“Our products are undifferentiated, generally speaking. They’re good products, but they’re undifferentiated,” First Republic Founder James Herbert II said in a video for his induction into the Bay Area Business Hall of Fame. “What’s differentiated is the people and their passion, their caring for clients and the service they deliver,”

Jamey Stillings

James Herbert II spent four decades building one of the nation’s 20 largest banks. Then, in the span of just seven and a half weeks, the 78-year-old founder saw it all come crashing down.

First Republic Bank, which Herbert founded in 1985, collapsed on May 1 after being toppled by a deposit run. As the San Francisco bank’s executive chairman, Herbert was involved in desperate efforts to arrange a private-sector solution. But after those efforts failed, he was left to watch as the Federal Deposit Insurance Corp. seized the bank and sold it to JPMorgan Chase.

Herbert is taking the bank’s failure hard, according to his friend Frank Fahrenkopf Jr., a longtime First Republic board member. In recent days, Herbert has been staying with family members in Jackson Hole, Wyoming — sitting in the backyard, looking at the Grand Tetons and trying to forget what went wrong, Fahrenkopf said in an interview.

“The bank was his life. It’s a tragedy for him,” Fahrenkopf said. “I call him every day to make sure he’s doing all right.”

The story of First Republic’s demise has several elements. It’s about the impact of fast-rising interest rates on a large mortgage portfolio that quickly lost value, as well as about the fears sparked by the March 10 failure of Silicon Valley Bank.

But it’s also a deeply personal story. The son of a banker, Herbert built his own large banking franchise before agreeing to its $1.8 billion sale. He later regained control, then held on to the CEO job past age 75, all while collecting pay packages that rivaled the CEOs of larger banks. Finally, approximately a year after he ceded day-to-day control, he watched it all crumble.

Herbert declined to comment for this story. People who know him said that he built First Republic around a distinct business philosophy, which focused on providing exceptional service.

The bank’s branches were known for offering fresh-baked chocolate chip cookies and wood-handled umbrellas to its well-to-do clients. During the pandemic, when some big banks raised their hourly minimum wages above $20, First Republic hit $30 per hour.

“The bank reflected Jim’s view that customer service could play a central role in clients’ lives,” said Tim Coffey, an analyst at Janney Montgomery Scott. “And it worked until interest rates went parabolic.”

‘Exceptional service’

Herbert’s father, also named James, was a longtime banker in Ohio who eventually served as president of the Ohio Bankers Association. When his son graduated from college in the mid-1960s, he offered some career advice: Don’t become a banker.

The younger Herbert had other ideas, though. One of his earliest jobs was at Chase Manhattan Bank, a predecessor to the industry behemoth that swooped in this week to purchase First Republic.

During the early 1980s, Herbert and a partner, Roger Walther, bought two California-based thrifts and formed a holding company called San Francisco Bancorp. After selling that firm in 1984, they opened First Republic Thrift & Loan the following year.

First Republic took savings deposits and offered jumbo mortgages, largely to wealthy consumers. In 1986, when First Republic held an initial public offering, it had a total enterprise value of $23.3 million. But the bank was well positioned for growth.

There were lots of affluent households in the Bay Area, where First Republic was based, as the region rode the tech revolution. First Republic later expanded to other well-off coastal cities, including New York, Boston, Los Angeles, San Diego and Palm Beach, Florida, and grew its wealth management business.

“The real story of First Republic is exceptional service — exceptional service delivered by exceptional people, all the time, every day, to every client,” Herbert said in a video for his induction into the Bay Area Business Hall of Fame.

“We have products, but all banks have products. Our products are undifferentiated, generally speaking. They’re good products, but they’re undifferentiated. What’s differentiated is the people and their passion, their caring for clients and the service they deliver,” he added.

During the mortgage boom of the early 2000s, Herbert got an offer to sell First Republic to Merrill Lynch. He was initially reluctant. But the deal he struck with Merrill in 2007 allowed the bank to keep its brand, its management team, its offices, its employees and substantial authority to make decisions.

