First Republic Bank's first-quarter earnings results will likely underscore its near-term earnings and profitability challenges after what turned out to be a tumultuous start to the year for the San Francisco-based company.

Following the failures of Silicon Valley Bank and Signature Bank, which led to broader concerns about industry liquidity, First Republic's stock price came under pressure due to the company's similarities to the two failed banks, including exposure to venture capital and a large amount of uninsured deposits. Plummeting confidence among consumers, also prompted by the failures, spurred deposit outflows for First Republic, leading the company to tap Federal Reserve borrowing ranging between $20 billion and $109 billion. To further bolster the company's liquidity position, a coalition of 11 of the nation's largest banks came together to deposit $30 billion into First Republic.

Rumors began that First Republic was potentially pursuing a sale in light of the events, but more recent reports suggest the company has opted to remain independent. Now, investors want to see the company's first-quarter earnings results shed light on what happened during the tumultuous quarter. Current equity analysts' estimates paint a bleak near-term picture for the company's earnings and profitability.

"[First Republic's] profitability remains challenged, [and] share price volatility could persist near-term given lingering elevated uncertainty on the fundamentals," Compass Point analyst David Rochester wrote in a March 17 note. "Near-term upside largely depends on deposit flows."

Deposit outflows

When First Republic reports first-quarter earnings, all eyes will be on its deposit base. The company's disclosed increased use of wholesale funding and the $30 billion deposit injection from large banks suggest it saw sizable deposit outflows.

Jefferies analysts Ken Usdin and Casey Haire estimate uninsured deposit outflows of up to $89 billion based on the company's various financial updates on cash, Fed borrowings, Federal Home Loan Bank borrowings and its insured deposit base. Compass Point's Rochester predicts a similar amount, estimating $90 billion in outflows prior to the deposit injection from the 11 large banks.

If the company saw about $90 billion in deposit outflows, that would be more than half of its deposit base of $176.44 billion as of Dec. 31, 2022.

Replacing those deposits will drive up the company's funding costs and weigh on its net interest margin (NIM), analysts wrote.

Since Dec. 31, 2022, the consensus estimate for First Republic's 2023 NIM has declined by 118 basis points, the biggest drop among all US banks trading on major exchanges with at least three analyst estimates, according to S&P Global Market Intelligence data.

The consensus estimate for the company's full-year NIM is 1.16%, compared to its NIM of 2.47% at Dec. 31, 2022. It is the only company in the analysis estimated to report NIM below 2%.

"We estimate substantially higher interest expense and lower [net interest margin] could weigh on earnings through year-end," Janney analyst Timothy Coffey wrote in a March 22 report.

Earnings challenges

Based off recent events, First Republic's earnings profile is "clearly impaired," Jefferies' Usdin and Haire wrote. "The simple math would say that [First Republic] could have negative forward earnings as a stand-alone entity."

Assuming FHLB borrowing and max Fed borrowings at market rates of 5%, the Jefferies analysts estimate a quarterly net interest income run rate of about $200 million, down from the estimate of $1.15 billion for the first quarter. Coupled with the analyst's fee and cost estimates, this would put First Republic's quarterly pre-provision net revenue run rate around negative $465 million, they wrote.

Separately, Coffey predicts a "modest" deposit balance decline would result in "sizable" earnings misses. The Janney analyst estimated that a 5% decline in fourth-quarter 2022 deposit balances would result in a 7% 2023 consensus EPS miss, while 15% in deposit runoff would result in a 50% 2023 consensus EPS miss.

Further, higher funding costs will cause earnings to move "notably downward for the coming quarters," Piper Sandler analyst Andrew Liesch wrote in a March 16 note.

The equity analyst consensus estimate is that First Republic's 2023 normalized EPS will be down 106.3%.

Potential capital raise

Multiple analysts suggested First Republic might have to turn to a capital raise given the increased size of its balance sheet.

"A capital raise would alleviate some stress from [First Republic]," Janney's Coffey wrote in his March 22 note.

Atlantic Equities analyst John Heagerty estimates the company's balance sheet is around $275 billion — after the $30 billion deposit injection from other banks — which would lower the company's Tier 1 ratio to about 6.4%, compared to 11.56% at Dec. 31, 2022. In the past, management has said it prefers to keep that ratio above 8% "and returning to that level would necessitate a [$5 billion] capital raise," Heagerty wrote. However, the ultimate size of a potential capital raise will depend on whether the company used new deposits to pay down short-term borrowings, he said.

Janney's Coffey predicted that First Republic is "unprepared" for a new regulatory environment in which unrealized losses on securities have grown in importance. If the company were to liquidate both its available-for-sale and held-to-maturity books, Coffey believes it would result in a loss of about $5.2 billion.

"Loss on the sale of investment securities of that magnitude could impact capital ratios, such as Tier 1 Leverage. Options to increase important regulatory ratios could include a meaningful raise of common equity," Coffey wrote.

Stock pressure

The company's stock price closed at $13.44 on April 5, down 88% from $115.00 on March 8, the day before industry liquidity concerns picked up.

With expectations for earnings headwinds in the foreseeable future, the company's stock price will remain under pressure.

"We believe FRC's stock price could reflect both the challenges to forward earnings power and the potential for a dilutive capital raise. As such, we expect continued volatility in the share price," Janney's Coffey wrote.

However, amid the coming headwinds, credit quality should prove to be a bright spot for the company.

"While First Republic's earnings power will diminish, the bank's high quality loan portfolio should perform very well in the face of any economic challenges," Piper Sandler's Liesch wrote.