DBRS Comments on City National Corporation’s 3Q13 Earnings – Senior at “A”

DBRS, Inc. (DBRS) has today commented on the 3Q13 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 $63.6 million for the quarter, up from $59.7 million in 2Q13, and from $59.8 million a year ago.

Highlights of the quarter include record levels of loans and deposits, continued strong asset quality including net recoveries, net interest margin expansion, and well managed expenses.

In a quarter where many banks struggled to generate loan growth, average loan balances, excluding FDIC covered loans, increased a solid 4% to $16.0 billion driven primarily by commercial lending and commercial real estate loans. Meanwhile, average core deposits increased a strong 6% during the quarter to $23.7 billion including 5% average growth in noninterest-bearing deposits.

On a FTE basis, net interest income increased 6% sequentially to $220.0 million reflecting average earning asset growth and margin expansion. The margin increased 6 bps to 3.30% primarily driven by higher income from covered loans that were repaid or charged-off, and to a lesser extent slower premium amortization. With continued deposit growth, especially within noninterest-bearing deposits, City National was able to bring funding costs lower as well. Nonetheless, the continued low rate environment and the run off of the higher yielding covered loans should pressure the margin in 4Q13.

Noninterest income increased 8% to $88.9 million, although the increase was primarily due to lower FDIC loss-sharing expense. Wealth management revenues were down $1.2 million to $56.7 million.
The Company noted that the merger between City National Asset Management (CNAM) and Rochdale Investments (Rochdale) has gone well with CNAM benefiting from an expanded national sales reach, while improving the products and capabilities of Rochdale. Overall, assets under management or administration increased 3% to $61.5 billion.

Even with continued investments in the business, the Company has done a good job managing expenses. Indeed, noninterest expenses declined by 1% to $209.4 million sequentially. Excluding City National’s 2012 acquisitions of Rochdale and First American Equipment Finance, year-to-date noninterest expenses were basically unchanged when compared to the similar period in 2012.

Already strong, asset quality continued to improve in the quarter with both classified loans and nonperforming assets (NPAs) declining. Moreover, the Company once again benefited from net recoveries of $6.8 million, or $19.1 million for the first nine months of 2013. As a result of strong asset quality, City National did not have a provision for loan losses for the third consecutive quarter even with strong loan growth. Nonetheless, the Company’s allowance for loan and lease losses remains solid at 1.79% of total loans and leases.

The Company noted that the average duration of the available-for-sale securities portfolio was 2.9 years, an improvement from 3.2 years in 2Q13. City National sold some longer duration securities at a gain of $5.6 million and has been reinvesting in shorter duration securities.

Capital remains sufficient for the rating with a tangible common equity to tangible assets ratio of 6.11%, especially considering the Company’s strong asset quality. The Company estimated its Basel III Tier 1 common equity ratio at 8.6% and all of the other pro-forma capital ratios are comfortably above the Basel III rules as well.

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

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