 First Republic grew its assets from $22 billion in 2010 to $212.6 billion at the end of last year.

Eric Thayer/Bloomberg

Then came the 2008 financial crisis. Merrill Lynch, on the verge of failing, was acquired by Bank of America, which had a competing private bank and wasn’t a good fit for First Republic. In 2009, Herbert led a group that raised $2 billion to buy back the bank. And the following year, in late December, First Republic went public for the second time. The spinoff was lucrative for Herbert, whose compensation in 2010 totaled $36.3 million, most of it from stock option awards.

Growth continued at a rapid and steady pace, as a sustained period of low interest rates drove heavy mortgage volumes. First Republic went from $22 billion of assets three months prior to its second IPO to $55 billion of assets in the fall of 2015. And Herbert benefited handsomely.

His annual compensation fluctuated, but there were years where it rivaled the sums paid to the CEOs of very large banks. In 2012, Herbert’s total compensation was $15.2 million, mostly in stock awards.

And in 2021, Herbert was paid $17.8 million, again mostly in stock awards, according to the bank’s disclosures. Among U.S. commercial banks, only the CEOs of JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and PNC Financial Services Group collected more money that year.

As of March 2022, Herbert owned more than 800,000 shares of the company’s common stock, representing 0.4% of the total shares available, according to the bank’s proxy statement last year.

‘A silver platter’

During his final decade at the helm of First Republic, Herbert had a good deal of stature in the industry. In 2018, the Federal Reserve Bank of San Francisco appointed him to the Federal Advisory Council, which typically meets four times per year with the Fed’s Board of Governors to dismiss economic and banking issues.

At First Republic, questions were arising about who would succeed Herbert. Initially, the bank’s only CEO in its nearly 40 years of existence was set to remain chairman and chief executive through 2017, and to stick around as executive chairman through 2021.

But that deal was reworked, and then it was reworked at least three more times. In 2021, Herbert, then 77, was set to remain CEO through the end of last year, and Hafize Gaye Erkan, the bank’s then-president, was named co-CEO, setting her up as Herbert’s heir apparent.

But in an unexpected move, Erkan resigned from her post on Dec. 31, 2021, just two weeks after the company announced that Herbert would soon begin a medical leave of absence to address a coronary health issue. In March 2022, then-Chief Financial Officer Michael Roffler, who had been appointed interim CEO, was named to the post permanently and joined the bank’s board of directors. 

Herbert, meanwhile, became the executive chairman, a role that allowed him to stay active “in the development of the bank’s overall strategy, preservation of its unique culture and maintenance of key relationships with clients and shareholders,” according to the bank’s 2022 proxy statement.

First Republic’s loan growth accelerated over the last three years, with total loans increasing by 48% between the end of 2020 and the end of 2022.

The bank was his life. It’s a tragedy for him.

Frank Fahrenkopf Jr., a longtime First Republic board member, on the bank’s founder, James Herbert II

Last year was an especially good year. The bank reported record-setting loan growth, loan-origination volume, revenue and earnings per share. Growth continued even as mortgage lending volumes fell industrywide, with the bank’s residential real estate book swelling by 28% between the first quarter and the fourth quarter.

At the end of 2022, First Republic’s assets were $212.6 billion — a nearly tenfold increase in the 12 years since Herbert bought back the bank.

In a January 2023 call with analysts, Herbert said the industry’s slowdown in mortgage lending presented “an extraordinary opportunity” for First Republic to take market share.

“Moments like this are very special,” Herbert said. “The volume of demand is down, we all know that … but the disruption that’s going on in the mortgage market … is just handing us [opportunity] on a silver platter.”

First Republic’s focus on mortgage lending, including its push for additional growth as the Federal Reserve began raising interest rates, ultimately contributed to its undoing, said David Chiaverini, a banking analyst at Wedbush Securities.

