How Citizens turned First Republic defeat into private banking victory

For hours it seemed like nothing was happening. It was the evening of Sunday April 30, 2023, and over at City Oyster in Delray Beach, on the Florida coast, Bruce Van Saun was trying to have one last dinner with friends before closing up his holiday house for the season.

But he was distracted. As chairman and chief executive of Citizens Financial Group, he was also bidding for a failing institution that the Federal Deposit Insurance Corporation (FDIC) was hawking around – First Republic Bank, a San Francisco-based commercial and private banking firm with over $200 billion in assets.

A number of banks had submitted offers earlier that day, and Citizens was among those given the chance to fine-tune bids before a 7pm deadline.

The final touches done, Van Saun headed out to dinner. But his cell phone nagged at him as he ate, teasing him with the possibility of good news that could come at any moment. The call never came. By the time the dinner was winding down, he knew things were not going his way.

Over at First Republic, no one had been expecting to get much sleep. Like pretty much everyone else she knew at the firm, Susan McDermott deTray, the bank’s deputy chief credit officer and head of credit administration, was waiting up all night to find out who she would be working for on Monday morning.

Getting here had been agonising. As First Republic’s prospects steadily worsened over the previous week, only a tiny group of senior managers had been involved in trying to secure its future. The rest of its roughly 7,200 staff were busy trying to keep the show on the road – and keep its clients from jumping ship.

That wasn’t easy: between the end of 2022 and March 31, 2023, First Republic customers pulled out more than 80% of its uninsured deposits, about $100 billion. Analysts estimated the bank’s unrealised losses at more than $13 billion, and it was also weighed down by a big loan book of single-family residential mortgage loans that were now earning far too little and would be difficult to sell.

First Republic specialized in serving – and lending to – high net-worth individuals. For some time, the bank’s clients had been refinancing their real-estate borrowings at lower rates for longer tenors. Often the bank had used such lending as a way to hook clients, who could then be targeted with other products.

From one perspective, that approach had looked sound enough: credit quality wasn’t the problem – in fact it was generally strong. But with policy rates hiking through 2022, the bank’s asset-liability mismatches would get worse and worse. Its loans were now at the wrong rates, and, like many other banks, it had a portfolio of high-quality debt securities that were also now way out of line with prevailing rates.

That in itself was not a problem, of course, unless they needed to be sold. Increasingly, investors worried that they might.

After the collapse of Silicon Valley Bank (SVB) in March, largely because of solvency fears after that bank had sold parts of its own portfolios at a loss, investors and depositors elsewhere in the regional bank sector were panicking. As analysts zeroed in on how quickly capital would evaporate if other banks’ losses should have to be crystallized, it was only a matter of time before the FDIC would have to take matters into its own hands and conduct a weekend auction for First Republic.

For those of the bank’s staff outside the inner sanctum, it had been a lurching ride. DeTray recalls the rapidly shifting climate all too well, and no better than when news of the collapse of SVB had begun to filter through at lunchtime on Friday, March 10, two days after the closure of the smaller Silvergate Capital.

“I remember being in a sales conference and having the tone change extremely swiftly from: ‘We need to buckle down and it’s a difficult environment, and we need to stay the course and serve our clients,’ to then hearing the news of SVB,” she tells Euromoney.

To deTray and her colleagues, the SVB news came as a shock despite the widespread awareness by then of the risks presented by poor balance-sheet management.

“There had definitely been mistakes, but having a good old-fashioned bank run was not something anybody thought was on the horizon at that point in time,” she says.

And although in the immediate aftermath, First Republic would be one of those likely to benefit as SVB deposits sought a new home, that was cold comfort – and everyone knew it.

“I don’t think there was a person in the room who felt that that type of event at one of our competitors was a good thing for regional banking,” adds deTray.

As it turned out, First Republic probably kept going a lot longer than many thought possible, under extreme circumstances and with its share price gyrating wildly. But despite a government-orchestrated $30 billion injection of uninsured deposits into First Republic on March 16 by a consortium of 11 US banks, an awful first-quarter earnings report on April 24 would kick off a seven-day countdown to doom for the firm.

