Merrill Lynch said it will buy First Republic Bank, a bank that specializes in luxury home lending in California, for $1.8 billion.
Merrill Lynch's cash-and-stock offer of $55 a share represents a 44% premium over First Republic's closing price on Friday.
Merrill Lynch has built up its private banking operations in recent years as the ranks of the wealthy have grown. It expects the deal to add modestly to its profits by the end of 2008.
Merrill Lynch said the deal is expected to be completed in the third quarter. First Republic of San Francisco will continue to operate its business separately as a new division of Merrill Lynch Bank & Trust Co., FSB.
Chairman and Chief Executive Jim Herbert and president and Chief Operating Officer Katherine August-deWilde will continue their roles.
Merrill Lynch said it wants to boost First Republic's earnings and revenue growth by accelerating the expansion of First Republic's offices and by cross promotions of products and services between the two companies.
Standard & Poor's equity analyst Stuart Plesser said in a research report last week that new branch openings should help First Republic's revenue to grow 15% in 2007. He also said the bank's share price, about a 10% premium to peer regional banks, is too high in light of slower growth prospects.
"We are concerned about continued net interest margin pressure due to an inverted yield curve and the bank's heavy reliance on borrowed funds," Plesser said.
As of Sept. 30, 2006, First Republic had assets of $10.7 billion, loans of $7.6 billion, deposits of $7.9 billion, and assets under management or administration of $16.4 billion.
In an interview with Reuters last year, John Thiel, head of the private banking and investment group at Merrill Lynch, said the firm has hired hundreds of bankers since 2000, as the ranks of the wealthy have grown. Merrill Lynch's private banking efforts tend to focus on clients with assets of $10 million and more.