Merrill to pay $1.8 billion for high-end bank

First Republic Bank, a San Francisco-based specialist in managing finances for wealthy clients and their businesses, agreed Monday to a $1.8-billion buyout by Merrill Lynch & Co.

For Merrill, the largest U.S. retail brokerage, the deal extends a six-year push to capture high-end clients. Merrill will pay the private bank’s stockholders $55 per share in cash and stock -- a 40% premium over Friday’s close that sent First Republic shares up $15.33 to $53.63. Merrill fell $2.14 to $92.39.

Defending the rich deal, Merrill executives said they were buying expertise in handling business loans, mortgages and other needs of the affluent -- the kind of services the brokerage has sought to expand.

The average First Republic customer has a net worth of more than $19 million, with nearly $8 million in liquid assets, a bank spokesman said.

The deal triggered a burst of investor interest in City National Corp., the Beverly Hills-based private bank that also focuses on wealthy individuals and their businesses. Shares in City National rose $2.44 to $70.56, a gain of 3.6%.

RBC Capital Markets analyst Joe Morford said City National would be an even greater plum for an acquirer focused on the financial high end. But City National, still run by the founding Goldsmith family, so far has been an acquirer itself of small banks and investment-management firms, he noted.

City National spokesman Cary Walker didn’t immediately return calls seeking comment.

First Republic, founded in 1985, has $10.7 billion in assets and reported net income of $17.4 million for the third quarter ended Sept. 30, up from $16.2 million a year earlier.

It has offices in areas such as Beverly Hills, Newport Beach and Palm Desert. It also has branches in Las Vegas, the Northeast and the Pacific Northwest as well as its home turf of Northern California.

It will operate as a stand-alone brand within Merrill Lynch, retaining its name, current management and San Francisco headquarters, the companies said.

A report from Keefe, Bruyette & Woods Inc. analysts called First Republic a “high-quality franchise” with a “very high cost structure” that Merrill should improve because it has cheaper sources of funds.

Lana Chan, an analyst with BMO Capital Markets Corp., said Merrill also would be able to help finance First Republic’s expansion efforts, which along with high funding costs had cut into its profitability recently.

scott.reckard@latimes.com