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First Republic Bank (FRC - Analyst Report) reported fourth-quarter 2013 adjusted earnings of 66 cents per share, in line with the Zacks Consensus Estimate. However, this compared favorably with the year-ago earnings of 61 cents.

Bottom-line improvement was backed by revenue growth, increase in loan and deposit balances as well as strong capital position. However, rise in non-interest expenses, and deteriorating profitability ratios were the headwinds for the quarter.

For 2013, the company’s adjusted earnings per share of $2.65 came in ahead of both the Zacks Consensus Estimate of $2.60 and the prior-year figure of $2.14. Notably, the company delivered positive earnings surprises in two of the trailing four quarters.

Including certain one-time items, the company reported net income of $90.5 million, up 10% from $82.3 million in the prior-year quarter, while for 2013 it increased 25% year over year to $360.8 million.

Performance in Detail

Total revenues were $345.9 million for the quarter, up 9.2% year over year. Excluding the impact of purchase accounting, First Republic’s core revenue came in at $371.0 million, up 3.7% from the prior-year quarter but below the Zacks Consensus Estimate of $380.0 million.

For 2013, the company’s total revenue stood $1.5 billion, in line with the Zacks Consensus estimate of $1.5 billion. However, it was up 9.4% year over year. Further, core revenue came at 1.3 billion, up 16.4 % year over year.

Republic’s net interest income increased 4.1% year over year to $314.8 million. Excluding the impact of purchase accounting, net interest income was $289.7 million, up 10.9% from the year-ago quarter. Higher interest income on loans and investments was the primary driver.

However, core net interest margin fell 40 basis points year over year to 3.06%. Excluding the impact of purchase accounting, margin was 3.32%, down 70 basis points (bps) year over year.

The company’s non-interest income came in at $56.2 million, up 1.1% year over year. The rise was primarily attributed to a significant increase in investment advisory fees and loan servicing fees.

Non-interest expenses stood $196.6 million, up 14.0% year over year. Elevated salaries and employee benefits expense along with increased expenses related to technology platform primarily led to this rise.

Core efficiency ratio stood at 56.9% compared with 52.1% in the prior-year quarter. Excluding the impact of purchase accounting, the ratio was 54.2% compared with 49.6% in the prior-year quarter. The increase in efficiency ratio indicates a decline in profitability.

Credit Quality

First Republic’s credit quality was a mixed bag in the quarter under review. Though the provision for credit losses declined significantly by 54.5%, total non performing assets increased 4.5% year over year to $57.7 million.

Further, nonperforming assets to total assets ratio equaled 0.14%, up 1% from 0.13% in the year-ago quarter. However, as of Dec 31, 2013, the ratio of net loan charge-offs to average total loans stood at 0.01%, in line with the prior-year period.

Asset and Capital Position

During the reported quarter, First Republic’s capital ratios stood at a well-capitalized level. As of Dec 31, 2013, the company’s Tier 1 leverage ratio was 9.19% compared with 9.33% as of Dec 31, 2012.

The Tier 1 risk-based capital ratio was 13.34% compared with 13.28% as of Dec 31, 2012. Further, book value per share came in at $24.63, up from $22.10 at the end of the prior-year quarter.

As of Dec 31, 2013 net loans increased 21.5% year over year to $33.8 billion, while total deposits rose 18.4 % to $32.1 billion.

Our Viewpoint

We expect First Republic’s long-term inorganic growth strategy to continue to gain momentum owing to its strong balance sheet position. Revenue may get a boost if the company continues to perform well in its Brokerage and Investment as well as Wealth Management segment.

Yet, the unsettled economic environment, rising expenses and stringent regulatory issues remain concerns. First Republic currently carries a Zacks Rank #3 (Hold).

Among other banks, State Street Corp. (STT - Analyst Report) is scheduled to report fourth-quarter results on Jan 24, while KeyCorp. (KEY - Analyst Report)  and Fifth Third Bancorp (FITB - Analyst Report) are expected to release results on Jan 23.

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