Kroger to merge with Albertsons?

[kr.abs.swy]

Storewanderer, I usually really like what you write on here, but need to clarify some of the issues on banks for you.

When banks fail, there isn't time for public comment. No chance. By the time you get through any kind of public comment, the situation will have gotten worse -- depositors will have left, employees will be nervous and will start leaving, good loan customers will have started refinancing elsewhere, and a bad situation will have gotten worse -- basically the good customers will already have left, so you'll be left with the bad customers, so the final loss will be even higher. Once a decision is taken to close a bank, you have to act quickly to maximize the value of what's left -- and to minimize the risk that the problems spread. The value of the failing bank goes down every day after everyone knows that it's failing.

Generally speaking, the guideline when a bank is sold is to minimize the cost to the FDIC. The reality is that FDIC assessments are going to go up as a result of First Republic and SVB, so the entire industry is going to pay the price for the failures of these banks. Banks have to make money, so those costs are going to get passed on to all of us one way or another (and before someone says that banks should just eat the costs -- don't be naive -- banks have to earn a return for their owners just like every other company). So choosing the option that minimizes losses (Chase in this case) is the right call for most everyone.

The deposits by larger banks into First Republic involved more than three banks. https://www.cnbc.com/2023/03/16/group-o ... s-say.html

I understand that you have it couched as an opinion, but I don't think it's responsible for you to say that "it was decided behind closed doors weeks ago that First Republic was being seized and going to Chase." I really think you need to have some evidence for that -- I haven't seen any. It's obvious that Chase has been engaged in the process, but there were other banks that also were kicking the tires on First Republic.

I've seen some concern on here that this makes Chase a lot bigger. The reality is that this doesn't make Chase even 5% larger (Chase is a $4 tn bank, First Republic was a $200 bn bank last year; what was left was much less). From the perspective of "does this make Chase too big" -- it's mostly a rounding error. Chase is certainly picking up some very attractive lines of business and client relationships, but not at a level that moves the needle all that much. I suppose it's directionally similar to if Kroger bought Stater Bros. or something like that.

Sales of failed banks are not subject to antitrust review. The regulator (in the case of First Republic, that would be the California banking department) closes the bank and appoints the FDIC receiver, and the FDIC is required to sell it to the highest bidder in order to minimize the cost to its insurance fund. The FTC and state governments have no say over it. That is why no one said a word, because short of getting Congress to change the law, there wasn't anything that anyone could do. It's a completely different situation from a retail merger that can be negotiated with the parties.

They have been negotiating for weeks. Recall when 3 larger banks, Chase being one, infused First Republic with $30 billion to try to keep it afloat a number of weeks ago (trying to avoid the scenario that just happened this week- really I think that was a backroom maneuver to keep First Republic from going down at that moment and keep it afloat a while longer to help stabilize the system, but it was decided behind closed doors weeks ago that First Republic was being seized and going to Chase). This was a maneuver to allow what happened to happen without going through any type of comment period where the public at large could provide feedback.

[storewanderer]

I guess where I am confused is what changed between this week and when First Republic got a $30 billion deposit infusion from Chase and the other competitors? They reported a loss of 40% of their deposits during the quarter (ending in March I think) in their earnings report in April... As in why didn't they shut the thing down and arrange for its sale weeks ago when it had more value left instead of having competitors give it a deposit infusion then finally doing this special deal with Chase?

First Republic reported $1.7 billion in net income for 2022 (with a pretty stable spread over the year) so it is fascinating how quickly conditions can change when it comes to banks.

The consumers and others involved with the banks will absolutely pay the price for these bank failures that are covered by the increased FDIC assessments.

You also raise a good point about the exact size of the seized First Republic but that even the entity before it lost a lot of deposits was very small compared to Chase and isn't even moving the share of Chase up 1%. Chase was already larger than it legally ever should have been allowed to get (10% share) but going up another .2% isn't exactly earth shattering and it is big enough to have the resources to alleviate issues/losses on trying to stabilize the customer relationships that are left there which obviously a smaller player would have a more difficult time doing and would be an awful lot of exposure.

