Explainer: Why First Republic Bank failed and what JPMorgan’s deal means

In late March, rich clients First Republic Bank courted to fuel its rapid development began withdrawing their accounts, focusing the U.S. regional banking crisis on it.

After regulators seized First Republic (FRC.N) over the weekend, the largest U.S. bank, JPMorgan Chase & Co. (JPM.N), said on Monday it would buy most of the San-Francisco lender’s assets.

After Silicon Valley Bank and Signature Bank, First Republic became the third major U.S. bank to fail in two months.

Here are some reasons for its collapse and what the JPMorgan merger may mean:

FIRST REPUBLIC
James “Jim” Herbert, son of an Ohio community banker, founded First Republic in 1985 to offer huge loans at low rates. After Bank of America bought Merrill Lynch, First Republic was listed again in 2010.

First Republic offered mortgage and loan rates to high-net-worth consumers. Bank promotional materials list Instacart creator Apoorva Mehta, investor Chamath Palihapitiya, and real estate developer Stephen M. Ross as customers.

According to bank literature, 22% of its company loans go to schools and non-profits.

In January, First Republic reported 19.5% annual shareholder returns, double its peers. The median single-family home loan borrower has $685,000, more than the average American.

Since U.S. deposit insurance only covers $250,000 per savings account, its strategy made it more vulnerable than regional lenders with less-affluent customers.

First Republic had several uninsured deposits.

As the U.S. Federal Reserve raised interest rates, its loan book and investment portfolio lost value, hindering its capital raise.

HOW IT UNWound
First Republic started losing money last year when the Fed raised interest rates to battle inflation.

According to First Republic’s annual report, gross unrealized losses in held-to-maturity investments, mostly government-backed debt, rose to $4.8 billion at the end of December from $53 million a year earlier.

By March, analysts and investors estimated its paper losses at $9.4–13.5 billion.

First Republic’s annual report warned investors that over half its loan book was single-family residential mortgage loans, which are hard to sell.

JPMORGAN DEAL
JPMorgan announced that First Republic’s 84 offices in eight U.S. states would reopen as branches of JPMorgan Chase Bank on Monday, transferring First Republic’s customers to the giant banking institution.

The transaction for majority of First Republic’s assets will expand the largest U.S. bank. The settlement involves paying $10.6 billion to the FDIC.

JPMorgan, led by experienced Chairman and CEO Jamie Dimon, has engaged into a loss-share contract with the FDIC on the single-family, residential, and commercial loans it bought, but will not assume First Republic’s corporate debt or preferred stock.