Lender crushes market by focusing on offering mortgages to a select few

by MPA19 Jan 2015
Since the financial crisis, First Republic Bank has dominated its competitors and has continually beaten the S&P 500 Indices by a solid 11%. So, what’s its secret sauce to success?

According to The Motley Fool, how the bank makes its money is pretty simple. It still accepts deposits, originates loans and does financial management. However, instead of building out its branch network, it opens branches in strategic locations to target affluent customers.

In fact, the bank only has 71 offices, but it has more than $46 billion in total assets.

First Republic's primary product is mortgages, according to The Motley Fool. Since the bank’s average customers are high-net worth individuals who often own businesses, these mortgages tend to have much lower risk.

The average loan-to-value (LTV) ratio of new single-family loans originated in the third quarter of 2014 was 60%. For many banks, that number exceeds 80%. Mortgages generated a total interest income of $378 million in the third quarter of 2014, which represented 81% of its total income, according to the bank's latest FDIC quarterly filing.


  • by | 1/19/2015 10:27:11 AM

    I think the Fed's will find this article very interesting. I think they will say the bank is discriminating against riskier borrowers through disparate impact. You can do that as a bank. I see fines in their future.

  • by Schocker | 1/19/2015 10:33:25 AM

    Marketing to a demographic and discriminating against a demographic are 2 different things. There shouldn't be anything criminal about seeking out solid customers and creating a low risk portfolio. I agree that the Feds may not feel this way though.

  • by Alex V | 1/19/2015 10:34:05 AM

    That's what I was thinking, the regulators are possibly going to see this as redlining and discrimination.

    Problem for lenders is that on the one hand they are expected to give equal access to everyone, on the other hand this bank has shown that by lending to only the "best" customers with low LTV's seems to have proven financially successful and responsible to the bank's shareholders.

    Government wants low income families to have access to buy houses but the higher the LTV, the less "skin in the game" by the borrower and the numbers clearly show that the higher the LTV the higher the foreclosures and delinquency.

    No easy solution.


Should CFPB have more supervision over credit agencies?