The abrupt resignation of the widely presumed successor to First Republic founder James Herbert would have been surprising even if it hadn’t coincided with the 77-year-old executive’s medical leave.
But the timing of the departure — announced Monday, just three weeks after Herbert’s six-month leave was disclosed — left analysts particularly puzzled, even though some said it likely wouldn’t be more than a short-term headwind for the company. Many observers had seen co-CEO Gaye Erkan, who left to pursue other opportunities, as the heir apparent to Herbert.
“Our conversations with investors yesterday suggest the announcement left many speculating about the true happenings behind the scenes,” David Chiaverini, an analyst with Wedbush Securities, said Tuesday in a research note. “Mainly, either Erkan has a truly exceptional opportunity waiting in the wings at another company, or perhaps there could have been fallout in the management ranks internally.”
First Republic has long been tight-lipped about succession plans, and Erkan’s resignation leaves the San Francisco company without an obvious plan to replace Herbert, the only CEO in the bank’s 36-year history. Erkan had been named co-CEO last July in a move that outsiders saw as solidifying her status as the company’s likely next leader.
Instead, First Republic on Monday named president Michael Roffler, who served until recently as its chief financial officer, as acting co-CEO while it searches for its next chief executive.
The $173 billion-asset bank, which specializes in private banking and wealth management, said that it has engaged the executive recruiting firm Korn Ferry in the CEO search. But as recruiters themselves often point out, using a search firm doesn’t necessarily mean a company will select an external candidate.
A First Republic spokesman declined to comment beyond what was in the company's press release Monday.
While finding the right candidate will be a challenge, analysts pointed to factors working in First Republic’s favor, including the strength of its management team and preliminary fourth-quarter earnings suggesting strong loan growth and credit quality.
In the last six years, First Republic’s total assets have roughly tripled even though the company has not made any acquisitions. And for years, its stock price gains have easily outpaced those of the U.S. banking industry as a whole.
“While the news is surprising and at many banks could lead to some near-term distractions, First Republic has established one of the strongest management teams in the industry, in our view, as well as a consistent strategy,” Andrew Liesch, an analyst with Piper Sandler, wrote in a note to investors.
First Republic’s share price began to rebound on Tuesday after falling by a little more than 5% to $195.44 on Monday. When the market closed Tuesday, its stock was trading at $202.62 per share.
Piper Sandler and Janney maintained neutral ratings for First Republic, while Wedbush raised its estimates based on preliminary fourth-quarter results that were also released Monday. First Republic grew its loans by roughly 20% year over year and said it expected loan chargeoffs of just $100,000 during the fourth quarter, according to the unaudited results.
Erkan’s departure is the latest twist in a long-running succession saga at First Republic. Under an agreement announced in 2012, Herbert was slated to retire as CEO in mid-2016 and to serve as chairman until Dec. 31, 2019.
But in 2015, First Republic said that Herbert would remain CEO and chairman until Dec. 31, 2017. Then in 2017, the company
In 2019, First Republic
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Herbert founded First Republic in 1985 and eventually sold it to Merrill Lynch in 2007. He continued to run the firm under the First Republic name while it was part of Merrill and, later, Bank of America. He reacquired the company in 2010 with the backing of two private-equity groups.
Whether First Republic ultimately selects an internal or external candidate as its next CEO, it is likely to favor someone with strong experience working with high-net worth clients or leading a business line such as wealth management or private banking, analysts said.
Given the company’s bicoastal presence, particularly in California and New York, the next CEO will likely also need to be comfortable with a good deal of cross-country travel, at least during their first year on the job, according to analysts.
“The individual would likely have a very strong background in a client-focused, high-touch, high-service financial services company consistent with what has made First Republic successful,” said Terry McEvoy, an analyst with Stephens.
Erkan joined the company in 2014 as part of its executive management team following nine years at Goldman Sachs. Originally from Turkey, she has a Ph.D. in operations research and financial engineering from Princeton University.
The company’s next CEO will need to accept some cultural differences between First Republic and many other similarly sized banks. In many cases, a new chief executive joining an organization wants to put his or her own stamp on the company, McEvoy said.
“In the case of First Republic, it’s one of the most successful financial services companies out there. I think many would say, ‘Don’t do that, just let it operate the way it has been,’ ” he said. “This isn’t a high-turnover company. You have to take some time to get to understand the culture, the partners and the teammates and almost stay out of their way and just let them do their job because that’s what’s made First Republic so successful.”
