DBRS Comments on City National Corporation’s 1Q13 Earnings – Senior at “A”

DBRS, Inc. (DBRS) has today commented on the 1Q13 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 common shareholders of $49.1 million for the quarter, up from $47.2 million in 4Q12 and from $46.3 million a year ago. DBRS notes that 1Q13’s results included a $2.4 million dividend related to City National’s recent non-cumulative perpetual preferred stock issuance.

Highlights of the quarter include solid loan growth and net recoveries from previously charged off loans. Nonetheless, revenues contracted sequentially due to continued net interest margin (NIM) pressure and lower noninterest income. DBRS notes that the Company has now been profitable every quarter for the past 20 years.

The Company plans on adding five new banking offices during 2013. Two of the branches will be in New York City, two more will be added in the San Francisco Bay area, and the fifth will replace a previous branch in Palo Alto, as City National looks to expand its technology banking business.

During the quarter, total revenue declined 3% to $294.6 million. Specifically, net interest income (FTE) declined modestly during the quarter to $206.3 million reflecting NIM pressure, as well as two fewer days in the quarter. Specifically, the margin contracted another 6 basis points during the quarter to 3.21% and was down a high 53 basis points over the past year. The sequential quarter decline primarily reflected lower income from covered loans. This dynamic will continue, which should keep pressure on the margin. Meanwhile, noninterest income declined 6% to $93.5 million. Strong cash management income was more than offset by lower distribution income from investments, lower income from client swap transactions, weaker international service fees, and higher FDIC loss-sharing expense.

Expenses were well controlled, declining by 5% sequentially to $211.3 million. On an adjusted basis, which excludes intangible amortization, a resolution of a legal claim, and loss sharing expenses, expenses would have declined by 1% to $202.4 million despite seasonally higher payroll taxes.

Period-end loans and leases, excluding covered loans, reached a record $15.2 billion, a sequential quarter increase of 3%. Loan growth was fairly broad based with commercial, commercial real estate mortgages, construction, and residential mortgages all increasing during the quarter. New loan production reached $990 million in 1Q13. Line utilizations have inched up for three consecutive quarters and approximately half of the loan growth seen in 1Q13 came from new clients.

City National did have a seasonal decline in deposits, which contributed to a smaller balance sheet in 1Q13. Specifically, average total deposits contracted 4% to $22.4 billion with average non-interest bearing deposits comprising the vast majority of the contraction. Even with the seasonal decline, the deposit franchise remains robust and helps underpin the rating.

Credit quality remains strong. Indeed, excluding covered loans, nonperforming assets declined and the Company once again benefited from $4.8 million of net recoveries. At $103.1 million, total nonperforming assets represent only 0.68% of total loans and leases and OREO compared to 0.81% at year-end. DBRS notes that construction loans comprised almost half of total nonaccrual loans, but this once troubled asset class has seen net recoveries in each of the past three quarters.

After paying a special dividend in 4Q12, City National was able to build capital through retained earnings in 1Q13. The Company’s tangible common equity to tangible assets ratio improved to 6.35% from 5.89% in 4Q12. Meanwhile, all regulatory capital metrics improved as well and remain well above the minimum capital standards for “well-capitalized” institutions.

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

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