JPMorgan Chase & Co. (JPM) Earnings Call Transcript

Good morning, ladies and gentlemen. Welcome to the JPMorgan Chase's conference call. This call is being recorded. Your line will be muted for the duration of the call. We will now go to the live presentation, please standby. At this time, I would like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon; and Chief Financial Officer, Jeremy Barnum. Mr. Barnum, please go ahead.

Thanks, operator. Good morning, everyone. The presentation is available on our website, and please refer to the disclaimer in the back. And thank you for joining. On this morning's call, we will cover the transaction we closed overnight for assets and liabilities of First Republic Bank. I'll keep my prepared remarks relatively brief so we can get to questions right away. Starting on Page 1. We always talk about how our fortress balance sheet and consistent operating model allows us to invest through cycles. The overwhelming majority of these investments are organic initiatives, you will hear details about many of them at our Investor Day later this month. But of course, it applies just as much to inorganic opportunities such as this transaction. The key transaction details on Page 2. We have acquired substantially all of the assets and assumed certain liabilities of First Republic Bank from the FDIC, including approximately $173 billion of loans, $30 billion of securities, $92 billion of deposits, which includes the $30 billion from large U.S. banks and $28 billion of FHLB advances. In addition, we will make a payment of $2.6 billion (sic) [ $10.6 billion ] to the FDIC. We are not assuming First Republic's subordinated debt or preferred stock. The FDIC has provided the traditional 80% loss share with respect to the substantial majority of acquired loans as is typical in a receivership transaction. We will be repaying the $25 billion of deposits from large U.S. banks. The deal also includes a $50 billion 5-year fixed rate funding facility from the FDIC, which helps manage the ALM profile of the transaction as well as the liquidity consumption. In terms of integration, we have received all necessary regulatory approvals and this transaction has closed. First Republic branches and offices will open today and operate normally. First Republic clients can bank as usual and feel confident that their deposits are backed by the strength and security of JPMorgan Chase. I should pause here for a second to address First Republic employees. They are a critical part of First Republic's well-known value proposition of outstanding customer service, and we are committed to treating them with respect, care and transparency. In addition, in connection with any job losses, we would emphasize that in the normal course, JPMorgan Chase hires tens of thousands of people in the United States each and every year, which means that there will be many opportunities for career redeployment. Moving to Page 3, which summarizes the financial impact of the transaction. We expect the transaction will generate a onetime gain at closing of $2.6 billion (sic) [ $10.6 billion ] post tax. Importantly, this does not include total restructuring costs of approximately $2 billion post tax, which we expect to incur over the course of 2023 and 2024. So accounting aside, on a net basis, the gain is quite modest. It's worth noting that the loss sharing agreement reduces the risk weighting on the covered loans to an average of about 25%, which significantly contributes to the capital efficiency of the deal. Touching on a few other points. The transaction is modestly accretive to EPS, and we expect to generate more than $500 million of incremental net income per year, not including the onetime gain or restructuring costs. It is also accretive to tangible book value per share and has an IRR of over 20%. The net of the day 1 gain and the corresponding RWA increase will reduce our CET1 ratio by approximately 40 basis points. Therefore, our pro forma ratio fell comfortably above current requirements and consistent with our first quarter '24 target of 13.5%. Turning to Page 4 for the transaction rationale. As you know, the FDIC invited us along with a number of other banks to participate in a competitive bid process. We did not seek out this deal, but it does have financial benefits as well as enhancing our market positions and accelerating some of our key growth opportunities, particularly in wealth management. We are happy that our financial strength and capabilities enabled us to participate in a process involving multiple bidders that resulted in a rapid and orderly resolution without the use of the systemic risk exceptions. Page 5, you'll see the branch map. The branches that we are acquiring from First Republic are in attractive locations and affluent markets, which is an opportunity to accelerate our wealth strategy. Moving to the due diligence and the integration plan on Page 6. After the data room opened, a large team of professionals representing all business and functional areas performed a comprehensive review of the data led by senior management. In terms of integration, clients will gain access to our leading capabilities and certain First Republic branches will be converted into new JPMorgan wealth centers. Over time, we will be converting First Republic's operations and platforms to Chase and JPMorgan brands and technology platforms. So to wrap up on Page 7. We are glad to have been able to contribute to the rapid and orderly resolution of First Republic Bank. This transaction is attractive for our shareholders, both from a financial perspective and for the opportunities it presents for our franchises, and we look forward to welcoming First Republic clients and employees to JPMorgan Chase. I want to make a correction here. I think I misspoke; the cash payment is $10.6 billion, not $2.6 billion. And with that, we will take any questions. Operator, please open the line.

