DBRS Comments on City National Corporation’s 2Q13 Earnings – Senior at “A”

DBRS, Inc. (DBRS) has today commented on the 2Q13 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 Corporation of $59.7 million for the quarter, up from $51.5 million in 1Q13 and from $54.8 million a year ago.

Highlights of the quarter include solid loan and deposit growth, continued improvements in asset quality, and positive operating leverage. Moreover, the Company continues to invest in the franchise; opening two new banking offices during the quarter, one in the East Bay area of San Francisco and one in New York City (City National’s first on the ground floor in New York). Additionally, the Company opened a loan production office in Boston to focus on the technology industry.

On a FTE basis, net interest income increased 1% during the quarter to $208.4 million benefiting from modest net interest margin expansion, as well as higher yielding loans replacing lower yielding securities. Specifically, the margin expanded three basis points to 3.24%. DBRS notes that average loans and leases (excluding FDIC covered loans) grew 4% sequentially to a record $15.4 billion, while average total securities declined by 9%. In aggregate, average earning assets declined 1% in the quarter. Positively, the Company indicated that loan utilization increased for the fourth consecutive quarter and that business confidence is improving in the markets City National serves.

Excluding net securities gains and the impact of covered assets, noninterest income increased 10% sequentially to $100.6 million primarily reflecting higher trust and investment fees, lease income and income from client swap transactions. Trust and investment fees increased $3.1 million, or 7%, to $49.8 million comprising approximately half of all adjusted noninterest income. Overall, City National had $59.1 billion of assets under management or administration at June 30, 2013.

Noninterest expenses were relatively stable at $211.4 million. Excluding the impact of covered assets and amortization of intangibles, expenses would have increased 1% to $203.7 million.

Favorable credit trends continued during the quarter. Indeed, early-stage delinquencies, nonaccruals, criticized and classified loans, and nonperforming assets all improved during the quarter. Moreover, the Company once again had net recoveries from previously charged off loans. As a result of the broad-based improvement in credit metrics, City National made no provisions for credit losses. At $289.9 million, the Company’s allowance for loan and lease losses is sufficient at 1.83% of total loans and leases, especially considering the size of the conservatively underwritten residential mortgage portfolio.

Higher interest rates caused the average duration of the available-for-sale securities to increase to 3.2 years from 2.5 years at March 31, 2013. Additionally, the higher rates caused accumulated other comprehensive income (AOCI) to decline by $67.6 million.

Capital remains sufficient for the rating level. Even with the decline in AOCI, City National’s tangible common equity to tangible assets ratio was relatively stable declining just three basis points during the quarter to 6.32%. The Company noted that all of its Basel III pro-forma capital ratios are comfortably above requirements. Indeed, City National reported an estimated Tier 1 common equity ratio of 8.6%.

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

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