“The way that they were winning against the competition is by undercutting on price,” Chiaverini said this week in an interview. “They were offering what were essentially long-duration jumbo mortgages at an attractively low rate, which is great for customers and leads to fast growth.”

As other lenders scaled back their mortgage originations amid rising interest rates, First Republic faced questions about its ability to attract deposits while continuing to extend new loans. Herbert argued that First Republic’s reputation as an experienced and high-value lender would enable it to weather a potential downturn.

“Most of our business is with existing clients and their direct referrals,” he told an analyst during First Republic’s July 2022 earnings call. “When their friends are having trouble getting something done, they say, ‘You ought to try First Republic.'”

The bank’s push-forward mentality led to a liquidity crunch, Chiaverini said. After rates rose, the bank faced the prospect of having to sell mortgages at below par value to raise capital, since the market value of those loans had fallen, he said.

“That’s why it ended up failing. No investor wanted to recapitalize First Republic, just like they didn’t want to recapitalize Silicon Valley Bank,” Chiaverini said. “They viewed it as throwing good money after bad, given how deep of a hole their balance sheet was in.”

‘Demise can happen very quickly’

During the first three months of this year, Herbert was among a handful of First Republic executives who sold millions of dollars of First Republic stock, according to regulatory filings. The shares were priced on average in the $130-per-share range, and Herbert’s stock sales totaled $4.5 million, The Wall Street Journal reported in March.

The sales were in line with Herbert’s annual estate planning and philanthropic donations, a spokesperson for Herbert told The Wall Street Journal.

And they represented about 5% of Herbert’s holdings, according to a source familiar with the situation. “It’s important that people have that perspective,” this source said. “He held onto a vast majority of his shares.”

When Silicon Valley Bank failed, First Republic was particularly vulnerable to the fallout. Both banks were based in the Bay Area, and both had upscale clienteles.

“I’ve spent a lot of nights not sleeping thinking about this: What could we have done to have avoided this?” said Fahrenkopf, the longtime First Republic board member. “And I came to the conclusion: If our bank was headquartered in Reno, Nevada, rather than San Francisco, so close to Silicon Valley Bank, this probably wouldn’t have happened.”

One First Republic customer who withdrew funds from a branch in San Francisco on Saturday, March 11 — one day after Silicon Valley Bank was seized by the government — described an anxious scene, with many customers still waiting to be served at 2 p.m., after the branch was scheduled to close.

A First Republic employee climbed onto a file cabinet to tell the assembled customers that their requests would be fulfilled, but also expressed uncertainty about whether the bank would survive the weekend, according to the customer, who spoke on condition of anonymity.

The next day, another regional bank, Signature Bank in New York City, also failed, as fear spread.

By the end of March, First Republic’s deposits, which totaled $176.4 billion at the end of last year, had fallen by more than $100 billion, not counting the $30 billion that 11 big banks deposited at the bank on March 16 in an effort to stabilize the situation.

“Certainly the outflow of $100 billion in a three-week period is a major factor, and  … before Silicon Valley, not something that anyone had really anticipated,” said the source who spoke about Herbert’s stock sales.

During First Republic’s final weeks, company executives mounted an all-hands-on-deck effort to find a private-sector solution that would keep the bank out of government receivership — and avoid wiping out shareholders.

As executive chairman, Herbert was no longer required to be involved in the bank’s day-to-day operations. But the crisis created an intense level of pressure that was hard for him to ignore, and his involvement increased. Still, the efforts failed, and First Republic became the second largest bank failure in U.S. history.

The level of complexity involved made a private-sector solution hard to achieve, said the source familiar with the bank’s situation. 

The demise of three regional banks in the last two months is a reminder of how rapidly bank runs can happen. “As soon as an institution loses the confidence of its customers, demise can happen very quickly,” said Coffey of Janney Montgomery Scott.

But Fahrenkopf said that he’s advised Herbert not to dwell on the past. “It doesn’t do any good to look behind,” Fahrenkopf said. “We can look forward. Don’t fret too much.”

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