Jim Herbert, founder of a teetering First Republic

Two months ago, any list of most admired US bankers would have included Jim Herbert. A shrewd and driven businessman, Herbert grew First Republic, his California-based lender, from just nine employees to America’s 14th largest bank by offering affluent urban professionals cheap mortgages and personalised service.

Now everything Herbert, aged 78, has worked for is under threat. The March 10 collapse of Silicon Valley Bank sparked a $100bn deposit run at First Republic where he is now executive chair. It also drew attention to the business model’s profound vulnerability to rising interest rates. Shares have plummeted 95 per cent, class action lawyers are circling and commentators are openly speculating whether his bank will be taken over by the Federal Deposit Insurance Corporation.

In First Republic’s online “heritage book”, Herbert warned employees to “stay ahead and stay alert” yet that is apparently what the bank and its leadership failed to do. “The problem is that this business model was designed for a low interest rate world,” says short seller Barry Norris, who has made several million dollars betting against First Republic. “If you want to be a successful banker you have to do more.”

Investors, friends and other beneficiaries of Herbert’s enthusiasm are now asking themselves how a business run by a man so lauded for his common sense and commitment could have gone so profoundly off-track. Linda Shelton, executive director of New York’s Joyce Theatre, says Herbert went the extra mile for her and others in the dance world. “He was a very inspiring person . . . always interested in supporting artists before anybody knew who they were,” she says. “It’s very hard to see this.”

Born in Ohio to a community banker and a homemaker, Herbert had only left the Midwest a handful of times before he went to college in Boston. As a trainee at Chase Manhattan bank, he got a wake-up call that remained an inspiration. “James”, his boss said, handing back a heavily edited report, “if you can’t do better than this, you should work somewhere else.”

“My standards shot up, and I never looked back,” Herbert recalled for the bank’s historian.

He met and married Cecilia Healy, one of Harvard’s early female MBAs. A detour into the soda-bottling business took him to San Francisco where he eventually founded First Republic in 1985. From the first, he focused on entrepreneurs and strivers, starting with extra-large mortgages before growing into a full service private bank. First Republic expanded into eight states, and the Herberts began a bicoastal life, supporting civic and charitable causes on both. “His interest and curiosity about the arts was unusual for a businessman,” says Helgi Tomasson, the retired artistic director of the San Francisco Ballet, where Herbert served as chair.

Herbert also proved he could play dealmaker with Wall Street’s best. In 2007, he sold First Republic to Merrill Lynch for a 40 per cent premium. But Merrill was crunched into Bank of America in the 2008 crisis, so Herbert bought his baby back with the help of private equity firm General Atlantic. Within months, they had relisted it on the stock exchange for 70 per cent more than they had paid. “Jim is one of the best and most entrepreneurial bankers of his generation,” Bill Ford, General Atlantic’s CEO, said after the deal.

For the next decade or so, it seemed Herbert could do no wrong. First Republic bet hard on wealth management with a high profile acquisition, and cruised past $50bn in assets. When American Banker magazine named him banker of the year in 2014, it pointed to the bank’s rapid growth and pristine credit quality to argue that “At 70, Herbert is at the top of his game.”

Around then, he pressed Ian Bremmer, Eurasia Group president, to pitch a public affairs show to New York’s public television station, and First Republic became its founding sponsor. “He was so supportive of making sure we didn’t just have establishment voices. He doesn’t care who you are going to vote for. He cares that you are talking to all sides,” Bremmer said.

But Herbert’s efforts to scale back his involvement with First Republic proved problematic. During the pandemic, he moved to Wyoming to be near his grandchildren, and began selling down his stake from around 1mn shares at the end of 2019, to about 700,000 this March. His remaining shares, which were worth $85mn at the start of March, are now valued at just over $4mn.

His chosen successor Hafize Gaye Erkan lasted just six months as co-chief executive and her surprise departure in early 2022 coincided with a serious cardiac illness that forced Herbert to step away from active leadership. By the time he returned, the Fed had begun rapidly raising interest rates, a process that destabilised SVB and sowed the seeds for First Republic’s current woes.

After years of fawning analyst and press coverage, Herbert appears stung by the suddenly harsh assessments of First Republic’s prospects. He was conspicuously absent from Monday evening’s disastrous earnings call that sent the shares into a new tailspin. But people close to the bank say he has returned from Wyoming to San Francisco to frantically work his contacts and seek a private-sector solution that will keep the bank alive.

“Jim in his prime would have been able to turn this around,” said a senior executive who knows Herbert well, and banks at First Republic. “He was an innovative banker and a lovely person. This is a tragedy.”

brooke.masters@ft.com