First RepublicBank: Dubious Dividends?

The news in April about First RepublicBank’s monumental $1. 5 billion quarterly loss alerted one and all to the severity of the bank’s problems. But the loss added insult to injury among the local brokerage community, already up in arms over a First Republic dividend issue that, at least in hindsight, seems highly suspect.

On February 16, 1988, First RepublicBank declared quarterly dividends on not just one but all four of its preferred stock issues. The troubled bank holding company declared that it would pay dividends to preferred stockholders ranging from 53. 125 cents to $2, 988 per share on April 1, 1988. Then, as further incentive to stock buyers, the bank said that it would only pay those dividends to shareholders who had bought stock on or before March 9, 1988.

But on March 15, the bank suddenly changed its tune, rescinding its previous declaration of dividends and announcing that it was seeking support from the Federal Deposit Insurance Corporation (FDIC). By the end of the week, the FDIC announced the bailout of First RepublicBank. Analysts estimate the bailout may be the largest in history, surpassing the $4. 5 billion bailout of Continental Illinois Corp. in 1984.

Problems the size of First RepublicBank’s don’t happen overnight. Yet within a month, the bank went from giving signals of health to bringing in the life-support systems. If it was an April Fool’s joke, you can bet stockholders aren’t laughing.

The official word from the bank is that rescinding the preferred dividends was a prudent decision. Indeed. And that it was further preservation of needed capital, which had begun back in December when the directors had deferred payment of dividends on all common stock. But that still doesn’t explain why a dividend was announced on February 16.