The San Francisco-based bank fell short of the S&P 500, which was down 5.9% in January, and the Russell 2000, which dropped 9.7% in the month. More specifically, First Republic trailed the average return in the banking sector, which was up about 3.6% in January.
It was not a great month for stocks across the board, as the markets were hurt by many of the same factors that caused them to drop in the fourth quarter, including inflation and COVID-19 variants. Also, the Federal Reserve indicated that it would likely raise interest rates, sending stocks (mainly growth stocks) tumbling.
But interest rate hikes, as well as a growing economy, are good for banks. And while inflation was the highest since 1982 last year, the economy grew 5.7% in 2021, the fastest rate since 1984. With the economy expected to grow at an above-average clip in 2022, that's more good news for banks.
So, what drove the negative performance by First Republic in what was a relatively decent month for banks?
The regional bank and wealth manager had a strong 2021, with the stock up 41%. The bank has 81 locations, mostly in and around major money centers in California, New York City, Boston, and Florida.
On Jan. 14, the company reported strong fourth-quarter earnings, with revenue up 26.4% year over year, net income up 35.5% year over year, and a record quarter for loan originations. Wealth management assets were up 43.7% while wealth management revenue was up 44% in the quarter year over year. Yet the stock price fell 21% from around $208 on Jan. 12 to $164 on Jan. 27.
So, why the decline, in spite of the strong fourth quarter? The drop likely had to do with some changes at the top at First Republic. Co-CEO James Herbert announced in December that he was taking a six-month leave of absence starting Jan. 1 for health reasons.
The other CEO, Hafize Gaye Erkan, announced that she was resigning on Jan. 3 to pursue other opportunities. Erkan was considered the heir apparent to become the CEO after Herbert, 77, retires, so it came as quite a shock.
The departure was discussed briefly on the fourth-quarter earnings call on Jan. 12, but leadership didn't go into any details. Chief financial officer Mike Roffler was named the interim CEO, and the board tapped consulting firm Korn Ferry to conduct a search for a permanent replacement.
The market may have been spooked by the potential underlying reasons for the departure, but the stock jumped back up on Jan. 27 after the Fed announced that it would likely be raising interest rates in March. Leadership issues aside, First Republic has been one of the best performing bank stocks over the past decade and is well-positioned for continued success.