[rwsandiego]

Very well-put, @kr.abs.swy. During the years after the 2008 financial crisis when several mid-sized and small banks failed, I was part of the team at my employer supporting bids on failed banks. The FDIC solicited bids and interested banks submitted them. Of the dozen or so bids we submitted; we won two. In both cases, our bids were the ones that cost the FDIC the least. Preference is given to "whole bank" bids, meaning the bidder acquires all assets and liabilities (deposits) of the failed institution. There is typically a loss-sharing agreement in which the acquirer and the FDIC share the amount of any losses taken, such as written off loans. The acquirer and the FDIC also share in any recovery of charged-off assets (ie.g. the borrower pays all or part of the defaulted loans back). These agreements are made because otherwise no buyer would be found. When a winning bidder submits a partial-bank bid, there is typically no loss-sharing agreement because the acquirer typically bids only on deposits and "good" assets (current loans, physical locations, equipment, etc.)

"Whole-bank" bids are preferred because the FDIC does not have to administer and dispose of assets that were not acquired. Loans have to be migrated to a third-party servicer hired by the FDIC so payments are collected, billing notices are generated, interest is accrued, etc. They also have to find an acquirer for these assets, as the FDIC isn't in the business of servicing loans. A former manager of mine worked on failed bank loan servicing during the S&L crisis in the '80s and the financial crisis in the 2000's and 2010's. It was a nightmare.

Of the institutions that have the resources to acquire a bank of this size (Chase, BofA, Wells, Citi, US Bank, PNC, Truist, Huntington, Fifth/Third, Citizen's, BMO-Harris, First-Citizen's, and Flagstar come to mind) only Chase, Fifth/Third, and Citizen's are really the only suitable options. Why do I say this?

• BofA is still fixing its operational and technology issues. If memory serves me correctly, they still haven't converted California to the same system as the rest of the bank. It took them more than five years to convert the piece of their Chicago business acquired from LaSalle. They don't have the bandwidth to take on an acquisition. Additionally, they once owned FRB. Merrill-Lynch acquired FRB in 2006/2007 and was subsequently acquired by BofA. BofA sold FRB to its most current owners in pretty short order

• Wells is busy addressing its many problems. Charlie Scharf is a smart man and wouldn't even attempt to bid.

• Citi is focusing on a small list of metro areas (NYC, Chicago, LA, San Diego, Orange County CA, and San Francisco) and does not want to grow their banking business.

• US Bank is busy with its integration of MUFG Union Bank. Frankly, had MUFG not sold Union Bank, UB would have been a good candidate to acquire FRB. They have similar customer service philosophies toward high net worth customers and MUFG, as the world's second-largest commercial bank behind Chase, has the resources to finance an acquisition. Alas, they cease to exist on 5/31/2023

• PNC's acquisition of BBVA would have to have improved to be called a "train wreck." I can't fathom what a fiasco an FRB migration would look like. They are also cheap and wouldn't submit a bid that was higher than Chase. Reportedly, they did bid, but not on the whole bank.

• Truist is STILL integrating BB&T and SunTrust, which merged several years ago to become Truist. They wouldn't (and reportedly didn't) bid.

• Huntington is focused on its core Midwestern region.

• Citizen's would have been a good choice. Their acquisition and migration of HSBC was pretty seamless. Reportedly, they submitted a partial-bank bid.

• BMO-Harris would also have been a good choice, but they are busy integrating Bank of the West.

• Flagstar (under its previous name of Community Bank of New York) has successfully integrated failed banks, but they are still integrating the legacy Flagstar and legacy CBNY businesses, not to mention having their hands full with Signature Bank

• First-Citizen's just acquired Silicon Valley Bank and is busy with that

The FDIC has published the purchase and assumption agreement on the Failed Bank Information page for FRB. In the coming months, information about all the bids will be published.

