DBRS Comments on City National Corporation’s 3Q12 Earnings – Senior at “A”

DBRS, Inc. (DBRS) has today commented on the 3Q12 earnings of City National Corporation (City National or the Company). DBRS rates the Company’s Issuer & Senior Debt at “A” with a Stable trend. The Company reported net income attributable to City National of $59.8 million for the quarter, up from $54.8 million in 2Q12 and from $41.4 million in 3Q11. DBRS notes that 3Q12 results included gains related to investments, as well as income related to its FDIC-assisted transaction that totaled an aggregate benefit of $3.8 million to net income, which was $2.2 million less than 2Q12’s unusual item benefit.

Highlights of the quarter include continued strong loan and deposit growth, positive operating leverage and still strong asset quality metrics. During the quarter, City National completed its acquisition of Rochdale Investment Management (Rochdale), a firm that manages $5.1 billion of assets for affluent and high net worth clients and their financial advisors. Moreover, the Company continues to make investments in its businesses. These investments include plans to open two more branches each in both New York City and the San Francisco Bay Area, as well as continued investments in technology.

Importantly, new loan production in the quarter was a record for the third consecutive quarter totaling $920 million with about half the growth coming from new clients. Nonetheless, the Company noted that some entrepreneurs and investors remain on the sidelines given all the economic and political uncertainty.

Even with today’s slow growth economy and low interest rate environment, the Company was able to grow revenues to a record $317.2 million, a 9% improvement from 2Q12. Net interest income (FTE) declined 3% during the quarter to $214.8 million, largely due to prepayment experience on covered loans. Specifically, the margin contracted 33 basis points to 3.58% and margin pressure is expected to continue, albeit at a slower pace. Meanwhile, average loans and leases, excluding FDIC-covered loans, increased a very solid 4% to $13.6 billion reflecting strong growth in commercial loans, and to a much lesser extent, residential mortgage loans.

Noninterest income increased 43% to $107.3 million. Excluding the impact of covered assets and net securities gains/losses, noninterest income was still up a considerable 35% to $98.4 million primarily reflecting the Rochdale acquisition and distribution income from other investments. Overall, assets under management totaled $38.0 billion at quarter-end.

Expenses increased 7% during the quarter to $207.9 million primarily reflecting the Rochdale acquisition. Excluding covered assets and amortization of intangibles, adjusted expenses increased 8.1% to $195.6 million.

Deposit growth was strong and City National’s overall robust deposit franchise is a key factor supporting the rating. Indeed, average core deposits grew 5% to $21.2 billion with average non-interest bearing deposits growing even faster at 8%. In four years, the Company has more than doubled the amount of its core deposit base.

Asset quality remains strong at City National. Indeed, the Company reported negligible non-covered net charge-offs following recoveries in 2Q12 and non-covered nonperforming assets (NPAs) showed modest improvements from already low levels. Specifically, NPAs of $130.5 million improved to a low 0.95% of total loans and leases from 0.98% in 2Q12. Meanwhile, NCOs were $2.2 million, or just 0.06% of average loans and leases. DBRS notes that the allowance for loan and leases remains very solid at 1.96% of total loans and leases.

Balance sheet growth and the Rochdale acquisition resulted in the Company’s tangible common equity ratio to decline 47 basis points during the quarter to a still sufficient 6.41%. Regulatory capital ratios were also pressured, but remain well above the “well-capitalized” regulatory thresholds. Preferring to keep the capital for organic growth opportunities, as well as for potential acquisitions,the Company noted that share repurchases are unlikely.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments and Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments. All can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Approver: Roger Lister
Initial Rating Date: 6 April 2005
Most Recent Rating Update: 2 March 2012

For additional information on this rating, please refer to the linking document under Related Research.