“At the beginning of March, I don’t think anybody was expecting what would eventually happen, at least not at First Republic,” says deTray. “Frankly, the reason that the bank was able to hang on as long as it did was because of the absolute passion for the business and for the clients that the relationship-management teams had.”

It was a frantic time, with near 24-hour workdays.

“At any other bank it might have been a case of picking up your bag and moving onto the next institution,” says deTray. “But this was about trying to stay together, trying to honour the service model, trying to keep what was a unique way of banking alive.”

That service model was exactly why Citizens had had its eye on First Republic for some time. Van Saun knew that the next logical step in his transformation of the bank since achieving complete independence from former owner RBS in 2015 was to establish a firm foothold in private banking and wealth management.

He wanted a business that could sit alongside its reshaped consumer bank and increasingly confident commercial bank, and which could take advantage of the opportunities that an integrated offering could provide.

About five years earlier he had bought New York-based Clarfeld Financial Advisors and rolled the existing wealth- management unit, Citizens Bank Private Wealth Management, into it. But to move to the next level, Citizens needed to scale up. An opportunistic acquisition – provided it could bring the right cultural fit – could tick many boxes at once.

And so, when Citizens learned late that Sunday night that it was out of the running, Van Saun would doubtless have been sorely disappointed. In the early hours of the morning the news crossed the wires that JPMorgan Chase – unsurprisingly deemed the simplest option for the regulators – would be the new owner of First Republic.

How would the tottering firm’s army of private bankers react?

“Dismay,” says deTray.

DeTray had been at First Republic for about eight years. Her resumé was quite the list. After a couple of years in research at a consulting firm, her banking career started, ironically, at Chase in New York before it was taken over by JPMorgan, in oil and gas investment banking.

Pretty soon she pivoted into the private bank, and was looking after financial sponsors there when JPMorgan bought Chase in December 2000. It was a febrile time as a banker in New York, with people and teams constantly on the move, institutional loyalties shifting with the weather.

Private banking is always a little like that – a banker’s principal relationship is with her clients, then her team, and only then the institution whose infrastructure she happens to be using.

Nevertheless, the nature of that institution still matters a lot, particularly when faced with the culture challenge of an acquisition. As well as Chase, deTray had experience at plenty of other firms that would go on to merge or be taken over.

She worked at Bank of New York before it was Bank of New York Mellon, then US Trust before and after it was bought by Bank of America from Charles Schwab in 2007, and then Wachovia before it was bought by Wells Fargo in the teeth of the 2008 financial crisis.

It was at Wells that she made the switch from East Coast to West Coast, to help build the Abbot Downing brand that the bank launched in 2012 to cater to its very wealthiest clients and that was being created out of its old Family Wealth and Lowry Hill franchises.

Wells ended the Abbot Downing brand in late 2020, sparking a flood of departures, but deTray had left five years earlier, in 2015, to join First Republic Bank, which was based in San Francisco. It is a move she remembers happily now.

“First Republic was one of the first places in all those experiences I had had where I saw the client really put first,” she says now. “All the rest had their bright spots and their challenges, but were largely similar – until I got to First Republic.”

Why was that? The biggest reason may well have been the firm’s limited range of business lines.

The trouble with universal banking organizations that are decades or centuries old is that everything ends up laid down like so many geological strata – the different units, the segmentation of clients, the operating procedures.

Chipping away at it all can be tough work, and tiring. The way deTray describes it, the frustration often manifests itself not through one big confrontation or strategic dispute, but more an accumulation of smaller issues.

“It’s the daily paper cuts of having to call around six divisions or teams to answer a simple question,” she says. “It’s the highly segmented client-service model, where if your client has a balance sheet of X or liquidity of Y, then they fit into this line of business, and if it’s a dollar over then they transition into a different one.”

Things can work differently under the relatively less-siloed regional banking model – provided, of course, that the bank itself is sound. And for all the chaos of March 2023, most are. Many – including First Republic – were renowned for their client service, others for their expertise in a particular sector vertical.

