First Republic goes from Wall Street Raider to Prey in a few days

(Bloomberg) – Just days ago, First Republic bank boasted another coup for its wealth management business: poaching a team of six from Morgan Stanley in Los Angeles.

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Recruitment campaigns against Bank of America Corp., JPMorgan Chase & Co., Bank of New York Mellon Corp. and Wells Fargo & Co. – Raids in Boston, New York and Palo Alto, California. It reflected how the San Francisco-based bank was rapidly expanding based on its technical wealth.

Now First Republic is trying to reassure customers and clients that they can avoid the fate of the Silicon Valley bank, which collapsed last week after its savers fled.

First Republic shares plunged 28% Thursday and are down about 80% since March 8. It is reviewing strategic options, including a sale, and is expected to attract interest from larger rivals. JPMorgan and Morgan Stanley are among those discussing a potential deal with the bank that could involve a sizeable capital injection, the Wall Street Journal reported Thursday.

It’s a stunning turn of events for the lender, which has built a wealth management franchise worth roughly $271 billion and blown it among American institutions. However, it is the emphasis on this business that could separate the fate of First Republic from SVB and New York’s Signature Bank.

While it quickly expanded into lines of credit for capital calls and loans to venture capitalists — services that SVB specialized in — it’s considered more attractive than its Californian counterpart because of its specialization in affluent.

“First Republic Bank grew up rich,” while “SVB started out with portfolio companies,” said Joe Maxwell, managing partner at Fintop Capital, a fintech venture capital firm. While there’s a lot of overlap, their starting point is still “part of their DNA,” he said.

A First Republic representative did not immediately respond to a request for comment. Emails sent to the leaders of the newly added advisory team were not bounced back immediately.

In a March 12 note to clients, signed by Executive Chairman Jim Herbert and Chief Executive Officer Michael Roffler, the bank said it has taken steps to bolster its liquidity through access to additional funding from JPMorgan.

“For nearly 40 years, we have operated a simple, no-nonsense business model that focuses on exceptional customer care. We have successfully navigated through various macroeconomic and interest rate environments,” they said.

Different origins

The origin story of First Republic couldn’t be more different than SVB in many ways.

Herbert founded First Republic in 1985 based on a hunch that jumbo mortgages were too good a deal for wealthy, established Californians to pass up. SVB’s banking model for startups was developed a few years earlier – via a poker game.

But over the next four decades, as interest rates fell and hot tech money dominated American finance, their customer bases began to overlap.

First Republic began actively promoting Silicon Valley’s tech wealth. The bank opened a branch on the Facebook campus in Menlo Park, California to attract early employees on the road to riches. In San Francisco, it has a branch at Twitter’s Market Street headquarters, which remains open.

Meanwhile, SVB’s offering grew as founders and venture capitalists got rich, and the company eventually bought wealth manager Boston Private in 2021.

Still, that wealth deal pales in comparison to First Republic, where wealth has grown to $271 billion from just $17.8 billion at the end of 2010.


Around this time, First Republic executives initiated a plan to transform the wealth division into a major player. Early deals included buying Luminous Capital, with $6 billion in client assets, for $125 million in 2014.

“They didn’t really penetrate the wealth investing business very well back then,” said David Hou, co-founder of Luminous.

As assets continued to grow and eventually surpassed $100 billion, Hou and Mark Sear, his partner, decided to exit the bank. They left the company in 2019 to found Evoke Advisors.

However, Hou, Sear, and other Evoke partners have kept money at First Republic amid last week’s upheaval. The same is true of other clients and fund managers, some of whom have taken to social media to express their love for the bank, urging people to stay put.

One Silicon Valley investor said he plans to keep all of his personal and business funds with First Republic.

Although the investor didn’t have its origins in the technology space, the investor found that First Republic understood the complexities of private technology assets better than the big banks – and on par with SVB.

