Shares of First Republic Bank closed 50 percent Tuesday, a day after a disturbing earnings report and a conference call with analysts in which the company’s executives declined questions. The speed of the decline triggered a series of volatility-induced trading freezes by the New York Stock Exchange.
On Monday, after the close of regular stock trading, First Republic released results showing just how perilous the bank’s future had become since mid-March following the bankruptcy of Silicon Valley Bank and Signature Bank. First Republic said its customers drew $102 billion in deposits in the first quarter — more than half of the $176 billion it held at the end of last year.
First Republic received a $30 billion temporary lifeline from the nation’s largest banks in March last month to support its operations. However, those banks can withdraw their deposits as early as July. In the first quarter, First Republic also borrowed $92 billion, mostly from the Federal Reserve and government-backed lending groups, essentially replacing deposits with loans.
The bank’s executives did little to inspire confidence during the conference call, offering only 12 minutes of prepared remarks. The bank also said on Monday it would cut as much as a quarter of its workforce and cut executive compensation by an unspecified amount.
“This is a trust issue, as with any bank, and when trust is lost, the money will flee,” Aswath Damodaran, a professor of finance at New York University, wrote in an email.
An analyst at Wolfe Research, Bill Carcache, explained in a research note Tuesday what he called “the long list of questions we weren’t allowed to ask.” Among them: how can the bank survive without raising new money, and how can it continue to provide attentive customer service – a staple of its reputation with wealthy clients – while cutting the staff it provides?
The bank’s ability to save itself without government repossession or intervention is limited and challenging. No buyer for the bank as a whole has yet emerged. Any bank or investor group interested in acquiring the bank would have to take over First Republic’s loan portfolio, which could saddle the buyer with billions of dollars in losses based on recent interest rate movements. The bank is also difficult to sell in pieces because its customers use many different services, such as checking accounts, mortgages and wealth management.
There are no easy solutions to First Republic’s situation, said Kathryn Judge, a financial regulation expert at Columbia Law School. “If there were attractive options, they would have already pursued them,” Ms. Judge explains.
The Fed can no longer take on some of a bank’s financial risk to facilitate a takeover as it did in 2008, as post-financial crisis reforms have changed its powers. And while the Federal Deposit Insurance Corporation could help in some way, that would most likely involve bankrupting the bank and invoking a “systemic risk exemption,” which would require officials from various agencies to sign, Ms. Judge.
But if the bank fails, the government will have to decide whether to protect its uninsured depositors, which can also be a difficult decision, she said.
“There really isn’t an easy answer,” Mrs. Judge said.
Representatives from the Fed and FDIC declined to comment.
Shares of other banks also fell on Tuesday, but not nearly as much as First Republic. The KBW Bank Index, a proxy for the sector, closed about 3.5 percent.
Separately, the Fed said on Tuesday that its review of supervision and regulation of Silicon Valley Bank will be released at 11 a.m. Friday.
Robert Copeland reporting contributed.
