First Republic Bank

First Republic Bank was a prominent American commercial bank, headquartered in San Francisco, that famously collapsed in May 2023. For decades, it carved out a lucrative niche by catering exclusively to high-net-worth individuals and businesses, offering them exceptional customer service and attractive loan terms. Its business model relied on providing large, often low-rate mortgages to wealthy clients, who in turn would park their substantial cash deposits at the bank. This strategy worked well in a low-interest-rate environment. However, the bank's foundation crumbled when the Federal Reserve began aggressively raising interest rates in 2022. This created a perfect storm: the value of the bank's low-yield bond and loan portfolio plunged, leading to massive unrealized losses, while depositors fled for higher yields elsewhere. The collapse of Silicon Valley Bank just weeks earlier accelerated a catastrophic bank run, leading to its seizure by the FDIC and subsequent sale to JPMorgan Chase. It stands as the second-largest bank failure in U.S. history, after Washington Mutual, a stark cautionary tale for investors.

First Republic’s story is a classic case of what happens when a seemingly safe business model meets a sudden change in the economic environment. Its failure wasn't due to risky subprime lending but rather to a fundamental vulnerability hidden in plain sight.

First Republic’s strategy was simple and, for a long time, incredibly effective.

• Attract the Rich: They focused on wealthy clients, offering them “jumbo” mortgages (loans too large to be sold to Fannie Mae or Freddie Mac) at exceptionally low, fixed rates. They even offered interest-only loans to make borrowing more attractive.
• Exceptional Service: The bank was legendary for its white-glove service, creating deep client loyalty.
• Cheap Deposits: In return for great loan terms, these wealthy clients brought their cash. These deposits represented a very low cost of funds for the bank, which it could then lend out profitably.

The fatal flaw was the asset-liability mismatch. The bank was essentially borrowing short-term (deposits that can be withdrawn at any time) and lending very long-term (30-year fixed-rate mortgages). When interest rates were near zero, this was a money-making machine. When rates shot up, it became a death trap.

The Fed's aggressive rate-hiking cycle in 2022-2023 hit First Republic with a devastating one-two punch:

1. Punch 1: Collapsing Asset Values: As new bonds and loans were being issued at 5%, the bank’s portfolio of old mortgages yielding 2.5-3% became dramatically less valuable. This is known as interest rate risk. While these were only unrealized losses on paper (as long as the bank didn't sell them), the market knew they were there, eroding confidence in the bank's solvency.
2. Punch 2: Fleeing Deposits: The bank’s sophisticated clientele wasn't foolish. Why keep millions in a checking account earning 0.1% when you could get over 4% in a U.S. Treasury bill or a money market fund? Deposits began to flow out. The situation turned critical after the failure of Silicon Valley Bank, as a huge portion of First Republic's deposits were well above the $250,000 FDIC insurance limit, sparking a full-blown bank run.

The fall of First Republic offers timeless lessons that go to the heart of value investing. It’s a reminder that no company is immune to fundamental economic forces.

First Republic was long seen as a “quality” company—a conservative, well-managed institution. This highlights a crucial lesson: reputation is not a substitute for due diligence. A savvy investor must always dig into the financial statements. For a bank, the most important story is told on the balance sheet. An investor could have seen the immense duration risk First Republic was taking. The notes to its financial statements revealed a massive gap between the book value and the market value of its loan and securities portfolios—a clear sign of the unrealized losses that would eventually become fatal.

Even without a deep financial background, an investor could have spotted several red flags in the years and months leading up to the collapse:

• High Percentage of Uninsured Deposits: This is public information. A bank with a high concentration of deposits above the FDIC limit is extremely vulnerable to panic.
• Extreme Asset-Liability Mismatch: While all banks do this to some extent, First Republic’s reliance on long-term, fixed-rate assets funded by flighty deposits was an outlier.
• Dependence on a Niche Clientele: Concentrating on a single, highly connected group of wealthy depositors meant that when fear took hold, it spread like wildfire. This is the opposite of diversification.

Ultimately, First Republic Bank serves as a powerful reminder that even the most prestigious-looking castles can be built on sand. For the patient investor, the most important work is not just finding good businesses, but understanding the risks that could bring them down.