As much as I don't want to see Chase get bigger, this is a drop in the bucket for them and a good thing for FRB's customers and the industry as a whole. My guess is there will be plenty of opportunity for other banks to bid on failed banks and/or buy banks that are at risk of failing.

Storewanderer, I usually really like what you write on here, but need to clarify some of the issues on banks for you.

When banks fail, there isn't time for public comment. No chance. By the time you get through any kind of public comment, the situation will have gotten worse -- depositors will have left, employees will be nervous and will start leaving, good loan customers will have started refinancing elsewhere, and a bad situation will have gotten worse -- basically the good customers will already have left, so you'll be left with the bad customers, so the final loss will be even higher. Once a decision is taken to close a bank, you have to act quickly to maximize the value of what's left -- and to minimize the risk that the problems spread. The value of the failing bank goes down every day after everyone knows that it's failing.

Generally speaking, the guideline when a bank is sold is to minimize the cost to the FDIC. The reality is that FDIC assessments are going to go up as a result of First Republic and SVB, so the entire industry is going to pay the price for the failures of these banks. Banks have to make money, so those costs are going to get passed on to all of us one way or another (and before someone says that banks should just eat the costs -- don't be naive -- banks have to earn a return for their owners just like every other company). So choosing the option that minimizes losses (Chase in this case) is the right call for most everyone.

The deposits by larger banks into First Republic involved more than three banks. https://www.cnbc.com/2023/03/16/group-o ... s-say.html

I understand that you have it couched as an opinion, but I don't think it's responsible for you to say that "it was decided behind closed doors weeks ago that First Republic was being seized and going to Chase." I really think you need to have some evidence for that -- I haven't seen any. It's obvious that Chase has been engaged in the process, but there were other banks that also were kicking the tires on First Republic.

I've seen some concern on here that this makes Chase a lot bigger. The reality is that this doesn't make Chase even 5% larger (Chase is a $4 tn bank, First Republic was a $200 bn bank last year; what was left was much less). From the perspective of "does this make Chase too big" -- it's mostly a rounding error. Chase is certainly picking up some very attractive lines of business and client relationships, but not at a level that moves the needle all that much. I suppose it's directionally similar to if Kroger bought Stater Bros. or something like that.

Sales of failed banks are not subject to antitrust review. The regulator (in the case of First Republic, that would be the California banking department) closes the bank and appoints the FDIC receiver, and the FDIC is required to sell it to the highest bidder in order to minimize the cost to its insurance fund. The FTC and state governments have no say over it. That is why no one said a word, because short of getting Congress to change the law, there wasn't anything that anyone could do. It's a completely different situation from a retail merger that can be negotiated with the parties.

They have been negotiating for weeks. Recall when 3 larger banks, Chase being one, infused First Republic with $30 billion to try to keep it afloat a number of weeks ago (trying to avoid the scenario that just happened this week- really I think that was a backroom maneuver to keep First Republic from going down at that moment and keep it afloat a while longer to help stabilize the system, but it was decided behind closed doors weeks ago that First Republic was being seized and going to Chase). This was a maneuver to allow what happened to happen without going through any type of comment period where the public at large could provide feedback.

[Romr123]

RWSandiego---excellent analysis. I had read an article that said PNC was perhaps the most likely to put together a whole-bank package, but as they say, I'm not mad that Chase got FRB. It's been interesting trying as a (relatively) HNWI to interface with these banks in two regions--Great Lakes and Inland Empire. Only Chase and BoA have significant presence in both areas (but I want to avoid them)...PNC with BBVA just entered the IE (but as you say is a trainwreck with BBVA). Comerica has a token presence in the IE. Huntington (which would be my preference--they were incredibly helpful w/a estate issue during early COVID) is sticking to their geography. Fifth Third, Key Bank don't have anything to speak of in the IE. I think I'm going to go with PNC in the next year or so...

[HCal]

I guess where I am confused is what changed between this week and when First Republic got a $30 billion deposit infusion from Chase and the other competitors? They reported a loss of 40% of their deposits during the quarter (ending in March I think) in their earnings report in April... As in why didn't they shut the thing down and arrange for its sale weeks ago when it had more value left instead of having competitors give it a deposit infusion then finally doing this special deal with Chase?

