DBRS Comments on City National’s 4Q12 Earnings – Sr. at “A”

DBRS, Inc. (DBRS) has today commented on the 4Q12 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 $47.2 million for the quarter, down from $59.8 million in 3Q12, but up from $43.9 million in 4Q11.

Highlights of the quarter include record levels of deposits and loans and continued improvements in already healthy asset quality. However, revenues declined 4% sequentially, while expenses increased by a high 7% resulting in negative operating leverage. Positively, City National did achieve positive operating leverage for the year.

On a fully taxable-equivalent basis, net interest income declined 3% to $209.1 million, as declines in asset yields more than offset earning asset growth. Specifically, the margin remained under significant pressure declining 31 basis points to 3.27% primarily reflecting strong loan and deposit growth that are adding lower yielding loans and securities to the balance sheet. The Company also reported lower accretable income from covered loans.

Noninterest income declined by 7% to $99.9 million and comprised 33% of total revenues. The decline primarily reflected lower distribution income from investments and a decrease in Federal Deposit Insurance Corporation (FDIC) loss-sharing income (expense). DBRS notes that wealth management revenues were relatively stable and fee income from foreign exchange services and letters of credit grew a robust 16% to $11.3 million.

Expenses increased $14 million sequentially to $222.0 million. DBRS notes that 4Q12 expenses included $4.7 million in legal and professional fees and expenses related to the resolution of a legal claim. Positively, expenses grew only 2% in 2012 even with several acquisitions and continued investments in the franchise. DBRS expects expenses to remain well controlled in 2013.

Excluding covered loans, average loan and lease balances increased 3% during the quarter to $14.0 billion. Meanwhile, average deposits increased 7% to $23.4 billion. DBRS notes that City National’s robust deposit franchise continues to underpin the rating.

Asset quality is strong with criticized, classified, nonaccrual loans and nonperforming assets (NPAs) all showing improvements during the quarter. Moreover, City National had net recoveries of $2.0 million in 4Q12 bringing total net recoveries to $7.1 million for 2012. Meanwhile, NPAs declined by $9.7 million to $120.8 million, or just 0.81% of total loans and leases and other real estate owned. While the provision for loan and lease losses increased $5.0 million sequentially to $7.0 million, the increase reflected loan growth, not asset quality deterioration. At 1.88%, the Company’s allowance for loan and lease losses remains very solid in DBRS’s opinion.

DBRS notes that acquisitions, strong balance sheet growth, and dividend payments including a special dividend paid in 4Q12 have pressured capital metrics over the past year. The Company did issue $175 million of 5.50% non-cumulative perpetual preferred stock during the quarter, which qualifies as Tier 1 capital, bolstering regulatory capital metrics compared to 3Q12. Nonetheless, City National’s tangible common shareholder’s equity to tangible assets ratio compressed 52 basis points sequentially and 112 basis points over the year to 5.89%. Overall, DBRS views the Company’s capital as sufficient.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]