To those rival firms interested in strengthening their own talent pool and expanding their client set, the balance sheet-management failures of March 2023 presented an opportunity to cherry-pick the best of that model.

For Citizens, it had all seemed ideal. Van Saun and consumer bank head Brendan Coughlin had been mulling for some time exactly how to step up the bank’s presence in wealth. The earlier Clarfeld acquisition had brought a terrific brand to the group, but by 2023 what Citizens’ senior management wanted to do was position the bank for the next chapter of its transformation.

Its ambitions were – and remain – no less than to be a genuine competitor with the top seven or so banks in the US. But to do that meant addressing one of the areas where the bank was still lacking scale – servicing the high net-worth and ultra-high net-worth client base.

Private banking, as one banker notes, goes “right down the middle of the fairway for that”.

Increasingly, the bank was aiming for a three-legged approach to its customer segment strategy, with a private bank and private wealth-management division to complement its commercial and consumer banks. The disruption and bank failures of early 2023 would make the business opportunity even more compelling, but before that came about Citizens’ bankers had already been thinking of private banking and wealth management as a natural evolution of the firm’s brand as it ramped up its scale and sophistication in other areas.

There were good financial reasons too. Citizens may have proved itself able to build a good franchise since breaking away from RBS, but it is not without its issues. One of those is the fact that its earnings are heavily driven by its balance sheet. In 2022 and 2023, its net interest income accounted for 75% of total revenues. At some peers it was more like 60%.

Shifting the balance towards more fee income has been one of the drivers behind building up Citizens’ commercial bank, but wealth would offer another valuable – and durable – revenue stream.

Investors prefer that to watching revenues gyrate according to the whims of a central bank. And although US rate expectations are now firmly in the higher-for-longer camp, Citizens still needs to prepare for when that finally changes.

At the same time as Van Saun was plotting how to fulfil his wealth-management ambitions even after losing out on First Republic, deTray was also surveying the landscape for an alternative to where she and her colleagues had ended up.

Her thinking was driven by a few priorities: a culture fit, a size fit, and perhaps most importantly, enough of what she calls “white space”, a void that can be filled by an incoming business that will not have to shoehorn itself into an existing operating model. That shoehorning is all the more difficult with teams that are used to a great deal of empowerment and autonomy – exactly what First Republic’s private bankers had enjoyed.

They all had their own favourite horses in the race to acquire the firm, but at or near the top of many lists had been Citizens Financial Group. It wasn’t hard to see why: it had the ambition and – crucially – it had the capacity.

“At Citizens there was a very well-established retail and consumer network, as well as commercial and investment banking capabilities – and a nice, big white space in the middle that they were looking to address with their wealth offering,” says deTray. “And so it would be possible to airlift the empowerment and client-first thinking of First Republic staff and put it into that white space.”

At the big money centre banks that would always be a tougher proposition, while at many other regionals there wouldn’t be enough scale or sophistication of other products and services to build upon.

The challenge of any growth story, of course, is to maintain the same nimble approach and service culture despite that growth – how to avoid becoming exactly the inflexible and process-laden machine that set you apart in the first place. It is a challenge that deTray is alive to.

Citizens represented a Goldilocks size, she argues: not too small and not too big. The bank has an existing retail framework and an existing commercial-banking framework, but neither are of the segmentation and scale that is seen at a big money centre bank.

“That means there is still an opportunity to ingrain in those cultures the collaboration that’s required for what is going into the white space,” she adds.

In the meantime, though, First Republic staff were meeting their new owners. On the morning of Monday May 1, just hours after JPMorgan won the auction for the firm, the banking firm’s staff were in First Republic’s corporate offices in San Francisco.

For all the urgent engagement, some of First Republic’s staff quickly realised that they might start to feel frustrated as their business was swallowed up by the JPMorgan machine. Policies and procedures can be highly complex at super-large firms, which means that serving the client day to day can get difficult.

“We’re optimists, and everyone tried really hard, but we knew that there was a clock ticking to make a call on whether or not this would work for our clients and our books of business in a meaningful timeframe,” says deTray. “And that just became more challenging over time.”