When exactly to shut down a bank is a tricky question. Obviously regulators don't want to shut down a bank that could potentially survive, but if it's not going to survive, then they don't want to wait longer than necessary. So when there is a run on deposits or a drop in share price, they need to quickly decide whether the bank can recover or if it's the start of a death spiral.

My guess is that since other banks/investors were willing to provide a cash infusion, that was seen as a sign that First Republic could still be viable. They probably wanted to wait and see how the market and depositors reacted to the infusion.

As a random side note, typically the government seizes failed banks on a Friday, which gives them the weekend to make arrangements before markets open. However, this isn't always followed if the condition of the bank is deteriorating rapidly. First Republic was closed on a Monday, which indicates that the situation must have been very bad.

[kr.abs.swy]

We've pretty much hijacked the thread ... moderators, I understand if you tell us to knock it off. But it's been an interesting conversation and there has been some good perspective on here.

StoreWanderer, to kind of answer your question: Part of the problem for First Republic is that they had made a bunch of fixed-rate mortgages that were perfectly good loans (from a credit perspective) but that lost value every time interest rates went up. First Republic could hold these on their books at par value as long as they continued to perform (and they were loans at great rates to good borrowers, so they were generally going to perform). But a buyer would have to mark them to market, and based on the changes in rates, they would be worth less. On a mark-to-market basis, First Republic was worthless even though the credit quality of their assets was good. So no bank was going to be willing to buy them -- you would have to pay another bank to take them away. In hypothetical numbers, First Republic's loan portfolio that used to be worth $1 was now worth 85 cents due to the change in rates (even though they would eventually repay First Republic $1 as they matured), but they had 90 cents of liabilities ... so Chase and the FDIC had to figure out how to split the 5 cent deficit while also recognizing that First Republic's client relationships, wealth advisors, etc., also had some amount of intangible value.

There is an interpretation of events that the massive deposits from Chase and the other banks were a last-ditch attempt to save the bank ... it wasn't enough ... and so over the past couple of weeks, the various potential buyers and the FDIC were floating structures that would minimize the hit to the FDIC insurance fund while also making the deal worthwhile for the buyer ... and JPM and the FDIC finally found a solution after a really long weekend when pretty much everyone knew the game was over. There was a lot of creativity in the JPM bid.

Hope this helps a bit.

I guess where I am confused is what changed between this week and when First Republic got a $30 billion deposit infusion from Chase and the other competitors? They reported a loss of 40% of their deposits during the quarter (ending in March I think) in their earnings report in April... As in why didn't they shut the thing down and arrange for its sale weeks ago when it had more value left instead of having competitors give it a deposit infusion then finally doing this special deal with Chase?

First Republic reported $1.7 billion in net income for 2022 (with a pretty stable spread over the year) so it is fascinating how quickly conditions can change when it comes to banks.

The consumers and others involved with the banks will absolutely pay the price for these bank failures that are covered by the increased FDIC assessments.

You also raise a good point about the exact size of the seized First Republic but that even the entity before it lost a lot of deposits was very small compared to Chase and isn't even moving the share of Chase up 1%. Chase was already larger than it legally ever should have been allowed to get (10% share) but going up another .2% isn't exactly earth shattering and it is big enough to have the resources to alleviate issues/losses on trying to stabilize the customer relationships that are left there which obviously a smaller player would have a more difficult time doing and would be an awful lot of exposure.

[jamcool]

In other Kroger news, they are planning to drop all print ads in all regions by the end of this year- which will hurt circulation of newspapers like the Arizona Republic, which has the weekly Fry’s ad-Fry’s seems to be the largest advertiser in Phoenix BTW. Yet AlbertSafeway still has its weekly ad in the Wednesday paper…and mails the same ad on Mondays.

[storewanderer]

We've pretty much hijacked the thread ... moderators, I understand if you tell us to knock it off. But it's been an interesting conversation and there has been some good perspective on here.

