What happened
The trouble with regional banks continues. Shares of First Republic Bank (FRCB) collapsed by over 70% this week, according to data from S&P Global Market Intelligence. The lender reported poor first-quarter earnings with massive deposit outflows and is rumored to be headed for receivership with the Federal Deposit Insurance Corp. (FDIC).
As of this writing, First Republic stock is down 97% year to date (YTD) and looks to be headed for a complete wipeout for shareholders.
So what
First Republic ran into trouble in March in conjunction with the Silicon Valley Bank (part of SVB Financial) collapse. Prominent venture capitalists decided to tell all their portfolio companies to pull money out of Silicon Valley Bank, causing panic and a run on the bank, with depositors fleeing the institution seemingly overnight.
First Republic is another Northern California bank with a similar customer base to Silicon Valley Bank and had to get a $30 billion deposit injection from big banks like JP Morgan in order to stay solvent, as it faced major withdrawal requests from customers. In its Q1 earnings release, management said that after March 10 (which is when trouble started brewing at Silicon Valley Bank), First Republic "began experiencing unprecedented deposit outflows."
Investors are now seeing how bad these deposit outflows really were. Despite the deposit injection from the big banks, First Republic lost $72 billion in net deposits during Q1, all of which happened during the month of March.
Management said it has stabilized withdrawal requests and slashed its expenses, but it looks like the company can't survive on its own. CNBC is reporting that the FDIC will be taking First Republic into receivership soon, which means it will be taking ownership of the bank and looking for strategic buyers who want to buy its outstanding loans. This would wipe out First Republic's equity value, so it is not surprising to see the stock collapse on this news.
Now what
For investors in First Republic stock, this is no doubt a disappointing outcome. The party looks to be finally over, and it would be surprising to see First Republic stock still publicly traded by the end of May.
This should serve as a lesson for investors in financial stocks: Things can get ugly really fast with these businesses, wiping out years of gains for shareholders in just a few short days, even if the bank's financials looked sound a few months ago.
First Republic is not the first bank to fail, and it certainly won't be the last. Individual investors should heed this lesson and proceed with caution when investing in bank stocks.