[Operator Instructions] For the first question, it's coming from the line of Steve Chubak from Wolfe Research.

Congrats on the deal. You noted, Jeremy, $500 million boost to earnings from the acquisition. FRC generated close to $1 billion of earnings annualized in the most recent quarter. Your funding base is admittedly much lower cost. Just trying to understand why the accretion isn't greater. Any help you can provide just to quantify the benefit in terms of funding or interest expense savings versus legacy First Republic.

Yes. Good question, Steve. I would say we're just generally trying to be a bit conservative. Obviously, there are open questions about deposit retention. We are very eager -- we're going to fight hard to keep all the clients. We welcome any clients who left to come back. But this is an uncertain situation and we want to be a bit conservative.

Understood. And maybe just for my follow-up on the -- because you alluded to deposit attrition, what attrition assumptions are you contemplating for First Republic whether it's loans, deposits, advisers as part of the accretion analysis and what expense synergies can be realized just given the strong footprint overlap in terms of what deposit coverage that you alluded to?

So Steve, I'll start with the Wealth advisers question because not surprisingly, we've had a number of advisory teams from First Republic reach out on an unsolicited basis. over the past several weeks, who are interested in joining JPMorgan, which as a starting point, we think is encouraging from a retention perspective. And then furthermore, there are still nearly 150 advisers with the firm. And we believe that our brand, the investment platform, the banking capabilities and our research can make us the firm of choice for many of these advisers. And we think JPMorgan is a great place for advisers to grow their practice and stay for the rest of their careers. We do understand that these are really good teams of high-quality advisers who have choices. So your question about attrition is well stated. And we're really looking forward to discussing everything we have to offer when we meet with them. I think you had a few other questions about what I would call general transaction modeling assumptions about attrition and expense synergies and so on. And what I would say is that generally, we've tried to be conservative, and we'll probably be giving you some more updates on that both at Investor Day and on subsequent earnings calls.

Next, we'll go to the line of Erika Najarian from UBS.

Jeremy, my first question is how much of the loss share agreement is contemplated in the CET1 impact at close? Is there anything else other than the risk-weighted assets going down to 25% in terms of the loss share agreement impact? And assuming that most of the marks are interest rate related, how are you going to share that net interest income, purchase accounting accretion from the FDIC? Or how would that work going forward?

Okay. A lot of technical details in there, Erika, about loss share, which is, to be fair, complicated stuff and can be a little bit hard to understand. So if we need to follow up, we can do it offline. But what I would say broadly is that given the nature of the portfolio and question, I think First Republic is very well known for very good credit discipline. As you point out, these are primarily rate marks. And therefore, the benefit of the loss share really is the sort of enhancement to the RWA risk weighting, which in turn is what makes these otherwise generally not very high-returning assets, in other words, prime mortgages primarily, actually quite attractive from a returns perspective. So the CET1 numbers fully incorporate the expected risk weighting of the RWA. And we'll leave it at that, I think.

Got it. And as Jamie is in the room, I just wanted to ask, I know you mentioned it on the media call, but just in case your investors weren't on that, is this sort of the end of the more acute liquidity issues? In other words, do you expect the resolution of First Republic to sort of be the big signposts that the acute liquidity issues that the industry suffered in March should be mostly behind the industry?

Well, no crystal ball is perfect, but yes, I think the banking system is very stable. You guys have reported already on tons of regional banks, who actually had good results, very modest outflow, a lot of the deposit outflows were because of quantitative tightening. It wasn't because of the people are having runs. There are only so many banks offsides this way. And I think this is -- there may be another smaller one, but this pretty much resolves them all. But this part of the crisis is over. That does not -- down the road, there are rates going way up, real estate, recession, that's a whole different issue. But for now, everyone should just take a deep breath.

Next, we'll go to the line of Gerard Cassidy from RBC Capital Markets.

Jeremy, and maybe Jamie as well. Obviously, you guys have experience in buying failed institutions. Washington Mutual, obviously, was the big one back in '08, '09. And I know this is very different than Washington Mutual. Then, of course, you bought Bear Stearns in a distressed acquisition. Can you share with us what are the risks that you have identified based on your experience in doing those deals that you really have to focus in on to make this deal as good as it looks on paper?

