First Republic Bank [CapiPedia]

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====== 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 [[mortgage]]s 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 rate]]s in 2022. This created a perfect storm: the value of the bank's low-yield [[bond]] and loan portfolio plunged, leading to massive [[unrealized loss]]es, 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.
===== The Anatomy of a Collapse =====
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.
==== A Business Model Built for a Zero-Rate World ====
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 loan]]s 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 The bank was essentially borrowing short-term (deposits that can be withdrawn at any time) and lending very long-term (30-year fixed-rate mortgages).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 Unraveling ====
The Fed's aggressive rate-hiking cycle in 2022-2023 hit First Republic with a devastating one-two punch:
  - **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.
  - **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.
===== Lessons for the Value Investor =====
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.
==== Look Under the Hood ====
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.
==== Key Warning Signs to Watch For ====
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.