Lessons From How This CEO Earned $144 Million for Himself and Billions More for Investors

By Markets Fool.com

In 1985, Jim Herbert founded First Republic Bank . The bank's plan was to make mortgage loans only to the wealthiest of individuals, those with the most cash to deposit at the bank and typically with the lowest credit risk -- the households that every bank wants as customers. With the competition so intense, First Republic's primary tactic would be world-class, white-glove customer service.

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Twenty-nine years of slow and steady growth later, Herbert is worth over $144 million and First Republic is on the verge of passing $50 billion in total assets.

Herbert and First Republic's success story is an incredible example of aligning management and shareholder incentives for the benefit of all.

The path to $144 million
Herbert's bank grew steadily for the first 20 years of its existence. The bank took a conservative approach to lending and doing business, allowing it to cruise through the savings and loan crisis of the late 1980s and early 1990s. The bank continued its path through the 1990s and was able to successfully bypass the dot-com bubble and recession of the early 2000s.


Source: First Republic Bank's fourth-quarter 2014 investor presentation.

Then, in 2007, Merrill Lynch -- whichBank of America would eventually bail out -- came to Herbert with an offer to buy the bank for $1.8 billion. Herbert would cash out a small fortune alongside the bank's existing shareholders, and Merrill would allow him to continue running the bank as a subsidiary.

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Not quite four years later, Herbert would make the deal of a lifetime. With Bank of America fully on the ropes, reeling from the financial crisis and Great Recession, Herbert negotiated a buyout of First Republic backed by a consortium of private-equity groups. The cost to buy back the bank: $1.86 billion, essentially the same price Merrill paid to buy First Republic in 2007.

In 2011, Herbert led the bank to an IPO, netting $3.3 billion. That's a 70% return to his private-equity backers in a little less than seven months.

The stock has done pretty well since, returning 72% to the KBW Bank Index's 33%.

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For his efforts, the bank's private-equity investors rewarded Herbert with a massive package of stock options. Today, those options are worth in excess of $144 million, making Herbert a very, very wealthy man.

The bank today has a market cap of $6.65 billion, according to data from Yahoo! Finance. Doing the math, that means the company has created $4.79 billion of shareholder value since Herbert bought the bank back from Bank of America. Not bad for a brief five years of work.

If only every bank had a Jim Herbert as CEO
Herbert has masterfully managed the growth of First Republic since 1985; the numbers speak for themselves. But what strikes me is the conservative, slow, and then sudden way that he's created so much wealth for himself and his shareholders. It's reminiscent of one of my favorite Warren Buffett quotes:

I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it, so that you had 20 punches -- representing all the investments that you got to make in a lifetime. And once you'd punched through the card, you couldn't make any more investments at all. Under those rules, you'd really think carefully about what you did, and you'd be forced to load up on what you'd really thought about. So you'd do so much better.

The bank is designed to serve only customers with the absolute best risk profiles. He has no desire to chase profits or growth by sacrificing credit quality. The bank offers a few products, and there is nothing groundbreaking or really innovative about any of them. Deposit accounts, mortgages, investments. That's about it. Certainly part of Herbert's genius is his ability to execute his customer service strategy -- the wealthiest individuals, it seems to me, are likely a pretty demanding group of people.

Looking at the business model another way, Herbert is basically saving his punches.

He knew that the downfall of banks is losing risk discipline, so he designed the bank to make it virtually impossible to underwrite bad loans. And then he stayed the course for 20 years until Merrill Lynch came knocking. He was exceptionally disciplined.

And then, in 2010, he took a risk. He knew his company and what it could do. He knew what it was really worth, intrinsically. He also recognized Bank of America's desperation. He teamed up with private equity and bought the bank. He punched one of his finite punch cards, as Buffett has said.

The result, it turns out, was a home run.

The article Lessons From How This CEO Earned $144 Million for Himself and Billions More for Investors originally appeared on Fool.com.

Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple and Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.