StoreWanderer, to kind of answer your question: Part of the problem for First Republic is that they had made a bunch of fixed-rate mortgages that were perfectly good loans (from a credit perspective) but that lost value every time interest rates went up. First Republic could hold these on their books at par value as long as they continued to perform (and they were loans at great rates to good borrowers, so they were generally going to perform). But a buyer would have to mark them to market, and based on the changes in rates, they would be worth less. On a mark-to-market basis, First Republic was worthless even though the credit quality of their assets was good. So no bank was going to be willing to buy them -- you would have to pay another bank to take them away. In hypothetical numbers, First Republic's loan portfolio that used to be worth $1 was now worth 85 cents due to the change in rates (even though they would eventually repay First Republic $1 as they matured), but they had 90 cents of liabilities ... so Chase and the FDIC had to figure out how to split the 5 cent deficit while also recognizing that First Republic's client relationships, wealth advisors, etc., also had some amount of intangible value.

There is an interpretation of events that the massive deposits from Chase and the other banks were a last-ditch attempt to save the bank ... it wasn't enough ... and so over the past couple of weeks, the various potential buyers and the FDIC were floating structures that would minimize the hit to the FDIC insurance fund while also making the deal worthwhile for the buyer ... and JPM and the FDIC finally found a solution after a really long weekend when pretty much everyone knew the game was over. There was a lot of creativity in the JPM bid.

Hope this helps a bit.

Yes, this helps. It is unfortunate First Republic could not remain independent but based on the way the portfolio looked and the situation with the rates it is clear that was not possible. I know they were previously considered a very stable bank, even back 3-4 months ago, I don't think anyone would have predicted this outcome.

[storewanderer]

In other Kroger news, they are planning to drop all print ads in all regions by the end of this year- which will hurt circulation of newspapers like the Arizona Republic, which has the weekly Fry’s ad-Fry’s seems to be the largest advertiser in Phoenix BTW. Yet AlbertSafeway still has its weekly ad in the Wednesday paper…and mails the same ad on Mondays.

Smiths has been sending its ad in the mail in Reno at least since, before Fred Meyer owned them. They made the switch in the mid 90's. Albertsons in Reno also briefly cut off the circular in the mid 90's and went to a full page newspaper ad with about 8-12 very very hot deals (quantity limits applied to every one of the deals), all loss leaders. They did that for a couple years but eventually the full size circular came back. Albertsons at that time also advertised acceptance of competitor coupons and competitors issued a ton of print coupons (especially Safeway). Back in the 90's, Smiths was the only grocery store ad that came in the mail.

Safeway has already dropped the print ad in parts of NorCal, they still send it out here in Reno (mailer) but it is now a single page front/back.

When there are fewer competitors in the market, there is less of a need to advertise. But I'm sure they'll pass the cost savings from cutting advertising expense straight to the consumer, so, it is all good.

[buckguy]

RWSandiego---excellent analysis. I had read an article that said PNC was perhaps the most likely to put together a whole-bank package, but as they say, I'm not mad that Chase got FRB. It's been interesting trying as a (relatively) HNWI to interface with these banks in two regions--Great Lakes and Inland Empire. Only Chase and BoA have significant presence in both areas (but I want to avoid them)...PNC with BBVA just entered the IE (but as you say is a trainwreck with BBVA). Comerica has a token presence in the IE. Huntington (which would be my preference--they were incredibly helpful w/a estate issue during early COVID) is sticking to their geography. Fifth Third, Key Bank don't have anything to speak of in the IE. I think I'm going to go with PNC in the next year or so...

PNC has much better customer service than Wells Fargo or BoA, although not as good as some of the banks they had acquired like National City. PNC bought Riggs Bank, a large but long troubled DC bank even though Mellon Bank had been the most obviously interested buyer---a good example of how these things don't necessary happen they way that bank employees or outside observers expect.

USBank bought an institution where I had some CDs and their customer service is an absolute trainwreck.