1.0
Part Two: First Republic Bank – The First 30 Years
I Like ‘First’ Anything
3.3
“A Most Successful Banking Enterprise”
First Republic was funded and launched at a time of tremendous
opportunity for an emerging financial services company, though it was the beginning of the savings and loan
crisis. It would build further on its jumbo mortgage business, which was well-developed from the prior bank
already, with sound financial management and lending practices, committed professionals and outstanding
service, all of which had distinguished San Francisco Bancorp. But by decade’s end, First Republic would be
tested by the 1989 Loma Prieta earthquake that caused widespread damage in the Bay Area. In addition, the
thrift and savings and loan industries that had given rise to First Republic would also be shaken to their
core by the collapse of hundreds of such financial institutions nationwide.
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Image Credit – Dlw415
3.4
Open Houses
First Republic got off to a strong start, with many clients of the
previous bank eager to establish a relationship with the new enterprise. Just like San Francisco Bancorp, “We
opened our doors with no federal insurance. Single location, ground floor and upstairs,” Herbert recalled.
Linda Moulds, who worked with Herbert at The Pop Shoppe, later joined him at San Francisco Bancorp and would
be an invaluable contributor to this new venture. Moulds worked in the back of the ground-floor office space,
as Controller of First Republic Bancorp. Herbert, Katherine August- deWilde and Gordon Taubenheim were
upstairs, along with a few others, including Herbert’s assistant, Jeanne Forster Gutsche. The team was busy
tending to the flow of new clients, and by the end of 1985, this modest group had grown to 13 employees and
set First Republic on its path to future success.
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3.6
El Camino Thrift & Loan
First Republic was focused on growing its existing business as 1985 drew
to a close. It was hardly in the market for an acquisition. Then Herbert received a call from the Thrift
Guaranty Corporation of California, the industry-run regulatory insurer for the California thrift industry. El
Camino Thrift & Loan Association in Escondido, CA, was on the brink of insolvency. Would First Republic be
interested in taking it over – with a significant infusion of cash from the regulator to help seal the deal?
Herbert considered it an offer he could not refuse, as well as an industry obligation.
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Image Credit – Federal Deposit Insurance Corporation
3.8
FDIC Coverage
As Herbert tackled the challenges inherited with the El Camino
acquisition, he also began to consider the issues that pervaded the industry at large. In 1984, Western
Community, one of the larger thrift and loans in California, had failed. Herbert instinctively knew that this
situation could be indicative of larger, systemic troubles, and with a constant focus on providing safety and
stability for investors, employees and clients, he took action.
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3.10
Quality and Quantity
In addition to Fannie Mae, First Republic turned to the community of
financial institutions that also purchased mortgages in the secondary market. But jumbo mortgages were still a
relatively recent innovation, and therefore perceived as riskier when compared to the standard, smaller
mortgages that were being packaged for resale by most originators.
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3.11
Credit Clawback Provision
In 1986, First Republic introduced what continues to be a fundamental
component of its credit culture: the credit “clawback” provision. Though the enterprise had few bad loans,
Herbert sought to formalize his expectation of superior safe lending by implementing a policy that, in effect,
designated Relationship Managers, First Republic’s credit-trained lending officers, “owners” of the loans they
wrote.
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3.12
Tending the Entrepreneurial Flame
The First Republic leadership team embodied the entrepreneurial spirit
and approached strategic and structural decisions with the intention of promoting the same throughout the
enterprise. Everyone pitched in to get the job done, with Herbert and August- deWilde divvying up projects and
shifting resources as needed. “Jim and Katherine are doers as well as managers,” said Dyann Tresenfeld, who
joined First Republic in May 1986, switching from a career as a successful real estate agent to that of a real
estate banker. “Everybody’s producing and has their feet on the ground and their hands on whatever they need
to do to take care of issues.”
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3.14
General Atlantic
First Republic received yet another capital boost in 1987, partly as a
result of a conversation August-deWilde had during an otherwise routine airline flight. After boarding the
plane, she realized that she knew the man seated next to her, a former colleague from her days at McKinsey &
Co. It was Edwin Cohen, President and Chief Executive Officer of General Atlantic, the private equity firm
that would again years later play a vital role in First Republic’s evolution. The two began talking, and Cohen
volunteered that General Atlantic might be interested in investing in First Republic.
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3.15
Strong Results
First Republic had recorded a slight decline in the dollar volume of
mortgages originated in 1987, compared to 1986. The company cited increased competition as the reason for
lower initial interest rates on adjustable mortgages, as well as thinner profit margins and reduced initial
profitability on new loans. The company assured shareholders that it would adjust to the competitive
environment in 1988. True to form, First Republic over-delivered.
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Image Credit - Photograph in the Carol M. Highsmith Archive, Library of Congress, Prints and Photographs Division.
3.16
Savings and Loan Crisis
Though First Republic Bancorp was establishing its footing and gaining
momentum, and despite the fact it was not a savings and loan institution but rather a thrift holding company,
there were signs that the industry as a whole was headed for trouble.
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3.17
Separating from the Pack
First Republic put as much distance as possible between itself and the
industry in its 1988 annual report to shareholders: “The Company and its subsidiaries are not associated in
any way with the Federal Home Loan Bank system, the savings and loan industry, or the Federal Savings and Loan
Insurance Corporation (FSLIC). First Republic Thrift & Loan, the larger of the Company’s two subsidiaries, has
been insured by the Federal Deposit Insurance Corporation (FDIC) since 1986; the smaller, El Camino Thrift &
Loan based in San Diego, has applied for FDIC insurance.”56 El Camino later secured coverage in August of
1989.
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3.18
Client Testimonials Debut
A powerful and longtime approach to communicating what makes First
Republic unique debuted in the pages of the 1989 Annual Report. The company turned the spotlight on what at
the time were its two largely distinct groups of clients: depositors and borrowers. Herbert felt that client
testimonials were really the only way to “prove” good service, and he initiated this innovative approach to
marketing the client- focused enterprise. Client testimonials would define the First Republic brand in years
to come and still feature prominently in the company’s advertising nationwide.
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3.19
Loma Prieta Earthquake
Some investors may have been worried about First Republic’s outlook
during the worst of the savings and loan crisis, but for Castro-Franceschi, Tresenfeld and First Republic’s
other top producers, most of 1989 was great. “We have this amazing momentum, we’re going gangbusters, we’re
really penetrating now … then the ’89 earthquake comes,” Castro-Franceschi recalled. She was hunched over her
typewriter trying to finish a set of loan documents on the afternoon of October 17th, 1989. Filing cabinets
crashed to the ground and the building shook, but the native San Franciscan did not move. She had seen her
share of earthquakes.
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3.20
Firm Footing
In its first four years, First Republic grew rapidly and withstood
repeated and significant tests of its strategy, adaptability and leadership. It navigated the troublesome
acquisition of El Camino Thrift & Loan, adopted a compensation strategy counter to the industry norm in order
to protect its clients and investors, secured FDIC insurance for its depositors, and continued to grow and
innovate through the savings and loan crisis. And it emerged from the damage of the 1989 San Francisco
earthquake with a one- time loss of less than a half-million dollars, mostly from lost leasehold improvements,
and damage-related loan write-downs estimated at less than $150,000.
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