Global markets: First Republic Bank collapse and JPMorgan deal

The bank said last week it had made outflows of more than $100 billion in the first quarter.

The biggest US bank JPMorgan Chase & Co said on Monday it would buy most of San Francisco-based First Republic’s assets after regulators seized the troubled lender over the weekend.

First Republic was founded in 1985 by James “Jim” Herbert, the son of a community banker in Ohio. The bank initially focused on providing large loans at cheap rates. In 2007, Merrill Lynch acquired the bank.

First Republic re-listed on the stock market in 2010 after being sold by Merrill’s new owner, Bank of America.

According to bank promotional materials, First Republic’s clients include Instacart founder Apoorva Mehta, investor Chamath Palihapitiya and real estate developer Stephen M. Ross.

First Republic also catered to other members of the community, according to bank materials, noting that schools and nonprofits account for 22% of its business loans.

Factors leading to the collapse of First Republic Bank

In January, First Republic said its shareholder return was 19.5% annually, more than double that of its peers. It also said its average single-family home loan borrower had access to $685,000 in cash, significantly more than the average American.

First Republic had a high level of uninsured deposits. Its strategy left it more vulnerable than regional lenders with less affluent customers, as US deposit insurance only guarantees up to $250,000 per savings account.

Its loan book and investment portfolio also became less valuable as the US Federal Reserve raised interest rates, inhibiting its ability to raise capital.

First Republic began running the paper deficit last year when the Fed began raising interest rates to fight inflation.

Gross unrealized losses in held-to-maturity investment portfolios, primarily government-backed loans, rose from $53 million at the end of December to $4.8 billion, according to First Republic’s annual report.

First Republic’s annual report also warned investors that more than half of its loan book consisted of single-family residential mortgage loans, which are difficult to take down.

JP Morgan deal

JPMorgan said under the deal First Republic’s 84 offices in eight US states would reopen as branches of JPMorgan Chase Bank from Monday, so customers of the failed bank would deal with the giant financial conglomerate instead.

JPMorgan will become even bigger as a result of the deal for most of First Republic’s assets. As part of the deal, it will pay $10.6 billion to the US Federal Deposit Insurance Corp (FDIC).

JPMorgan, led by veteran Chairman and CEO Jamie Dimon, has also entered into a loss-share deal with the FDIC on purchases of single-family, residential and commercial loans, but it will not take over First Republic’s corporate debt or preferred stock.

(with inputs from agencies)