Republic Bank to JPMorgan Chase & Co. JPM this week. PacWest’s shares have been diving this week in the wake of First Republic’s collapse….
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A quick rise in interest rates, a large amount of uninsured deposits and a first-quarter update that revealed further weaknesses in its business all contributed to the demise of First Republic Bank, now the second-largest bank blowup since Washington Mutual.
As of Dec. 31, First Republic FRC was ranked as the 14th largest bank in the U.S. by the Federal Reserve with consolidated assets of nearly $213 billion. Washington Mutual had $307 billion of assets as the largest bank failure in U.S. history during the global financial…
JPMorgan Chase has won the auction to take over fallen First Republic Bank, the Federal Deposit Insurance Corp. announced early Monday morning.
The deal will see America’s largest bank JPM assume all the deposits and “substantially all the assets” of First Republic FRC, which became the fourth U.S. bank to fail this year.
Signature Bank’s collapse served as a painful reminder for a community bank in St. Petersburg, Florida, that no deal is done until the cash is in the seller’s hand.
President Thomas Zernick, who is set to become CEO of BayFirst early next year, said that the company is looking to make more commercial and consumer loans in the Tampa area to decrease its reliance on gain-on-sale income.
The $1 billion-asset BayFirst Financial reported Thursday that its first-quarter net income dipped 43% on a linked-quarter basis. The decline was due in large part to a $60 million loan sale that was “canceled without cause” when regulators closed New York-based Signature, BayFirst CEO Anthony Leo said Friday on a conference call with analysts.
BayFirst made a company-record $121 million in government-guaranteed loans during the three months ended March 31 —including $61 million in March — selling much of that production to Signature before the Federal Deposit Insurance Corp. placed it in receivership, Leo said.
Though BayFirst, the holding company for BayFirst National Bank, quickly found a buyer for the $60 million in Small Business Administration 7(a) loans it failed to sell to Signature, market conditions had turned markedly less favorable. That resulted in $1.6 million in reduced income.
BayFirst, which has emerged as one of the nation’s most prolific SBA 7(a) lenders in recent years, is in the process of filing a breach-of-contract claim against the FDIC, according to Leo. “We have put the FDIC as receiver on notice of our claim for the differential in the gain,” Leo said. “While we cannot assess the likelihood of our claim being fully honored, we have received no indication to doubt that it will be.”
The FDIC declined to comment. As things stand, the agency expects Signature’s failure to cost the Deposit Insurance Fund $2.5 billion.
The loss of Signature as a buyer for its 7(a) loans should have little impact on BayFirst’s loan-sale prospects going forward, Chief Financial Officer Robin Oliver said on the conference call.
“We do bid our SBA-guaranteed loans to seven or eight investors each quarter, so there are multiple other players in the market we already have relationships with and sell to on a regular basis.”
In the first quarter, BayFirst gained $4.4 million on the sale of its government-guaranteed loans, down from $5.8 million during the quarter ending Dec. 31.
BayFirst, which has originated more than $252 million in 7(a) loans since Oct. 1, the start of the agency’s fiscal year, has no plans to scale back its SBA lending operation in the wake of the Signature loan-sale disruption. At the same time, the company intends to fund more commercial and consumer loans in the Tampa-area marketplace, boosting net interest income and lessening reliance on gain-on-sale, Leo said.
President Thomas Zernick said BayFirst originated $49 million of local consumer, mortgage and conventional business loans in the first quarter. BayFirst reported $933 million in deposits on March 31, up 17% since the end of 2022. Zernick isset to become CEO when Leo retires early next year.
BayFirst opened its ninth branch, in Tampa, in March and plans to open a tenth, in Sarasota, in June. “We are clearly in a growth mode,” Leo said.
For now, BayFirst has no plans to add branches outside of the fast-growing Tampa region, which has surpassed 4 million in population, according to Leo. “Frankly, we’ve just scratched the surface there,” he said. “We do not believe it would make sense for us to move outside the Tampa region, at least on an organic basis. …We’ve got a lot of work to do here, and we’ve got a lot of opportunity here.”
But Leo did not rule out a “strategic transaction” or a “significant lift-out” of a banking team to expand BayView’s presence in an adjacent or nearby market.
