The big challenge facing First Republic’s new CEO

By naming a new chief executive, First Republic Bank has brought an end to a period of leadership tumult, but Mike Roffler takes the reins at a time of other challenges.

With interest rates poised to rise, borrower demand for the San Francisco company’s bread-and-butter mortgage products is likely to come under pressure, according to analysts.

The Federal Reserve is widely expected to boost its benchmark interest rates multiple times this year, potentially beginning with its meeting Wednesday, in an effort to tame soaring inflation. Those hikes could drive up rates broadly. When rates for home loans rise, borrower demand tends to taper.

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Already, mortgage rates have risen this year. Rates for 30-year fixed-rate mortgages averaged 3.85% in the first week of March, up from 3.76% the prior week, and up from 3.05% a year earlier, according to Freddie Mac.

First Republic ranks “near the bottom of all mid-cap banks from an asset sensitivity position,” Wells Fargo analyst Jared Shaw said Monday, referring to analyses showing that many other similarly sized banks are better positioned to benefit from rising interest rates.

The $181 billion-asset bank’s “leading growth product, the single-family mortgage, has already seen meaningful reduction in industry application volumes,” Shaw said.

First Republic culminated a strong 2021 with fourth-quarter revenue up 26% from a year earlier to $1.4 billion and net income up 35.5% to $400 million. Single-family and multifamily mortgages in the affluent Bay Area and other major markets proved big performance drivers.

Should rates climb as expected, mortgages will become more expensive, and both home purchases and refinance activity could abate.

Jefferies analyst Casey Haire said that higher rates present a headwind. “If you need to play rates, First Republic is not at the top of anyone’s list,” he said.

Still, First Republic forecast double-digit percentage loan growth in 2022, with mortgage lending expected to expand, Haire noted.

That anticipated resilience is a result of the bank’s large focus on wealthy clients in affluent markets, such as San Francisco, Los Angeles, Boston and New York City, where wealth has continued to expand during the pandemic, Haire said.

First Republic has roughly a 15% share of the high-net-worth market in the Bay Area, but a smaller share in its other markets, Haire noted. As such, the bank has plenty of room for growth.

As First Republic prepares to navigate a shifting rate environment while simultaneously trying to gain market share, Roffler’s promotion should provide leadership clarity.

Late in 2021, First Republic founder and CEO Jim Herbert started a medical leave that the company said could last six months.

Earlier last year, as part of a succession plan, Herbert, who founded the company in 1985, agreed to share the co-CEO title with Hafize Gaye Erkan, his widely presumed successor.

However, in January, Erkan abruptly resigned to pursue other opportunities and, in the same month, Chief Operating Officer Jason Bender stepped down because of a family tragedy.

Those departures left Roffler as the logical inside choice, Haire said. Roffler had been named president in 2021 and previously served as chief financial officer for about six years. In January, he was named acting co-CEO.

First Republic did hire a recruiting firm to conduct a search for additional candidates, leaving the chief executive position in flux until Roffler’s promotion was announced on Sunday.

In a recent regulatory filing, First Republic said that the 77-year-old Herbert would return to work in April, and Sunday’s announcement provides clarity about his position. Herbert will transition to the role of executive chairman, where he will continue to help guide overall strategy while also cultivating client and shareholder relationships, the bank said.

“I don't know the details of his health challenges, but I think the fact that he is coming back signals that his prognosis is good, and his return is important” for a leadership transition, Haire said. “I feel much better with him coming back, and I think everyone is comfortable with Roffler, given his experience.”

Roffler “has a deep knowledge of our business model and is highly regarded by our stakeholders,” George Parker, First Republic’s acting chairman, said in a press release. “As a collaborative and forward-looking leader, he is well-positioned to drive thoughtful evolution while maintaining the bank’s consistent, safe growth for many years to come."

First Republic did not immediately respond to a request for further comment Monday. But in the press release, Roffler, who joined First Republic in 2009 and has more than 25 years of banking and accounting experience, praised “the phenomenal culture and company Jim and the team” built.

“I am grateful to work with colleagues who deeply care for our clients, communities, and one another,” Roffler said. “I look forward to guiding our future success, through an unwavering focus on exceptional client service, alongside an outstanding leadership team, and with the support of our Board and Jim.”