And so, when on June 9 Citizens announced the hiring of some 50 senior private bankers and another 100 support staff, all from First Republic, across Boston, Florida, New York and San Francisco, it should perhaps not have come as a complete surprise.

DeTray, subsequently named as head of Citizens Private Bank in late July, was one of those who joined in that initial wave.

“The regional model is just an easier model for providing high-touch service,” she says. “And Citizens really stood out for the relative strength of its balance sheet, the quality and commitment of executive management – and again, that white space.”

Despite that bold move, Van Saun and his teams were forced to play it cautiously in 2023 – and continue to do so, knowing that the worst result would be to take on board more staff and books of business than the firm could handle.

The advantage of that approach is that the infrastructure can be built precisely with the needs of the firm’s eventual target client roster in mind.

“If we had our druthers, we would have been able to move at the speed of light and really get the rails set up for operations at scale,” says deTray. “But it’s a build.”

What seems beyond doubt is the extent to which the rest of Citizens has been motivated to get behind that build. Almost as soon as the new arrivals from First Republic were on board, teams from Citizens’ consumer and commercial banking divisions began meeting with deTray and her colleagues.

“Senior and junior people in each of those practices understand that we need alignment across the entire organization to do this at speed,” she says. “And I haven’t had one interaction yet that speaks to anything other than complete alignment on what the priority is.”

And with good reason: the bank gets to make its client relationships stickier, and clients get serviced in one place. The firm’s new private bankers now even benefit from having an in-house investment- banking capability, meaning that referrals can often be a thing of the past. Done right, it is a win-win.

Citizens Private Bank formally launched nationwide in October, when the firm announced plans to open six private-banking offices in 2023 and 2024, in New York City, Boston and Palm Beach, and three locations in San Francisco. By the end of 2023, the private bank had raised more than $1.2 billion in deposits.

Whenever they talk about it, Citizens bankers sound excited about what they are up to in wealth and private banking. But there is a bear case too. After all, the awkward fact remains that the First Republic model failed. And so the questions mount up. Can Citizens build the right quality of deposit book? Can it build a wealth business without giving credit away? Can it generate the right margin?

It is early days, but so far, the signs are positive. As Van Saun and Citizens chief financial officer John Woods noted at the bank’s first-quarter 2024 earnings presentation on April 17, the bank has doubled year-end private bank deposits, to $2.4 billion.

But more than the growth, they like the quality. Some 39% of those deposits are what the industry calls DDA and CWI – non-interest-bearing demand deposit accounts and checking-with-interest. These are the kinds of sticky deposits that banks prize for their ability to generate good margins, and the private bank is attracting higher levels than legacy Citizens, meaning an accretion for the bank in terms of mix.

Those deposits are also a reminder that the retail offering – provided it is not too big and unwieldy – can be just as important as any other bells and whistles at the institution where a private banker works. Teams that either have no connection to a retail network, or who are attached to one that is so established as to be able to resist any cultural influence from private bankers, present a problem.

“Private-banking clients have extremely sophisticated needs, and they definitely span the consumer and commercial space, but at the end of the day they are all individuals, they all have a bank account, they need mortgages,” says deTray. “If you don’t have a strong practice in the consumer space, you are never going to be able to treat your private-banking client like a real person.”

The sweet spot is when the two meet. Not long after moving to Citizens, one private banker met a client while he was on vacation. The client’s first question was: “Do you have room for me at your new organization?” Then he slid a cheque across the table that he wanted deposited, despite being nowhere near a Citizens branch. The banker drove miles and miles to do what was needed.

Might there have been a technological solution? After all, Citizens, like many other banks, allows cheque deposit via its mobile app.

“People always say that technology is going to eat away at this, and of course technology is important,” says deTray. “But let’s be clear about what true high-touch service means: the client has the opportunity to self-serve, but it is not a requirement.”

DeTray and her colleagues are finding plenty of support for that kind of service ethic at her new home. The serendipity of Citizens’ ambitions meeting the opportunity presented by the First Republic collapse is not lost on her.

“This is why so many of us chose Citizens,” says deTray. “We didn’t see a lot of hurdles.”