Earnings Call Adds Farcical Element to First Republic’s Implosion
In the annals of disastrous corporate earnings calls, First Republic Bank on April 24 offered up a whopper. It was short, lasting about 12 minutes. You could call it sweet, too – if you were an executive trying to avoid talking about the beleaguered bank’s problems.
After an overview of recent developments from FRB CEO Jim Herbert, the San Francisco-based bank ended the call without taking any questions from participants. (The transcript of the quarterly call underscores the abruptness of its conclusion.) By the end of trading the following day, FRB’s stock price had fallen 50 percent.
Now, we can’t say for certain that the fishy earnings call tanked FRB’s shares. Releasing a quarterly earnings report showing investors had pulled more than $100 billion in deposits from the bank probably would have sufficed all on its own. We can say, however, that a vague and evasive earnings call couldn’t have helped calm fears in the market about FRB’s health.
“As the industry events unfolded in March, we experienced unprecedented deposit outflows,” said Herbert during the earnings call. Talk about an understatement.
Not surprisingly, regulators seized the bank this week, making FRB the third major financial institution to fall into conservatorship in two months. JPMorgan Chase bought the bulk of its assets from the FDIC for $10.6 billion.
If authorities at the Securities and Exchange Commission really want to be sticklers for the rules, the short and uninformative earnings call raises questions about FRB’s compliance with securities regulations. SEC rules call for companies to disclose material information to the public in a timely and accurate manner. They also require that companies provide an opportunity for investors to ask questions. You could make the case that FRB’s actions in this instance didn’t meet those standards.
Importantly, the nature and content of the call also points to serious deficiencies in FRB’s internal governance. It seems preposterous that anyone in the C-suite of a publicly traded company would expect to get away with stonewalling the public in such a fashion on an earnings call. The fact that Herbert did suggests little fear of reprisal from the company’s board of directors. That, or Herbert knew that there was no hope of saving the bank, which seems entirely possible.
So, what lessons can other companies learn from this fiasco? The first is that they should manage their risk better than FRB did in this case. But that’s self-evident. A more nuanced takeaway: FRB’s evasiveness when it came to revealing the truth of its situation didn’t do anything to help it avoid a collapse. In fact, it might have hastened the bank’s downfall.
Perhaps forthright communication and transparency with the public would have helped save FRB, but likely not. Nevertheless, obscuring the truth in this case served no purpose other than casting leadership at the company in a shady light.
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