We're leaving behind a lot of things. So you're basically getting a very clean bank in the most clean way you can get it. That does not mean there's no risk. It just means you have a very clean bank, in the cleanest way you can get it, that didn't have those problems. And of course, if we didn't have the mortgage crisis that sitting on top of Bear Stearns and WaMu, et cetera. So we feel pretty good about it. That doesn't mean that something doesn't pop its ugly head up down the road.

Very good. And then on the assumptions with your -- the deposits you're assuming, do you guys get to reprice those deposits from the get-go? Or do you have to wait until -- if there are term deposits, do you have to wait until they mature and then you reprice them?

Well, a bunch of nuances in there, Gerard. So one sort of issue is system integration. Obviously, the -- any term deposits, CDs or anything with a contractual maturity remains that way. So I think the reprice experience will blend over time into the rest of our deposit franchise is what I would say. But it's going to evolve I think, over the next few months.

Next, we'll go to the line of Ebrahim Poonawala from Bank of America.

Jeremy, if I could follow up just in terms of the loan book. So if you can help us, what's going to be the yield of these loans that are coming on when you mark-to-market? I'm just trying to understand the NII contribution tied to the loan and the securities book as we go forward and back into your $500 million net income map?

Yes. Good question, Ebrahim. I guess in simple terms, I would just say, as part of purchase accounting, all this stuff gets fair valued. So you can just kind of look at the screen, mark these things to market and assume the associated yield.

Got it. And I guess one just separate question, given the amount of time you rather spend with the regulators through this whole FRC transaction. It does feel like the industry is in need of consolidation. Would love to hear, Jeremy, your thoughts or Jamie, your comments around, do you think the regulators are prepared for allowing some of the regional banks to consolidate and become a market solution if we get into more stress over the coming months and quarters?

Yes. So I would say -- and we've been very clear, we're hoping for an open bank solution here. We support and want community banks and regional banks. You need big banks too to do the type of business we do around the world for our larger clients. And banks will consolidate. You're going to have all of that taking place. But you should ask the bank regulators what their real view is of consolidation.

Next, we'll go to the line of Mike Mayo from Wells Fargo Securities.

Just one specific question. What is the rate on the 5-year loan from the FDIC?

Mike, I'd rather not disclose the specific rate, it's at market financing is what I would say. Fixed rate.

Okay. That's all part of the $500 million accretion. And the $500 million accretion is immediate accretion and assumes 0 synergies. Is that correct?

So the way we talked about it is sort of run rate $500 million plus offset -- excluding the bargain purchase gain, day 1 as well as the restructuring costs that we expect to incur over the next couple of years. So once all that's worked its way through the income statement, that's when that sort of $500 million plus kicks in.

And Jamie, just I guess for the history books, you were reported in the media that you were kind of the ring leader to help stabilize First Republic, help move the industry past this phase. It didn't play out maybe exactly as planned, but certainly, the loss to the FDIC is less than I think almost anybody had expected, no systemic risk exception, anything like that. So just as you pull the lens back, how do you think about JPMorgan's involvement? How do you think about this resolution? How do you think about kind of the way things played out and the way things should have played out?

Yes. So the first one -- look, I was just the first phone call. All of those banks were deeply involved in trying to figure out what we can do to stem the run and the tide, slow things down for First Republic to give them a chance to seek out an open bank. So we didn't know at the time whether that would be possible. Some thought yes, and some thought no, but we wanted to give them the time. It did in fact calm things down and stop the run, and it did give them time to look at it, they couldn't get there. I think Jeremy has made the point that this is actually a very good outcome for everyone because this is how the system was meant to work, no systemic SRE, systemic, whatever, you call that. It was put up for bid. It was competitive bidding, cheapest cost to the DIF, which the FDIC said will be something north of $13 billion. But remember -- and everyone should remember, that DIF is paid for by the banks. So I think this -- you're never going to have no bank failures. So if this is how these things work in the future, that's a rather good thing. So all in all, okay, and hopefully, our mini bank crisis is over.

And one last quick follow-up. In terms of -- you said this part of the crisis is over. Have you seen that in the deposit flows? Like for a while, you got an influx of deposits. Is that still stable like it was?