Introduced to both banks six years ago as early Tech employees, they chose First Republic over SVB for relationship management with clients. You now have a personal line of credit, a mortgage, and a venture fund with the bank — and plan to keep them there.

That kind of intent was put to the test again on Wednesday when both S&P Global Ratings and Fitch Ratings downgraded First Republic’s credit rating to junk, citing the risk that its customers would withdraw their money en masse.

No chance

Other First Republic customers are also hoping the bank will weather the turmoil – but are taking no chances.

Homebuyers in the Bay Area are now resorting to “double apping” — submitting loan applications to a second bank just in case, said Joske Thompson, a real estate agent at Compass in San Francisco.

“Having a backup was unthinkable until last week,” said Thompson, who has been a real estate agent for four decades.

They’re not the only ones exercising caution.

A New York-based wealth management firm that caters to high-net-worth investors transferred a high eight-figure sum of cash from First Republic last week, including money in checking accounts, company funds and certificates of deposit, according to a person familiar with the matter.

The person, who asked not to be identified when discussing private information, said the wealth manager has no intention of leaving the bank forever but is trying to allocate and diversify money after the SVB collapse.

The money will be diverted to institutions including JPMorgan and BNY Mellon, the person said.

Cultural Connections

Herbert, who was CEO of First Republic for 37 years, is among the highest paid US executives. Colony Capital founder Tom Barrack sits on the bank’s board of directors.

According to the company’s proxy statement, Herbert’s total compensation for 2021 was $17.8 million. He has served on the boards of institutions from coast to coast, including the San Francisco Ballet Association and New York’s Lincoln Center for the Performing Arts.

Herbert’s wife, Cecilia, is a longtime board member and oversees BlackRock Inc’s iShares exchange-traded fund complex. She has also served on the boards of non-profit organizations such as Stanford Health Care and WNET Group, a New York-based public media company.

Jean-Marc Berteaux had been a First Republic retail client for more than 15 years when he and another client introduced the bank to the Boston Youth Symphony Orchestra, a non-profit organization of which they serve as board members.

“They support nonprofits with the understanding that they can grow their private wealth businesses,” said Berteaux, a retired investment manager.

He said his banker called him Saturday and Sunday to make sure there was an insured cash levy in place to redistribute the nonprofit’s $250,000 million to other banks.

“Give me a megabank that would have done that,” Berteaux said.

concentration risk

The similarities – and differences – between First Republic and SVB are evident in their balance sheets.

Both SVB and First Republic fund equity call lines to private equity and venture capital funds. But SVB’s $41 billion accounted for more than half of its loan portfolio. First Republic had $10 billion of such loans outstanding.

Both issue single-family mortgages, but the SVB had lent less than $9 billion. That’s a fraction of First Republic’s $99 billion balance, which made up 59% of its loan portfolio (mark Zuckerberg received a 1.05% interest rate in 2012). It had an additional $22 billion in multifamily loans and $11 billion in other commercial real estate.

One area of ​​contrast is their insole base. Consumer accounts make up 37% of the First Republic, with businesses covering the rest. SVB doesn’t have the same breakdown in its most recent annual report, but the notes came mostly from commercial clients in the technology, life sciences, private equity and venture capital sectors.

First Republic has said that no sector accounts for more than 9% of total business deposits, while having a lower percentage of unsecured deposits than SVB.

Dick Bove, chief financial strategist at Odeon Capital Group, reckons Royal Bank of Canada will most likely bid for First Republic as it is drawn to the wealth management business.

“Banks always want what they like to call the ultra-wealthy customer group,” he said. First Republic customers have amassed fortunes over decades, he said, while many SVB customers indulged in the whims of “hot money.”

–Assisted by Max Reyes, Pierre Paulden, Amanda Albright, Patrick Clark, Amanda Gordon, Blake Schmidt and Sally Bakewell.

(Updated stock price, additional details on First Republic’s options in fourth paragraph.)

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